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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

Commission file number 1-6549

AMERICAN SCIENCE AND ENGINEERING, INC.

(Exact name of registrant as specified in its charter)

Securities registered pursuant to Section 12(b) of the Act:

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

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

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

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

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer or a non-accelerated filer (as defined in Rule 12b-2 of the Securities Exchange Act of 1934)

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

The aggregate market value of voting stock held by non-affiliates of the registrant, computed using the closing sale price of common stock of $59.73 on September 30, 2008 was $510,434,000.

8,839,530 shares of registrant’s common stock were outstanding on May 29, 2009.

DOCUMENTS INCORPORATED BY REFERENCE

The registrant intends to file a definitive Proxy Statement pursuant to Regulation 14A within 120 days of the end of the fiscal year ended March 31, 2009. Portions of such Proxy Statement are incorporated by reference in Part III.

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AMERICAN SCIENCE AND ENGINEERING, INC.

FORM 10-K

FOR THE PERIOD ENDED MARCH 31, 2009

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CAUTIONARY STATEMENT

This Annual Report and the documents incorporated by reference contain forward-looking statements.  For this purpose, any statements contained herein that are not statements of historical fact may be deemed to be forward-looking statements.  Without limiting the foregoing, the words “believes”, “anticipates”, “plans”, “expects”, “should” and similar expressions are intended to identify forward-looking statements.  The factors discussed under “Item 1A. Risk Factors”, among others, could cause actual results to differ materially from those indicated by forward-looking statements made herein and presented elsewhere by management from time to time.  We expressly disclaim any obligation to update 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 this Annual Report to “AS&E”, the “Company”, “we”, “our” and “us” means American Science and Engineering, Inc. and its subsidiary.

PART I

ITEM 1. BUSINESS

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

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

·                  Authorities responsible for port and border security;

·                  Military organizations;

·                  High threat commercial and government facilities;

·                  Aviation security agencies; and

·                  Legal enforcement agencies

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

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

The Company’s objective is to distinguish itself from its competitors by offering innovative products which provide customers with superior threat detection and/or improved operating efficiencies. To achieve this objective, AS&E incorporates a variety of X-ray imaging and image processing technologies into its products.  A number of the Company’s products use our patented Z Backscatter™ technology.  Z Backscatter is a unique X-ray imaging technique that has distinct advantages for the detection of organic or low atomic number (Z) materials such as plastic explosives, composite weapons, and illegal drugs even when concealed by complex backgrounds.

Technology

The Company’s X-ray imaging products utilize several technologies including traditional transmission X-ray technology, our proprietary Z Backscatter technology, Shaped Energy® technology and Radioactive Threat Detection (RTD).

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

Transmission X-ray Technology:  Transmission images are created from X-rays that pass through the object that is being examined.  Medical X-ray images are a type of transmission X-ray.  In transmission imaging, the detector measures the relative intensity of the X-rays that pass directly through the object.  The degree to which X-rays are transmitted through an object is

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

Z Backscatter Technology:   Most of the Company’s X-ray systems utilize AS&E’s patented Z Backscatter technology.  The term “Backscatter” refers to those X-rays that scatter off of the object under examination back toward the X-ray source.  Z Backscatter detectors capture these scattered X-rays which are then used to create highly readable, photo-like images.

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

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

Other Technologies:   Two other technologies employed by AS&E are Shaped Energy and Radioactive Threat Detection (RTD).  Shaped Energy technology is a specialized form of high energy transmission X-ray which is used in AS&E’s OmniView™.  Radioactive Threat Detection (RTD) is a technology which is used to find radioactive materials in vehicles and is an option on selected AS&E detection systems.

Products and Systems

The Company’s products and services can be grouped into five different areas including CargoSearch Inspection Systems, Z Backscatter Systems, ParcelSearch and Personnel Screening Inspection Systems, Contract Research and Development, and Service and Support.

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

OmniView™ Gantry System:  a multi-view, relocatable high-energy cargo and vehicle inspection system.  This system combines 6 MeV high-energy transmission imaging and three Z Backscatter X-ray views for left, right and top-side imaging of cargo.  OmniView provides side and top-down views of the cargo in a relocatable configuration. OmniView utilizes AS&E’s patented Shaped Energy® technology to penetrate densely loaded cargo containers. Shaped Energy “shapes” the high energy spectrum to filter out non-essential radiation, making the system safe for operators and staff and eliminating the need for extensive exclusion zones.  High energy 6 MeV transmission X-rays can penetrate 14 inches (35 cm) of steel or 8.5 feet (260 cm) of oil, yet do not require heavy shielding, an exterior building, or standoff zones.   The Z Backscatter images are ideal for the detection of organic or “low Z” materials including explosives, drugs, alcohol, and tobacco that transmission X-rays alone can miss. The System’s multiple Z Backscatter views of the cargo improve detection while facilitating interpretation of the X-ray image.  The OmniView Gantry System’s scanning platform operates by moving on rails past stationary vehicles and cargo.  The system is bi-directional allowing for a throughput of approximately 25 trucks per hour.  OmniView Gantry is ideal for ports, borders, and high-threat facilities.

Z Portal®:  a multi-view, high throughput, drive-through inspection system capable of scanning cars, vans, trucks, and their cargoes for threats and contraband.  The relocatable screening system can be configured with one, two or three Z Backscatter X-ray detectors, allowing for left, right and/or top-side imaging of the vehicle under examination.  The images produced by the Z Portal are ideal for the detection of organic materials including explosives, drugs, alcohol, tobacco, and stowaways.  The Z Portal is well-suited for scanning vehicles at border crossings, high threat facilities, and other vehicle entry checkpoints.

Z Gantry™: a multi-view Z Backscatter inspection system capable of scanning cars, vans, trucks, and their cargo for concealed threats and contraband in a gantry configuration. The relocatable Z Gantry screening system is configured with three Z Backscatter imaging modules, allowing a left, right, and top view of the vehicle under examination.  The rail-mounted Z Gantry system moves over the top of stationary vehicles and cargo while scanning for threats and illegal goods such as stowaways, explosives, drugs, and alcohol.

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Z Backscatter Systems:  Z Backscatter Systems include imaging systems that use Z Backscatter imaging only.

Z Backscatter Van™ (ZBV): a mobile X-ray screening system built into a commercially available chassis.  It utilizes Z Backscatter X-ray technology to produce photo-like images of the contents of a vehicle or cargo container, highlighting organic materials such as plastic explosives or other anomalies. With one-sided, backscatter-only imaging, security officials can use ZBV for screening vehicles, sea containers, and other cargo for terrorist threats, trade fraud, and contraband, simply by driving past the objects.   The ZBV can be equipped with Radioactive Threat Detection (RTD) capability.  With RTD, the ZBV can produce Z Backscatter images for general screening while simultaneously scanning the object for the presence of radioactive material.  The ZBV is available on a variety of chassis in several versions, including a militarized trailer configuration (ZBV Mil Trailer) that is designed for use by the U.S. military.

ParcelSearch and Personnel Screening Inspection Systems: ParcelSearch systems 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 and convention centers.

Personnel screening is a crucial part of any threat detection effort.  Today, threats can 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 effort to intercept prohibited substances, such as drugs and alcohol.

Gemini™:  Gemini is a parcel and baggage inspection system which combines AS&E’s Z Backscatter technology with dual-energy transmission X-ray to provide enhanced detection for a wide range of threats.  Dual-energy transmission is best suited for the detection of threats such as guns and knives, and for identifying wires and other components of improvised explosive devices (IEDs). It also provides some organic and metallic discrimination in uncluttered environments.  Z Backscatter imaging provides enhanced detection of organic materials such as explosives and narcotics, which may be missed by transmission-only systems in cluttered baggage.  In addition, the complementary photo-like Z Backscatter image makes it easier for security officers to interpret images, thus reducing analysis time and minimizing operator fatigue. During fiscal 2009 the Company introduced two additional Gemini models to customers with a range of tunnel sizes to suit various applications.

