**UNITEDSTATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

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**FORM 10-K**

 

| **x**                                              | **ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE  SECURITIES EXCHANGE ACT OF 1934**     |
|----------------------------------------------------|---------------------------------------------------------------------------------------------------------|
|                                               |
| **For  the fiscal year ended March 31, 2008** |
|                                               |
| **o**                                              | **TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE  SECURITIES EXCHANGE ACT OF 1934** |

 

**Commission file number 1-6549**

 

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**AMERICAN SCIENCE ANDENGINEERING, INC.**

(Exactname of registrant as specified in its charter)

 

| **Massachusetts**(State or other jurisdiction of  incorporation or organization)               | ** ** | **04-2240991**(IRS Employer Identification No.) |
|------------------------------------------------------------------------------------------------|------------|-------------------------------------------------|
| ** **                                                                                     | ** ** | ** **                                      |
| **829  Middlesex Turnpike,  Billerica, Massachusetts**(Address of principal executive offices) | ** ** | **01821**(Zip Code)                             |

 

**(978)262-8700**

(Registrant’stelephone number, including area code)

 

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

 

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

 

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

 

Indicateby checkmark if the registrant is a well-known seasoned issuer, as defined in Rule 405of the Securities Act:  Yes oNo x

 

Indicateby checkmark if the registrant is not required to file reports pursuant to Section 13or Section 15(d) of the Act:  Yes oNo x

 

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

 

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

 

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

 

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

 

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

 

Theaggregate market value of voting stock held by non-affiliates of theregistrant, computed using the closing sale price of common stock of $62.66 on September 30,2007 was $546,583,000.

 

8,768,257shares of registrant’s common stock were outstanding on May 28, 2008.

 

**DOCUMENTS INCORPORATED BY REFERENCE**

 

**Theregistrant intends to file a definitive Proxy Statement pursuant to Regulation14A within 120 days of the end of the fiscal year ended March 31, 2008.Portions of such Proxy Statement are incorporated by reference in Part III.**

 

 

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**AMERICANSCIENCE AND ENGINEERING, INC.**

 

**FORM 10-K**

 

**FOR THEPERIOD ENDED MARCH 31, 2008**

 

**TABLE OFCONTENTS**

 
| ** **    | ** **                                                                                                           | **Page  Number** |
|---------------|----------------------------------------------------------------------------------------------------------------------|------------------|
|          | **PART I**                                                                                                      |             |
| ITEM 1.       | Business                                                                                                             | 3                |
| ITEM 1A.      | Risk Factors                                                                                                         | 8                |
| ITEM 1B.      | Unresolved  Staff Comments                                                                                           | 14               |
| ITEM  2.      | Properties                                                                                                           | 14               |
| ITEM 3.       | Legal Proceedings                                                                                                    | 14               |
| ITEM 4.       | Submission  of Matters to a Vote of Security Holders                                                                 | 14               |
|          |                                                                                                                 |             |
|          | **PART II**                                                                                                     |             |
|          | ** **                                                                                                           |             |
| ITEM 5.       | Market for  the Company’s Common Equity, Related Stockholder Matters and Issuer Purchases  of Equity Securities | 15               |
| ITEM 6.       | Selected  Financial Data                                                                                             | 17               |
| ITEM 7.       | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                          | 17               |
| ITEM 7A.      | Quantitative  and Qualitative Disclosures about Market Risk                                                          | 23               |
| ITEM 8.       | Financial  Statements and Supplementary Data                                                                         | 23               |
| ITEM 9.       | Changes in  and Disagreements with Accountants on Accounting and Financial Disclosure                                | 23               |
| ITEM 9A.      | Controls and  Procedures                                                                                             | 24               |
| ITEM 9B.      | Other Information                                                                                                    | 24               |
|          |                                                                                                                 |             |
|          | **PART III**                                                                                                    |             |
| ** **    |                                                                                                                 |             |
| ITEM 10.      | Directors,  Executive Officers and Corporate Governance                                                              | 24               |
| ITEM 11.      | Executive  Compensation                                                                                              | 24               |
| ITEM 12.      | Security  Ownership of Certain Beneficial Owners and Management and Related Stockholder  Matters                     | 25               |
| ITEM 13.      | Certain  Relationships and Related Transactions, and Director Independence                                           | 25               |
| ITEM 14.      | Principal  Accounting Fees and Services                                                                              | 25               |
|          |                                                                                                                 |             |
|          | **PART IV**                                                                                                     |             |
| ** **    |                                                                                                                 |             |
| ITEM 15.      | Exhibits  and Financial Statement Schedules                                                                          | 25               |
| SIGNATURES    |                                                                                                                 | 48               |
| EXHIBIT INDEX | 49                                                                                                                   |

 

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**CAUTIONARY STATEMENT**

 

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

 

All references in thisAnnual report to “AS&E”, the “Company”, “we”, “our” and “us” means AmericanScience and Engineering, Inc. and its subsidiary.

 

**PART I**

 

**ITEM 1.BUSINESS**

 

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

 

The Company manufacturessophisticated X-ray inspection products that can be used to inspect parcels,baggage, vehicles, pallets, cargo containers, and people.  The Company sells its products in the UnitedStates and throughout the world to a variety of customers, including:

 

·                  Authorities responsible for port and border security

 

·                  Aviation security agencies

 

·                  Military organizations; and

 

·                  High threat commercial and government facilities

 

AS&E’s products are used by these customers tohelp combat terrorism, trade fraud, drug trafficking, weapons smuggling, andillegal immigration.  Our products arealso used for military force protection and general facility security.

 

Beginning with the terroristattacks on September 11, 2001, and continuing with the proliferation ofglobal terrorism, homeland security and force protection concerns have becomeof paramount importance in the United States and around the world. The Companybelieves that homeland defense, force protection and military securityinitiatives will continue to provide new revenue opportunities, with additionalgrowth in the seaports and borders, federal and military facilities, andcorporate security markets.

 

The Company’s objectiveis to distinguish itself from its competitors by offering innovative productswhich provide superior threat detection. To achieve this, AS&E incorporatesa variety of X-ray imaging and image processing technologies into its products.  A number of the Company’s products use ourpatented Z BackscatterTM technology.  ZBackscatter is a unique X-ray imaging technique that has distinct advantagesfor the detection of organic or low atomic number (Z) materials such asplastic explosives, composite weapons, and illegal drugs even when concealed bycomplex backgrounds.

 

**Technology**

 

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

 

X-ray imaging devicescontain these basic subsystems: X-ray sources, detectors, and software.  The source generates an X-ray beam that isdirected at the object to be scanned (baggage, container, etc.).  When the source X-rays encounter the object,they are either absorbed by the object, pass directly through the object, orscatter off of the object.  Dense (highatomic number) materials tend to absorb X-rays. Materials that are less dense (low atomic number) tend to scatterX-rays.  The detectors record theintensity of the transmitted or scattered X-rays.  Software is then used to interpret thesignals from the detectors and to construct and display X-ray images.

 

***TransmissionX-ray Technology:**** *Transmission images are created from X-rays that passthrough the object that is being examined. Medical X-ray images are a type of transmission X-ray.  In transmission imaging, the detectormeasures the relative intensity of the X-rays that pass directly through theobject.  The degree to which X-rays aretransmitted through an object is dependant upon the size of the X-ray sourceand the composition and quantity of the material in the path of the X-raybeam.  Low energy sources are used toscan smaller objects such as parcels and baggage, and high energy sources areused for scanning large 

 

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items such as trucks and cargo containers.  Transmission X-ray images are useful forseeing “through” the object of interest. A transmission image, however, represents an aggregate of all objects inthe path on the beam and can therefore be difficult to interpret.

 

***ZBackscatter Technology:**** *Most of the Company’s X-ray systemsutilize AS&E’s patented Z Backscatter technology.  The term “Backscatter” refers to those X-raysthat *scatter* off of the objectunder examination *back* toward theX-ray source.  Z Backscatter detectorscapture these scattered X-rays which are then used to create highly readable,photo-like images.

 

Many threat items are organicin nature and have low atomic numbers. Such items include drugs, explosives, composite weapons, andstowaways.  These items tend to scatterX-rays much more so than inorganic materials like steel and other metals.  As a result, these organic threat items tendto stand out as bright, visible objects when scanned by a Z Backscatter imagingsystem.

 

Z Backscatter imagescomplement transmission images and several of the Company’s products employboth technologies.  The combination ofbackscatter and transmission images gives security officials more informationabout the contents of the baggage or container by differentiating densematerials, such as metals, from low-Z materials such as explosives.  In addition, the two images enable aninspector to perform a quicker and more thorough examination of the object inquestion.

 

***Other Technologies:***  Two other technologies employed by AS&E are ShapedEnergy and Radioactive Threat Detection (RTD). Shaped Energy technology is a specialized form of high energy transmissionX-ray which is used in AS&E’s OmniView product line. Radioactive ThreatDetection (RTD) is a technology which is used to find radioactive materials invehicles.

 

**Productsand Systems**

 

The Company’s productsand services can be grouped into six different areas including CargoSearchTMInspection Systems, Z Backscatter Systems, ParcelSearchTM Inspection Systems,Personnel Inspection, Contract Research and Development, and Service andSupport.

 

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

 

*OmniViewTM Gantry System*:  a multi-view,relocatable high-energy cargo and vehicle inspection system.  This system combines 6 MeV high-energytransmission imaging and three Z Backscatter X-ray views for left, right andtop-side imaging of cargo.  OmniViewprovides side and top-down views of the cargo in a relocatable configuration.OmniView utilizes AS&E’s patented Shaped EnergyTM technology to penetratedensely loaded cargo containers. Shaped Energy “shapes” the high energyspectrum to filter out non-essential radiation, making the system safe foroperators and staff.  High energy 6.0 MeVtransmission X-rays can penetrate 14 inches (35 cm) of steel or 8.5 feet (260cm) of oil, yet doesn’t require heavy shielding, an exterior building, orstandoff zones.   The Z Backscatterimages are ideal for the detection of organic or “low Z” materials includingexplosives, drugs, alcohol, and tobacco that transmission X-rays alone canmiss. The System’s multiple Z Backscatter views of the cargo improve detectionwhile facilitating interpretation of the X-ray image.  The OmniView Gantry System’s scanningplatform operates by moving on rails past stationary vehicles and cargo.  The system is bi-directional allowing for athroughput of approximately 25 trucks per hour. OmniView Gantry is ideal for ports, borders, and high-threat militaryfacilities.

 

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

 

*PalletSearchTM*:  a conveyorized X-rayinspection system designed to perform non-intrusive inspection of mixed cargoshipped on large pallets or in air cargo containers.  The system is especially useful forinspecting large, irregularly shaped containers and cargo.

 

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

 

*Z Backscatter VanTM (ZBV*): a mobile X-ray screening system builtinto a commercially available chassis. It utilizes Z Backscatter X-ray technology to produce photo-like imagesof the contents of a vehicle or cargo container, highlighting organic materialssuch as plastic explosives or other anomalies. With one-sided, backscatter-onlyimaging, security officials can use 

 

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ZBV for screeningvehicles, sea containers, and other cargo for terrorist threats, trade fraud,and contraband, simply by driving past the objects.   The ZBV can be equipped with RadioactiveThreat Detection (RTD) capability.  WithRTD, the ZBV can produce Z Backscatter images for general screening whilesimultaneously scanning the object for the presence of radioactivematerial.  The ZBV is available inseveral versions, including a militarized trailer configuration (ZBV MilTrailer) that is designed for use by the U.S. military.

 

***ParcelSearch******TM****** Inspection Systems:***** ParcelSearchsystems are designed for the non-intrusive X-ray scanning of parcels, baggage,and mail. These systems are primarily located in government facilities,airports, commercial office buildings, high-security federal facilities andconvention centers. ParcelSearch systems include:

 

*Gemini**TM*: Gemini is a parcel and baggage inspection system which combines AS&E’sZ Backscatter technology with Dual-energy transmission X-ray to provideenhanced detection for a wide range of threats. Dual-energy transmission is best suited for the detection of threatssuch as guns and knives, and for identifying wires and other components ofimprovised explosive devises (“IEDs”). It also provides some organic andmetallic discrimination in uncluttered environments.  Z Backscatter imaging provides enhanceddetection of organic materials such as explosives and narcotics, which may bemissed by transmission-only systems in cluttered baggage.  In addition, the complementary photo-like ZBackscatter image makes it easier for security officers to interpret images,thus reducing analysis time and minimizing operator fatigue.

 

*Model 101VANTM*: a self-contained conveyor-based parcel inspectionsystem housed in a standard van; designed and built to the rigorous specificationsof U.S. Customs and Border Protection.

 

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

 

***PersonnelScreening:***  Personnel screening is a crucial part of anythreat detection effort.  Today, threatscan take the smallest of forms and are often easily hidden on a person.  With the advent of suicide bombings,personnel screening has taken on an even more important role.  Personnel screening is also important in the effortto intercept prohibited substances, such as drugs and alcohol.

 

*SmartCheckTM*:  apersonnel screening system for the effective screening for contraband andthreats hidden under a person’s clothing. SmartCheck simultaneously detects both metallic and non-metallicobjects, such as guns and knives, plastic explosives, liquid explosives,composite weapons, drugs and other hidden threats and contraband.  Its Z Backscatter image gives the operator aneasy-to-read display of where the threat or contraband is hidden, thuseliminating the need for intrusive and time-consuming pat-downs and stripsearches.  SmartCheck employs proprietaryadvanced image processing algorithms to enhance privacy, while maintaining ahigh level of threat detection.

 

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

 

***Service andSupport:***   AS&E’s highly skilled Field ServiceEngineers (FSEs) provide support services worldwide. Each FSE has a technicaldegree in Electrical and/or Mechanical Engineering (or equivalent experience),and is trained in the operation and repair of electronics, hydraulics,pneumatics, mechanics, electrical systems, and computers. FSEs are available 7days a week, 24 hours a day, and are located at AS&E offices in Asia,Central America, Europe, the Middle East, and North America.   In addition, Technical Support is providedat the Company’s headquarters in Billerica, Massachusetts. AS&E providescomprehensive, cost-effective spare parts solutions customized for eachsystem.  The Company maintains aninventory of field-replaceable components in order to meet customer needs forspare parts.

 

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

 

**IntellectualProperty**

 

The Company relies on acombination of patent, copyright, trademark, contract and trade secret laws toestablish and protect its proprietary rights in its technology. The Company haspatents either issued and/or pending in the United States, Germany, Japan, theUnited Kingdom, China, Austria, France, Ireland, Italy, Switzerland, Australia,Canada, Belgium, Denmark, Finland, Greece, Italy, Netherlands, Portugal, Spain,Sweden, Turkey, Hong Kong, India, Israel, The Republic of Korea, New Zealand,Mexico, 

 

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Norway, The Russian Federation, Ukraine, Singapore,United Arab Emirates, Malaysia, Thailand and Egypt, and under the GulfCooperation Council and the Patent Cooperation Treaty.

 

In general, the Companypursues a policy of obtaining patent protection both in the United States andin selected foreign countries for subject matter we consider patentable andimportant to our business strategy. The Company has 63 unexpired patents issuedby, and 59 patent applications pending with, the U.S. Patent and Trademark Office,as well as with the respective patent offices of the foreign countries notedabove. Over half of our issued patents have been issued in the last five years.

 

Generally, patents issuedin the United States are effective for the longer of 17 years from the date ofissue or 20 years from the earliest effective filing date of the correspondingpatent application if filed prior to June 8, 1995. The duration of foreignpatents varies in accordance with applicable local law. While the duration ofour patents varies, we believe that the duration of our patents is adequaterelative to the expected lives of our products.

 

The Company believes thatits patents, proprietary technology, know-how, and trademarks providesubstantial protection for the Company’s competitive position and the Companyintends to aggressively protect its intellectual property assets, by litigationor other means, as appropriate. Nevertheless, there can be no assurances thatthe steps taken by the Company in this regard will be adequate to preventmisappropriation or infringement of its technology or that the Company’scompetitors will not independently develop technologies that are substantiallyequivalent or superior to the Company’s technology. Effective protection ofintellectual property rights may be limited or unavailable in certain foreigncountries. See “Item 3. Legal Proceedings” below.

 

**Sales andMarketing**

 

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

 

**Customers**

 

The Company has acustomer base consisting of government and commercial clients from both theUnited States and abroad. Domestically, the Company’s primary client base iscomprised of agencies of the U.S. Government. Approximately 55%, 70%, and 77%of the Company’s total sales in fiscal 2008, 2007, and 2006, respectively, werederived from either (i) contracting directly with the U.S. Government, or (ii) contractingwith contractors working directly with the U.S. Government. Certain of theCompany’s contracts with the U.S. Government provide the U.S. Government withthe standard unilateral right to terminate these contracts for convenience. Todate, the Company has not experienced any material losses as a result of thiscontractual provision. The Company is heavily dependent upon sales to agenciesof the U.S. Government and reductions or delays in procurement of the Company’ssystems and services by these agencies may have a material adverse effect onthe Company.

 

International sales,primarily to foreign governments, accounted for approximately 36%, 27%, and 14%of the Company’s total sales in fiscal 2008, 2007, and 2006 respectively, andcontinue to be a high priority for the Company as part of its long-term growthstrategy. International sales entail longer sales cycles and project financingrequirements; however the Company continues to focus on these sales as a meansof broadening its customer base and reducing its dependency on sales to theU.S. Government. The Company manages its overseas risk in a number of ways,including actively increasing the number of opportunities it is pursuing at anyone time, working with international funding sources to help customers financeand secure funding of these projects, and obtaining downpayments and letters ofcredit to secure its international receivables. The majority of internationalcontracts are bid in U.S. dollars. For those contracts that are bid in othercurrencies, the Company considers the need to engage in hedging contracts tocontrol foreign exchange risk. There were no hedging activities in fiscal 2008,2007, or 2006.

 

In fiscal 2008,the Company had sales to two major customers, both agencies of the U.S.Government, which accounted for 12% and 10% of total sales.  In fiscal 2007, the Company had sales to twomajor customers, both agencies of the U.S. Government, which accounted for 31%and 15% of total sales.  In fiscal 2006,these same customers accounted for 26% and 30% of total sales.

 

**Competition**

 

The Company has manycompetitors in the homeland security X-ray detection market, including severallarge and well-established manufacturers of security equipment with financialand other resources greater than those of the Company. Certain X-ray securitysystem customers select such systems based largely on price. Other customers,including some agencies of the U.S. Government and certain users in countrieswith high levels of concern over security, tend to select systems based largelyon detection capability.  Many of theCompany’s systems offer premium performance and have in some cases been pricedhigher than many competing systems. The Company believes that its patented andproprietary technology give it a strong competitive position in the sale ofsecurity systems to customers concerned with performance and detection. TheCompany also believes that its strategy 

 

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of concentrating on products with unique features,including Z Backscatter and Shaped Energy, and/or competitive pricing will giveit a strong position to increase its sales of X-ray systems. However, a numberof companies have developed products that compete with the Company’s X-rayinspection products. (See “Forward-Looking Information and Factors AffectingFuture Performance”)

 

**ISO 9001Certification**

 

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

 

In qualifying, theCompany met or exceeded the standards for establishing a quality managementsystem for preventing non-conformity at every level of the product life cycle,from customer order, through development and production, to installation andsupport.

 

The Company believes thatdemonstrating continuous quality improvement is vital for building customersatisfaction and making business processes more efficient in order to increaseits competitive edge.

 

**ComponentAvailability**

 

Critical material andsubsystems are procured from both domestic suppliers as well as internationallyfrom global supply partners.  Thesesupply sources are in some cases single sources of supply and the material providedcan have extended lead times.  Inresponse to expanding customer demand in the global security screening market,the Company has taken steps to mitigate sourcing risks by working closely withits suppliers to ensure future material and subsystem availability to supportits production plans. In some cases, the Company has chosen to stock reservematerial to ensure future availability. Efforts have also included identifyingand qualifying second source suppliers for critical material and a number ofkey subsystems in support of its product lines. The Company does not expect toexperience sustained difficulties in securing required material and subsystemsto support its forward business operations.

 

**RegulatoryCompliance**

 

AS&EcomplieswithapplicablefederalregulationsunderTitle21CFRSubchapterJ-RadiologicalHealth.  AllAS&EcabinetX-rayproductscomplywithallapplicableU.S.Governmentradiationsafetyperformancestandardsincluding21CFR1020.40.AllpersonnelinspectionsystemsofAS&EcomplywiththevoluntaryconsensusradiationsafetystandardsadoptedbytheAmericanNationalStandardsInstituteANSIN43.17-2002.

 

**Researchand Development**

 

The Company spentapproximately $12,306,000 of its own funds for research and development duringfiscal 2008, compared to $7,184,000 and $9,601,000 in fiscal 2007 and 2006,respectively. The fiscal 2008 research and development efforts were focused ondesign modifications and enhancements to existing products, the development ofnew applications and the development of new products.

