10-K/A 1 a10-ka.txt FORM 10-K/A SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED) FOR THE FISCAL YEAR ENDED MARCH 31, 2000 OR TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission file number 1-6549 AMERICAN SCIENCE AND ENGINEERING, INC. (Exact name of registrant as specified in its charter) MASSACHUSETTS 04-2240991 (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 829 MIDDLESEX TURNPIKE, BILLERICA, MASSACHUSETTS 01821 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (978) 262-8700 Securities registered pursuant to Section 12(b) of the Act:

Title of Each Class Name of Each Exchange On Which Registered ------------------- ----------------------------------------- Common Stock ($.66 2/3 par value) American Stock Exchange

Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES |X| NO__ 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. The aggregate market value of voting stock held by non-affiliates of the registrant on June 16, 2000 was $28,884,000. 4,968,874 shares of Registrant's Common Stock were outstanding on June 16, 2000. The Exhibit Index is located on page 48 NOTICE REGARDING FORWARD LOOKING STATEMENTS Some of the statements contained in this Report and in the documents incorporated by reference are forward-looking made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. In essence, forward-looking statements are predictions of future events. Although we would not make forward-looking statements unless we believe we have a reasonable basis for doing so, we cannot guarantee their accuracy and actual results may differ materially from those we anticipated due to a number of uncertainties, many of which we are not aware. You should understand also that we have no plans to update our forward-looking statements. Our forward-looking statements are accurate only as of the date of this Report, or in the case of forward-looking statements in documents incorporated by reference, as of the date of those documents. Certain risk factors which might cause actual results to differ materially from those projected are more fully set forth under the caption "Risk Factors" in the Company's Registration Statement on Form S-3 (SEC File No. 333-9151). 1 PART I ITEM 1. BUSINESS American Science and Engineering, Inc., a Massachusetts corporation formed in 1958 (together with its subsidiary, the "Company"), develops, produces, markets, sells, maintains and provides research, engineering and training services with respect to X-ray inspection systems. |_| X-RAY PRODUCTS The Company provides a full line of X-ray detection and imaging products used primarily for the detection of smuggled goods, including illegal drugs, and terrorist explosives. This equipment is purchased by sophisticated government and commercial clients who place a premium on the detection of organic material in complex backgrounds and the ability to see the contents of containers with precision. The Company utilizes proprietary transmission and backscatter X-ray detection to provide differentiation of bombs, drugs and contraband in camouflaged environments. The range of application includes border control and manifest verification, protection of high risk government offices, mail and parcel screening, correctional facility security, military security, executive security, aviation security, and special event security (e.g. Olympics, UN 50th Anniversary and World Cup Soccer). The Company's market is driven by domestic and global trends in terrorism; the continued global proliferation of drug smuggling; and the continuing increase in global trade which creates greater incentives and opportunities to evade duties or perpetrate trade fraud by misdeclaring cargo shipping manifests. The Company believes that market demand for cargo and vehicle inspection equipment is growing in many parts of the world. Originally fueled by the desire of the U.S. Government to interdict drug traffic, the market has now expanded into other applications of broader interest to a wider range of countries. The Company's CargoSearch-TM- family of products, originally developed with the assistance of the U.S. Department of Defense and the U.S. Customs Service, provides the Company with a range of products to serve this market. Based on the original success of the Company's fixed-site CargoSearch-TM- installation at Otay Mesa, CA for inspecting trucks and containers, the Company has installed seven additional fixed sites for the U.S. Customs Service on the southwestern border, with one more system on order. In addition, the Company has installed a fixed site system in Abu Dhabi and has added IsoSearch-TM- and Marine CargoSearch alternatives to the product line in order to provide clients with more flexibility and customized solutions to their inspection needs. The first IsoSearch-TM- system was installed in South Africa in the spring of 1999 and the first Marine CargoSearch was installed in Egypt in the spring of 2000. In general, the U.S. Government is primarily interested in cargo inspection systems to interdict illicit drug shipments while other governments are primarily motivated by a desire to increase revenues by verifying cargo manifests or to deter the transport of terrorist weapons or bombs. The Company's MobileSearch-TM- system adds flexibility, mobility and the ability to inspect cars to the basic CargoSearch concept. MobileSearch also allows clients to engage in surprise searches. In addition to performing the kinds of contraband searches performed by CargoSearch, the Company believes that MobileSearch will have applications in the force protection area as military personnel are increasingly exposed to guerilla-style or low intensity conflicts which leave their mobile, advanced forces exposed to the potential for terrorist attack. MobileSearch systems are deployed in five countries. 