SmartCheck™:  a personnel screening system for the effective screening for contraband and threats hidden under a person’s clothing.  SmartCheck simultaneously detects both metallic and non-metallic objects, 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 an easy-to-read display of where the threat or contraband is hidden, thus eliminating the need for intrusive and time-consuming pat-downs and strip searches.  SmartCheck employs proprietary advanced image processing algorithms to enhance privacy, while maintaining a high 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 it believes provide avenues for advancing our core technologies or developing product offerings for strategic customers or markets.

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

AS&E provides comprehensive technical training on all X-ray inspection systems. Our instructors specialize in current threat detection techniques and employ both classroom theory and hands-on training to help clients become expert users of AS&E equipment. Our technical training informs customers about detection technologies and best practices through demonstrations and field activities that simulate real-life threat and contraband encounters.  Technical training is included with each system sale and additional training for image analysis, service and maintenance training, and other customized training courses are provided aftermarket to interested customers.

Intellectual Property

The Company relies on a combination of patent, copyright, trademark, and trade secret laws, and contractual provisions to protect our intellectual property.  In general, the Company pursues a policy of obtaining patent protection both in the United States and in selected foreign countries for subject matter we consider patentable and important to our business strategy.  As of March 31, 2009, the Company has in excess of 40 unexpired patents issued by the United States Patent and Trademark Office and multiple pending applications directed to a variety of technologies.  The Company also has granted patents or pending

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applications pursuant to the following treaties and/or in the following countries: Patent Cooperation Treaty, European Patent Convention, Gulf Cooperation Counsel, Australia, Austria, Belgium, Canada, China, Denmark, Finland, France, Germany, Greece, Hong Kong, India, Israel, Ireland, Italy, Japan, Korea, Malaysia, Mexico, Netherlands, New Zealand, Norway, Portugal, Russian Federation, Singapore, Spain, Sweden, Switzerland, Thailand, Turkey, Ukraine, United Arab Emirates, United Kingdom.  A significant number of our patents have been issued in the last five years.

Generally, if pending on June 8, 1995, a patent issued in the United States is effective for the longer of 17 years from the date of issue or 20 years from the United States filing date of the earliest non-provisional application upon which the patent is based.  If filed after June 8, 1995, a patent is generally effective for a term of 20 years from the United States filing date of the earliest non-provisional application upon which the patent is based.  The duration of foreign patents varies in accordance with applicable local law. While the duration of our patents varies, we believe that the duration of our patents is adequate relative to the expected lives of our products. Although the Company believes the ownership of such patents, copyrights, and trademarks is an important factor in its business and that its success depends in part on the ownership thereof, the Company relies primarily on the innovative skills, technical competence, and marketing abilities of its personnel.

The Company also has various trademarks registered and pending registration with the United States Patent and Trademark Office, as well as marks registered and pending registration in various jurisdictions around the world.  Company patents and trademarks are carefully reviewed regularly, and those with no foreseeable commercial value are abandoned to eliminate costly maintenance fees.  The Company has ongoing research and development efforts and expects to seek additional intellectual property protection in the future.

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

The Company believes that its patents, proprietary technology, trade secrets, know-how, and trademarks provide substantial protection for the Company’s competitive position and the Company intends to aggressively protect its intellectual property assets, by litigation or other means, as appropriate.  We have periodically monitored and continue to monitor the activities of our competitors and other third parties with respect to their use of intellectual property. In addition, we require our employees, consultants, outside collaborators, and certain distributors and suppliers to execute confidentiality and, where appropriate, non-competition agreements upon commencing employment or other relationships with us.  Nevertheless, there can be no assurances that the steps taken by the Company in this regard will be adequate to prevent misappropriation or infringement of its technology or that the Company’s competitors will not independently develop technologies that are substantially equivalent or superior to the Company’s technology.  Effective protection of intellectual property rights may be limited or unavailable in certain foreign countries.  See “Item 3. Legal Proceedings” below.

Sales and Marketing

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

Customers

The Company has a customer base consisting of government and commercial clients from both the United States and abroad. Domestically, the Company’s primary client base is comprised of agencies of the U.S. Government. Approximately 56%, 55%, and 70% of the Company’s total sales in fiscal 2009, 2008, and 2007, respectively, were derived from either (i) contracting directly with the U.S. Government, or (ii) contracting with contractors working directly with the U.S. Government. A significant number of the Company’s contracts with the U.S. Government provide the U.S. Government with the standard unilateral right to terminate these contracts for convenience. As discussed under Item 7 of this Annual Report, during fiscal 2009 two of the Company’s contracts with the U.S. Government were partially terminated for convenience by the U. S. Government.  These partial terminations did not result in any material losses to the Company.   The Company is heavily dependent upon sales to agencies of the U.S. Government and reductions or delays in procurement of the Company’s systems and services by these agencies may have a material adverse effect on the Company.

International sales, primarily to foreign governments, accounted for approximately 37%, 36%, and 27% of the Company’s total sales in fiscal 2009, 2008, and 2007 respectively, and continue to be a high priority for the Company as part of its long-term growth strategy. International sales entail longer sales cycles and project financing requirements; however the Company continues to focus on these sales as a means of broadening its customer base. The Company manages its overseas risk in a number of ways, including actively increasing the number of opportunities it is pursuing at any one time and obtaining downpayments and letters of credit to secure its international receivables. The majority of international contracts are bid in U.S.

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dollars. For those contracts that are bid in other currencies, the Company considers the need to engage in hedging contracts to control foreign exchange risk. There were no hedging activities in fiscal 2009, 2008, or 2007.

In fiscal 2009, the Company had sales to two major customers, one agency of the U.S. Government and one international government, which accounted for 18% and 16% of total sales, respectively.  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 two major customers, both agencies of the U.S. Government, which accounted for 31% and 15% of total sales.

Competition

The Company has many competitors in the homeland security X-ray detection market, including several large and well-established manufacturers of security equipment with financial and other resources greater than those of the Company. Certain X-ray security system customers select such systems based largely on price. Other customers, including some agencies of the U.S. Government and certain users in countries with high levels of concern over security, tend to select systems based largely on detection capability.  Many of the Company’s systems offer premium performance and have in some cases been priced higher than competing systems. The Company believes that its patented and proprietary technology give it a strong competitive position in the sale of security systems to customers concerned with performance and detection. The Company also believes that its strategy of concentrating on products with unique features, including Z Backscatter and Shaped Energy, and/or competitive pricing will give it a strong position to increase its sales of X-ray inspection systems. However, a number of companies have developed products that compete with the Company’s X-ray inspection products. (See Item 1A.  Risk Factors)

ISO 9001 Certification

In August 2006, the Company’s Quality Management System was recertified under the ISO 9001:2000 Standard of the International Organization for Standardization which it has been registered under since 2003.  ISO 9001 is an internationally recognized quality management and assurance standard.  In qualifying, the Company met or exceeded the standards for establishing a quality management system for preventing non-conformity at every level of the product life cycle, from customer order, through development and production, to installation and support.  The Company believes that demonstrating continuous quality improvement is vital for building customer satisfaction and making business processes more efficient in order to increase its competitive edge.