 

In addition, the Companyconducted government-sponsored research primarily focused on advances in X-raysystems, image analysis and integrated system development for niche securityinspection problems. The Company recognized revenues of $13,978,000,$6,597,000, and $2,804,000 in fiscal 2008, 2007, and 2006, respectively forthese efforts. Many of the Company’s government sponsored research anddevelopment contracts provide for a fixed fee or a reimbursement of allowablecosts plus a fixed fee. The Company’s contracts in these areas are obtained bysubmitting research and development proposals to various organizations,sometimes in response to requests for such proposals.

 

**Personnel**

 

As of March 31, 2008the Company had 346 employees as compared to 299 employees at March 31,2007.   It is the Company’s policy tohave employees sign nondisclosure agreements as a condition of employment. Noneof the Company’s employees are represented by labor unions.

 

**SalesBacklog**

 

The Company’s firm(signed contracts) sales backlog was $99,606,000, $105,634,000, and $68,840,000at March 31, 2008, March 31, 2007, and March 31, 2006,respectively.

 

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Certain of the Company’scontracts with the U.S. Government contain clauses permitting the government toterminate the contract for convenience upon certain terms and conditions,including partial payment to the Company for work performed. Total contractswith U.S Government agencies and subcontractors in the backlog were$42,640,000, $58,833,000, and $30,058,000, at March 31, 2008, 2007 and2006, respectively. It is estimated that approximately 77% of the 2008 backlogwill be filled within the fiscal year ending March 31, 2009.

 

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

 

Most export sales aretransacted in U.S. dollars, and most are either secured by irrevocable lettersof credit or paid in advance. The following table shows the breakdown of netsales and contract revenues to international and domestic customers and themajor regions of international activity based upon customer’s country ofdomicile. All assets are maintained within the United States with the exceptionof inventory depots, inventory in transit or awaiting installation and cashaccounts maintained at foreign locations (approximately 4% of the Company’sassets).

 

***NetSales and Contract Revenues***

 
| ** **                                         | ** ** | **Fiscal Year** | ** ** |
|----------------------------------------------------|------------|----------------------|------------|
| **(Dollars in thousands)**               | ** ** | **2008**             | ** ** | **2007** | ** ** | **2006** | ** ** |
|                                               |       |                 |       |   |   |   |   |   |   |   |   |   |   |
| Domestic                                           |       | $                    | 107,021    |   | 64 | % | $ | 111,335 |   | 73 | % | $ | 141,491 |   | 86 | % |
| International                                      |       | 59,712               |       | 36 | % | 41,851 |   | 27 | % | 22,113 |   | 14 | % |
|                                               |       |                 |       |   |   |   |   |   |   |   |   |   |   |
| Net Sales and  Contract Revenues                   |       | $                    | 166,733    |   | 100 | % | $ | 153,186 |   | 100 | % | $ | 163,604 |   | 100 | % |
|                                               |       |                 |       |   |   |   |   |   |   |   |   |   |   |
| Percent of  International Revenue by Major Region: |       |                 |       |   |   |   |   |   |   |   |   |   |   |
| Middle  East & Africa                     |       | 70                   | %          |   |   | 66 | % |   |   | 50 | % |   |   |
| Pacific Rim                                        |       | 14                   | %          |   |   | 20 | % |   |   | 37 | % |   |   |
| Europe                                             |       | 14                   | %          |   |   | 14 | % |   |   | 11 | % |   |   |
| All Other                                          |       | 2                    | %          |   |   | — | % |   |   | 2 | % |   |   |

 

**AvailableInformation**

 

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

 

**ITEM1A.  RISK FACTORS**

 

You should carefullyconsider the following risk factors, in addition to other information includedin this Annual Report on Form 10-K and other reports we file with theSecurities and Exchange Commission.  Ifany of the following risks occur, the Company’s business, financial conditionand operating results could be materially adversely affected.

 

**The Company’s reliance on a small number ofcustomers for a large portion of its revenues could harm its business andprospects.**

 

The Company’s business isdependent on sales to a small number of customers, which include agencies ofthe United States government. During fiscal 2008, two customers accounted for22% of the Company’s total revenues. During fiscal 2007, two customersaccounted for 46% of the Company’s total revenues, and during fiscal 2006, twocustomers accounted for 56% of the Company’s total revenues. Certain of theCompany’s government contracts may be terminated at the government’sdiscretion. The termination of the Company’s relationship with one or more ofits significant customers or the reduction or delay of orders of its systems bythese customers would substantially reduce the Company’s revenues, and itsbusiness and prospects may be harmed.

 

**The Company conducts its business worldwide, whichexposes it to a number of difficulties in coordinating its internationalactivities and dealing with multiple regulatory environments.**

 

The Company’s revenues tointernational customers, including foreign governments, accounted forapproximately 36%, 27% and 14% of its net revenues for the fiscal years ended March 31,2008, March 31, 2007 and March 31, 2006, respectively, and asignificant number of domestic customer orders require shipments to, andservices provided in, overseas locations. In addition, the 

 

8

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Company transacts business internationally with anumber of its key suppliers. As a result of the Company’s worldwide businessoperations, it is subject to various risks, including:

 

·             international regulatory requirements and policychanges;

 

·             lengthy sales cycles;

 

·             longer payment cycles by foreign customers;

 

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

 

·             difficulties in staffing and managing foreignoperations;

 

·             geopolitical instability;

 

·             political and economic changes and disruptions;

 

·             favoritism towards local suppliers;

 

·             governmental currency controls;

 

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

 

·             currency exchange rate fluctuations; and

 

·             tariff regulations.

 

Although the Company’s international sales have beendenominated primarily in U.S. dollars, changes in currency exchange rates thatincrease the relative value of the U.S. dollar may make it more difficult forthe Company to compete with foreign manufacturers on price or otherwise have amaterial adverse effect on its sales and operating results.

 

**The Company’s lengthy sales cycle requires it toincur significant expenses with no assurance that it will generate revenue orrecover such expenses.**

 

A substantial portion of the Company’s sales dependsupon the decision of governmental agencies to upgrade or expand security atborder crossing inspection sites, existing airports, seaports and otherfacilities. Accordingly, a portion of the Company’s product sales is subject todelays associated with the lengthy approval processes that often accompany suchcapital expenditures. During these approval periods, the Company expendssignificant financial and managerial resources in anticipation of future ordersthat may not occur. If the Company fails to receive an order after expendingthese resources, it may be unable to generate sufficient revenue to recover thecosts incurred and its business and prospects may be harmed.

 

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

 

The Company’s largest customers are governmentagencies and demand for its products is dependent upon national priorities andgovernmental initiatives, including defense-related programs. These prioritiesand initiatives are subject to change from time to time in response to theeconomic and political environment.   TheCompany is also exposed to the United States budget approval and appropriationdecisions and processes which are driven by numerous factors, includinggeo-political events and macroeconomic conditions, and are beyond our control.While the overall level of U.S. defense spending has increased in recent yearsfor numerous reasons, including increases in funding of operations in Iraq andAfghanistan and the U.S. Department of Defense’s military transformationinitiatives, we can give no assurance that such spending will continue to grow,or not be reduced. Significant changes in defense spending could have long-termconsequences for our size and structure. In addition, changes in governmentpriorities and requirements could impact the funding, or the timing of funding,of our programs which could negatively impact our results of operations andfinancial condition.

 

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

 

The Company competes in markets in which the Companyor its customers must comply with federal, state, local and foreignregulations, such as health and safety regulations. The Company develops,configures and markets its products to meet its customers’ needs created bythese regulations. Any significant change in these regulations could reducedemand for the Company’s products or increase its costs to comply with newregulations, both of which may adversely affect its operating results.

 

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**The Company’s reliance on a limited number ofsuppliers for some key components for its products could harm its business andprospects.**

 

The Company relies on anumber of suppliers to provide material and subsystems for our products. TheCompany is reliant on a number of key international supply partners for coretechnology products, including subsystems with complex sub-tier supply chains.  In addition, certain material or subsystemsused in our products may be available from a sole source or limited number ofsuppliers, increasing the risk of supply disruption. Although our products maybe able to be redesigned to avoid using any sole source supplier, it would beexpensive and time consuming to make such a change. If the Company changes anyof its suppliers, a qualification process would need to be completed and theaffected product may require redesign, creating potential delays in productshipments.

 

Some of our suppliers mayallocate material due to market demand for the products they produce or marketconstraints such as the global availability of raw materials. We have noguaranteed supply arrangements with our suppliers and there can be no assurancethat our suppliers will continue to meet our requirements. Many of ourcompetitors are much larger and may be able to obtain priority allocations fromthese shared suppliers, thereby limiting or making our sources of supplyunreliable for these components. If our supply of materials is disrupted, wecannot ensure that we would be able to find another supplier on a timely basis.

 

The Company depends onits subcontractors and suppliers to deliver material that is in full compliancewith critical quality and specification requirements. Quality issues may affectthe reliability and performance of our products, customer confidence, andadversely impact financial performance. Any difficulty in obtaining sufficientand timely delivery of conforming material could result in delays or reductionsin product shipments that could materially and adversely affect our business,financial condition and consolidated results of operations. This in turn couldalso damage our reputation in the market and cause us to lose market share. TheCompany does not expect to experience sustained difficulties in securingrequired material and subsystems to support forward business operations.

 

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

 

Given the nature of themarkets in which the Company participates, it cannot reliably predict futurerevenue and profitability. A high proportion of the Company’s costs are fixed,due in part to its significant sales, research and development, andmanufacturing costs. As a result of its fixed costs, small declines in revenuecould disproportionately affect the Company’s operating results and stock pricein a quarter. Factors that may affect the Company’s quarterly operating resultsand the market price of its common stock include:

 

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

 

·             lengthy sales cycles and the effect of large orders;

 

·             changes in political agendas or national priorities;

 

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

 

·             political unrest in the regions where the Companytransacts business;

 

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

 

·             competitive pressures resulting in lower selling pricesfor its products;

 

·             delays or problems in the introduction of newproducts;

 

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

 

·             variations in the Company’s product mix;

 

·             the timing and amount of the Company’s expenditures inanticipation of future sales;

 

·             increased costs of raw materials or supplies; and

 

·             changes in the volume or timing of product orders.

 

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

 

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

 

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

 

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

 

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

 

The Companygenerates funds for its research and development activities from operations,private sources and the government. The Company may be unable to generate thefunds necessary to support its research and development activities if it doesnot generate sufficient funds from operations, other potential private sources,or the government. The Company may not successfully compete with othercompanies and research institutions for government funding and funding fromother private sources. Additionally, government-funding priorities are subjectto frequent changes. For example, in fiscal 2008, 2007, and 2006, the Companyrecorded $13,978,000, $6,597,000 and $2,804,000, respectively, forgovernment-sponsored research and development. There is no guarantee that theCompany will receive funds for government-sponsored research in the future. Ifthe Company is unable to fund its research and development activities throughits operations or from outside sources, the Company may be unable to continueto innovate or bring its innovations to market on a timely or cost effectivebasis, or its innovations may be surpassed by other competitors or new technologies.

 

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

 

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

 

· unanticipated delays;

 

· access to capital;

 

· budget overruns;

 

· technical problems; and

 

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

 

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

 

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

 

The market for the Company’s products has been characterized by rapidtechnological changes, frequent product introductions and evolving industrystandards and customer requirements. The Company believes that these trendswill continue into the foreseeable future. The Company’s success will depend,in part, upon its ability to enhance its existing products, successfullydevelop new products that meet changing customer and regulatory requirementsand gain market acceptance. If the Company fails to do so, its products may berendered obsolete or uncompetitive by new industry standards or changingtechnology, in which case 

 

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itsrevenue and operating results would suffer. In developing any new product, theCompany may be required to make a substantial investment before it candetermine the commercial viability of the new product. If the Company fails toaccurately foresee its customers’ needs and future activities, it may investheavily in research and development of products that do not lead to significantrevenue.

 

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

 

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

 

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

 

·**productperformance, functionality and quality;

 

·**price;

 

·**the overall costof ownership of the system;

 

·**prior customerrelationships;

 

·**technologicalcapabilities of the product;

 

·**certification bygovernment authorities;

 

·**local marketpresence; and

 

·**breadth of thesales and service organization.

 

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

 

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

 

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

 

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

 

Initiating ordefending against the enforcement of the Company’s intellectual property rightsmay result in significant, protracted, and costly litigation. The Company haspreviously been involved in various litigations involving its intellectualproperty and has been successful in protecting such interests to date. TheCompany expects intellectual property disputes to be an ordinary part of itsbusiness for the foreseeable future. The Company may initiate claims orlitigation against third parties for infringement of its intellectual propertyrights, or to establish the validity of its property rights. There can be noassurance that the Company will prevail in any such action. Litigation by oragainst the Company could result in significant expense and divert the effortsof technical and management personnel, whether or not such litigation resultsin a favorable outcome for the Company. In the event of an adverse result inany such litigation, the Company could be required to pay substantial damages,cease the manufacture, use and sale of infringing products, expend significantresources to develop non-infringing technology, discontinue 

 

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the use of certainprocesses, or obtain licenses for the infringing technology. If a license wererequired, the Company cannot assure that it would be able to obtain one oncommercially reasonable terms, if at all. The Company cannot assure that itwill be successful in developing non-infringing technology or that the cost ortime required to develop such technology will be reasonable.

 

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

 

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

 

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

 

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

 

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

 

Substantially allof the Company’s outstanding shares of common stock are freely tradable withoutrestriction or further registration. Affiliates must sell all shares they ownin compliance with the volume and other requirements of Rule 144, exceptfor the holding period requirements. Nevertheless, sales of substantial amountsof common stock by the Company’s stockholders, or even the potential for suchsales, may cause the market price of the Company’s common stock to decline andcould impair the Company’s ability to raise capital through the sale of theCompany’s equity securities.

 

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

 

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

 

· announcements of developments related tothe Company’s business;

 

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

 

· general conditions in the worldwideeconomy;

 

· announcements of technologicalinnovations;

 

· new products or product enhancements bythe Company or its competitors;

 

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

 

· developments in the Company’srelationships with its customers and suppliers.

 

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

 

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

 

Provisions in theCompany’s articles of organization and the Company’s shareholder rights planmay have the effect of discouraging or preventing a change in control. Theseprovisions could limit the price that certain investors might be willing to payin the future for shares of the Company’s common stock. Specifically, theCompany’s articles of organization authorize its Board of Directors to issue upto 100,000 shares of preferred stock in one or more series, to fix certainrights, preferences, privileges and 

 

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restrictions granted toor imposed upon any wholly unissued shares of preferred stock, to fix thenumber of shares constituting any such series, and to fix the designation ofany such series, without further vote or action by its shareholders. The termsof any series of preferred stock, which may include priority claims to assetsand dividends and special voting rights, could adversely affect the rights ofthe holders of common stock and thereby reduce the value of the Company’scommon stock. The Company has no present plans to issue shares of preferredstock. The Company has in place a shareholder rights plan, which was renewed inApril of 2008, under which its stockholders are entitled to purchaseshares of its preferred stock under certain circumstances. These circumstancesinclude the purchase of 15% or more of the outstanding shares of common stockby a person or group, or the announcement of a tender or exchange offer toacquire 15% or more of the outstanding common stock. The shareholder rightsplan may have the effect of impeding or preventing certain types oftransactions involving a change in control of the Company that could bebeneficial to the stockholders.

 

**ITEM1B.  UNRESOLVED STAFF COMMENTS**

 

There are nounresolved written comments that were received from the SEC staff 180 days ormore before the end of our fiscal year relating to our periodic or currentreports under the Securities Exchange Act of 1934.

 

**ITEM 2.PROPERTIES**

 

The Company leasesan 188,000 square foot facility located in Billerica, Massachusetts which isowned by an unaffiliated real estate limited partnership and serves as theCompany’s executive offices, research, manufacturing and warehousefacilities.  The lease expires on February 29,2016.  The Company believes that itsfacilities are adequate and provide sufficient production capacity for itspresent intended purposes. The Company’s facilities are currently utilizedprimarily on a one-shift basis. The Company is able to add additional capacityby adding second and third shifts if necessary.

 

The Company’sformer High Energy Systems division had leased 24,733 square feet ofmanufacturing, research and development, and office space in Mountain View,California. The lease commenced on February 1, 2004 and had an initialterm of seven years with an option to extend for an additional five-yearperiod. In January 2005, as part of the asset sale agreement with Accuray,Incorporated, the Company assigned its rights and obligations under this leaseto Accuray. The Company is secondarily liable for the lease payments in theevent of default by Accuray.

 

**ITEM 3.  LEGAL PROCEEDINGS**

 

On October 3,2007, the Company commenced litigation in the United States District Court forthe Eastern District of Virginia against AutoClear, LLC, and its affiliatesControl Screening, LLC, and Scan-Tech Security, LP, for infringement of theCompany’s United States Patent No. 5,313,511, seeking damages andinjunctive relief. The parties have recently begun discovery in this matter.

 

On September 4,2007, the Company received a notice from the United States EnvironmentalProtection Agency (the “EPA”) that it may potentially be liable for certaincosts related to the proposed clean-up at the Sutton Brook Disposal AreaSuperfund Site located in Tewksbury, Massachusetts. The Company is one ofapproximately 45 entities identified by the EPA as a Potentially ResponsibleParty (“PRP”) in connection with alleged historical disposal of waste materialsfor the period from 1958 through the mid-1980s, the timeframe underinvestigation by the EPA. The Company has denied liability, and has initiatedparticipation in the global negotiation and settlement processes with the EPAand with other PRPs. Such negotiation processes are ongoing.

 

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

 

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

 

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

 

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**PART II**

 

**ITEM 5. MARKET FOR THECOMPANY’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS, AND ISSUER PURCHASES OFEQUITY SECURITIES**

 

**Market Information**

 

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

 
| **Fiscal Year** | ** ** | **Quarter Ended**  | ** ** | **High** | ** ** | **Low** | ** ** |
|----------------------|------------|-------------------------|------------|----------|------------|---------|------------|
|                 |       |                    |       |     |       |    |       |
| 2008                 |       | March 31, 2008     |       | $        | 57.99      |    | $          | 47.16 |   |
|                 |       | December 31, 2007  |       | $        | 67.14      |    | $          | 46.00 |   |
|                 |       | September 30, 2007 |       | $        | 73.40      |    | $          | 54.55 |   |
|                 |       | June 30, 2007      |       | $        | 57.71      |    | $          | 46.67 |   |
|                 |       |                    |       |     |       |    |       |
| 2007                 |       | March 31, 2007     |       | $        | 60.45      |    | $          | 49.78 |   |
|                 |       | December 31, 2006  |       | $        | 71.22      |    | $          | 44.86 |   |
|                 |       | September 30, 2006 |       | $        | 61.97      |    | $          | 36.03 |   |
|                 |       | June 30, 2006      |       | $        | 93.53      |    | $          | 51.00 |   |

 

**Holders**

 

As of May 28, 2008,there were approximately 744 holders of record of the Company’s common stock.

 

**Common Stock Dividends**

 

During fiscal2008, the Board of Directors approved a cash dividend plan for 2008.   Common stock cash dividends declared duringthe year ended March 31, 2008 were as follows:

 
| **Date Declared**  | ** ** | **Dividend per  common share** | ** ** |
|-------------------------|------------|------------------------------------------|------------|
| August 6,  2007    |       | 0.20                                     |       |
| November 5,  2007  |       | 0.20                                     |       |
| February 11,  2008 |       | 0.20                                     |       |
| Total                   |       | $                                        | 0.60       |   |
|                         |            |                                          |            |  |

 

On May 13, 2008, the Company declared another quarterly dividend of$0.20 for holders of record on May 19, 2008 to be paid June 6, 2008. No cash dividends were declared duringthe fiscal year ended March 31, 2007. The Company has received consent from its bank for these dividends asits credit facility restricts the payment of dividends (except in shares of theCompany’s stock).  Future dividend payments will depend on our earnings,capital requirements, financial condition and capital needs and other factorsconsidered relevant by our Board.