Component Availability

Critical material and subsystems are procured from both domestic suppliers and global supply partners.  These supply sources are in several cases, involving key components, single sources of supply and the material provided can have extended lead times.  In response to expanding customer demand in the global security screening market, the Company has taken steps to mitigate sourcing risks by working closely with its suppliers to ensure future material and subsystem availability to support its production plans. In some cases, the Company has chosen to stock reserve material to ensure future availability. Efforts have also included identifying and qualifying second source suppliers for critical material and a number of key subsystems in support of its product lines. The Company does not expect to experience sustained difficulties in securing required material and subsystems to support its future business operations.

Regulatory Compliance

AS&E must comply with applicable federal regulations under Title 21 CFR Subchapter J - Radiological Health.  To the Company’s knowledge, all AS&E cabinet X-ray products comply with all applicable U.S. Government radiation safety performance standards including 21 CFR 1020.40. To the Company’s knowledge, all personnel inspection systems of AS&E comply with the voluntary consensus radiation safety standards adopted by the American National Standards Institute ANSI N43.17-2002.

Research and Development

The Company spent approximately $18,070,000 of its own funds for research and development during fiscal 2009, compared to $12,306,000 and $7,184,000 in fiscal 2008 and 2007, respectively. The fiscal 2009 research and development efforts were focused on new product development, the development of new applications, and design modifications and enhancements to existing products.

In addition, the Company conducted government-sponsored research primarily focused on advances in X-ray systems, image analysis and integrated system development for niche security inspection problems. The Company recognized revenues of $12,524,000, $13,978,000, and $6,597,000 in fiscal 2009, 2008, and 2007, respectively for these efforts. Many of the Company’s government sponsored research and development contracts provide for a fixed fee or a reimbursement of allowable costs plus a

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fixed fee. The Company’s contracts in these areas are obtained by submitting research and development proposals to various organizations, sometimes in response to requests for such proposals.

Personnel

As of March 31, 2009 the Company had 375 employees as compared to 346 employees at March 31, 2008.   It is the Company’s policy to have employees sign a non-compete and non-disclosure agreement as a condition of employment. None of the Company’s employees are represented by labor unions.

Sales Backlog

The Company’s firm (signed contracts) sales backlog was $155,349,000, $99,606,000, and $105,634,000 at March 31, 2009, March 31, 2008, and March 31, 2007, respectively.

A significant number of the Company’s contracts with the U.S. Government contain clauses permitting the government to terminate the contract for convenience upon certain terms and conditions, including partial payment to the Company for work performed. This right was exercised in fiscal 2009 by two U.S. Government agencies who were parties to the contract.  Total contracts with U.S Government agencies and subcontractors in the backlog were $71,545,000, $42,640,000, and $58,833,000, at March 31, 2009, 2008 and 2007, respectively. It is estimated that approximately 82% of the 2009 backlog will be converted within the fiscal year ending March 31, 2010.

Financial Information about Foreign and Domestic Operations and Export Sales

Most export sales are transacted in U.S. dollars, and most are either secured by irrevocable letters of credit or paid in advance. The following table shows the breakdown of net sales and contract revenues to international and domestic customers based upon the customer’s country of domicile and the major regions of international activity. All assets are maintained within the United States with the exception of inventory depots, inventory in transit or awaiting installation and cash accounts maintained at foreign locations (approximately 5.3% of the Company’s assets).

Net Sales and Contract Revenues

Available Information

The Company’s principal executive offices are located at 829 Middlesex Turnpike, Billerica, MA 01821; telephone number 978-262-8700; corporate website www.as-e.com. We make available, free of charge through our website, our annual Form 10-K, current reports on Form 10-Q and Form 8-K, and amendments to these reports filed or furnished pursuant to Section 13(a) of the Securities Exchange Act of 1934 as soon as practicable. In addition, our reports, proxy and information statements and other information filed with the SEC 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’s website at www.sec.gov.

ITEM 1A.  RISK FACTORS

You should carefully consider the following risk factors, in addition to other information included in this Annual Report on Form 10-K and other reports we file with the Securities and Exchange Commission.  If any of the following risks occur, the Company’s business, financial condition and operating results could be materially adversely affected.

The Company’s reliance on a small number of customers for a large portion of its revenues could harm its business and prospects.  A number of contracts held by those customers may be terminated at the customer’s discretion.

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The Company’s business is dependent on sales to a small number of customers, which include agencies of the United States government. During fiscal 2009, two customers accounted for 34% of the Company’s total revenues.   During fiscal 2008, two customers accounted for 22% of the Company’s total revenues and during fiscal 2007, two customers accounted for 46% of the Company’s total revenues. The Company can provide no assurance that its existing customers will increase or maintain their level of demand for the Company’s products.

A significant number of the Company’s government contracts may be terminated at the government’s discretion. During fiscal 2009, two of the Company’s contracts with the U.S. Government were partially terminated for convenience by the U.S. Government.  Although these partial terminations did not result in material losses to the Company, future contract terminations could negatively impact the Company’s results of operations.  The termination of the Company’s relationship with one or more of its significant customers or the reduction or delay of orders of its systems by these customers would substantially reduce the Company’s revenues, and its business and prospects may be harmed.

The Company’s results of operations are affected by the overall economy and governmental spending.

The Company’s results of operations may be materially adversely affected by the conditions in the global economy and the impact of those conditions on U.S. and foreign government spending. The global economic recession has caused extreme volatility and disruptions in the capital and credit markets, including a significant reduction in the availability of capital resources to many business enterprises. U.S. and foreign economies have experienced and continue to experience significant declines in employment, spending, household wealth and lending.  Businesses have faced and may continue to face weakened demand for their products and services, difficulty obtaining access to financing, increased funding costs, and barriers to expanding operations. U.S. and foreign government spending for programs involving products such as the Company’s may be reduced or delayed, now or in the future, due to reduced tax revenues and other spending imperatives, including financial institution support and economic stimulus programs.  Economic and market conditions may continue to worsen and could negatively impact the Company’s results of operations.

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

The Company’s largest customers are government agencies and demand for its products is dependent upon national priorities and governmental initiatives. These priorities and initiatives are subject to change from time to time in response to the economic and political environment.   The Company is also exposed to budget approval and appropriation decisions and processes which are driven by numerous factors, including geo-political events and macroeconomic conditions, and are beyond our control. While the overall level of U.S. defense spending has increased in recent years for numerous reasons, we can give no assurance that such spending will continue to grow, or not be reduced. Significant changes in defense spending could have long-term consequences for our size and structure. In addition, changes in government priorities and requirements could impact the funding, or the timing of funding, of our programs which could negatively impact our results of operations and financial condition.

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

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

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

The Company’s revenues to international customers, including foreign governments, accounted for approximately 37%, 36% and 27% of its net revenues for the fiscal years ended March 31, 2009, March 31, 2008  and March 31, 2007, respectively, and a significant number of domestic customer orders require shipments to, and services provided in, overseas locations. In addition, the Company transacts business internationally with a number of its key suppliers. As a result of the Company’s worldwide business operations, it is subject to various risks, including:

· international regulatory requirements and policy changes;

· lengthy sales cycles;

· longer payment cycles by foreign customers;

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

· difficulties in staffing and managing foreign operations;

· geopolitical instability;

· political and economic changes and disruptions;

· favoritism towards local suppliers;

· governmental currency controls;

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

· currency exchange rate fluctuations; and

· tariff regulations.

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

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

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

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

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

Some of our suppliers may allocate material due to market demand for the products they produce or market constraints such as the global availability of raw materials. We have no guaranteed supply arrangements with our suppliers and there can be no assurance that our suppliers will continue to meet our requirements. Many of our competitors are much larger and may be able to obtain priority allocations from these shared suppliers, thereby limiting or making our sources of supply unreliable for these components. There is also the possibility that a key single source supplier may be acquired by or form a strategic alignment with a competitor, which could impact our ability to secure required materials.  If our supply of materials is disrupted, we cannot ensure that we would be able to find another supplier on a timely basis.

The Company depends on its subcontractors and suppliers to deliver material that is in full compliance with critical quality and specification requirements. Quality issues may affect the reliability and performance of our products, customer confidence, and adversely impact financial performance. Any difficulty in obtaining sufficient and timely delivery of conforming material could result in delays or reductions in product shipments that could materially and adversely affect our business, financial condition and consolidated results of operations. This in turn could also damage our reputation in the market and cause us to lose market share. The Company does not expect to experience sustained difficulties in securing required material and subsystems to support forward business operations.

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Fluctuations in the Company’s operating results and unanticipated contract terminations may cause its stock price to fluctuate.

Given the nature of the markets in which the Company participates, and given the right of key customers to terminate contracts at their discretion, it cannot reliably predict future revenue and profitability. A high proportion of the Company’s costs are fixed, due in part to its significant sales, research and development, and manufacturing costs. As a result of its fixed costs, even small declines in revenue could disproportionately affect the Company’s operating results and stock price at any time. Factors that may affect the Company’s quarterly operating results and the market price of its common stock include:

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

· lengthy sales cycles and the effect of large orders;

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

· changes in political agendas or national priorities;

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

· political unrest in the regions where the Company transacts business;

· adverse changes in industries on which the Company is particularly dependent;

· competitive pressures resulting in lower selling prices for its products;

· delays or problems in the introduction of new products;

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

· variations in the Company’s product mix;

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

· increased costs of raw materials or supplies; and

· changes in the volume or timing of product orders.

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

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

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

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

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

The Company generates funds for its research and development activities from operations, private sources and the government. The Company may be unable to generate the funds necessary to support its research and development activities if it does not generate sufficient funds from operations, other potential private sources, or the government. The Company may not successfully compete with other companies and research institutions for government funding and funding from other private sources. Additionally, government-funding priorities are subject to frequent changes. For example, in fiscal 2009, 2008, and 2007, the Company recorded $12,524,000, $13,978,000 and $6,597,000, respectively, for government-sponsored research and

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development. There is no guarantee that the Company will receive funds for government-sponsored research in the future. If the Company is unable to fund its research and development activities through its operations or from outside sources, the Company may be unable to continue to innovate or bring its innovations to market on a timely or cost effective basis, or its innovations may be surpassed by other competitors or new technologies.

The Company’s success depends on new product development.

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

· unanticipated delays;

· access to capital;

· budget overruns;

· technical problems; and

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

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

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

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

The Company may not be able to compete successfully.

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

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

· product performance, functionality and quality;

· price;

· the overall cost of ownership of the system;

· prior customer relationships;

· technological capabilities of the product;

· certification by government authorities;

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· local market presence; and

· breadth of the sales and service organization.

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

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

The Company relies primarily on a combination of trade secrets, patents, copyrights, trademarks and confidentiality procedures to protect its technology. Despite its precautions, the steps the Company has taken to protect its technology may be inadequate. Existing trade secret, patent, trademark and copyright laws offer only limited protection. The Company’s patents could be invalidated or circumvented.  In addition, others may develop substantially equivalent or superseding proprietary technology, or competitors may offer equivalent products in competition with the Company’s products, thereby substantially reducing the value of the Company’s proprietary rights. The laws of some foreign countries in which the Company’s products are or may be developed, manufactured or sold may not protect its products or intellectual property rights to the same extent as do the laws of the United States. This may make the possibility of piracy of the Company’s technology and products more likely. The Company cannot assure that the steps it has taken to protect its intellectual property will be adequate to prevent misappropriation of its technology. The Company’s inability to protect its intellectual property could have a negative impact on its operations and financial results.

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

Initiating or defending against the enforcement of the Company’s intellectual property rights may result in significant, protracted, and costly litigation. The Company has previously been and continues to be involved in various litigations involving its intellectual property and has been successful in protecting such interests to date. The Company expects intellectual property disputes to be an ordinary part of its business for the foreseeable future. The Company may initiate claims or litigation against third parties for infringement of its intellectual property rights, or to establish the validity of its property rights. There can be no assurance that the Company will prevail in any such action. Litigation by or against the Company could result in significant expense and divert the efforts of technical and management personnel, whether or not such litigation results in a favorable outcome for the Company. In the event of an adverse result in any such litigation, the Company could be required to pay substantial damages, cease the manufacture, use and sale of infringing products, expend significant resources to develop non-infringing technology, discontinue the use of certain processes, or obtain licenses for the infringing technology. If a license were required, the Company cannot assure that it would be able to obtain one on commercially reasonable terms, if at all. The Company cannot assure that it will be successful in developing non-infringing technology or that the cost or time required to develop such technology will be reasonable.

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

The Company’s future success depends in large measure upon the continued contributions of its senior management team and other key personnel.  We cannot guarantee that we will be able to attract and retain key personnel or executive management in sufficient numbers, with the requisite skills or on acceptable terms necessary or advisable to support our continued growth.  If we lose professionals or are unable to attract new talent, we will not be able to maintain our position in the market or grow our business.

Existing external financing may not be available in the future.

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

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

Substantially all of the Company’s outstanding shares of common stock are freely tradable without restriction or further registration. Affiliates must sell all shares they own in compliance with the volume and other requirements of Rule 144.

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Nevertheless, sales of substantial amounts of common stock by the Company’s stockholders, or even the potential for such sales, may cause the market price of the Company’s common stock to decline and could impair the Company’s ability to raise capital through the sale of the Company’s equity securities.

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

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

· announcements of developments related to the Company’s business;

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

· general conditions in the worldwide economy;

· announcements of technological innovations;

· new products or product enhancements by the Company or its competitors;

· developments in patents or other intellectual property rights and litigation; and

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

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

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

Provisions in the Company’s articles of organization and the Company’s shareholder rights plan may have the effect of discouraging or preventing a change in control. These provisions could limit the price that acquirers might be willing to pay in the future for shares of the Company’s common stock. Specifically, the Company’s articles of organization authorize its Board of Directors to issue up to 100,000 shares of preferred stock in one or more series, to fix certain rights, preferences, privileges and restrictions granted to or imposed upon any wholly unissued shares of preferred stock, to fix the number of shares constituting any such series, and to fix the designation of any such series, without further vote or action by its shareholders. The terms of any series of preferred stock, which may include priority claims to assets and dividends and special voting rights, could adversely affect the rights of the holders of common stock and thereby reduce the value of the Company’s common stock. The Company has no present plans to issue shares of preferred stock. The Company has in place a shareholder rights plan, which was renewed in April of 2008, under which its stockholders are entitled to purchase shares of its preferred stock under certain circumstances. These circumstances include the purchase of 15% or more of the outstanding shares of common stock by a person or group, or the announcement of a tender or exchange offer to acquire 15% or more of the outstanding common stock. The shareholder rights plan may have the effect of impeding or preventing certain types of transactions involving a change in control of the Company that could be beneficial to the stockholders.

ITEM 1B.  UNRESOLVED STAFF COMMENTS

None.

ITEM 2. PROPERTIES

The Company leases an 186,000 square foot facility located in Billerica, Massachusetts which is owned by an unaffiliated real estate limited partnership and serves as the Company’s executive offices, research, manufacturing and warehouse facilities.  The lease expires on February 29, 2016. The Company believes that its facilities are adequate and provide sufficient production capacity for its present intended purposes. The Company’s facilities are currently utilized primarily on a one-shift basis. The Company is able to add additional capacity by adding second and third shifts if necessary.