 

**Securities Authorized for Issuance under EquityCompensation Plans**

 

The followingtable provides information about the Company’s stock option plans and thecommon stock that may be issued upon the exercise of options and rights underall existing equity compensation plans as of March 31, 2008.

 
| **Plan  category**                                               | ** ** | **Number  of securities to be  issued upon exercise of  outstanding options  and rights as of  March 31, 2008  (a)** | ** ** | **Weighted-average  exercise price of  outstanding options  and rights  (b)** | ** ** | **Number  of securities  remaining available for future  issuance under equity  compensation plans as of  March 31, 2008 (excluding  securities reflected in column(a))** | ** ** |
|------------------------------------------------------------------|------------|---------------------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
|                                                             |       |                                                                                                                      |       |                                                                          |       |                                                                                                                                                                           |       |
| **Equity  compensation plans approved by security holders:**     |       |                                                                                                                      |       |                                                                          |       |                                                                                                                                                                           |       |
| 1995 Combination  Plan                                           |       | 13,566                                                                                                                    |       | $                                                                             | 15.28      |                                                                                                                                                                           | —     |   |
| 1999 Combination  Plan                                           |       | 51,560                                                                                                                    |       | $                                                                             | 19.74      |                                                                                                                                                                           | —     |   |
| 2000 Combination  Plan                                           |       | 79,524                                                                                                                    |       | $                                                                             | 32.09      |                                                                                                                                                                           | —     |   |
| 2002 Combination  Plan                                           |       | 130,974                                                                                                                   |       | $                                                                             | 29.08      |                                                                                                                                                                           | —     |   |
| 2003 Stock Plan  for Non-Employee Directors                      |       | 116,485                                                                                                                   |       | $                                                                             | 40.73      |                                                                                                                                                                           | —     |   |
| 2005 Equity and  Incentive Plan                                  |       | 471,322                                                                                                                   |       | $                                                                             | 42.43      |                                                                                                                                                                           | 143,641    |   |
| **Equity  compensation plans not approved by security holders:** |       |                                                                                                                      |       |                                                                          |       |                                                                                                                                                                           |       |
| 1997  Non-Qualified Option Plan                                  |       | 29,811                                                                                                                    |       | $                                                                             | 26.11      |                                                                                                                                                                           | —     |   |
| 1998  Non-Qualified Option Plan                                  |       | 45,122                                                                                                                    |       | $                                                                             | 31.59      |                                                                                                                                                                           | —     |   |
| Total                                                            |       | 938,364                                                                                                                   |       | $                                                                             | 36.80      |                                                                                                                                                                           | 143,641    |   |

 

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**Purchases of Equity Securities**

 

OnMay 17, 2007, the Board of Directors approved a Stock Repurchase Programwhich authorized the Company to repurchase up to $35 million of shares of itscommon stock from time to time on the open market.  As of March 31, 2008, the maximum dollarvalue of shares that may yet be purchased under the program totaled $9,832,000.

 

Thefollowing table provides information about our purchases during the quarterended March 31, 2008 of equity securities that are registered by uspursuant to Section 12 of the Exchange Act.

 
| **2008**                                 | ** ** | **Total  Number of  Shares  Purchased** | ** ** | **Average Price  Paid per  Share** | ** ** | **Total Number of  Shares Purchased  as Part of  Publicly  Announced  Programs** | ** ** |
|------------------------------------------|------------|----------------------------------------------|------------|----------------------------------------------|------------|-----------------------------------------------------------------------------------------------------------|------------|
| January 1 –  January 31   |       | 80,755                                       |       | $                                            | 51.83      |                                                                                                      | 80,755     |   |
| February 1 –  February 29 |       | 63,800                                       |       | 54.27                                        |       | 63,800                                                                                                    |       |
| March 1 –  March 31       |       | 70,000                                       |       | 52.94                                        |       | 70,000                                                                                                    |       |
| **Total**                                |       | 214,555                                      |       | $                                            | 52.92      |                                                                                                      | 214,555    |   |

 

OnMay 8, 2008 the Board of Directors approved another Stock RepurchaseProgram which authorizes the Company to repurchase up to $35 million of sharesof its common stock from time to time on the open market.

 

**Stock Performance Graph**

 

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

 

**Total Return to Shareholders**

** (Dividends reinvested monthly)**

 

 

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

 

**ITEM 6.SELECTED FINANCIAL DATA**

 

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

 
| **(Dollars  in thousands,**      |       | **Fiscal  Year** |       |
|----------------------------------|------------|------------------|------------|
| **except  per share amounts)**   | ** ** | **2008**         | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
|                             |       |             |       |   |   |   |   |   |   |   |   |
| Net sales and  contract revenues |       | $                | 166,733    |   | $ | 153,186 |   | $ | 163,604 |   | $ | 88,314 |   | $ | 76,342 |   |
| Net income                       |       | 17,478           |       | 24,610 |   | 29,786 |   | 11,185 | (1) | 1,911 |   |
| Income per  share—diluted   |       | 1.87             |       | 2.38 |   | 3.27 |   | 1.31 |   | 0.26 |   |
| Total assets                     |       | 235,534          |       | 221,725 |   | 173,389 |   | 98,287 |   | 55,803 |   |
| Stockholders’  equity       |       | 166,072          |       | 167,698 |   | 130,198 |   | 61,570 |   | 38,433 |   |
| Dividends per  common share      |       | $                | 0.60       |   | $ | — |   | $ | — |   | $ | — |   | $ | — |   |

 

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

 

**ITEM 7.   MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

 

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

 

**2008Compared to 2007**

 

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

 

Net sales and contractrevenues for fiscal 2008 increased by 9% to $166,733,000 compared to fiscal2007 revenues of $153,186,000. The Company reported net income before taxes of$27,485,000 in fiscal 2008 compared to a net income before taxes of $40,016,000in the previous fiscal year. Net income for fiscal 2008 was $17,478,000 ($1.87per share, on a diluted basis) as compared to a net income of $24,610,000($2.38 per share, on a diluted basis) in fiscal 2007. Backlog at March 31,2008 was $99,606,000, a 6% decrease from the record-high year-end backlog of$105,634,000 reported at March 31, 2007. This decrease in backlog is attributable primarily to revenues beingearned on a significant CargoSearch order which was in backlog at March 31,2007.

 

***Results of Operations***    Total net sales and contractrevenues of $166,733,000 in fiscal 2008 increased by $13,547,000 or 9% from theprevious year. Revenues related to product sales and contracts increased by$2,025,000 or 2% due to the following factors. CargoSearch system revenuesincreased by $16,346,000 due to higher order volume on products introduced inthe past two years.  ParcelSearch systemrevenues increased by $7,446,000 due primarily to one large multi-unit orderreceived during the year.  Contractresearch and development revenues also increased $5,805,000 from the prior yearattributable primarily to one large contract which comprised 82% of overallcontract research and development revenues. These revenue increases were offset by a decrease in Z BackscatterSystem sales of $27,353,000 from the prior year attributable to a decrease inthe number of units sold.  In each of theprevious two years, Z Backscatter System contributed over 65% of overallproduct revenues.  The current yearshowed a shift in the product mix with a greater percentage of revenues beingreceived by the Company’s other product offerings.  Service revenues increased in fiscal 2008 by$11,522,000 or 22% to $63,568,000 due primarily to certain new large servicecontracts received during fiscal 2008 for products sold in fiscal 2007 whosewarranties expired during fiscal 2008.

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

**2007Compared to 2006**

 

***Results of Operations***    Total net sales and contractrevenues of $153,186,000 in fiscal 2007 decreased by $10,418,000 or 6% from theprevious year. Revenues related to product sales and contracts decreased by$26,936,000 or 21% due to the following: Z Backscatter System sales decreased $17,262,000 from the prior year asthe multi-unit orders received from the US Government in the prior year werenot repeated in the current year. Aftermarket part sales decreased $6,799,000 from the prior year and returnedto more standard revenue levels.  TheCompany had received one large order in fiscal 2006 which had contributed toits high parts revenues in the prior year. Parcel system revenues alsodecreased by $5,138,000 from the prior year attributable primarily to adecrease in order volume in the year. These product revenue decreases wereoffset by a $3,806,000 increase in contract research and development revenuesas compared to the prior period attributable primarily to one large contractresearch and development contract received in the current year.  Service revenues increased in fiscal 2007 by$16,518,000 or 46% to $52,046,000 due primarily to service contract revenuespurchased for the shipments of systems in 2006 and 2007.

 

In fiscal 2007, 73% ofthe Company’s revenues were from domestic customers as compared to 86% infiscal 2006. In fiscal 2007, the Company had sales to two customers whichaccounted for 46% of total sales. In fiscal 2006, the Company had sales to twomajor customers which accounted for 56% of total sales.

 

Cost of sales andcontracts of $86,647,000 in fiscal 2007 increased by $1,241,000 or 1% from theprevious year. Cost of product sales and contracts of $60,033,000 decreased by$5,341,000 or 8% as compared to the prior year. Cost of product sales and 

 

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contracts totaled 59% ofrevenues in fiscal 2007 as compared to 51% of revenues in fiscal 2006. Thisdecrease in gross margin is due primarily to $3,559,000 of stock-basedcompensation and a decrease in the volume of shipments of higher margin ZBackscatter systems.  The cost of servicerevenues increased $6,582,000 or 33% from the prior year. Cost of servicerevenues totaled 51% of revenues in fiscal 2007 as compared to 56% of revenues infiscal 2006.  This margin improvement isdue primarily to improved system performance of systems under service contractsas compared to the prior year.

 

Selling, general andadministrative expenses in fiscal 2007 increased by $7,494,000 to $27,136,000compared to fiscal 2006 and represented 18% of revenues in fiscal 2007 ascompared to 12% of revenues in fiscal 2006. This increase in spending can beattributed to $5,035,000 of stock-based compensation expense, increases inincentive compensation costs ($473,000) related to the bonuses and commissionsearned during the period, increased salaries and payroll related costs($497,000) as the Company increased its sales and marketing capabilities,increased marketing costs ($687,000), increases in expenses related to the Company’s ongoing ERP systemimplementation project ($248,000), and increased legal expenditures ($534,000)related to legal costs incurred related to an abandoned acquisition and othercorporate initiatives.

 

Company funded researchand development spending decreased by $2,417,000 to $7,184,000 in fiscal 2007,a 25% change compared to the $9,601,000 spent in fiscal 2006.  Research and development spending represented5% of revenues in fiscal 2007 as compared to 6% of revenues in fiscal 2006.  Fiscal 2007 costs decreased as the engineeringteam focused on revenue related contracts including contract research anddevelopment engagements.  The Company’sfiscal 2007 research and development activities focused on design modificationsto its existing products and the development of product alternatives tocontinue to bring innovative products to its customers.

 

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

 

TheCompanyreportedpre-taxincomeof$40,016,000infiscal2007ascomparedtoapre-taxincomeof$45,769,000inthepreviousfiscalyearprimarilyduetothedecreasedrevenuesandexpenseincreasesnotedabove.TheCompanyrecordedincometaxexpenseof$15,406,000infiscal2007ascomparedto$15,983,000inthepriorfiscalyear.  TheCompany’seffectivetaxrateexcludingtheimpactofthewarrant(income)expensewas41%infiscal2007ascomparedto31%infiscal2006.  Thisincreaseintheratecanbeattributedtotheutilizationofremainingnetoperatinglosscarry-forwardsinfiscal2006,theimplementationofFAS123(R)infiscal2007,andthereductionofcertaintaxcreditsinfiscal2007.

 

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

 

**Liquidityand Capital Resources**

 

Cash and cashequivalents at year-end decreased by $17,232,000 to $52,418,000 at March 31,2008 as compared to $69,650,000 at March 31, 2007. Cash flow provided byoperations of $17,339,000 resulted from the following:

 

· Reported net income of $17,478,000adjusted for the following non-cash items:

 

· Depreciation and amortization of$4,123,000 which was $1,698,000 higher than the previous year due primarily tothe depreciation of the Company’s building facilities and the depreciation ofthe ERP system which was placed in service in fiscal 2008.

· Stock compensation expense of $5,314,000

·The write-down of a note receivable from an unrelated third party of$1,608,000.

·The amortization of bond discounts of $2,278,000.

·An increase in deferred taxes related to the increased deferred revenuebalances and stock compensation expense.

 

· The increase in deferred revenue of$18,326,000 due to certain large service contracts which were billed at theoutset of the contract period.  86% ofthe deferred revenue balance at March 31, 2008 is expected to be earned infiscal 2009.

 

· The increase in accounts payable of$4,543,000 due to increased purchases in the fourth quarter of fiscal 2008.

 

These cashcontributors were offset by the following:

 

· An increase in inventories of$20,328,000 during the year.  Thisincrease is due to the building of certain systems in advance of orders inorder to meet anticipated order delivery deadlines, the introduction in thecurrent year of the ZPortal systems which are higher cost systems recognizedupon installation and/or acceptance as appropriate, the stocking of 

 

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internationalinventory depots to support service contract requirements, and $4.4 million ininventory for two orders shipped but not yet accepted as of March 31,2008.

 

· An increase in accounts receivable of$4,236,000 from the prior year due primarily to the timing of certain milestonebillings and prepayments in the prior year.

 

· The decrease in customer deposits of$5,007,000 as revenues were earned on certain milestones payments received inthe prior year.

 

Net cash of$8,124,000 was used for investing activities in fiscal 2008. Fiscal 2008capital expenditures totaled $3,270,000 versus $4,733,000 for fiscal 2007.Investments in fixed assets were comprised primarily of information technologyexpenditures, leasehold improvements related to the Company’s facilitiesexpansion, and demo equipment. The Company invested $163,971,000 in short-terminvestments during the year, and had maturities of $159,725,000 on short-term investments.In addition, the Company paid $608,000 in exchange for a note receivable froman unrelated company which was subsequently written off in the third quarter offiscal 2008.

 

At March 31, 2008,short-term investments and cash equivalents were invested primarily incommercial paper, money market funds, corporate debentures and certificates ofdeposit.  The Company does not invest inauction rate securities.  Although managementbelieves our investment policy is conservative in nature, certain short-terminvestments in commercial paper can be exposed the credit risk of theunderlying companies to which they relate and interest earned on theseinvestments is subject to interest rate fluctuations. The maturities within ourinvestment portfolio generally range from 30 to 365 days.

 

Net cash used forfinancing activities was $26,436,000 in fiscal 2008. Cash was used primarilyfor the payment of $25,168,000 to repurchase 473,303 shares as part of thestock repurchase program announced in the first quarter of fiscal 2008.  In addition, the Company issued threequarterly dividend payments totaling $5,516,000 during the year.  Cash provided by financing activitiesconsisted primarily of the receipt of $3,029,000 in proceeds from the exerciseof employee stock options.

 

On November 16,2006, the Company modified its domestic loan and security agreement withSilicon Valley Bank East which was scheduled to expire on November 29,2006.  The Company increased its domesticfacility from $5.0 million to $20.0 million to support the Company’sroutine working capital needs.  TheCompany’s $10.0 million export loan and security facility, guaranteed by theExport-Import Bank of the United States, expired as of November 29,2006. The maximum amount available for borrowings under the domesticfacility is (a) if the Company’s unrestricted cash is greater than orequal to $30.0 million, is $20.0 million minus the amount of all outstandingletters of credit less certain reserves, and minus the outstanding principalbalance of any advances or (b) if the Company’s unrestricted cash is lessthan $30.0 million for a period of 30 consecutive days, the lesser of (i) the$20.0 million, or ii) 85% of eligible domestic accounts receivable minusthe amount of outstanding letters of credits adjusted for certain reserves andminus the principal balance of any advances. The modification of the domestic loan and security agreement extendedthis credit facility through November 14, 2008.

 

The credit facility bearsan interest rate of the greater of 4.0% or the Silicon Valley Bank prime rate(5.25% at March 31, 2008). The credit agreement is collateralized bycertain assets of the Company and contains certain restrictions, includinglimitations on the amount of distributions that can be made to stockholders,and the disposition or encumbrances of assets, and requires the maintenance ofcertain financial covenants.  As of March 31,2008, the Company was in compliance with these covenants.

 

At March 31, 2008,there were no borrowings outstanding against this credit facility.  Under the terms of the credit agreement, theCompany was required to pay certain one-time facility fees which are beingamortized over the life of the facility and is required to pay a fee of 0.50%quarterly on unused amounts under the line of credits.  Total expenses incurred related to these feeswere $157,000, $201,000, and $172,000, in fiscal 2008, 2007, and 2006,respectively.

 

In the normal course ofbusiness, the Company may provide certain customers and potential customerswith performance guarantees, which are generally backed by standby letters ofcredit. In general, the Company would only be liable for the amount of theseguarantees in the event of default in the performance of our obligations, theprobability of which is remote in management’s opinion.   As of March 31, 2008 the Company hadoutstanding $6,091,000 in stand-by letters of credit against the domesticfacility with $13,909,000 remaining availability.   Of the outstanding letters of credit,$300,000 relates to the Company’s building lease and the remainder isguaranteeing performance on certain international projects.   No amounts have been drawn against theseletters of credit. In addition at March 31, 2008, the Company had arestricted cash balance of $2,523,000 related to certain bank required depositsfor outstanding letters of credits, bid bonds, and other bank-related fees.

 

In recent years, theCompany has funded its operations and capital expenditures with cash generatedby operations, including deposits from customers on long-term projects and fromproceeds received from stock issuances and option exercises. The 

 

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Company currently has noamounts drawn on its line of credit and believes that its cash flows fromoperations, cash and investments on hand and available lines of credit aresufficient to meet the current and foreseeable operating requirements of theCompany’s business.

 

***ContractualObligations*** The Company leases various office equipmentand facilities under non-cancelable leases. In addition, in the normal courseof business, the Company enters into purchase orders with its vendors for thepurchase of materials or services to meet its production needs. The followingtable summarizes the Company’s contractual obligations as of March 31,2008.

 
| **(In thousands)**                  | ** ** | **Total** | ** ** | **Less than 1 year** | ** ** | **1-3 years** | ** ** | **3-5 years** | ** ** | **After 5 years** | ** ** |
|------------------------------------------|------------|-----------|------------|-------------------------------------|------------|--------------------|------------|--------------------|------------|-----------------------------|------------|
| **Recorded  Contractual Obligations:**   |       |      |       |                                |       |               |       |               |       |                        |       |
| Lease financing  liability               |       | $         | 10,674     |                                | $          | 1,134              |       | $                  | 2,465      |                        | $          | 2,672 |   | $ | 4,403 |   |
| Other long-term  obligations             |       | 61        |       | 17                                  |       | 35                 |       | 9                  |       | —                      |       |
|                                     |       |      |       |                                |       |               |       |               |       |                        |       |
| **Unrecorded  Contractual Obligations:** |       |      |       |                                |       |               |       |               |       |                        |       |
| Operating Leases                         |       | 1,475     |       | 194                                 |       | 370                |       | 370                |       | 541                         |       |
| Purchase  Commitments                    |       | 29,965    |       | 29,937                              |       | 22                 |       | 6                  |       | —                      |       |
|                                     |       |      |       |                                |       |               |       |               |       |                        |       |
| Total                                    |       | $         | 42,175     |                                | $          | 31,282             |       | $                  | 2,892      |                        | $          | 3,057 |   | $ | 4,944 |   |

 

***Inflation*** The Company does not believe that inflationhas had a material effect on its results of operations. There can be noassurance, however, that the Company’s business will not be affected by inflationin the future.

 

**CriticalAccounting Policies**

 

The Companyconsiders certain accounting policies related to revenue recognition,inventories, allowances for obsolete and excess inventory, stock-basedcompensation, and income taxes to be critical policies due to the estimationprocesses involved in each.

 

***RevenueRecognition:***  The Company recognizes certain CargoSearchand Z Backscatter system sales and other product revenue, primarilyParcelSearch systems and after-market parts, in accordance with SEC StaffAccounting Bulletin (“SAB”)No. 101, Revenue Recognition in FinancialStatements modified by SAB No. 104 which requires that four basic criteriamust be met before revenue can be recognized: (1) persuasive evidence ofan arrangement exists; (2) delivery has occurred or services rendered; (3) thefee is fixed and determinable; and (4) collectibility is reasonablyassured.

 

Certain of theCompany’s contracts are multiple-element arrangements, which include standardproducts, custom-built systems or contract engineering projects, services, suchas training and service contracts. In accordance with Emerging Issues TaskForce Issue No. 00-21, “Revenue Arrangements with Multiple Deliverables,”(“EITF 00-21”) revenue arrangements that include multiple elements are analyzedto determine whether the deliverables can be divided into separate units ofaccounting or treated as a single unit of accounting. The consideration theCompany receives is allocated among the separate units of accounting based ontheir relative fair values determined based on prices of these elements as soldon a stand-alone basis, and the applicable revenue recognition criteria areapplied to each of the separate units. There is no customer right of return inthe Company’s sales agreements.  Revenuesare allocated to a delivered product or service when all of the followingcriteria are met: (1) the delivered item has value to the customer on astandalone basis; (2) there is objective and reliable evidence of the fairvalue of the undelivered item; and (3) if the arrangement includes ageneral right of return relative to the delivered item, delivery or performanceof the undelivered item is considered probable and substantially in ourcontrol.

 

Revenues for certainlong-term, custom-built systems or contract engineering projects are recognizedon a percentage of completion basis. The lengths of these contracts typicallyrange from 9 to 24 months from order to delivery and acceptance.Percentages-of-completion are determined by relating the actual costs of workperformed to date for each contract to its estimated final costs. Revisions incosts and profit estimates are reflected in the period in which the factscausing the revision become known.