The Company’s former High Energy Systems division had leased 24,733 square feet of manufacturing, research and development, and office space in Mountain View, California. The lease commenced on February 1, 2004 and had an initial term of seven years with an option to extend for an additional five-year period. In January 2005, as part of the asset sale agreement

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with Accuray, Incorporated, the Company assigned its rights and obligations under this lease to Accuray. The Company is secondarily liable for the lease payments in the event of default by Accuray during the lease term, which expires in February 2011.

ITEM 3.  LEGAL PROCEEDINGS

On October 3, 2007, the Company commenced litigation in the United States District Court for the Eastern District of Virginia against AutoClear, LLC, and its affiliates Control Screening, LLC, and Scan-Tech Security, LP, for infringement of the Company’s United States Patent No. 5,313,511, seeking relief, including an injunction.  The Company subsequently added United States Patent No. 6,546,072 to the complaint. However, this patent was later withdrawn from the litigation.  This case was settled in June of 2009 with the court holding that the defendants had infringed on the Company’s United States Patent No. 5,313,511.  Under the terms of the settlement agreement, the Company has granted the defendants a limited license under the patent commencing later this year.  Other terms of the settlement agreement are confidential.

The Company is also subject to various legal proceedings and claims that arise in the ordinary course of business.  At the present time, it is not possible to predict the outcome of these matters; however, the Company currently believes that the resolution of these matters will not have a material adverse impact on its financial condition, results of operations or cash flows.

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

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

PART II

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

Market Information

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

Holders

As of May 29, 2009, there were approximately 626 holders of record of the Company’s common stock.

Common Stock Dividends

In May of 2007, the Company began declaring quarterly cash dividends for its common stock shareholders.   Common stock cash dividends declared during the fiscal years ended March 31, 2009 and March 31, 2008 were as follows:

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On May 13, 2009, the Company declared another quarterly dividend of $0.20 for holders of record on May 26, 2009 to be paid June 4, 2009.  The Company has received consent from its bank for these dividends as its credit facility restricts the payment of dividends (except in shares of the Company’s stock).  Future dividend payments will depend on our earnings, capital requirements, financial condition and capital needs and other factors considered relevant by our Board.

Securities Authorized for Issuance under Equity Compensation Plans

The following table provides information about the Company’s equity compensation plans and the common stock that may be issued upon the exercise of options and rights under all existing equity compensation plans as of March 31, 2009.

Purchases of Equity Securities

On May 17, 2007, the Board of Directors approved a Stock Repurchase Program which authorized the Company to repurchase up to $35 million of shares of its common stock from time to time on the open market.  This Stock Repurchase Program was completed in the first quarter of fiscal 2009.  On May 13, 2008, the Board of Directors approved an additional Stock Repurchase Program which authorized the Company to repurchase up to another $35 million in shares of its common stock from time to time on the open market. As of March 31, 2009, the remaining balance available under the program to purchase shares was $26,732,000.  On May 7, 2009 the Board of Directors approved the continuation of the Stock Repurchase Program through fiscal 2010.

The following table provides information about our purchases during the quarter ended March 31, 2009 of equity securities that are registered by us pursuant to Section 12 of the Exchange Act.

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Stock Performance Graph

The following chart graphs the performance of the cumulative total return to shareholders (stock price appreciation plus dividends, if applicable) during the previous five years in comparison to the returns of the Standard & Poor’s 500 Composite Stock Price Index, the S&P SmallCap 600 Index and the Standard & Poor’s 500 Information Technology Composite Stock Price Index.

Comparison of Cumulative Five Year Total Return

ITEM 6. SELECTED FINANCIAL DATA

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

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

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

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

2009 Compared to 2008

Overview    American Science and Engineering, Inc. develops and manufactures state-of-the-art X-ray inspection systems for homeland security and other critical defense applications. The Company’s primary technologies are: (1) Z Backscatter technology which is used to detect plastic explosives, illegal drugs, and other contraband even when artfully concealed in complex backgrounds; and (2) Shaped Energy X-ray inspection systems which combine the material discrimination features of Z Backscatter with the penetration capability of high-energy X-rays for dense cargos.

Net sales and contract revenues for fiscal 2009 increased by 31% to $218,367,000 compared to fiscal 2008 revenues of $166,733,000. The Company reported net income before taxes of $43,700,000 in fiscal 2009 compared to a net income before taxes of $27,485,000 in the previous fiscal year. Net income for fiscal 2009 was $28,353,000 ($3.18 per share, on a diluted basis) as compared to a net income of $17,478,000 ($1.87 per share, on a diluted basis) in fiscal 2008. Backlog at March 31, 2009 was $155,349,000, a 56% increase from the year-end backlog of $99,606,000 reported at March 31, 2008.

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

In fiscal 2009, 63% of the Company’s revenues were from domestic (based upon customer’s country of domicile) customers as compared to 64% in fiscal 2008. In fiscal 2009, the Company had sales to two customers which accounted for 34% of total sales.  In fiscal 2008, the Company had sales to two customers which accounted for 22% of total sales.

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

Selling, general and administrative expenses in fiscal 2009 increased by $6,650,000 to $32,871,000 as compared to fiscal 2008 and represented 15% of revenues in fiscal 2009 as compared to 16% of revenues in fiscal 2008. This increase in spending can be attributed to increased incentive compensation costs ($4,611,000) as the Company achieved certain incentive compensation goals in the current year, increased payroll and payroll related costs ($1,180,000) due to increased headcount and the accrual of certain severance payments, increased marketing related costs ($540,000) as the Company increased trade shows and demos to introduce new product offerings, and increased legal fees ($1,499,000) related primarily to on-going patent litigation.  In addition, in fiscal 2008 there was a write-down of a note receivable of $1,608,000 that was deemed uncollectible.

Company-funded research and development spending increased by $5,764,000 to $18,070,000 in fiscal 2009, a 47% increase as compared to the $12,306,000 spent in fiscal 2008.  Research and development spending represented 8% of revenues in fiscal 2009 as compared to 7% of revenues in fiscal 2008. Fiscal 2009 costs increased as the Company hired during the year additional engineering resources to focus on the Company strategic development efforts.  The fiscal 2009 research and development efforts were focused on new product development, the development of new applications, and design modifications and enhancements to existing products.

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

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The Company reported pre-tax income of $43,700,000 in fiscal 2009 as compared to a pre-tax income of $27,485,000 in the previous fiscal year primarily due to the items noted above. The Company recorded income tax expense of $15,347,000 in fiscal 2009 as compared to $10,007,000 in the prior fiscal year.  The Company’s effective tax rate was 35% in fiscal 2009 as compared to 36% in fiscal 2008.  This decrease in rate can be attributed to the increase in manufacturing and research and development credits available in the current year due in part to the reinstatement of certain research and development tax credits during this fiscal year by the federal government and to a decrease in non-deductible stock compensation expense,.

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

2008 Compared to 2007

Results of Operations    Total net sales and contract revenues of $166,733,000 in fiscal 2008 increased by $13,547,000 or 9% from the previous year. Revenues related to product sales and contracts increased by $2,025,000 or 2% due to the following factors. CargoSearch system revenues increased by $16,346,000 due to higher order volume on products introduced in the past two years.  ParcelSearch and Personnel Screening system revenues increased by $7,446,000 due primarily to one large multi-unit order received during the year.  Contract research and development revenues also increased $5,805,000 from the prior year attributable primarily to one large contract which comprised 82% of overall contract research and development revenues.  These revenue increases were offset by a decrease in Z Backscatter System sales of $27,353,000 from the prior year attributable to a decrease in the number of units sold.  In each of the previous two years, Z Backscatter Systems contributed over 65% of overall product revenues.  The current year showed a shift in the product mix with a greater percentage of revenues being received from 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 service contracts received during fiscal 2008 for products sold in fiscal 2007 whose warranties expired during fiscal 2008.