 

Training and servicecontracts deliverables are accounted for separately from the delivered productelements as the Company’s undelivered products have value to its customers on astand-alone basis and the Company has objective and reliable evidence of thefair value of such services. Accordingly, service revenue representing the fairvalue of services not yet performed at the time of product shipment is deferredand recognized as such services are performed.

 

Certain contractsrequire payments from the customer upon execution of the agreement that areincluded in customer deposits. Individual customer deposits are reduced by theamount of revenue recognized on the contract until a zero balance isreached.  For all fixed price and long-termcontracts, if a loss is anticipated on the contract, a provision is made in theperiod in which such losses are determined.

 

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

 

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

 

Service revenuesare recognized on time and materials engagements as the services are provided.Service contract revenues are recognized on a straight-line basis over the lengthof the contract which reasonably approximates the period service revenues areearned.

 

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

 

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

 

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

 

SFAS 123(R) requiresthe Company to estimate the fair value of share-based awards on the date ofgrant using an option pricing model. The Company adopted SFAS 123(R) usingthe modified prospective transition method which required the application ofthe accounting standard starting April 1, 2006, the first day of theCompany’s fiscal year 2007. Prior period information was not restated toreflect the fair value method of expensing share-based awards.

 

***IncomeTaxes:***  The Companyaccounts for income taxes in accordance with SFAS No. 109, “Accounting forIncome Taxes.” Accordingly, the Company recognizes deferred income taxes basedon the expected future tax consequences of differences 

 

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between the financialstatement basis and the tax basis of assets and liabilities, calculated usingenacted tax rates in effect for the year in which the differences are expectedto be reflected in the tax return. The Company evaluates the need for avaluation allowance against its net deferred tax assets at year end based uponits three year cumulative income and its projections of future income, andrecords a valuation allowance against any net deferred tax assets if it is morelikely than not that they will not be realized.

 

**NewAccounting Pronouncements**

 

In September 2006,the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS 157”). SFAS157 establishes a common definition for fair value to be applied, establishes aframework for measuring fair value in accordance with generally acceptedaccounting principles, and expands disclosure about such fair value measurements.In February 2007, the FASB issued SFAS No. 159, “The Fair ValueOption for Financial Assets and Financial Liabilities-including an amendment ofFASB Statement No. 115” (“SFAS 159”). SFAS 159 allows an entity theirrevocable option to elect fair value for the initial and subsequentmeasurement of certain financial assets and liabilities under aninstrument-by-instrument election. SFAS 157 and SFAS 159 are both effective forfiscal years beginning after November 15, 2007. Management does not expectthe adoption of SFAS 157 or SFAS 159 to have a material impact on the Company’sfinancial position, results of operations and cash flows.

 

In December 2007,the FASB issued SFAS No. 141R, “Business Combinations” (“SFAS 141R”). SFAS141R replaces SFAS 141 and establishes principles and requirements for how anacquirer recognizes and measures in its financial statements the identifiableassets acquired, the liabilities assumed, any noncontrolling interest in theacquiree and the goodwill acquired. This standard is effective for fiscal yearsbeginning after December 15, 2008.

 

In December 2007,the FASB issued SFAS No. 160, “Noncontrolling Interests in ConsolidatedFinancial Statements” (“SFAS 160”). SFAS 160 establishes accounting andreporting standards for ownership interests in subsidiaries held by partiesother than the parent, the amount of consolidated net income attributable tothe parent and to the noncontrolling interest, changes in a parent’s ownershipinterest and the valuation of retained noncontrolling equity investments when asubsidiary is deconsolidated. This standard is effective for fiscal yearsbeginning after December 15, 2008.

 

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

 

The Company issubject to interest rate risk on its credit facilities which have variableinterest rates tied to the Prime Rate. As of March 31, 2008, the Companyhad no variable interest rate debt outstanding. See Note 3 of Notes toConsolidated Financial Statements for a discussion of our long-term indebtedness.

 

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

 

As of March 31,2008, the Company holds short-term investments and cash equivalents consistingof commercial paper, money market funds, corporate debentures/bonds andcertificates of deposit. The Company’s primary objective with its investmentportfolio is to invest available cash while preserving principal and meetingliquidity needs. These investments have an average interest rate ofapproximately 3.4% and are subject to interest rate risk. As a result of theaverage maturity and conservative nature of the investment portfolio, a suddenchange in interest rates would not have a material adverse effect on the valueof these investments.  To minimize thisrisk, we maintain a significant portion of our cash balances in money marketfunds. In general, money market funds are not subject to interest rate riskbecause the interest paid on such funds fluctuates with the prevailing interestrate.

 

**ITEM 8.FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA**

 

The financialstatements and supplementary financial information listed in the Index toConsolidated Financial Statements on page 25 are filed as part of thisAnnual Report on Form 10-K and are incorporated into this item by reference.

 

**ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ONACCOUNTING AND FINANCIAL DISCLOSURE**

 

None.

 

23

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**ITEM 9A.CONTROLS AND PROCEDURES**

 

**Evaluationof Disclosure Controls and Procedures**

 

As of the end ofthe period covered by this report, under the supervision and with theparticipation of our management, including our Chief Executive Officer andChief Financial Officer, the Company reviewed and evaluated the effectivenessof the Company’s disclosure controls and procedures pursuant to Rules 13a-15(e) and15d-15(e) of the Securities Exchange Act of 1934 as amended (the “ExchangeAct”). Based upon their evaluation, our Chief Executive Officer and our ChiefFinancial Officer concluded that our disclosure controls and procedures wereeffective as of March 31, 2008 to ensure that information required to bedisclosed by the Company in the reports filed and submitted by it under theExchange Act is recorded, processed, summarized and reported within the timeperiod specified in the Securities and Exchange Commission’s rules andforms, and to provide reasonable assurance that information required to bedisclosed by the Company in such reports is accumulated and communicated to theCompany’s management, including its Chief Executive Officer and Chief FinancialOfficer, as appropriate to allow timely decisions regarding requireddisclosure.

 

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

 

Our management isresponsible for establishing and maintaining adequate internal control overfinancial reporting, as such term is defined in Rules 13a-15(f) and15d-15(f) of the Exchange Act.  Ourmanagement conducted an evaluation of the effectiveness of our internal controlover financial reporting using the framework in “Internal Control-IntegratedFramework” issued by the Committee of Sponsoring Organizations of the TreadwayCommission.  Based on this evaluationunder the criteria established in “Internal Control – Integrated Framework”,our management concluded that the Company’s internal control over financialreporting was effective as of March 31, 2008.  Vitale, Caturano & Company, Ltd.,our independent registered public accounting firm, has audited theeffectiveness of our internal control over financial reporting as of March 31,2008, and has issued their report thereon which is included herein.

 

**Changesin Internal Controls over Financial Reporting**

 

Therehavebeennochangesinourinternalcontroloverfinancialreporting,assuchtermisdefinedinRules13a-15(f)and15d-15(f)oftheExchangeAct,duringthequarterendedMarch31,2008thathavemateriallyaffected,orarereasonablylikelytomateriallyaffect,theCompany’sinternalcontroloverfinancialreporting.

 

**ITEM 9B.OTHER INFORMATION**

 

None.

 

**PART III**

 

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

 

**Code ofConduct**

 

The Company hasadopted a Code of Conduct that applies to our Board of Directors, ChiefExecutive Officer, Chief Financial Officer, and all employees of the Company.The Company’s Code of Conduct is posted on our website at www.as-e.com and maybe accessed in the Corporate Governance section of the Investor Informationpage. The Company intends to satisfy the disclosure requirement under Item 10of Form 8-K, regarding an amendment to, or waiver from, our Code ofConduct, by posting such information on our website at the location specifiedabove.

 

The otherinformation called for by this item is hereby incorporated by reference fromthe Registrant’s Definitive Proxy Statement relating to the 2008 Annual Meetingof Stockholders, which Proxy Statement will be filed with the Securities andExchange Commission on or about July 29, 2008.

 

**ITEM 11.EXECUTIVE COMPENSATION**

 

The informationcalled for by this item is hereby incorporated by reference from the Registrant’sDefinitive Proxy Statement relating to the 2008 Annual Meeting of Stockholders,which Proxy Statement will be filed with the Securities and Exchange Commissionon or about July 29, 2008.

 

24

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**ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS ANDMANAGEMENT AND RELATED STOCKHOLDER MATTERS**

 

The informationcalled for by this item is hereby incorporated by reference from the Registrant’sDefinitive Proxy Statement relating to the 2008 Annual Meeting of Stockholders,which Proxy Statement will be filed with the Securities and Exchange Commissionon or about July 29, 2008.

 

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

 

The informationcalled for by this item is hereby incorporated by reference from the Registrant’sDefinitive Proxy Statement relating to the 2008 Annual Meeting of Stockholders,which Proxy Statement will be filed with the Securities and Exchange Commissionon or about July 29, 2008.

 

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

 

The informationcalled for by this item is hereby incorporated by reference from the Registrant’sDefinitive Proxy Statement relating to the 2008 Annual Meeting of Stockholders,which Proxy Statement will be filed with the Securities and Exchange Commissionon or about July 29, 2008.

 

**PART IV**

 

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

 

The financialstatements listed in the Index to Consolidated Financial Statements on page 26are filed as part of this report, and such Index is incorporated in this itemby reference.

 

The exhibitslisted in the Exhibit Index on page 49 are filed as part of thisreport, and such Index is incorporated in this item by reference.

 

25

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

**INDEX TO CONSOLIDATED FINANCIAL STATEMENTS**

 

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

 
| ** **                                                                                                                                                                                                       | ** ** | **PAGE** |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------|
| **CONSOLIDATED FINANCIAL STATEMENTS**                                                                                                                                                                            |       |     |
| Report  of Independent Registered Public Accounting Firm                                                                                                                                                         |       | 27       |
| Consolidated Balance  Sheets—March 31, 2008 and 2007                                                                                                                                                   |       | 28       |
| Consolidated  Statements of Operations for the Years Ended March 31, 2008, 2007, and  2006                                                                                                                  |       | 29       |
| Consolidated Statements of  Stockholders’ Equity and Comprehensive Income for the Years Ended  March 31, 2008, 2007, and 2006                                                                          |       | 30       |
| Consolidated  Statements of Cash Flows for the Years Ended March 31, 2008, 2007, and  2006                                                                                                                  |       | 31       |
| Notes to Consolidated Financial Statements                                                                                                                                                                       |       | 32       |
|                                                                                                                                                                                                             |       |     |
| **CONSOLIDATED SUPPLEMENTARY FINANCIAL INFORMATION**                                                                                                                                                             |       |     |
| Unaudited Quarterly Consolidated Financial Data for  the Years Ended March 31, 2008 and 2007                                                                                                                |       | 47       |
|                                                                                                                                                                                                             |       |     |
| Financial  statement schedules have been omitted because of the absence of conditions  under which they are required or because the required information is given in  the financial statements or notes thereto. |

 

26

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**REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTINGFIRM**

 

To theBoard of Directors and Stockholders

of American Science andEngineering, Inc.

 

We have audited theaccompanying consolidated balance sheets of American Science and Engineering, Inc.and subsidiary (“the Company”) as of March 31, 2008 and 2007 and therelated consolidated statements of operations, stockholders’ equity andcomprehensive income, and cash flows for each of the years ended March 31,2008, 2007 and 2006.  We also haveaudited American Science and Engineering, Inc. and subsidiary’s internalcontrol over financial reporting as of March 31, 2008, based on criteriaestablished in *Internal Control—Integrated Framework*issued by the Committee of Sponsoring Organizations of the Treadway Commission(COSO). Management is responsible for these financial statements, formaintaining effective internal control over financial reporting, and for itsassessment of the effectiveness of internal control over financial reporting.Our responsibility is to express an opinion on these financial statements andan opinion on the Company’s internal control over financial reporting based onour audits.

 

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

 

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

 

Because of its inherentlimitations, internal control over financial reporting may not prevent ordetect misstatements. Also, projections of any evaluation of effectiveness to futureperiods are subject to the risk that controls may become inadequate because ofchanges in conditions, or that the degree of compliance with the policies orprocedures may deteriorate.

 

In our opinion, thefinancial statements referred to above present fairly, in all materialrespects, the consolidated financial position of American Science andEngineering, Inc. and subsidiary as of March 31, 2008 and 2007 andthe results of their operations and their cash flows for each of the threeyears in the period ended March 31, 2008 in conformity with accountingprinciples generally accepted in the United States of America. Also, in ouropinion, American Science and Engineering, Inc. maintained, in allmaterial respects, effective internal control over financial reporting as of March 31,2008 based on criteria established in *InternalControl—Integrated Framework* issued by the Committee of SponsoringOrganizations of the Treadway Commission (COSO).

 

As discussed in Note 1 tothe consolidated financial statements, the Company adopted SFAS No. 123(R),Share-Based Payment, effective April 1, 2006.

 
| /s/ Vitale,  Caturano & Company, Ltd. |
|------------------------------------------------|
|                                           |
| VITALE,  CATURANO & COMPANY, LTD.     |
|                                           |
| June 11, 2008                             |
| Boston, Massachusetts                          |

 

27

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

**CONSOLIDATED BALANCE SHEETS**

**MARCH 31, 2008 AND 2007**

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

 
| ** **                                                                    | ** ** | **2008** | ** ** | **2007** | ** ** |
|-------------------------------------------------------------------------------|------------|----------|------------|----------|------------|
| **Assets**                                                                    |       |     |       |     |       |
| Current assets:                                                               |       |     |       |     |       |
| Cash and cash  equivalents                                                    |       | $        | 52,418     |     | $          | 69,650 |   |
| Restricted cash  and investments                                              |       | 319      |       | 202      |       |
| Short-term  investments                                                       |       | 72,687   |       | 66,086   |       |
| Accounts  receivable, net of allowances of $230 in 2008 and $224 in 2007      |       | 27,583   |       | 23,366   |       |
| Unbilled costs  and fees                                                      |       | 6,114    |       | 5,841    |       |
| Inventories                                                                   |       | 40,107   |       | 20,140   |       |
| Prepaid expenses  and other current assets                                    |       | 4,815    |       | 6,730    |       |
| Deferred income  taxes                                                        |       | 1,577    |       | 3,087    |       |
| **Total  current assets**                                                     |       | 205,620  |       | 195,102  |       |
| Building,  equipment and leasehold improvements, net                          |       | 22,201   |       | 23,054   |       |
| Restricted cash  and investments                                              |       | 2,204    |       | 2,599    |       |
| Deferred income  taxes                                                        |       | 5,231    |       | 970      |       |
| Other assets                                                                  |       | 278      |       | —   |       |
|                                                                          |       |     |       |     |       |
| **Total  assets**                                                             |       | $        | 235,534    |     | $          | 221,725 |   |
| ** **                                                                    |       |     |       |     |       |
| **Liabilities  and Stockholders’ Equity**                                |       |     |       |     |       |
| Current  liabilities:                                                         |       |     |       |     |       |
| Accounts payable                                                              |       | $        | 12,660     |     | $          | 8,117 |   |
| Accrued salaries  and benefits                                                |       | 2,935    |       | 7,241    |       |
| Accrued warranty  costs                                                       |       | 1,671    |       | 1,997    |       |
| Deferred revenue                                                              |       | 23,120   |       | 4,321    |       |
| Customer  deposits                                                            |       | 6,547    |       | 11,554   |       |
| Current portion  of lease financing liability                                 |       | 1,134    |       | 1,263    |       |
| Warrant  liability                                                            |       | —   |       | 634      |       |
| Other current  liabilities                                                    |       | 8,097    |       | 4,290    |       |
| **Total  current liabilities**                                                |       | 56,164   |       | 39,417   |       |
| Lease financing  liability, net of current portion                            |       | 9,540    |       | 10,379   |       |
| Other long term  liabilities                                                  |       | 3,758    |       | 4,231    |       |
|                                                                          |       |     |       |     |       |
| **Total  liabilities**                                                        |       | 69,462   |       | 54,027   |       |
| ** **                                                                    |       |     |       |     |       |
| Commitments and  contingencies (Notes 2 and 8)                                |       |     |       |     |       |
| Stockholders’  equity:                                                   |       |     |       |     |       |
| Preferred stock,  no par value                                                |       |     |       |     |       |
| Authorized—100,000  shares                                               |       |     |       |     |       |
| Issued—None                                                              |       | —   |       | —   |       |
| Common stock,  $0.662/3 par value                                        |       |     |       |     |       |
| Authorized—20,000,000  shares                                            |       |     |       |     |       |
| Issued and  outstanding 8,945,633 shares in 2008 and 9,186,975 shares in 2007 |       | 5,963    |       | 6,125    |       |
| Capital in  excess of par value                                               |       | 91,544   |       | 105,036  |       |
| Accumulated  other comprehensive income                                       |       | 114      |       | 48       |       |
| Retained  earnings                                                            |       | 68,451   |       | 56,489   |       |
|                                                                          |       |     |       |     |       |
| **Total  stockholders’ equity**                                          |       | 166,072  |       | 167,698  |       |
| ** **                                                                    |       |     |       |     |       |
| **Total  liabilities and stockholders’ equity**                          |       | $        | 235,534    |     | $          | 221,725 |   |

 

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

 

28

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

**CONSOLIDATED STATEMENTS OF OPERATIONS**

**FOR THE YEARS ENDED MARCH 31, 2008, 2007, AND2006**

(Amounts in thousands except per share amounts)

 
| ** **                                                                                    | ** ** | **2008**    | ** ** | **2007** | ** ** | **2006** | ** ** |
|-----------------------------------------------------------------------------------------------|------------|-------------|------------|----------|------------|----------|------------|
| **Net  sales and contract revenues:**                                                         |       |        |       |     |       |     |       |
| Net product  sales and contract revenues                                                      |       | $           | 103,165    |     | $          | 101,140  |       | $ | 128,076 |   |
| Net service  revenues                                                                         |       | 63,568      |       | 52,046   |       | 35,528   |       |
| **Total  net sales and contract revenues**                                                    |       | 166,733     |       | 153,186  |       | 163,604  |       |
| ** **                                                                                    |       |        |       |     |       |     |       |
| **Cost of  sales and contracts:**                                                             |       |        |       |     |       |     |       |
| Cost of product  sales and contracts                                                          |       | 70,413      |       | 60,033   |       | 65,374   |       |
| Cost of service  revenues                                                                     |       | 36,570      |       | 26,614   |       | 20,032   |       |
| **Total  cost of sales and contracts**                                                        |       | 106,983     |       | 86,647   |       | 85,406   |       |
| ** **                                                                                    |       |        |       |     |       |     |       |
| **Gross  profit**                                                                             |       | 59,750      |       | 66,539   |       | 78,198   |       |
| ** **                                                                                    |       |        |       |     |       |     |       |
| Selling, general  and administrative expenses                                                 |       | 26,221      |       | 27,136   |       | 19,642   |       |
| Research and  development costs                                                               |       | 12,306      |       | 7,184    |       | 9,601    |       |
| Gain on sale of  assets                                                                       |       | —      |       | —   |       | (336     | )          |
|                                                                                          |       |        |       |     |       |     |       |
| **Operating  expenses**                                                                       |       | 38,527      |       | 34,320   |       | 28,907   |       |
| ** **                                                                                    |       |        |       |     |       |     |       |
| **Operating  income**                                                                         |       | 21,223      |       | 32,219   |       | 49,291   |       |
| ** **                                                                                    |       |        |       |     |       |     |       |
| **Other  income (expense):**                                                                  |       |        |       |     |       |     |       |
| Interest and  investment income                                                               |       | 6,842       |       | 5,621    |       | 2,513    |       |
| Interest expense                                                                              |       | (158        | )          | (353     | )          | (24      | )          |
| Other, net                                                                                    |       | (433        | )          | 259      |       | 83       |       |
| Change in  warrant valuation                                                                  |       | 11          |       | 2,270    |       | (6,094   | )          |
| **Total  other income (expense)**                                                             |       | 6,262       |       | 7,797    |       | (3,522   | )          |
| ** **                                                                                    |       |        |       |     |       |     |       |
| **Income  before provision for income taxes**                                                 |       | 27,485      |       | 40,016   |       | 45,769   |       |
| **Provision  for income taxes**                                                               |       | 10,007      |       | 15,406   |       | 15,983   |       |
| **Net  income**                                                                               |       | $           | 17,478     |     | $          | 24,610   |       | $ | 29,786 |   |
| ** **                                                                                    |       |        |       |     |       |     |       |
| **Income  per share            ** | **—** | **Basic**   | ** ** | $        | 1.92       |     | $          | 2.70 |   | $ | 3.48 |   |
| ** **                                                                                    | **—** | **Diluted** |       | $        | 1.87       |     | $          | 2.38 |   | $ | 3.27 |   |
| **Weighted  average shares**                                                                  | **—** | **Basic**   |       | 9,114    |       | 9,117    |       | 8,555 |   |
| ** **                                                                                    | **—** | **Diluted** |       | 9,347    |       | 9,368    |       | 9,113 |   |
| **Dividends  declared per share**                                                             |       | $           | 0.60       |     | —     |     | —     |   |