In fiscal 2008, 64% of the Company’s revenues were from domestic (based upon customer’s country of domicile) customers as compared to 73% in fiscal 2007. In fiscal 2008, the Company had sales to two customers which accounted for 22% of total sales. In fiscal 2007, the Company had sales to two major customers which accounted for 46% of total sales.

Cost of sales and contracts of $106,983,000 in fiscal 2008 increased by $20,336,000 or 23% from the previous year. Cost of product sales and contracts of $70,413,000 increased by $10,380,000 or 17% as compared to the prior year. Cost of product sales and contracts totaled 68% of revenues in fiscal 2008 as compared to 59% of revenues in fiscal 2007. This increase in costs as a percentage of revenue is due primarily to a decrease in the volume of shipments of higher margin Z Backscatter systems, and an increase in revenue attributable to lower margin contract 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% of revenues in fiscal 2008 as compared to 51% of revenues in fiscal 2007.  This increase in costs as a percentage of revenue is due primarily to increased material required to support outstanding service contracts and increased overhead costs to support the increased international install base.

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

Company-funded research and development spending increased by $5,122,000 to $12,306,000 in fiscal 2008, a 71% increase as compared to the $7,184,000 spent in fiscal 2007.  Research and development spending represented 7% 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 additional engineering resources to focus on the Company strategic development efforts.  The Company’s fiscal 2008 research and development activities focused on design modifications to its existing products and the development of product alternatives to continue to bring 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 in fiscal 2007. Interest income increased by $1,221,000 due to increased funds available 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 associated with outstanding warrants. During fiscal 2007, this mark to market adjustment resulted in $2,270,000 in income.  All remaining outstanding warrants were exercised during the first quarter of fiscal 2008 and no future mark to market adjustments will be effected.

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The Company reported pre-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 as compared to $15,406,000 in the prior fiscal year.  The Company’s effective tax rate excluding the impact of the warrant income was 36% in fiscal 2008 as compared to 41% in fiscal 2007.  This decrease in rate can be attributed to a reduction in state income taxes due to increased international revenues during the year, a decrease in non-deductible stock compensation expense, and the increase in manufacturing and research and development credits available in the current year.

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

Liquidity and Capital Resources

Cash and cash equivalents at year-end increased by $53,001,000 to $105,419,000 at March 31, 2009 as compared to $52,418,000 at March 31, 2008.   In addition, the Company had $36,384,000 and $72,687,000 of short-term investments at March 31, 2009 and March 31, 2008, respectively.

Cash flow provided by operations of $35,385,000 resulted from the following:

· Reported net income of $28,353,000 adjusted for the following non-cash items:

· Depreciation and amortization of $4,294,000.

· Stock compensation expense of $4,940,000.

· The amortization of bond discounts of $384,000 which was $1,894,000 less than the prior year due to the Company shifting investments to shorter term, lower yield instruments in response to the global economic recession experienced in the current year.

· The provision for contracts, inventory and accounts receivable reserves of $2,790,000 which increased from the prior year due primarily to an increase in reserves for excess inventory as the Company reassessed its parts requirements for field service replacements and reserved parts not expected to be utilized in the field in the next twelve months.

· An increase in deferred revenue of $5,873,000 due to certain large service contracts which were billed at the outset of the contract period.  86% of the deferred revenue balance at March 31, 2009 is expected to be earned in fiscal 2010.

· An increase in customer deposits of $8,271,000 due to the receipt of milestone payments on certain cargo contracts during the year.

· An increase in accrued expenses and other liabilities of $6,483,000 due primarily to incentive compensation accruals as the Company achieved its earnings based performance goals for the year.

These cash contributors were offset by the following:

· An increase in inventories of $10,409,000 during the year.  This increase is due to $4,600,000 in inventory for three orders shipped but not yet accepted as of March 31, 2009, the building of certain systems in advance of orders in order to meet anticipated order delivery deadlines, the introduction in the current year of the ZPortal systems which are higher cost systems recognized upon installation and/or acceptance as appropriate, and the stocking of international inventory depots to support service contract requirements.

· An increase in accounts receivable of $9,622,000 from the prior year due primarily to the increase in fourth quarter revenues and the timing of certain large milestone invoices in the fourth quarter of the current year.

Net cash of $34,269,000 was provided by investing activities in fiscal 2009. Fiscal 2009 capital expenditures totaled $2,350,000 versus $3,270,000 for fiscal 2008. Investments in fixed assets were comprised primarily of information technology expenditures, leasehold improvements related to the Company’s facilities expansion, and equipment used in production. The Company invested $65,347,000 in short-term investments during the year, and had maturities of $101,966,000 on short-term investments.  Due to the current global economic recession, the Company has opted to invest its available funds very conservatively and has invested a majority of these funds in money market funds and other cash equivalents at March 31, 2009.

At March 31, 2009, short-term investments and cash equivalents were invested primarily in commercial paper, money market funds, treasury bills, government agency bonds, corporate debentures and certificates of deposit.  The Company does not invest in auction rate securities.  Although management believes our investment policy is conservative in nature, certain short-term investments in commercial paper can be exposed to the credit risk of the underlying companies to which they relate and interest earned on these investments is subject to interest rate fluctuations. The maturities within our investment portfolio generally range from 30 to 365 days.

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Net cash used for financing activities was $16,560,000 in fiscal 2009. Cash was used primarily for the payment of $18,060,000 to repurchase 349,327 shares as part of the Company’s Stock Repurchase Program.  In addition, the Company issued quarterly dividend payments totaling $7,041,000 during the year.  Cash provided by financing activities consisted primarily of the receipt of $5,903,000 in proceeds from the exercise of employee stock options.  In addition, with the increase in the Company’s banking facility signed in November of 2008, the Company was able to release certain restrictions on its cash previously restricted to collateralize outstanding letters of credit.

On November 14, 2008, the Company modified its Loan and Security Agreement with Silicon Valley Bank to extend the facility through November 13, 2009 and to increase the facility from $20.0 million to $40.0 million to support the Company’s routine letters of credit and working capital needs.  If the Company maintains a cash and investments balance of $60.0 million or greater, then the maximum amount available for borrowings under the facility is $40.0 million minus the amount of all outstanding letters of credit less certain reserves, and minus the outstanding principal balance of any advances.  If the Company’s cash and investment balance falls below $60.0 million for a period of 30 consecutive days, then the maximum amount available for borrowings under the facility is the lesser of (i) $40.0 million, or (ii) 80% of eligible domestic accounts receivable minus the amount of outstanding letters of credits adjusted for certain reserves and minus the principal balance of any advances.

The credit facility bears an interest rate of the greater of 4.0% or the Silicon Valley Bank prime rate (4.0% at March 31, 2009). The credit agreement is collateralized by certain assets of the Company and contains certain restrictions, including limitations on the amount of distributions that can be made to stockholders, and the disposition or encumbrances of assets, and requires the maintenance of certain financial covenants.  As of March 31, 2009, the Company was in compliance with these covenants.

At March 31, 2009, there were no borrowings outstanding against this credit facility.  Under the terms of the credit agreement, the Company was required to pay certain one-time facility fees which are being amortized 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.  The unused facility fees will be waived in any quarter in which the average aggregate credit extensions (as defined in the agreement) exceed $25.0 million for such quarter. Total expenses incurred related to these fees were $214,000, $157,000 and $202,000 in fiscal 2009, 2008, and 2007, respectively.