 

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

 

29

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

**CONSOLIDATED STATEMENTS OFSTOCKHOLDERS’ EQUITY AND COMPREHENSIVE INCOME**

**FOR THEYEARS ENDED MARCH 31, 2008, 2007, AND 2006**

(Amounts in thousands,except share amounts)

 
|                                                                 |   | **Common Stock** | ** ** | **Capital in** | ** ** | **Retained  Earnings** | ** ** | **Accumulated  Other** |       |       |       |             |       |      |       |
|----------------------------------------------------------------------|--------|-----------------------|------------|---------------------|------------|------------------------|------------|------------------------|------------|------------|------------|------------------|------------|-----------|------------|
|                                                                 |   | ** **            | ** ** | **Par**             | ** ** | **Excess of**     | ** ** | **(Accumulated**       | ** ** | **Comp.**  |       | **Unearned**     |       |      |       | **Comprehensive** |   |
|                                                                 |   | **Shares**            | ** ** | **Value**           | ** ** | **Par Value**     | ** ** | **Deficit)**           | ** ** | **Income** | ** ** | **Compensation** | ** ** | **Total** | ** ** | **Income** |   |
|                                                                 |   |                  |       |                |       |                   |       |                   |       |       |       |             |       |      |       |   |   |
| **Balance,  March 31, 2005**                                         |   | 8,341,480             |       | $                   | 5,560      |                   | $          | 54,098                 |       | $          | 2,093      |             | $          | (12       | )          | $ | (169 | ) | $ | 61,570 |   |   |   |
| Net income                                                           |   | —                |       | —              |       | —                 |       | 29,786                 |       | —     |       | —           |       | 29,786    |       | 29,786 |   |
| Exercise of stock  options and warrants                              |   | 695,777               |       | 465                 |       | 19,700                 |       | —                 |       | —     |       | —           |       | 20,165    |       | — |   |
| Issuance of stock  under employee compensation plans                 |   | 9,344                 |       | 6                   |       | 484                    |       | —                 |       | —     |       | —           |       | 490       |       | — |   |
| Issuance of  restricted stock                                        |   | 24,078                |       | 16                  |       | 2,135                  |       | —                 |       | —     |       | (2,151           | )          | —    |       | — |   |
| Tax benefit  accrued on stock option exercises                       |   | —                |       | —              |       | 17,540                 |       | —                 |       | —     |       | —           |       | 17,540    |       | — |   |
| Compensation  expense on stock options                               |   | —                |       | —              |       | 104                    |       | —                 |       | —     |       | —           |       | 104       |       | — |   |
| Translation  adjustment                                              |   | —                |       | —              |       | —                 |       | —                 |       | (3         | )          | —           |       | (3        | )          | (3 | ) |
| Amortization of  unearned compensation                               |   | —                |       | —              |       | —                 |       | —                 |       | —     |       | 547              |       | 547       |       | — |   |
| Unrealized gain  (loss) on available for sale securities, net        |   | —                |       | —              |       | —                 |       | —                 |       | (1         | )          | —           |       | (1        | )          | (1 | ) |
|                                                                 |   |                  |       |                |       |                   |       |                   |       |       |       |             |       |      |       |   |   |
| **Balance,  March 31, 2006**                                         |   | 9,070,679             |       | 6,047               |       | 94,061                 |       | 31,879                 |       | (16        | )          | (1,773           | )          | 130,198   |       | $ | 29,782 |   |
| Net income                                                           |   | —                |       | —              |       | —                 |       | 24,610                 |       | —     |       | —           |       | 24,610    |       | 24,610 |   |
| Exercise of stock  options and warrants                              |   | 67,130                |       | 45                  |       | 2,912                  |       | —                 |       | —     |       | —           |       | 2,957     |       | — |   |
| Issuance of stock  under employee compensation plans                 |   | 10,530                |       | 7                   |       | 631                    |       | —                 |       | —     |       | —           |       | 638       |       | — |   |
| Issuance of  restricted stock                                        |   | 38,636                |       | 26                  |       | (26                    | )          | —                 |       | —     |       | —           |       | —    |       | — |   |
| Tax benefit  accrued on stock option exercises                       |   | —                |       | —              |       | 544                    |       | —                 |       | —     |       | —           |       | 544       |       | — |   |
| Compensation  expense on stock options                               |   | —                |       | —              |       | 7,186                  |       | —                 |       | —     |       | —           |       | 7,186     |       | — |   |
| Compensation  expense on restricted stock and restricted stock units |   | —                |       | —              |       | 1,501                  |       | —                 |       | —     |       | —           |       | 1,501     |       | — |   |
| Translation  adjustment                                              |   | —                |       | —              |       | —                 |       | —                 |       | 16         |       | —           |       | 16        |       | 16 |   |
| Reversal of  unearned compensation upon adoption of FAS 123(R)       |   | —                |       | —              |       | (1,773                 | )          | —                 |       | —     |       | 1,773            |       | —    |       | — |   |
| Unrealized gain  (loss) on available for sale securities, net        |   | —                |       | —              |       | —                 |       | —                 |       | 48         |       | —           |       | 48        |       | 48 |   |
|                                                                 |   |                  |       |                |       |                   |       |                   |       |       |       |             |       |      |       |   |   |
| **Balance,  March 31, 2007**                                         |   | 9,186,975             |       | 6,125               |       | 105,036                |       | 56,489                 |       | 48         |       | —           |       | 167,698   |       | $ | 24,674 |   |
| Net income                                                           |   | —                |       | —              |       | —                 |       | 17,478                 |       | —     |       | —           |       | 17,478    |       | 17,478 |   |
| Repurchase of  common stock                                          |   | (473,303              | )          | (316                | )          | (24,852                | )          | —                 |       | —     |       | —           |       | (25,168   | )          | — |   |
| Exercise of stock  options and warrants                              |   | 149,260               |       | 99                  |       | 4,062                  |       | —                 |       | —     |       | —           |       | 4,161     |       | — |   |
| Issuance of stock  under employee compensation plans                 |   | 12,091                |       | 8                   |       | 681                    |       | —                 |       | —     |       | —           |       | 689       |       | — |   |
| Issuance of  restricted stock                                        |   | 70,640                |       | 47                  |       | (47                    | )          | —                 |       | —     |       | —           |       | —    |       | — |   |
| Tax benefit  accrued on stock option exercises                       |   | —                |       | —              |       | 1,350                  |       | —                 |       | —     |       | —           |       | 1,350     |       | — |   |
| Compensation  expense on stock options                               |   | —                |       | —              |       | 3,258                  |       | —                 |       | —     |       | —           |       | 3,258     |       | — |   |
| Compensation  expense on restricted stock and restricted stock units |   | —                |       | —              |       | 2,056                  |       | —                 |       | —     |       | —           |       | 2,056     |       | — |   |
| Dividends  declared                                                  |   | —                |       | —              |       | —                 |       | (5,516                 | )          | —     |       | —           |       | (5,516    | )          | — |   |
| Translation  adjustment                                              |   | —                |       | —              |       | —                 |       | —                 |       | (8         | )          | —           |       | (8        | )          | (8 | ) |
| Unrealized gain  (loss) on available for sale securities, net        |   | —                |       | —              |       | —                 |       | —                 |       | 74         |       | —           |       | 74        |       | 74 |   |
|                                                                 |   |                  |       |                |       |                   |       |                   |       |       |       |             |       |      |       |   |   |
| **Balance,  March 31, 2008**                                         |   | 8,945,663             |       | $                   | 5,963      |                   | $          | 91,544                 |       | $          | 68,451     |             | $          | 114       |       | $ | — |   | $ | 166,072 |   | $ | 17,544 |   |

 

The accompanying notes are anintegral part of these consolidated financial statements

 

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

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

**FOR THE YEARS ENDED MARCH 31, 2008, 2007, AND2006**

(Amounts in thousands)

 
| ** **                                                                                                   | ** ** | **2008** | ** ** | **2007** | ** ** | **2006** | ** ** |
|--------------------------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| **Cash  flows from operating activities:**                                                                   |       |     |       |     |       |     |       |
| Net income                                                                                                   |       | $        | 17,478     |     | $          | 24,610   |       | $ | 29,786 |   |
| Adjustments to  reconcile net income to net cash provided by operating activities:                           |       |     |       |     |       |     |       |
| Depreciation and  amortization                                                                               |       | 4,123    |       | 2,425    |       | 989      |       |
| Provisions for  contracts, inventory, and accounts receivable reserves                                       |       | 380      |       | (203     | )          | 2,673    |       |
| Write-down of  note receivable                                                                               |       | 1,608    |       | —   |       | —   |       |
| Gain on sale of  assets                                                                                      |       | —   |       | —   |       | (336     | )          |
| Change in fair  value of warrants                                                                            |       | (11      | )          | (2,270   | )          | 6,094    |       |
| Amortization of  bond discount                                                                               |       | (2,278   | )          | (1,666   | )          | (356     | )          |
| Stock  compensation expense                                                                                  |       | 5,314    |       | 8,687    |       | 651      |       |
| Deferred income  taxes                                                                                       |       | (2,751   | )          | 72       |       | 5,627    |       |
| Reversal of  deferred tax asset valuation allowance relating to the utilization of tax net  operating losses |       | —   |       | —   |       | (2,715   | )          |
| Change in assets  and liabilities:                                                                           |       |     |       |     |       |     |       |
| Accounts  receivable                                                                                         |       | (4,236   | )          | 2,621    |       | 2,408    |       |
| Unbilled costs  and fees                                                                                     |       | (273     | )          | (1,748   | )          | (3,338   | )          |
| Inventories                                                                                                  |       | (20,328  | )          | (3,206   | )          | 5,248    |       |
| Prepaid expenses  and other assets                                                                           |       | 587      |       | 1,878    |       | (5,566   | )          |
| Accounts payable                                                                                             |       | 4,543    |       | 1,458    |       | (84      | )          |
| Deferred revenue                                                                                             |       | 18,326   |       | 4,591    |       | (212     | )          |
| Customer  deposits                                                                                           |       | (5,007   | )          | 5,451    |       | (5,029   | )          |
| Accrued expenses  and other current liabilities                                                              |       | (136     | )          | 2,154    |       | 4,358    |       |
| Non-current  liabilities                                                                                     |       | —   |       | —   |       | (51      | )          |
|                                                                                                         |       |     |       |     |       |     |       |
| Total  adjustments                                                                                           |       | (139     | )          | 20,244   |       | 10,361   |       |
|                                                                                                         |       |     |       |     |       |     |       |
| Net cash  provided by operating activities                                                                   |       | 17,339   |       | 44,854   |       | 40,147   |       |
|                                                                                                         |       |     |       |     |       |     |       |
| **Cash  flows from investing activities:**                                                                   |       |     |       |     |       |     |       |
| Proceeds from  maturities of short-term investments                                                          |       | 159,725  |       | 109,345  |       | 39,146   |       |
| Purchases of  short-term instruments                                                                         |       | (163,971 | )          | (130,600 | )          | (61,334  | )          |
| Proceeds from  sale of assets                                                                                |       | —   |       | —   |       | 2,800    |       |
| Issuance of note  receivable                                                                                 |       | (608     | )          | (1,000   | )          | —   |       |
| Purchases of  property and equipment                                                                         |       | (3,270   | )          | (4,733   | )          | (11,224  | )          |
| Cash used for  investing activities                                                                          |       | (8,124   | )          | (26,988  | )          | (30,612  | )          |
|                                                                                                         |       |     |       |     |       |     |       |
| **Cash  flows from financing activities:**                                                                   |       |     |       |     |       |     |       |
| Decrease  (increase) in restricted cash and investments                                                      |       | 278      |       | (2,703   | )          | 257      |       |
| Proceeds from  financing of leasehold improvements                                                           |       | 417      |       | 2,253    |       | 3,339    |       |
| Repurchase of  shares                                                                                        |       | (25,168  | )          | —   |       | —   |       |
| Payment of  common stock dividend                                                                            |       | (5,516   | )          | —   |       | —   |       |
| Repayment of  leasehold financing                                                                            |       | (1,335   | )          | (804     | )          | (378     | )          |
| Proceeds from  exercise of warrants                                                                          |       | 509      |       | 834      |       | 1,854    |       |
| Proceeds from  exercise of stock options                                                                     |       | 3,029    |       | 989      |       | 10,118   |       |
| Reduction of  income taxes paid due to the tax benefit from employee stock option expense                    |       | 1,350    |       | 544      |       | 10,515   |       |
| Cash (used for)  provided by financing activities                                                            |       | (26,436  | )          | 1,113    |       | 25,705   |       |
|                                                                                                         |       |     |       |     |       |     |       |
| Foreign currency  translation effect on cash                                                                 |       | (11      | )          | 16       |       | (3       | )          |
|                                                                                                         |       |     |       |     |       |     |       |
| **Net  increase (decrease) in cash and cash equivalents**                                                    |       | (17,232  | )          | 18,995   |       | 35,237   |       |
| **Cash  and cash equivalents at beginning of year**                                                          |       | 69,650   |       | 50,655   |       | 15,418   |       |
| **Cash  and cash equivalents at end of year**                                                                |       | $        | 52,418     |     | $          | 69,650   |       | $ | 50,655 |   |
|                                                                                                         |       |     |       |     |       |     |       |
| **Supplemental  disclosures of cash flow information:**                                                      |       |     |       |     |       |     |       |
| Interest paid                                                                                                |       | $        | 158        |     | $          | 353      |       | $ | 24 |   |
| Income taxes  paid                                                                                           |       | $        | 11,417     |     | $          | 12,495   |       | $ | 7,598 |   |
| **Non-cash  transactions:**                                                                                  |       |     |       |     |       |     |       |
| Issuance of  stock for 401K match                                                                            |       | $        | 689        |     | $          | 638      |       | $ | 490 |   |
| Issuance of  restricted stock                                                                                |       | $        | —     |     | $          | —   |       | $ | 2,151 |   |
| Assumption of  debt / lease financing receivable                                                             |       | $        | —     |     | $          | 2,029    |       | $ | 2,303 |   |
| Fair value of  warrants exercised                                                                            |       | $        | 623        |     | $          | 1,134    |       | $ | 8,193 |   |

 

The accompanying notes are an integral part of these consolidated financialstatements.

 

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

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

 

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

 

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

 

**Principlesof Consolidation**

 

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

 

**Use ofEstimates**

 

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

 

**Cash andCash Equivalents**

 

The Companyconsiders all investments with original maturities of 90 days or less to becash equivalents.  The Company maintainscash and cash equivalent balances with financial institutions that exceedfederally insured limits.  The Companyhas not experienced any losses related to these balances, and managementbelieves its credit risk to be minimal. Cash and cash equivalents are carriedat cost, which approximates fair market value at fiscal year-end 2008 and 2007.

 

**RestrictedCash and Investments**

 

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

 

**Short-termInvestments and Cash Equivalents**

 

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

 
| ** **                    | ** ** | **Amortized  Cost** | ** ** | **Gross  Unrealized  Gains** | ** ** | **Gross  Unrealized  Losses** | ** ** | **Fair Value** | ** ** |
|-------------------------------|------------|---------------------|------------|------------------------------|------------|-------------------------------|------------|---------------------|------------|
| **2008:**                     |       |                |       |                         |       |                          |       |                |       |
| Money market  funds           |       | $                   | 33,340     |                         | $          | —                        |       | $                   | —     |   | $ | 33,340 |   |
| Certificates of  deposit      |       | 7,000               |       | 2                            |       | —                        |       | 7,002               |       |
| Commercial paper              |       | 45,098              |       | 37                           |       | —                        |       | 45,135              |       |
| Corporate  debentures/bonds   |       | 32,495              |       | 99                           |       | (56                           | )          | 32,538              |       |
| Total                         |       | $                   | 117,933    |                         | $          | 138                           |       | $                   | (56        | ) | $ | 118,015 |   |
|                          |       |                |       |                         |       |                          |       |                |       |
| Classified as:                |       |                |       |                         |       |                          |       |                |       |
| Cash equivalents              |       |                |       |                         |       |                          |       | $                   | 45,328     |   |
| Short term  securities        |       |                |       |                         |       |                          |       | 72,687              |       |
|                          |       |                |       |                         |       |                          |       | $                   | 118,015    |   |
|                          |       |                |       |                         |       |                          |       |                |       |
| **2007:**                     |       |                |       |                         |       |                          |       |                |       |
| Money market  funds           |       | $                   | 6,240      |                         | $          | —                        |       | $                   | —     |   | $ | 6,240 |   |
| Certificates of  deposit      |       | 4,201               |       | —                       |       | (1                            | )          | 4,200               |       |
| Commercial paper              |       | 72,760              |       | 6                            |       | (1                            | )          | 72,765              |       |
| Corporate  debentures/bonds   |       | 37,762              |       | 9                            |       | (6                            | )          | 37,765              |       |
| U.S. Government  agency bonds |       | 3,974               |       | —                       |       | —                        |       | 3,974               |       |
| Total                         |       | $                   | 124,937    |                         | $          | 15                            |       | $                   | (8         | ) | $ | 124,944 |   |
|                          |       |                |       |                         |       |                          |       |                |       |
| Classified as:                |       |                |       |                         |       |                          |       |                |       |
| Cash equivalents              |       |                |       |                         |       |                          |       | $                   | 58,858     |   |
| Short term securities         |       |                |       |                         |       |                          |       | 66,086              |       |
|                          |       |                |       |                         |       |                          |       | $                   | 124,944    |   |

 

32

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**AccountsReceivable and Unbilled Costs and Fees**

 

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

 
| **(In thousands)** | ** ** | **Balance at  Beginning of  Year** | ** ** | **Charged  (Credited) to  Costs and  Expenses** | ** ** | **Deductions /  Write-offs  Charged to  Reserves** | ** ** | **Balance  at End of  Year** | ** ** |
|-------------------------|------------|----------------------------------------------|------------|-----------------------------------------------------------|------------|--------------------------------------------------------------|------------|----------------------------------------|------------|
| **2008**                |       | $                                            | 224        |                                                      | $          | 19                                                           |       | $                                      | 13         |   | $ | 230 |   |
| **2007**                |       | $                                            | 345        |                                                      | $          | (119                                                         | )          | $                                      | 2          |   | $ | 224 |   |
| **2006**                |       | $                                            | 501        |                                                      | $          | (106                                                         | )          | $                                      | 50         |   | $ | 345 |   |

 

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

 

Included inaccounts receivable and unbilled costs and fees at March 31, 2008 and 2007are $20,822,000 and $23,976,000, respectively, attributable to both prime andsubcontracts with federal and state governments. The Company establishes a reserveagainst unbilled costs and fees based on known troubled accounts or contracts,historical experience, and other currently available evidence. There was notactivity in the reserve for unbilled costs and fees during fiscal 2008.  Activity in the allowance for unbilled costsand fees for fiscal 2007 and 2006 is as follows:

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

 

**Inventories**

 

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

 

The components ofinventories at March 31, 2008 and 2007 were as follows:

 
| **(In thousands)**                                 | ** ** | **2008** | ** ** | **2007** | ** ** |
|---------------------------------------------------------|------------|----------|------------|----------|------------|
| Raw materials,  completed subassemblies and spare parts |       | $        | 18,113     |     | $          | 11,260 |   |
| Work-in-process                                         |       | 12,163   |       | 6,681    |       |
| Finished goods                                          |       | 9,831    |       | 2,199    |       |
| ** **                                              |       |     |       |     |       |
| **Total**                                               |       | $        | 40,107     |     | $          | 20,140 |   |

 

33

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

 

**Notes Receivable**

 

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

 

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

 

TheCompanyprovidesfordepreciationandamortizationofitsfixedassetsonastraight-linebasisoverestimatedusefullivesof3-11yearsorremainingleaseterms.Expendituresfornormalmaintenanceandrepairsarechargedtoexpenseasincurred.Significantadditions,renewalsorbettermentsthatextendtheusefullivesoftheassetsarecapitalizedatcost.Thecostandaccumulateddepreciationapplicabletoequipmentandleaseholdimprovementssold,orotherwisedisposedof,areremovedfromtheaccounts,andanyresultinggainorlossisincludedintheconsolidatedstatementsofoperations.