In the normal course of business, the Company may provide certain customers and potential customers with performance guarantees, which are generally backed by standby letters of credit. In general, the Company would only be liable for the amount of these guarantees in the event of default in the performance of our obligations, the probability of which is remote in management’s opinion.  The Company had outstanding $35,282,000 in standby letters of credit against the Loan and Security Agreement with $4,718,000 remaining availability.  The outstanding letters of credit are primarily for guaranteeing performance on certain international projects.   No amounts have been drawn against these letters of credit.

In recent years, the Company has funded its operations and capital expenditures with cash generated by operations, including deposits from customers on long-term projects and from proceeds received from option exercises. The Company currently has no amounts drawn on its line of credit and believes that its cash flows from operations, cash and investments on hand and available lines of credit are sufficient to meet the current and foreseeable operating requirements of the Company’s business.

Contractual Obligations  The Company leases certain facilities under non-cancelable leases. In addition, in the normal course of business, the Company enters into purchase orders with its vendors for the purchase of materials or services to meet its production needs. The following table summarizes the Company’s contractual obligations as of March 31, 2009.

In addition, in conjunction with the sale of a division in fiscal 2005, the lease for that division’s facility was assigned to the acquirer. The Company remains secondarily liable for the remaining lease payments in the event of default by the acquirer during the lease term which expires in February 2011. Remaining lease payments at March 31, 2009 totaled $764,000. No accrual for this contingent liability has been recorded at March 31, 2009 as payment of this expense is considered remote.

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

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Critical Accounting Policies

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

Revenue Recognition:  The Company recognizes certain CargoSearch, Z Backscatter and ParcelSearch and Personnel Screening system sales and after-market part sales, in accordance with SEC Staff Accounting Bulletin (“SAB”) No. 101, Revenue Recognition in Financial Statements modified by SAB No. 104 which requires that four basic criteria must be met before revenue can be recognized: (1) persuasive evidence of an arrangement exists; (2) delivery has occurred or services rendered; (3) the fee is fixed and determinable; and (4) collectability is reasonably assured.

Certain of the Company’s contracts are multiple-element arrangements, which include standard products, custom-built systems or contract engineering projects, services (such as training), and service and maintenance contracts. In accordance with Emerging Issues Task Force Issue No. 00-21, “Revenue Arrangements with Multiple Deliverables,” (“EITF 00-21”) revenue arrangements that include multiple elements are analyzed to determine whether the deliverables can be divided into separate units of accounting or treated as a single unit of accounting. The consideration the Company receives is allocated among the separate units of accounting based on their relative fair values determined based on prices of these elements as sold on a stand-alone basis, and the applicable revenue recognition criteria are applied to each of the separate units. There currently is no customer right of return in the Company’s sales agreements.  Revenues are allocated to a delivered product or service when all of the following criteria are met: (1) the delivered item has value to the customer on a standalone basis; (2) there is objective and reliable evidence of the fair value of the undelivered item; and (3) if the arrangement includes a general right of return relative to the delivered item, delivery or performance of the undelivered item is considered probable and substantially in our control.

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

The Company recognizes sales for its systems that are produced in a standard manufacturing operation, have minimal customer site installation requirements and have shorter order to delivery cycles, when title passes and when other revenue recognition criteria are met. Management believes the customer’s post-delivery acceptance provisions and installation requirements on these systems are perfunctory and inconsequential and the costs of installation at the customer’s site are accrued at the time of revenue recognition.  The Company has demonstrated a history of customer acceptance subsequent to shipment and installation of these systems.  For systems which entail more significant installation efforts and site work and/or have non-standard customer acceptance provisions, revenue recognition is deferred until installation is complete and customer acceptance has occurred.

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

Training and service contracts deliverables are accounted for separately from the delivered product elements as the Company’s undelivered products have value to its customers on a stand-alone basis and the Company has objective and reliable evidence of the fair value of such services. Accordingly, service revenue, representing the fair value of services not yet performed at the time of product shipment, is deferred and recognized as such services are performed.

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

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

Certain contracts require payments from the customer upon execution of the agreement that are included in customer deposits. Individual customer deposits are reduced by the amount of revenue recognized on the contract until a zero balance is reached. Revenue recognized in excess of billings under the contracts is included in unbilled costs and fees in the accompanying balance sheet. Of the amounts in unbilled costs and fees at March 31, 2009, $6,242,000 (99%) is expected to be billed and collected during fiscal 2010.

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

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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.

Inventories and Related Allowance for Obsolete and Excess Inventory:   Inventories consist of material, labor and manufacturing overhead and are recorded at the lower of cost or net realizable value. Excessive manufacturing overhead costs such as idle facility expense, freight, handling costs and wasted material (spoilage) attributable to abnormally low volumes (levels that materially differ from budgeted production plans due primarily to changes in customer demand) are excluded from inventory and recorded as an expense in the period incurred. The Company regularly reviews inventory quantities on hand and records a provision for excess and obsolete inventory based primarily on the estimated forecast of product demand over the next twelve to eighteen months. Demand for products can fluctuate significantly. A significant increase in the demand for the Company’s products could result in a short-term increase in inventory balances, while a significant decrease in demand could result in an increase in the amount of excess inventory quantities on hand. Additionally, inventory reserves require estimates of future product demand, which may materially impact the provision required for excess and obsolete inventory. In the future, if inventory were determined to be overvalued, the Company would be required to recognize such costs in its cost of goods sold at the time of such determination. Likewise, if inventory is determined to be undervalued, the Company may have over-reported costs of goods sold in previous periods and would be required to recognize such additional operating income at the time of sale. Therefore, although the Company makes every effort to ensure the accuracy of forecasts of future product demand, any significant unanticipated changes in demand or technological developments could have a significant impact on the value of its inventory and reported operating results.

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

New Accounting Pronouncements

SFAS No. 157

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS 157”). SFAS 157 establishes a common definition for fair value to be applied, establishes a framework for measuring fair value in accordance with generally accepted accounting principles, and expands disclosure about such fair value measurements. The Company adopted the required provisions of SFAS 157 that became effective in our first quarter of fiscal 2009. The adoption of these provisions did not have a material impact on our Consolidated Financial Statements. For further information about the adoption of the required provisions of SFAS 157.

In February 2008, the FASB issued FASB Staff Position No. 157-2, “Effective Date of FASB Statement No. 157” (“FSP 157-2”). FSP 157-2 delays the effective date of SFAS 157 for nonfinancial assets and nonfinancial liabilities, except for certain items that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually). We are currently evaluating the impact of SFAS 157 on our Consolidated Financial Statements for items within the scope of FSP 157-2, which will become effective beginning with our first quarter of fiscal 2010.

SFAS No. 162

In May 2008, the FASB issued FAS No. 162, “The Hierarchy of Generally Accepted Accounting Principles” (“FAS 162”). FAS 162 identifies the sources of accounting principles and the framework for selecting the principles to be used in the preparation of financial statements of nongovernmental entities that are presented in conformity with GAAP. FAS 162 is effective 60 days following the SEC’s approval of the Public Company Accounting Oversight Board amendments to AU Section 411, “The Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles”. The Company does not expect the adoption of FAS 162 to have a material impact on the Company’s financial condition or results of operations.

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EITF Issue No. 06-11

In June 2007, the FASB ratified Emerging Issues Task Force Issue No. 06-11, “Accounting for Income Tax Benefits of Dividends on Share-Based Payment Awards” (“EITF 06-11”), which requires income tax benefits from dividends or dividend equivalents that are charged to retained earnings and are paid to employees for equity classified nonvested shares, nonvested equity share units and outstanding equity share options to be recognized as an increase in additional paid-in capital and to be included in the pool of excess tax benefits available to absorb potential future tax deficiencies on share-based payment awards. The adoption of EITF 06-11, which became effective in the first quarter of fiscal 2009, did not have a material impact on our Consolidated Financial Statements.