 

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

 
| **(In thousands)**                              | ** ** | **Estimated Useful Lives**        | ** ** | **2008** | ** ** | **2007** | ** ** |
|------------------------------------------------------|------------|---------------------------------------------|------------|----------|------------|----------|------------|
| Building and  leasehold improvements                 |       | Lesser of 11 years or  remaining lease term |       | $        | 18,014     |     | $          | 17,252 |   |
| Equipment and  tooling                               |       | 3-10 years                                  |       | 2,488    |       | 2,306    |       |
| Computer equipment  and software                     |       | 3-5 years                                   |       | 15,368   |       | 14,272   |       |
| Furniture and  fixtures                              |       | 5-7 years                                   |       | 1,476    |       | 1,319    |       |
| Demo and test  equipment                             |       | 3-7 years                                   |       | 4,193    |       | 3,120    |       |
| Motor vehicles                                       |       | 3 years                                     |       | 18       |       | 18       |       |
| Total                                                |       |                                        |       | 41,557   |       | 38,287   |       |
| Less accumulated  depreciation and amortization      |       |                                        |       | (19,356  | )          | (15,233  | )          |
| Building,  equipment and leasehold improvements, net |       |                                        |       | $        | 22,201     |     | $          | 23,054 |   |

 

**RevenueRecognition**

 

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

 

Certain of theCompany’s contracts are multiple-element arrangements, which include standardproducts, custom-built systems or contract engineering projects, services, suchas training and service contracts. In accordance with Emerging Issues TaskForce Issue No. 00-21, “Revenue Arrangements with Multiple Deliverables,”(“EITF 00-21”) revenue arrangements that include multiple elements are analyzedto determine whether the deliverables can be divided into separate units ofaccounting or treated as a single unit of accounting. The consideration theCompany receives is allocated among the separate units of accounting based ontheir relative fair values determined based on prices of these elements as soldon a stand-alone basis, and the applicable revenue recognition criteria areapplied to each of the separate units. There is no customer right of return inthe Company’s sales agreements.  Revenuesare allocated to a delivered product or service when all of the followingcriteria are met: (1) the delivered item has value to the customer on astandalone basis; (2) there is objective and reliable evidence of the fairvalue of the undelivered item; and (3) if the arrangement includes ageneral right of return relative to the delivered item, delivery or performanceof the undelivered item is considered probable and substantially in ourcontrol.

 

Revenues forcertain long-term, custom-built systems or contract engineering projects arerecognized on a percentage of completion basis. The lengths of these contractstypically range from 9 to 24 months from order to delivery and acceptance. Percentages-of-completionare determined by relating the actual costs of work performed to date for eachcontract to its estimated final costs. Revisions in costs and profit estimatesare reflected in the period in which the facts causing the revision becomeknown.

 

34

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

 

Certain contractsrequire payments from the customer upon execution of the agreement that areincluded in customer deposits. Individual customer deposits are reduced by theamount of revenue recognized on the contract until a zero balance is reached.Revenue recognized in excess of billings under the contracts is included inunbilled costs and fees in the accompanying balance sheet. Of the amounts inunbilled costs and fees at March 31, 2008, $6,040,000 (99%) is expected tobe billed and collected during fiscal 2009.

 

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

 

Under the terms of certain of its cost reimbursement contracts, the Company is not permitted to bill customers a specified portion of the contract value until completion. Such retainages (approximately $74,000 and $46,000 at March 31, 2008 and 2007, respectively)  result from both commercial contract retentions and government contract withholdings generally for up to 15% of fees, as well as the difference between the actual and provisional indirect cost billing rates. Retainages are included in the accompanying consolidated balance sheets as components of unbilled costs and fees. The accuracy and appropriateness of the Company’s direct and indirect costs and expenses under these cost reimbursement contracts and its accounts receivable recorded pursuant to such contracts, are subject to regulation and audit, including by the U.S.  Defense Contract Audit Agency (“DCAA”) or by other appropriate agencies of the U.S. Government.  Such agencies have the right to challenge the Company’s cost estimates or allocations with respect to any government contract.  Additionally, a portion of the payments to the Company under government contracts are provisional payments that are subject to potential adjustment upon audit by such agencies.  Historically, such audits have not resulted in any significant disallowed costs.  Although the Company can give no assurances, in the opinion of management, any adjustments likely to result from inquiries or audits of its contracts will not have a material adverse impact on the Company’s financial condition or results of operations.

 

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

 

Service revenuesare recognized on time and materials engagements as the services are provided.Service contract revenues are recognized on a straight-line basis over thelength of the contract which reasonably approximates the period servicerevenues are earned.

 

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

 

**WarrantyCosts**

 

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

 

**DeferredRevenue**

 

The Company offersto its customers extended warranty and service contracts. These contractstypically have a coverage period of one to five years, and include advancepayments that are recorded as deferred revenue. Revenue is recognized on astraight-line basis over the life of the contract, which reasonablyapproximates the period these revenues are earned. Costs associated with theseextended warranty and service contracts are expensed to cost of goods sold asincurred.

 

35

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**Impairmentof Long-Lived Assets**

 

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

 

Impairment isassessed by comparing the estimated undiscounted cash flows over the asset’sremaining life to the carrying amount of the asset. If the estimated cash flowsare insufficient to recover the asset, an impairment loss is recognized basedon the difference between the carrying value of the asset and the fair value ofthe asset less any costs of disposal.  Noimpairment costs were recorded in the fiscal years ended March 31, 2008,2007 and 2006.

 

**AccruedSalaries and Benefits**

 

Accrued salariesand benefits at March 31, 2008 and March 31, 2007 include thefollowing:

 
| **(In thousands)**                    | ** ** | **2008** | ** ** | **2007** | ** ** |
|--------------------------------------------|------------|----------|------------|----------|------------|
| Accrued payroll  and payroll related taxes |       | $        | 656        |     | $          | 510 |   |
| Accrued benefits                           |       | 236      |       | 212      |       |
| Accrued  incentive compensation            |       | 550      |       | 5,269    |       |
| Accrued vacation                           |       | 1,493    |       | 1,250    |       |
|                                       |       | $        | 2,935      |     | $          | 7,241 |   |

** **

**CustomerDeposits**

 

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

 

**Researchand Development**

 

Internally fundedresearch and development costs including direct labor, material, subcontractorexpenses and related overheads are expensed as incurred. Internally fundedresearch and development costs were $12,306,000, $7,184,000, and $9,601,000 infiscal 2008, 2007, and 2006, respectively. In addition, the Company recognized revenues of $13,978,000, $6,597,000,and $2,804,000, in fiscal 2008, 2007, and 2006, respectively related togovernment-sponsored research and development earned primarily on a costreimbursement and fee basis as discussed above.

 

**FairValue of Financial Instruments**

 

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

 

**Incomeper Common and Potential Common Shares**

 

Basic earnings percommon share is computed by dividing net income available to commonstockholders by the weighted average number of shares of common stockoutstanding during the year. Diluted earnings per share include the dilutiveimpact of options, warrants, restricted stock and restricted stock units usingthe average share price of the Company’s common stock for the period. For theyears ended March 31, 2008, 2007, and 2006, respectively, common stockequivalents of 253,000, 108,000, and 72,000 are excluded from diluted earningsper share, as their effect is anti-dilutive.

 
| ** **                                                                                                                  | ** ** | **Year  Ended**          | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------|------------|--------------------------|------------|
| **(In  thousands except per share amounts)**                                                                                | ** ** | **March 31,  2008** | ** ** | **March 31,  2007** | ** ** | **March 31,  2006** | ** ** |
| **Earnings  per Share Basic:**                                                                                              | ** ** | ** **               | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net income                                                                                                                  |       | $                        | 17,478     |   | $ | 24,610 |   | $ | 29,786 |   |
| Weighted average  number of common shares outstanding—basic                                                            |       | 9,114                    |       | 9,117 |   | 8,555 |   |
| Income per Share  – Basic                                                                                              | ** ** | $                        | 1.92       |   | $ | 2.70 |   | $ | 3.48 |   |
|                                                                                                                        | ** ** |                     |       |   |   |   |   |
| **Earnings  per Share Diluted:**                                                                                            | ** ** |                     |       |   |   |   | ** ** |
| Net income                                                                                                                  |       | $                        | 17,478     |   | $ | 24,610 |   | $ | 29,786 |   |
| Adjustment to  net income for change in warrant valuation                                                                   |       | (11                      | )          | (2,270 | ) | — |   |
| Adjusted net  income                                                                                                        | ** ** | $                        | 17,467     |   | $ | 22,340 |   | $ | 29,786 |   |
| Weighted average  number of common shares outstanding—basic                                                            |       | 9,114                    |       | 9,117 |   | 8,555 |   |
| Assumed exercise  of stock options, warrants, restricted stock and restricted stock units, using  the treasury stock method |       | 233                      |       | 251 |   | 558 |   |
| Weighted average  number of common and potential common shares outstanding —diluted                                    |       | 9,347                    |       | 9,368 |   | 9,113 |   |
| Income per share  — Diluted                                                                                            | ** ** | $                        | 1.87       |   | $ | 2.38 |   | $ | 3.27 |   |

 

36

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**IncomeTaxes**

 

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

 

**Concentrationsof credit risk**

 

Financial instruments,which potentially subject the Company to concentrations of credit risk, consistprimarily of cash and cash equivalents, investments and accounts and unbilledreceivables.  At times, the Companymaintains cash balances in excess of insured limits. The Company maintains itscash and cash equivalents with major financial institutions.  The Company’s credit risk is managed byinvesting its cash in high quality money market funds, commercial paper,investment grade corporate bonds and certificates of deposit.

 

The Company’s largestcustomer, an agency of the U.S. Government, at March 31, 2008 comprised24% of the total accounts receivable balance. The Company generally requires letters of credit and/or prepayments fromhigher-risk and international customers. The Company has not experienced any significant losses from uncollectibleaccounts.

 

**Stock-BasedCompensation**

 

On April 1, 2006,the Company adopted Statement of Financial Accounting Standards No. 123(R) (SFAS123(R)) “Accounting for Stock-Based Compensation”, which requires themeasurement and recognition of all compensation costs for all stock basedawards made to employees and the Board of Directors based upon fair value overthe requisite service period for awards expected to vest. Prior to adoption,the Company accounted for stock options under the intrinsic value method set inaccordance with Accounting Principles Board Opinion No. 25, “Accountingfor Stock Issued to Employees,” and related interpretations, and provided therequired pro forma disclosures prescribed by SFAS No. 123, “Accounting forShare-based Compensation”, as amended.

 

SFAS 123(R) requiresthe Company to estimate the fair value of share-based awards on the date ofgrant using an option pricing model. The Company adopted SFAS 123(R) usingthe modified prospective transition method which required the application ofthe accounting standard starting April 1, 2006, the first day of theCompany’s fiscal year 2007. Prior period information was not restated toreflect the fair value method of expensing share-based awards.

 

Stock- basedcompensation costs recognized for the years ended March 31, 2008 and 2007,includes compensation costs for awards granted prior to, but not yet vested asof April 1, 2006 (adoption date), as well as any new grants issued after April 1,2006.  The Company recognized $5,314,000and $8,594,000 of share-based compensation costs in the consolidated statementsof income for the year ended March 31, 2008 and 2007, respectively. Theincome tax benefit related to such compensation for the years ended March 31,2008 and 2007 was approximately $818,000 and $1,140,000, respectively.

 

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

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

 

The Company hadpreviously adopted the provisions of SFAS No. 123, “Accounting forShare-based Compensation,” as amended by SFAS No. 148, “Accounting forShare-based Compensation—Transition and Disclosure,” through disclosure only.The following table illustrates the effect on net income and earnings per sharefor the fiscal year ended March 31, 2006 as if the Company had applied thefair value recognition provisions of SFAS No. 123 to share-based employeeawards.

 

37

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

 

Upon adoption ofSFAS 123(R), in accordance with Staff Accounting Bulletins No. 107 and No. 110,the Company selected the Black-Scholes option pricing model as the most appropriatemethod for determining the estimated fair value for the stock awards.  The Black-Scholes method of valuationrequires several assumptions: (1) the expected term of the stock award, (2) theexpected future stock volatility over the expected term and (3) risk-freeinterest rate. The expected term represents the expected period of time theCompany believes the options will be outstanding based on historicalinformation. Estimates of expected future stock price volatility are based onthe historic volatility of the Company’s common stock and the risk freeinterest rate is based on the U.S. Zero-Bond rate.  The fair value of options at date of grantwas estimated with the following assumptions:

 
| ** **               |       | **Year  Ended**    |       |
|--------------------------|------------|--------------------|------------|
| ** **               | ** ** | **March 31,** | ** ** | **March 31,** | ** ** | **March 31,** |   |
| ** **               | ** ** | **2008**           | ** ** | **2007** | ** ** | **2006** |   |
| **Assumptions:**         |       |               |       |   |   |   |   |
| Expected life            |       | 3 years            |       | 3 years |   | 3 years |   |
| Risk-free  interest rate |       | 4.1                | %          | 4.8 | % | 3.4 | % |
| Stock volatility         |       | 51                 | %          | 56 | % | 53 | % |
| Dividend yield           |       | 1.3                | %          | 0 | % | 0 | % |

** **

**NewAccounting Pronouncements**

 

In September 2006,the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS 157”). SFAS157 establishes a common definition for fair value to be applied, establishes aframework for measuring fair value in accordance with generally acceptedaccounting principles, and expands disclosure about such fair valuemeasurements. In February 2007, the FASB issued SFAS No. 159, “TheFair Value Option for Financial Assets and Financial Liabilities-including anamendment of FASB Statement No. 115” (“SFAS 159”). SFAS 159 allows anentity the irrevocable option to elect fair value for the initial andsubsequent measurement of certain financial assets and liabilities under aninstrument-by-instrument election. SFAS 157 and SFAS 159 are both effective forfiscal years beginning after November 15, 2007. Management does not expectthe adoption of SFAS 157 or SFAS 159 to have a material impact on the Company’sfinancial position, results of operations and cash flows.

 

In December 2007,the FASB issued SFAS No. 141R, “Business Combinations” (“SFAS 141R”). SFAS141R replaces SFAS 141 and establishes principles and requirements for how anacquirer recognizes and measures in its financial statements the identifiableassets acquired, the liabilities assumed, any noncontrolling interest in theacquiree and the goodwill acquired. This standard is effective for fiscal yearsbeginning after December 15, 2008.

 

In December 2007,the FASB issued SFAS No. 160, “Noncontrolling Interests in ConsolidatedFinancial Statements” (“SFAS 160”). SFAS 160 establishes accounting andreporting standards for ownership interests in subsidiaries held by partiesother than the parent, the amount of consolidated net income attributable tothe parent and to the noncontrolling interest, changes in a parent’s ownershipinterest and the valuation of retained noncontrolling equity investments when asubsidiary is deconsolidated. This standard is effective for fiscal yearsbeginning after December 15, 2008.

 

**2. LEASEAGREEMENTS**

 

The Company leasescertain equipment under operating lease arrangements and facilities undernon-cancelable operating leases with various renewal options. For operatingleases which contain fixed escalations in rental payments, the Company recordsthe total rent payable on a straight-line basis over the original lease term asdefined in SFAS 98 “Accounting for Leases.” The 

 

38

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Company incurred$269,000, $204,000, and $634,000 of operating rent expense in 2008, 2007, and2006 respectively.   In conjunction withthe Company’s lease for its headquarters, the Company has issued security inthe form of a standby letter of credit in the amount of $300,000 with anoriginal expiration date of March 1, 2006 and contains automaticextensions through May 15, 2016.

 

In March 2005,the Company renewed its lease agreement for its corporate headquarters andmanufacturing facilities in Billerica, Massachusetts.  As part of thelease agreement, the Company’s landlord agreed to certain renovations to theBillerica facility including the construction of additional high baymanufacturing space.  The Company was responsible for a portion of theconstruction costs and was deemed to be the owner of the building during theconstruction period under EITF 97-10 “The Effect of Lessee Involvement in AssetConstruction”.  In January 2007, the Company amended this leaseagreement to expand its lease to include the remaining available space in thebuilding.  During the year ended March 31,2007, the Company capitalized $2,029,000 to record the facility on its bookswith an offsetting credit to the Lease Financing Liability.  In addition,amounts paid for construction were recorded as construction in progress and thelandlord construction allowances of $5,642,000 in 2006 and $367,000 in 2008were recorded as additional lease financing liability.

 

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

 

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

 
| **Year Ending March 31,**            | ** ** | **Operating Leases** | ** ** | **Capital Leases** | ** ** |
|-----------------------------------------------------|------------|---------------------------|------------|-------------------------|------------|
| 2009                                                |       | $                         | 194        |                    | $          | 1,278 |   |
| 2010                                                |       | 185                       |       | 1,291                   |       |
| 2011                                                |       | 185                       |       | 1,412                   |       |
| 2012                                                |       | 185                       |       | 1,412                   |       |
| 2013                                                |       | 185                       |       | 1,424                   |       |
| Thereafter                                          |       | 541                       |       | 4,498                   |       |
| Total payments                                      |       | $                         | 1,475      |                    | 11,315     |   |
| Imputed interest                                    |       |                      |       | (641                    | )          |
| Lease financing  liability                          |       |                      |       | $                       | 10,674     |   |
| Less: Current  portion of lease financing liability |       |                      |       | 1,134                   |       |
| Lease financing  liability, net of current portion  |       |                      |       | $                       | 9,540      |   |

** **

**3. LINEOF CREDIT**

 

On November 16,2006, the Company modified its domestic loan and security agreement withSilicon Valley Bank East which was scheduled to expire on November 29,2006.  The Company increased its domesticfacility from $5.0 million to $20.0 million to support the Company’sroutine working capital needs.  TheCompany’s $10.0 million export loan and security facility, guaranteed by theExport-Import Bank of the United States, expired as of November 29,2006. Maximum amount available for borrowings under the domestic facilityis (a) if the Company’s unrestricted cash is greater than or equal to $30.0million, $20.0 million minus the amount of all outstanding letters of creditless certain reserves, and minus the outstanding principal balance of anyadvances or (b) if the Company’s unrestricted cash is less than $30.0 millionfor a period of 30 consecutive days, the lesser of (i) the $20.0 million, orii) 85% of eligible domestic accounts receivable minus the amount ofoutstanding letters of credits adjusted for certain reserves and minus theprincipal balance of any advances.  Themodification of the domestic loan and security agreement extended this credit facilitythrough November 14, 2008.

 

The creditfacility bears an interest rate of the greater of 4.0% or the Silicon ValleyBank prime rate (5.25% at March 31, 2008). The credit agreement iscollateralized by certain assets of the Company and contain certainrestrictions, including limitations on the amount of distributions that can bemade to stockholders, and the disposition or encumbrances of assets, andrequire the maintenance of certain financial covenants.  As of March 31, 2008, the Company was incompliance with these covenants.

 

At March 31,2008, there were no borrowings outstanding against this credit facility.  Under the terms of the credit agreement, theCompany was required to pay certain one-time facility fees which are beingamortized over the lives of the facilities and is required to pay a fee of0.50% quarterly on unused amounts under the line of credits.  Total expenses incurred related to these feeswere $157,000, $202,000, and $172,000 in fiscal 2008, 2007, and 2006,respectively.

 

39

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In the normalcourse of business, the Company may provide certain customers and potentialcustomers with performance guarantees, which are generally backed by standbyletters of credit. In general, the Company would only be liable for the amountof these guarantees in the event of default in the performance of ourobligations, the probability of which is remote in management’s opinion.   The Company had outstanding $6,091,000 instand-by letters of credit against the domestic facility with $13,909,000remaining availability.   Of theoutstanding letters of credit, $300,000 relates to the Company’s building leaseand the remainder is guaranteeing performance on certain internationalprojects.   No amounts have been drawnagainst these letters of credit. In addition at March 31, 2008, theCompany had a restricted cash balance of $2,523,000 related to certain bankrequired deposits for outstanding letters of credits, bid bonds, and otherbank-related fees.

 

**4. INCOMETAXES**

 

The provision forincome taxes for the years ended March 31, 2008, 2007, and 2006 consistedof the following:

 
| **(In thousands)**        | ** ** | **2008** | ** ** | **2007** | ** ** | **2006** | ** ** |
|--------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Current:                       |       |     |       |     |       |     |       |
| Federal                        |       | $        | 12,040     |     | $          | 13,909   |       | $ | 11,388 |   |
| State                          |       | 680      |       | 1,419    |       | 1,653    |       |
| Foreign                        |       | 40       |       | 30       |       | 30       |       |
|                           |       | 12,760   |       | 15,358   |       | 13,071   |       |
| Deferred                       |       |     |       |     |       |     |       |
| Federal                        |       | (2,713   | )          | (204     | )          | 5,090    |       |
| State                          |       | (40      | )          | 252      |       | 537      |       |
| Change in  Valuation Allowance |       | —   |       | —   |       | (2,715   | )          |
|                           |       | (2,753   | )          | 48       |       | 2,912    |       |
| Total                          |       | $        | 10,007     |     | $          | 15,406   |       | $ | 15,983 |   |

 

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

 
| **(In thousands)**                       | ** ** | **2008** | ** ** | **2007** | ** ** | **2006** | ** ** |
|-----------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Provision for  income taxes at statutory rate |       | $        | 9,620      |     | $          | 14,005   |       | $ | 16,019 |   |
| State tax  provision net of federal effect    |       | 416      |       | 1,085    |       | 1,424    |       |
| Permanent tax  differences for stock warrant  |       | (4       | )          | (795     | )          | 2,133    |       |
| Non-deductible  stock based compensation      |       | 242      |       | 1,369    |       | —   |       |
| Research tax  credits                         |       | (191     | )          | (30      | )          | (226     | )          |
| Effect of ETI  exclusion                      |       | —   |       | (229     | )          | (678     | )          |
| Change in  valuation allowance                |       | —   |       | —   |       | (2,715   | )          |
| Qualifying  manufacturing credits             |       | (179     | )          | (206     | )          | (189     | )          |
| Other                                         |       | 103      |       | 207      |       | 215      |       |
|                                          |       |     |       |     |       |     |       |
| Provision for  income taxes                   |       | $        | 10,007     |     | $          | 15,406   |       | $ | 15,983 |   |

 

During fiscal2006, the deferred tax valuation allowance at March 31, 2005 of $9,740,000was reversed, due to the determination by the Company that the benefits of thedeferred tax asset will more likely than not be realized in the current andfuture years.  This valuation allowancewas established by a combination of prior year operating activities and theexercise of non-qualified stock options and disqualifying dispositions ofincentive stock options by employees. The amount that related to prior year operating activities totaled$2,715,000 and was recorded as a reduction of the fiscal 2006 income taxexpense.  The amount that related to theexercise of stock options of $7,025,000 was recorded as a component of the taxbenefit accrued on stock option exercises in equity in accordance with theprovisions of APB No. 25 and SFAS No. 109.

 

The significantcomponents of the net deferred tax assets at March 31, 2008 and 2007 areas follows:

 
| ** **                                       | ** ** | **2008**    | ** ** | **2007**        | ** ** |
|--------------------------------------------------|------------|-------------|------------|-----------------|------------|
| **(In thousands)**                          | ** ** | **Current** | ** ** | **Non-current** | ** ** | **Current** | ** ** | **Non-current** | ** ** |
| Assets:                                          |       |        |       |            |       |   |   |   |   |
| Net operating  loss carry forwards               |       | $           | —     |            | $          | — |   | $ | — |   | $ | 3 |   |
| Accounts  receivable and unbilled costs and fees |       | —      |       | 84              |       | 83 |   | — |   |
| Inventory                                        |       | 104         |       | 797             |       | 814 |   | — |   |
| Deferred revenue                                 |       | —      |       | 1,522           |       | — |   | 276 |   |
| Accrued vacation                                 |       | 489         |       | —          |       | 326 |   | — |   |
| Accrued warranty  costs                          |       | 620         |       | —          |       | 733 |   | — |   |
| Depreciation                                     |       | —      |       | 304             |       | — |   | 468 |   |
| Unearned  compensation                           |       | 343         |       | 2,524           |       | 1,103 |   | 223 |   |
| Other                                            |       | 21          |       | —          |       | 28 |   | — |   |
| Deferred income  tax assets                      |       | 1,577       |       | 5,231           |       | 3,087 |   | 970 |   |
| Valuation  allowance                             |       | —      |       | —          |       | — |   | — |   |
| Net deferred  income taxes                       |       | $           | 1,577      |            | $          | 5,231 |   | $ | 3,087 |   | $ | 970 |   |

 

40

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In June 2006,the FASB issued Interpretation No. 48, “Accounting for Uncertainty inIncome Taxes, an interpretation of FASB Statement 109” (“FIN 48”). Thisstatement clarifies the criteria that an individual tax position must satisfyfor some or all of the benefits of that position to be recognized in a company’sfinancial statements. FIN 48 prescribes a recognition threshold of more-likely–than-not,and a measurement attribute for all tax positions taken or expected to be takenon a tax return, in order for those tax positions to be recognized in thefinancial statements. Effective April 1, 2007, the Company adopted theprovisions of FIN 48 and there has been no material effect on the financialstatements. As a result, there was no cumulative effect related to adoptingFIN 48 and no interest or penalties related to uncertain tax positions wasaccrued.

 

The Company iscurrently open to audit under the statute of limitations by the InternalRevenue Service and state taxing authorities for the years ending March 31,2005 through 2008.  There are no federalor state income tax examinations that are currently being performed. TheCompany believes that there are no uncertain tax positions as of March 31,2008.

 

**5.WARRANTY OBLIGATIONS**

 

Certain of theCompany’s products carry a one-year warranty, the costs of which are accruedfor at time of shipment or delivery. Accrual rates are based upon historicalexperience over the preceding twelve months and management’s judgment of futureexposure. Warranty experience for the years ended March 31, 2008 and 2007is as follows:

 
| **(In thousands)**                           | ** ** | **2008** | ** ** | **2007** | ** ** |
|---------------------------------------------------|------------|----------|------------|----------|------------|
| Warranty accrual  at beginning of period          |       | $        | 1,997      |     | $          | 3,606 |   |
| Accruals for  warranties issued during the period |       | 2,826    |       | 2,585    |       |
| Adjustment of  preexisting accrual estimates      |       | (2,020   | )          | (2,735   | )          |
| Warranty costs  incurred during period            |       | (1,132   | )          | (1,459   | )          |
| Warranty accrual  at end of period                |       | $        | 1,671      |     | $          | 1,997 |   |

 

**6. STOCKHOLDERS’ EQUITY**

 

**Preferred Stock**

 

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

 

**Common Stock and Warrant Offering**

 

On May 28, 2002,the Company closed on a private placement offering of common stock andwarrants. A total of 1,115,000 shares were sold to accredited investors at aprice of $17.64 each. In addition, warrants to purchase an additional 295,475shares of common stock at a price of $23.52 were issued. Proceeds to theCompany approximated $18.4 million, net of approximately $1.3 million ofissuance costs of which $3.1 million was assigned to the warrants issued. Thewarrants were immediately vested and had a five-year life which expired in May of2007. Due to certain conversion features of these warrants that provided thatthe holder could opt for a cash settlement in certain instances, including amerger, a sale of all or substantially all of the Company’s assets, or a tenderoffer or exchange offer of shares of the Company’s stock, a liability equal tothe Black-Scholes valuation of the warrants at the deal closing date wasrecorded on the Company’s balance sheet. The “mark to market” change in thewarrants valuation of ($11,000), ($2,270,000), and $6,094,000, was recorded asother (income) expense for the years ended March 31, 2008, March 31,2007, and March 31, 2006, respectively. The liability of $634,000representing the fair market value of outstanding warrants at period end isrecorded as a current liability at March 31, 2007.  In May of 2007, all remaining warrantswere exercised and no liability for these warrants remains at March 31,2008.

 

41

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During fiscal2008, 2007 and 2006, warrants to purchase 21,625, 35,450 and 78,825 shares ofcommon stock were exercised resulting in total proceeds received of $509,000,$834,000 and $1,854,000, respectively. In addition, in fiscal 2006 the Company issued 61,998 shares of commonstock upon the cashless exercise of warrants to purchase 85,475 shares ofcommon stock.  The fair market value ofthe warrants at the date of exercise totaled $623,000, $1,134,000 and $8,193,000in fiscal 2008, 2007 and 2006, respectively. The cash proceeds and the fairvalue of the liability were recorded as additional paid in capital at March 31,2008 and March 31, 2007.

 

**Share Repurchase Program**

 

On May 17, 2007, the Board of Directors approved a Stock RepurchaseProgram which authorized the Company to repurchase up to $35 million of sharesof its common stock from time to time on the open market.  During the fiscal year ended March 31,2008, the Company repurchased 473,303 shares of common stock at an averageprice of $53.17.  As of March 31,2008, the maximum dollar value of shares that may yet be purchased under theprogram totaled $9,832,000.

 

OnMay 8, 2008 the****Board ofDirectors approved an additional Stock Repurchase Program which authorizes theCompany to repurchase up to $35 million of shares of its common stock from timeto time on the open market.

 

**Common Stock Dividends**

 

On May 21, 2007, the Company announced a quarterly dividend plan forfiscal year 2008.  Three quarterlydividends of $0.20 per common share each were declared and paid during fiscalyear 2008.  On May 13, 2008, theCompany declared another quarterly dividend of $0.20 for holders of record on May 19,2008 to be paid June 6, 2008.

 

**StockOption and Other Compensation Plans**

 

The Company hasvarious stock option and other compensation plans for directors, officers, andemployees. The Company had the following stock option plans outstanding as of March 31,2008: the 1995 Combination Plan, the 1997 Non-Qualified Option Plan, the 1998Non-Qualified Option Plan, the 1999 Combination Plan, the 2000 CombinationPlan, the 2002 Combination Plan, the 2003 Stock Plan for Non-Employee Directorsand the 2005 Equity and Incentive Plan. There are 3,480,000 shares authorizedunder these plans. Vesting periods are at the discretion of the Board ofDirectors and typically range between one and three years. Certain of theoptions granted vest upon the achievement of certain performance based goals aswell as service time incurred.  Optionsunder these plans are granted at fair market value and have a term of five orten years from the date of grant.

 

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

 
| ** **                                                                | ** ** | **2008**                   | ** ** | **2007**                               | ** ** | **2006**                   | ** ** |
|---------------------------------------------------------------------------|------------|----------------------------|------------|----------------------------------------|------------|----------------------------|------------|
| ** **                                                                | ** ** | **Number  of Shares** | ** ** | **Weighted  Average  Exercise  Price** | ** ** | **Number  of Shares** | ** ** | **Weighted  Average  Exercise  Price** | ** ** | **Number of  Shares** | ** ** | **Weighted  Average  Exercise  Price** | ** ** |
| Options  outstanding, beginning of year                                   |       | 887,573                    |       | $                                      | 37.43      |                       | 878,470    |   | $ | 36.79 |   | 1,065,964 |   | $ | 20.66 |   |
| Options granted                                                           |       | 76,970                     |       | 63.21                                  |       | 60,670                     |       | 48.23 |   | 378,010 |   | 55.23 |   |
| Options  exercised                                                        |       | (127,635                   | )          | 23.73                                  |       | (31,680                    | )          | 31.23 |   | (554,954 | ) | 18.23 |   |
|                                                                      |       |                       |       |                                   |       |                       |       |   |   |   |   |   |   |
| Options canceled  or expired                                              |       | (8,845                     | )          | 59.71                                  |       | (19,887                    | )          | 51.94 |   | (10,550 | ) | 44.44 |   |
| Options  outstanding, end of year                                         |       | 828,063                    |       | $                                      | 41.70      |                       | 887,573    |   | $ | 37.43 |   | 878,470 |   | $ | 36.79 |   |
| Options  exercisable, end of year                                         |       | 712,356                    |       | $                                      | 38.74      |                       | 639,219    |   | $ | 33.88 |   | 265,778 |   | $ | 18.80 |   |
|                                                                      |       |                       |       |                                   |       |                       |       |   |   |   |   |   |   |
| Options  available for grant                                              |       | 145,691                    |       |                                   |       | 320,865                    |       |   |   | 440,835 |   |   |   |
| Weighted average  fair value per share of options granted during the year |       |                       |       | $                                      | 22.60      |                       |       |   | $ | 20.09 |   |   |   | $ | 20.99 |   |

 

The followingsummarizes certain data for options outstanding and exercisable at March 31,2008:

 

42

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| ** **            | ** ** | **Number of  Shares** | ** ** | **Range of  Exercise Prices** | ** ** | **Weighted  Average Exercise  Price** | ** ** | **Weighted  Average Remaining  Contractual Life** | ** ** |
|-----------------------|------------|----------------------------|------------|-----------------------------------------|------------|--------------------------------------------|------------|-------------------------------------------------------------|------------|
| Options  outstanding: |       | 169,203                    |       | $6.50–$20.00                       |       | $                                          | 11.91      |                                                        | 4.88       |   |
|                  |       | 97,563                     |       | 20.01–30.00                        |       | 27.56                                      |       | 6.39                                                        |       |
|                  |       | 64,532                     |       | 30.01–40.00                        |       | 38.93                                      |       | 6.68                                                        |       |
|                  |       | 126,866                    |       | 40.01–50.00                        |       | 45.74                                      |       | 7.58                                                        |       |
|                  |       | 201,391                    |       | 50.01–60.00                        |       | 53.64                                      |       | 7.28                                                        |       |
|                  |       | 168,508                    |       | 60.01–66.45                        |       | 63.54                                      |       | 7.84                                                        |       |
|                  |       | 828,063                    |       |                                    |       | $                                          | 41.70      |                                                        | 6.80       |   |
|                  |       |                       |       |                                    |       |                                       |       |                                                        |       |
| Options  exercisable: |       | 169,203                    |       | $6.50–$20.00                       |       | $                                          | 11.91      |                                                        |       |   |
|                  |       | 97,563                     |       | 20.01–30.00                        |       | 27.56                                      |       |                                                        |       |
|                  |       | 64,532                     |       | 30.01–40.00                        |       | 38.93                                      |       |                                                        |       |
|                  |       | 118,599                    |       | 40.01–50.00                        |       | 45.97                                      |       |                                                        |       |
|                  |       | 184,254                    |       | 50.01–60.00                        |       | 53.69                                      |       |                                                        |       |
|                  |       | 78,205                     |       | 60.01–66.45                        |       | 64.39                                      |       |                                                        |       |
|                  |       | 712,356                    |       |                                    |       | $                                          | 38.74      |                                                        |       |   |

 

The totalintrinsic value, representing the difference between market value on the dateof exercise and the option price, of stock options exercised during fiscal2008, 2007 and 2006 was $4,892,000, $904,000 and $29,650,000,respectively.   Nonvested stock optionawards are subject to the risk of forfeiture until the fulfillment of specifiedconditions. As of March 31, 2008 there was $1,426,000 of totalunrecognized compensation cost related to nonvested stock option awards grantedunder the Company’s stock plans. This cost is expected to be recognized over aweighted average period of three years.

 

The Companyrealizes a tax deduction upon the exercise of non-qualified stock options anddisqualifying dispositions of incentive stock options due to the recognition ofcompensation expense in the calculation of its taxable income. The amount ofthe compensation recognized for tax purposes is based on the difference betweenthe market value of the common stock and the option price at the date theoptions are exercised and/or sold. These tax benefits are credited toadditional paid-in capital if it is considered more likely than not that theywill be realized. No tax benefits were recorded in fiscal 2005 as available taxbenefits of $5,115,000 were offset by valuation allowances in accordance withSFAS 109. During fiscal 2008, 2007 and 2006, a tax benefit of $1,350,000,$544,000 and $10,515,000, respectively, was recorded to additional paid-incapital for exercises and/or sales of stock options or stock and an additional$7,025,000 was recorded in fiscal 2006 for prior year exercises and/or salesupon the reversal of the valuation allowance on deferred tax assets.

 

On April 22,2005 American Science and Engineering, Inc. announced that its Board ofDirectors had accelerated the vesting of certain unvested stock optionspreviously awarded to employees. The accelerated options were issued undervarious equity incentive plans maintained by the Company. The acceleration ofoutstanding unvested options was immediately effective on a fully-vested basis.Options held by the Chief Executive Officer, the Chief Financial Officer, allother members of management, and any other employees participating in incentiveor commission compensation plans were not included in the acceleration plan.Options held by members of the Board of Directors were also excluded from thevesting acceleration. Options to purchase approximately 193,553 shares ofcommon stock were subject to acceleration. The Company effected thisacceleration in order to provide a deserved reward to relevant employees fortheir significant contributions in connection with the outstanding performanceof the Company. The Board of Directors determined that such action was also inthe best interests of the shareholders as it believed that such plan wouldengender loyalty, promote equity ownership, and encourage increased futureperformance by the subject employee population. The Company recorded compensation expense of $64,000 during the yearended March 31, 2006 related to these accelerated options for optionsexercised by individuals who terminated employment prior to the original optionvesting date.

 

***RestrictedStock and Restricted Stock Units: ***The Company has instituted long termincentive plans for certain key employees. These plans call for the issuance ofrestricted stock which vest upon the achievement of certain performance basedgoals as well as service time incurred. Restricted stock and restricted stock units may also be granted to otheremployees with vesting periods that range from one to three years.  In addition, annually on January 10ththe Board of Directors is granted restricted stock. These restricted stockshares vest on a pro-rata basis on service time incurred in the upcomingcalendar year.  The fair values of theserestricted stock awards are equal to the market price per share of the Company’scommon stock on the date of grant.

 

Nonvestedrestricted stock and stock unit awards are subject to the risk of forfeitureuntil the fulfillment of specified conditions. As of March 31, 2008 therewas $4,480,000 of total unrecognized compensation cost related to nonvestedrestricted stock and stock unit awards granted under the Company’s stock plans.This cost is expected to be recognized over a three year period.

 

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

 

43

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| ** **                                                 | ** ** | **2008**                   | ** ** | **2007**                               | ** ** | **2006**                   | ** ** |
|------------------------------------------------------------|------------|----------------------------|------------|----------------------------------------|------------|----------------------------|------------|
| ** **                                                 | ** ** | **Number  of Shares** | ** ** | **Weighted  Average  Exercise  Price** | ** ** | **Number  of Shares** | ** ** | **Weighted  Average  Exercise  Price** | ** ** | **Number of  Shares** | ** ** | **Weighted  Average  Exercise  Price** | ** ** |
| Restricted stock  and units outstanding, beginning of year |       | 49,538                     |       | $                                      | 54.52      |                       | 23,125     |   | $ | 54.92 |   | 4,889 |   | $ | 34.52 |   |
| Granted                                                    |       | 72,970                     |       | 60.80                                  |       | 49,538                     |       | 54.52 |   | 24,077 |   | 55.32 |   |
| Vested                                                     |       | (9,807                     | )          | 56.77                                  |       | (23,125                    | )          | 54.92 |   | (5,841 | ) | 39.50 |   |
|                                                       |       |                       |       |                                   |       |                       |       |   |   |   |   |   |   |
| Forfeited                                                  |       | (2,400                     | )          | 60.62                                  |       | —                     |       | — |   | — |   | — |   |
| Restricted stock  and units outstanding, end of year       |       | 110,301                    |       | $                                      | 58.34      |                       | 49,538     |   | $ | 54.52 |   | 23,125 |   | $ | 54.92 |   |

 

**7.BUSINESS SEGMENT INFORMATION**

 

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

 

**Geographical Data**

 

All of the Company’sexport sales originate from the United States. At March 31, 2008, approximately 4.3% of the Company’s assets werein foreign countries.  The majority ofthese foreign assets were inventory in international depots for fieldreplacements or systems shipped internationally but not accepted by fiscal yearend.

 

The followingtable shows the breakdown of net sales and contract revenues to foreign anddomestic customers and the major regions of international activity based uponcustomer country of domicile:

 

***Net Sales and Contract Revenues***

 
| ** **                                         | ** ** | **Fiscal Year** | ** ** |
|----------------------------------------------------|------------|----------------------|------------|
| **(Dollars in thousands)**               | ** ** | **2008**             | ** ** | **2007** | ** ** | **2006** | ** ** |
|                                               |       |                 |       |   |   |   |   |   |   |   |   |   |   |
| Domestic                                           |       | $                    | 107,021    |   | 64 | % | $ | 111,335 |   | 73 | % | $ | 141,491 |   | 86 | % |
| International                                      |       | 59,712               |       | 36 | % | 41,851 |   | 27 | % | 22,113 |   | 14 | % |
| Net Sales and  Contract Revenues                   |       | $                    | 166,733    |   | 100 | % | $ | 153,186 |   | 100 | % | $ | 163,604 |   | 100 | % |
|                                               |       |                 |       |   |   |   |   |   |   |   |   |   |   |
| Percent of  International Revenue by Major Region: |       |                 |       |   |   |   |   |   |   |   |   |   |   |
| Middle  East & Africa                     |       | 70                   | %          |   |   | 66 | % |   |   | 50 | % |   |   |
| Pacific Rim                                        |       | 14                   | %          |   |   | 20 | % |   |   | 37 | % |   |   |
| Europe                                             |       | 14                   | %          |   |   | 14 | % |   |   | 11 | % |   |   |
| All Other                                          |       | 2                    | %          |   |   | — | % |   |   | 2 | % |   |   |

 

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

 

*Fiscal 2008****:*****  **$20,325,000 and $16,602,000, respectivelyto two customers.

 

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

 

*Fiscal 2006****:*****  **$48,722,000 and $43,485,000,respectively, to two customers.