EITF Issue No. 03-6-1

In June 2008, the FASB issued Staff Position EITF 03-6-1, “Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities” (“FSP EITF 03-6-1”), effective for fiscal years beginning after December 15, 2008.  FSP EITF 03-6-1 clarifies that unvested share-based awards that contain nonforfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities and must be included in the computation of EPS pursuant to the two-class method. We are currently evaluating the impact of adopting FSP EITF 03-6-1 on our Consolidated Financial Statements which will become effective beginning with our first quarter of fiscal 2010.

EITF Issue No. 07-5

In June 2008, the FASB issued EITF Issue No. 07-5, “Determining Whether an Instrument (or an Embedded Feature) is Indexed to an Entity’s Own Stock” (“EITF 07-5”). EITF 07-5 addresses the determination of whether provisions that introduce adjustment features (including contingent adjustment features) would prevent treating a derivative contract or an embedded derivative on a company’s own stock as indexed solely to the company’s stock. EITF 07-5 is effective for fiscal years beginning after December 15, 2008. The Company does not expect the adoption of EITF 07-5 to have a material impact on the Company’s financial condition or results of operations.

ITEM 7A. QUANTITIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Company is subject to interest rate risk on its credit facilities which have variable interest rates tied to the Prime Rate. As of March 31, 2009, the Company had no variable interest rate debt outstanding. See Note 3 of Notes to Consolidated Financial Statements for a discussion of our long-term indebtedness.

The cash accounts for the Company’s operations in Hong Kong, England, and Abu Dhabi are maintained in Hong Kong dollars, pounds sterling and dirhams, respectively. The gains and losses from foreign currency transactions are included in the statement of operations for the period and were immaterial. A hypothetical 10% change in foreign currency rates would not have a material impact on the Company’s results of operations or financial position.

As of March 31, 2009, the Company holds short-term investments and cash equivalents consisting of treasury bills, commercial paper, money market funds, corporate debentures/bonds, agency bonds and certificates of deposit. The Company’s primary objective with its investment portfolio is to invest available cash while preserving principal and meeting liquidity needs. These investments have an average interest rate of approximately 0.5% and are subject to interest rate risk. As a result of the average maturity and conservative nature of the investment portfolio, a sudden change in interest rates would not have a material adverse effect on the value of these investments.  To minimize this risk, we maintain a significant portion of our cash balances in money market funds. In general, money market funds are not subject to interest rate risk because the interest paid on such funds fluctuates with the prevailing interest rate.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

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

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

None.

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ITEM 9A. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

As of the end of the period covered by this report, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, the Company reviewed and evaluated the effectiveness of the Company’s disclosure controls and procedures pursuant to Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934 as amended (the “Exchange Act”). Based upon their evaluation, our Chief Executive Officer and our Chief Financial Officer concluded that our disclosure controls and procedures were effective as of March 31, 2009 to ensure that information required to be disclosed by the Company in the reports filed and submitted by it under the Exchange Act is recorded, processed, summarized and reported within the time period specified in the Securities and Exchange Commission’s rules and forms, and to provide reasonable assurance that information required to be disclosed by the Company in such reports is accumulated and communicated to the Company’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

Management’s Report on Internal Control over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act.  Our management conducted an evaluation of the effectiveness of our internal control over financial reporting using the framework in “Internal Control-Integrated Framework” issued by the Committee of Sponsoring Organizations of the Treadway Commission.  Based on this evaluation under the criteria established in “Internal Control — Integrated Framework”, our management concluded that the Company’s internal control over financial reporting was effective as of March 31, 2009.  Caturano and Company, P.C., our independent registered public accounting firm, has audited the effectiveness of our internal control over financial reporting as of March 31, 2009, and has issued their report thereon which is included herein.

Changes in Internal Controls over Financial Reporting

There have been no changes in our internal control over financial reporting, as such term is defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act, during the quarter ended March 31, 2009 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

ITEM 9B. OTHER INFORMATION

None.

PART III

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

Code of Conduct

The Company has adopted a Code of Business Conduct and Ethics that applies to our Board of Directors, Chief Executive Officer, Chief Financial Officer, and all employees of the Company. The Company’s Code of Business Conduct and Ethics is posted on our website at www.as-e.com and may be accessed in the Corporate Governance section of the Investor Information page. The Company intends to satisfy the disclosure requirement under Item 10 of Form 8-K, regarding an amendment to, or waiver from, our Code of Conduct, by posting such information on our website at the location specified above.

The other information called for by this item is hereby incorporated by reference from the Registrant’s Definitive Proxy Statement relating to the 2009 Annual Meeting of Stockholders, which Proxy Statement will be filed with the Securities and Exchange Commission on or about July 29, 2009.

ITEM 11. EXECUTIVE COMPENSATION

The information called for by this item is hereby incorporated by reference from the Registrant’s Definitive Proxy Statement relating to the 2009 Annual Meeting of Stockholders, which Proxy Statement will be filed with the Securities and Exchange Commission on or about July 29, 2009.

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

The information called for by this item is hereby incorporated by reference from the Registrant’s Definitive Proxy Statement relating to the 2009 Annual Meeting of Stockholders, which Proxy Statement will be filed with the Securities and Exchange Commission on or about July 29, 2009.

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

The information called for by this item is hereby incorporated by reference from the Registrant’s Definitive Proxy Statement relating to the 2009 Annual Meeting of Stockholders, which Proxy Statement will be filed with the Securities and Exchange Commission on or about July 29, 2009.

ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES

The information called for by this item is hereby incorporated by reference from the Registrant’s Definitive Proxy Statement relating to the 2009 Annual Meeting of Stockholders, which Proxy Statement will be filed with the Securities and Exchange Commission on or about July 29, 2009.

PART IV

ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

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

The exhibits listed in the Exhibit Index on page 50 are filed as part of this report, and such Index is incorporated in this item by reference.

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AMERICAN SCIENCE AND ENGINEERING, INC. AND SUBSIDIARY

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

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

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders

of American Science and Engineering, Inc.

We have audited the accompanying consolidated balance sheets of American Science and Engineering, Inc. and subsidiary (“the Company”) as of March 31, 2009 and 2008 and the related consolidated statements of operations, stockholders’ equity and comprehensive income, and cash flows for each of the years ended March 31, 2009, 2008 and 2007.  We also have audited American Science and Engineering, Inc. and subsidiary’s internal control over financial reporting as of March 31, 2009, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Management is responsible for these financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on these financial statements and an opinion on the Company’s internal control over financial reporting based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audit of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk.  Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of American Science and Engineering, Inc. and subsidiary as of March 31, 2009 and 2008 and the consolidated results of their operations, stockholders’ equity and their cash flows for each of the three years in the period ended March 31, 2009 in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, American Science and Engineering, Inc. maintained, in all material respects, effective internal control over financial reporting as of March 31, 2009 based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

/s/ Caturano and Company, P.C.

Caturano and Company, P.C.

June 10, 2009

Boston, Massachusetts

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AMERICAN SCIENCE AND ENGINEERING, INC. AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS

MARCH 31, 2009 AND 2008

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

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

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AMERICAN SCIENCE AND ENGINEERING, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE YEARS ENDED MARCH 31, 2009, 2008, AND 2007

(Amounts in thousands except per share amounts)

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

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AMERICAN SCIENCE AND ENGINEERING, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY AND COMPREHENSIVE INCOME

FOR THE YEARS ENDED MARCH 31, 2009, 2008, AND 2007

(Amounts in thousands, except share amounts)