 

Domestically, theCompany’s primary client base is comprised of agencies of the U.S. Government.Approximately 55%, 70%, and 77%, of the Company’s sales in fiscal 2008, 2007,and 2006 respectively, were derived from either (i) contracting directlywith the U.S. Government, or (ii) contracting with contractors workingdirectly with the U.S. Government. Certain of the Company’s contracts with theU.S. Government provide the U.S. Government with the standard unilateral rightto terminate these contracts for convenience. To date, the Company has notexperienced any material losses as a result of this contractual provision.

 

One customer at March 31,2008 had accounts receivable balances representing in excess of 10% ofconsolidated accounts receivable. This customer, an agency of the U.S.Government, had receivables totaling $6,726,000 (24%) at March 31,2008.  Two customers at March 31,2007 had accounts receivable balances representing in excess of 10% ofconsolidated accounts receivable.  

 

44

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These customers,both agencies of the U.S. Government, had receivables totaling $6,322,000 (26%)and $3,535,000 (14%) at March 31, 2007.

 

Included inunbilled costs and fees at March 31, 2008 was $5,783,000 related to fivecustomers, which is expected to be billed and collected during fiscal 2009.Included in unbilled costs and fees at March 31, 2007 was $5,074,000related to three customers, which was billed and collected during fiscal 2008.

 

**8. SALESOF ASSETS**

 

In January 2005,the Company completed an agreement to sell certain assets, comprised ofinventory, fixed assets, intellectual property, and certain revenue producingcontracts of its High Energy Systems Division to Accuray, Incorporated (“Accuray”).The sales price for these assets totaled $8,300,000 of which $5,500,000 wasreceived in cash and $2,800,000 in the form of a promissory note, $2,000,000 ofwhich was secured by a letter of credit. The note receivable bore an interestrate of 7% and matured in January of 2006. The Company recognized a gainon the sale of these assets of $5,442,000, which was included in income fromoperations in the year ended March 31, 2005.  During fiscal 2006, upon expiration of thewarranty period for material sold, the unused warranty reserve of $336,000,established at the time of sale, was reversed and is included as additionalgain on sale of assets for the year ended March 31, 2006. In conjunctionwith this sale, certain employees of the High Energy Systems Division wereemployed by Accuray and the Company entered into a license agreement and asupply agreement for linear accelerators with Accuray.

 

**9.COMMITMENTS AND CONTINGENCIES**

 

**Deferred Compensation**

 

The Company had anunfunded deferred compensation plan, originally adopted in 1976 and amended atvarious times, for certain retired directors. This plan is closed such that no other directors are qualified forcompensation under this plan.  This planprovides for periodic payments beginning at age 65, the amount of which dependson the director’s length of service. The Company paid $17,000 per year in theyears ended March 31, 2008, 2007 and 2006 under this deferred compensationplan. At March 31, 2008 and March 31, 2007, $61,000 and $69,000,respectively, was accrued for under this plan.

 

**Lease Liability**

 

In conjunctionwith the sale of the High Energy Systems division in fiscal 2005 (see Note 8),the lease for the California operations of the High Energy Systems Division wasassigned to Accuray. The Company remains secondarily liable for the remaininglease payments in the event of default by Accuray during the lease term whichexpires in February 2011. Remaining lease payments at March 31, 2008totaled $1,140,000. No accrual for this contingent liability has been recordedat March 31, 2008 as payment of this expense is considered remote.

 

**Litigation**

 

On October 3,2007, the Company commenced litigation in the United States District Court forthe Eastern District of Virginia against AutoClear, LLC, and its affiliatesControl Screening, LLC, and Scan-Tech Security, LP, for infringement of theCompany’s United States Patent No. 5,313,511, seeking damages andinjunctive relief. The parties have recently begun discovery in this matter.

 

On September 4,2007, the Company received a notice from the United States EnvironmentalProtection Agency (the “EPA”) that it may potentially be liable for certaincosts related to the proposed clean-up at the Sutton Brook Disposal AreaSuperfund Site located in Tewksbury, Massachusetts. The Company is one ofapproximately 45 entities identified by the EPA as a Potentially ResponsibleParty (“PRP”) in connection with alleged historical disposal of waste materialsfor the period from 1958 through the mid-1980s, the timeframe underinvestigation by the EPA. The Company has denied liability, and has initiatedparticipation in the global negotiation and settlement processes with the EPAand with other PRPs. Such negotiation processes are ongoing.  The Company is not able to estimate anypotential cost associated with this claim.

 

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

 

**Purchase Commitments**

 

In the normalcourse of business, the Company enters into purchase orders with its vendorsfor the purchase of materials or services to meet its production needs. At March 31,2008, the Company had $29,965,000 of open purchase orders which are 

 

45

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expected to befulfilled primarily within the next 2 years. Certain single source vendors orvendors producing custom material require significant lead times from order todelivery of their material. Should the demand for the Company’s productsdecline significantly, or should there be a significant shift in the mix ofproducts being demanded, the Company may incur cancellation charges related tothese commitments, that could be material to the Company’s results ofoperations. To date, the Company has not experienced any material lossesrelated to cancellation penalties.

 

**EmploymentAgreements**

 

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

 

**Retirement Savings Plan**

 

The Companymaintains a 401(k) Retirement Savings Plan for all employees.   Employees are eligible to participate on thefirst of the month following date of employment.  The Plan is funded by elective employeecontributions of up to 100% of their compensation up to IRS limits. Under thePlan the Company at its discretion matches 50% of the first 6% of employeecontributions for each participant in the form of Company common stock.Expenses under the Plan, consisting of Company contributions which were made inCompany stock and Plan administrative expenses paid by the Company, totaled$731,000, $660,000, and $520,000, in 2008, 2007, and 2006 respectively.

 

46

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

**UNAUDITEDQUARTERLY CONSOLIDATED FINANCIAL DATAFOR THE YEARS ENDED MARCH 31, 2008 AND MARCH 31, 2007**

 
| ** **                       | ** ** | **2008 by quarter**                                         | ** ** | **2007 by quarter** | ** ** |
|----------------------------------|------------|-----------------------------------------------------------------------|------------|-------------------------------|------------|
| ** **                       | ** ** | **1st**                                                               | ** ** | **2nd**                       | ** ** | **3rd** | ** ** | **4th** | ** ** | **1st** | ** ** | **2nd** | ** ** | **3rd** | ** ** | **4th** | ** ** |
| ** **                       | ** ** | **(In thousands, except per share amounts)** | ** ** |
|                             |       |                                                                  |       |                          |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Net sales and  contract revenues |       | $                                                                     | 44,471     |                          | $          | 37,627 |   | $ | 42,615 |   | $ | 42,020 |   | $ | 29,882 |   | $ | 29,588 |   | $ | 47,797 |   | $ | 45,919 |   |
| Gross profit                     |       | 17,401                                                                |       | 14,078                        |       | 15,184 |   | 13,087 |   | 13,497 |   | 13,529 |   | 21,938 |   | 17,575 |   |
| Operating income                 |       | 8,161                                                                 |       | 5,454                         |       | 4,427 |   | 3,181 |   | 5,553 |   | 6,067 |   | 12,559 |   | 8,040 |   |
| Net income                       |       | 6,172                                                                 |       | 4,515                         |       | 4,002 |   | 2,789 |   | 5,995 |   | 4,753 |   | 8,072 |   | 5,790 |   |
| Net income per  share            |       |                                                                  |       |                          |       |   |   |   |   |   |   |   |   |   |   |   |   |
| —Basic                      |       | $                                                                     | 0.67       |                          | $          | 0.49 |   | $ | 0.44 |   | $ | 0.31 |   | $ | 0.66 |   | $ | 0.52 |   | $ | 0.89 |   | $ | 0.63 |   |
| —Diluted                    |       | $                                                                     | 0.66       |                          | $          | 0.48 |   | $ | 0.43 |   | $ | 0.30 |   | $ | 0.41 |   | $ | 0.49 |   | $ | 0.86 |   | $ | 0.60 |   |

 

47

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**SIGNATURES**

 

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

 
|                       |   | AMERICAN SCIENCE  AND ENGINEERING, INC. |
|----------------------------|--------|-----------------------------------------|
|                       |   |                                    |
| DATED: June 12,  2008 |   | By:                                     |      /s/  ANTHONY R. FABIANO |
|                       |   |                                    |
|                       |   |                                    | Anthony R. Fabiano |
|                       |   |                                    | President and Chief  Executive Officer |
|                            |        |                                         |  |  |

 

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

 
| **Signature**           | ** ** | **Title**                                   | ** ** | **Date**            |
|-------------------------|------------|---------------------------------------------|------------|---------------------|
| ** **              | ** ** | ** **                                  | ** ** | ** **          |
| /s/ ANTHONY R.  FABIANO |       | Director and President  and Chief Executive |       | June 12,  2008 |
| Anthony R.  Fabiano     |       | Officer (Principal Executive  Officer)      |       |                |
|                    |       |                                        |       |                |
| /s/ KENNETH J. GALAZNIK |       | Chief Financial Officer  and Treasurer      |       | June 12,  2008 |
| Kenneth J.  Galaznik    |       | (Principal Financial  Officer)              |       |                |
|                    |       |                                        |       |                |
| /s/ DENIS R.  BROWN     |       | Chairman of the Board,  Director            |       | June 12,  2008 |
| Denis R. Brown          |       |                                        |       |                |
|                    |       |                                        |       |                |
| /s/ ROGER P.  HEINISCH  |       | Director                                    |       | June 12,  2008 |
| Roger P.  Heinisch      |       |                                        |       |                |
|                    |       |                                        |       |                |
| /s/ HAMILTON W.  HELMER |       | Director                                    |       | June 12,  2008 |
| Hamilton W.  Helmer     |       |                                        |       |                |
|                    |       |                                        |       |                |
| /s/ ERNEST J.  MONIZ    |       | Director                                    |       | June 12,  2008 |
| Ernest J. Moniz         |       |                                        |       |                |
|                    |       |                                        |       |                |
| /s/ MARK S.  THOMPSON   |       | Director                                    |       | June 12,  2008 |
| Mark S. Thompson        |       |                                        |       |                |
|                    |       |                                        |       |                |
| /s/ CARL W. VOGT        |       | Director                                    |       | June 12,  2008 |
| Carl W. Vogt            |       |                                        |       |                |

 

48

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**EXHIBITINDEX**

 
| **Exhibit  Number** | ** ** | **Description of Exhibit (and Statement)  of Incorporation by Reference, If Applicable)**                                                                                                                                             | ** ** | **Page  Number  (If Filed)** |
|---------------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------|
| ** **          | ** ** | ** **                                                                                                                                                                                                                                                                         | ** ** | ** **                        |
| (3)(a)              |       | Restated  Articles of Organization of the Company (filed as an Exhibit to the  Company’s Annual Report on Form 10-K for the year ended  September 30, 1967 and incorporated herein by reference)                                                               |       |                              |
| (3)(b)              |       | Articles  of Amendment to Restated Articles of Organization of Company (filed as  Exhibit 2(a)(ii)(B) to the Company’s Registration Statement on  Form S-7, No. 2-56452, filed May 25, 1976 and incorporated  herein by reference)                   |       |                              |
| (3)(c)              |       | Articles  of Amendment to Restated Articles of Organization of Company (filed as  Exhibit 12 to the Company’s Annual Report on Form 10-K for the year  ended March 31, 1976, and incorporated herein by reference)                                             |       |                              |
| (3)(d)              |       | By-laws  of Company, as amended (filed as Exhibit 2(a)(iii) to the Company’s  Registration Statement on Form S-7, No. 2-56452, filed May 25,  1976 and incorporated herein by reference)                                                             |       |                              |
| (3)(e)              |       | Amended  and Restated By-laws of the Company (filed as Exhibit 3.2 to the  Company’s Quarterly Report on Form 10-Q for the quarter ended  December 31, 2003, and incorporated herein by reference)                                                             |       |                              |
| (4)                 |       | Shareholders  Rights Plan (filed as Exhibit to the Company’s filing on  Form dated, 1992 and incorporated herein by references)                                                                                                                                     |       |                              |
| (4)(a)              |       | Shareholder  Rights Agreement, dated April 17, 1998, between the Company and American  Stock Transfer & Trust Company (filed as Exhibit 1 to the  Company’s filing on Form 8-A12B filed on April 15, 1998 and  incorporated herein by reference) |       |                              |
| (4)(c)              |       | RightsAgreement,datedApril17,2008,betweentheCompanyandAmericanStockTransfer&TrustCompany(filedasExhibit4.1totheCompany’sfilingonForm8-A12BfiledonApril18,2008andincorporatedhereinbyreference)                                                                            |       |                              |
| (10)(b)(xii)        |       | 1997  Non-Qualified Stock Option Plan (filed as Exhibit 99 to the Company’s  Registration Statement on Form S-8, File No. 333-27927, filed on  May 28, 1997 and incorporated herein by reference)                                                         |       |                              |
| (10)(b)(xiii)       |       | 1998  Non-Qualified Stock Option Plan (filed as Exhibit (10)(b)(xiii) to the  Company’s Annual Report on Form 10-K for the year ended March 31,  1998 and incorporated herein by reference)                                                                    |       |                              |
| (10)(c)(i)          |       | Lease  of Billerica property (filed as Exhibit 10(c) to the Company’s  Annual Report on Form 10-K for the year ended March 31, 1995 and  incorporated herein by reference)                                                                                |       |                              |
| (10)(c)(ii)         |       | Amendment  to Lease of Billerica property (filed as Exhibit 10(c)(ii) to the  Company’s Annual Report on Form 10-K for the year ended March 28,  1997 and incorporated herein by reference)                                                               |       |                              |
| (10)(c)(iv)         |       | 1999  Combination Stock Option Plan (filed as Exhibit 99 to the Company’s  Registration Statement on Form S-8, File No. 333-91801, filed on  November 30, 1999 and incorporated herein by reference)                                                      |       |                              |
| (10)(c)(v)          |       | 2000  Combination Stock Option Plan (filed as Exhibit A to the Definitive  Proxy Statement on Schedule 14A filed on August 18, 2000 and  incorporated herein by reference)                                                                                               |       |                              |
| (10)(c)(vi)         |       | 2002  Combination Stock Option Plan (filed as Exhibit 99.1 to the Company’s  Registration Statement on Form S-8, No. 333-102338, filed on  January 3, 2003 and incorporated herein by reference)                                                          |       |                              |
| (10)(c)(xv)         |       | Lease  of Mountain View, California facility for High Energy Systems Division (filed  as Exhibit 10(c)(xv) to the Company’s Quarterly Report on Form 10-Q  for the quarter ended June 30, 2003 and incorporated herein by  reference)                          |       |                              |
| (10)(c)(xvi)        | *          | Employment  Offer Letter between the Company and Anthony R. Fabiano dated August 21,  2003 (filed as Exhibit 10(c)(xv) to the Company’s Quarterly Report on  Form 10-Q for the quarter ended September 30, 2003 and incorporated  herein by reference)    |       |                              |
| (10)(c)(xvii)       |       | Second  Amendment of Lease of 829 Middlesex Turnpike, Billerica, Massachusetts (filed  as Exhibit 10(c)(vii) to the Company’s Quarterly Report on  Form 10-Q for the quarter ended December 31, 2004 and incorporated  herein by reference)               |       |                              |
| (10)(c)(xviii)      |       | Amendment  of 2002 Combination Stock Option Plan (filed as Exhibit 99.1 to the  Company’s Registration Statement on Form S-8, No. 333-102338, filed  on January 3, 2003 and incorporated herein by reference)                                             |       |                              |
| (10)(c)(xix)        |       | 2003  Stock Plan for Non-Employee Directors (filed as Exhibit 4.1 to the  Company’s Registration Statement on Form S-8, File No. 333-117843,  filed on July 30, 2004 and incorporated herein by reference)                                                |       |                              |
| (10)(c)(xx)         |       | Amendment  to 2003 Stock Plan for Non-Employee Directors (filed as  Exhibit 10(c)(xx) to the Company’s Annual Report on Form 10-K for  the year ended March 31, 2005 and incorporated herein by reference)                                                     |       |                              |
| (10)(c)(xxi)        |       | 2005  Equity and Incentive Plan (filed as Exhibit 4.1 to the Company’s  Registration Statement on Form S-8, No. 333-129851, filed on  November 21, 2005 and incorporated herein by reference)                                                             |       |                              |

 

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| (10)(c)(xxii)  | *      | Change  in Control & Severance Benefit Agreement between the Company and  Anthony Fabiano dated November 3, 2005 (filed as  Exhibit 10(c)(xxii) to the Company’s Annual report on Form 10-K for  the year ended March 31, 2006 and incorporated herein by reference)        |   |   |
|----------------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------|
| (10)(c)(xxiii) | *      | Form of  Change in Control & Severance Benefit Agreement between the Company  and Named Executives (filed as Exhibit 10(c)(xxiii) to the Company’s  Annual report on Form 10-K for the year ended March 31, 2006 and  incorporated herein by reference)                     |   |   |
| (10)(c)(xxiv)  |   | Form of  Restricted Stock Agreement (Performance) under the AS&E 2005 Equity and  Incentive Plan (filed as Exhibit 10(c)(xxiv) to the Company’s Annual  report on Form 10-K for the year ended March 31, 2006 and  incorporated herein by reference)                             |   |   |
| (10)(c)(xxv)   |   | Form ofStockOptionAgreement(Performance)undertheAS&E2005EquityandIncentivePlan(filedasExhibit10(c)(xxv)totheCompany’sAnnualreportonForm10-KfortheyearendedMarch31,2006andincorporatedhereinby reference)                                                                                        |   |   |
| (10)(c)(xxvi)  |   | Form of  Stock Option Agreement (ISO) under the AS&E 2005 Equity and Incentive  Plan (filed as Exhibit 10(c)(xxvi) to the Company’s Annual report on  Form 10-K for the year ended March 31, 2006 and incorporated herein  by reference)                                         |   |   |
| (10)(c)(xxvii) |   | Form of  Stock Option Agreement (NQ) under the AS&E 2005 Equity and Incentive Plan  (filed as Exhibit 10(c)(xxvi) to the Company’s Annual report on  Form 10-K for the year ended March 31, 2006 and incorporated herein  by reference)                                          |   |   |
| 10(c)(xxviii)  |   | Third  Amendment of Lease of 829 Middlesex Turnpike, Billerica, Massachusetts (filed  as Exhibit 10(c)(xxviii) to the Company’s Annual Report on  Form 10-K for the year ended March 31, 2007 and incorporated herein  by reference)                                                      |   |   |
| 10(c)(xxix)    | ****   | Employment  Agreement between the Company and Anthony R. Fabiano dated February 2,  2008 (filed herewith)                                                                                                                                                                                                |   |   |
| (10)(d)(xi)    |   | Loan  and Security Agreement between the Company and Silicon Valley Bank East dated  August 11, 2003 (filed as Exhibit 10(d)(xi) to the Company’s  Quarterly Report on Form 10-Q for the quarter ended September 30,  2003 and incorporated herein by reference)                     |   |   |
| (10)(d)(xii)   |   | Export  Import Bank Loan and Security Agreement between the Company and Silicon  Valley Bank East dated August 11, 2003 (filed as Exhibit 10(d)(xii)  to the Company’s Quarterly Report on Form 10-Q for the quarter ended  September 30, 2003 and incorporated herein by reference) |   |   |
| (10)(d)(xiii)  | **     | Asset  Purchase Agreement between Accuray Incorporated and the Company dated  December 11, 2004 (filed as Exhibit 10(d)(xiii) to the Company’s  Annual Report on Form 10-K for the year ended March 31, 2005 and  incorporated herein by reference)                                  |   |   |
| (10)(d)(xix)   |   | Third  Loan Modification Agreement between Silicon Valley Bank and the Company dated  November 15, 2006 (filed as Exhibit 10(d)(xiii) to the Company’s  Quarterly Report on Form 10-Q for the quarter ended December 31,  2006 and incorporated herein by reference)                 |   |   |
| (21.1)         |   | Identification  of Company’s subsidiary, AS&E Global, Inc., incorporated in  Massachusetts (filed as Exhibit 22.1 to the Company’s Annual Report on  Form 10-K for the year ended March 31, 2003 and incorporated herein  by reference)                                     |   |   |
| (23.1)         |   | Consent  of Independent Registered Public Accounting Firm                                                                                                                                                                                                                                                     |   |   |
| (31.1)         |   | Certification  of Chief Executive Officer pursuant to Rule 13a-14(a)                                                                                                                                                                                                                                     |   |   |
| (31.2)         |   | Certification  of Chief Financial Officer pursuant to Rule 13a-14(a)                                                                                                                                                                                                                                     |   |   |
| (32.1)         |   | Certification  of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as  adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002                                                                                                                                                 |   |   |
| (32.2)         |   | Certification  of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as  adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002                                                                                                                                                 |   |   |

 

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* Contract withManagement

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

*** Filed herewith

 

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