2 The Company offers high performance X-ray systems for inspecting parcels at prices that have generally been higher than those of competing, less capable systems. However, in recent years, the Company has brought to the marketplace several new products for inspecting cargo that are priced significantly lower than competing systems. Across the entire range of its X-ray inspection systems, the Company has focused on selling products with unique features that create strong product differentiation and offer distinct performance advantages. The Company's product line currently includes 12 models. These models can be broadly categorized into 4 groups including the CargoSearch-TM- family, the Model 101 series, the Model 66 series, and the BodySearch-TM- Personnel Inspection System. All of these systems utilize the Company's Z-Registered Trademark- Backscatter technology (aspects of which are covered by issued and pending U.S. patents), which detects organic materials, such as illegal drugs, plastic explosives, and plastic weapons, which often go undetected by competing systems. The CargoSearch-TM- family of products includes the CargoSearch-TM- system, the relocatable IsoSearch-TM- system, MarineSearch-TM- , designed specifically for port applications, the MobileSearch-TM- system, and the PalletSearch-TM- system. The CargoSearch-TM- system is a non-intrusive inspection technology for the X-ray scanning of trucks, cars, cargo containers, pallets, and air cargo using the Company's unique and patented Z-Registered Trademark- Backscatter technology. The fixed CargoSearch-TM- system sells for a turnkey price generally lower than competing systems. The U.S. Customs Service presently operates eight CargoSearch-TM- systems along the southwestern border, with one more on order. The first MobileSearch-TM- system was delivered under a $1.8 million contract with the Defense Advanced Research Project Agency (DARPA). This mobile version of a CargoSearch-TM- system is a self-contained unit inside a conventional truck that is deployable within minutes and provides the transport mechanism via a hydraulic drive. The Company is marketing the MobileSearch-TM- system to agencies of the U.S. Government and to foreign security and customs agencies. The Company has delivered a total of eight systems to the U.S. Government, has delivered twelve systems to three foreign governments and has orders for additional systems. All of the units after the first include both Z-Registered Trademark- Backscatter and transmission X-ray capabilities. PalletSearch-TM- was designed for the inspection of pallets for the detection of contraband, weapons and explosives for high security facilities where high confidence inspection is a requirement. The first PalletSearch-TM- system was delivered during fiscal 1997 to an ultra-secure agency of the U.S. Government, and additional units have been ordered by a foreign government for customs inspection applications, one of which was installed during the summer of 1999. The Micro-Dose-Registered Trademark- Model 101 Series consists of 6 models. The mobile Model 101VAN-TM- is a sophisticated, vehicle mounted inspection system designed and built to the rigorous specifications of the U.S. Customs Service. The Model 101ZZ-Registered Trademark- Trailer is a field deployable system for extended on site security details. The Models 101Z-Registered Trademark-, 101ZZ-Registered Trademark-, 101GT-TM-, and 101XL-TM- are moveable (but not mobile), conveyor based systems allowing rapid inspection of high volumes of luggage and other packages. The Model 66-Registered Trademark- handles small packages using the patented Z-Registered Trademark- Backscatter technology. This technology was validated by a study conducted by several U.S. government agencies involving the Model 66-Registered Trademark- and competitive systems in which the Model 66-Registered Trademark- was determined to have superior detection capability for terrorist devices hidden in complex backgrounds. This test resulted in increased order demand from both government and commercial clients, including Fortune 100 companies. 3 The BodySearch-TM- Personnel Inspection System offers a fast, safe, and non-intrusive way to screen individuals for weapons, drugs, and illegal contraband concealed under clothing, providing a viable alternative to pat or strip searches. This system is used for drug detection and head of state security as well as for correctional facility security. Through the end of fiscal 2000, the Company has sold a total of 14 BodySearch-TM- units, including five units to the U.S. Customs Service. AS&E's High Energy Systems Division (HES), acquired in 1998 and located in Santa Clara, California focuses on the design, fabrication of high energy, compact linear accelerators for a customer base that includes medical, materials processing, non-destructive testing, radiation testing, security and special uses. The Company has patents in the United States, Germany, Japan, and the United Kingdom, as well as patents pending in the United States and under the Patent Cooperation Treaty. The Company has sold product in, or has marketing activity in most major regions of the world including Africa, Asia, Europe, the Middle East, Australia and South America. Each U.S. patent issued after May 1995 will have a duration of twenty years from the date of application. The Company relies on certain proprietary technology and know-how, as well as certain of these patents, to establish and maintain its competitive position. The Company believes that its patents, proprietary technology and know-how provide substantial protection for the Company's competitive position and the Company has publicly stated its intent to aggressively protect its intellectual property assets, by litigation or other means, as appropriate. During fiscal 1999 the Company instituted litigation against the U.S. Customs and EG&G Astrophysics Research Corp. in order to protect its intellectual property (See item 3 -"Legal Proceedings"). The Company's X-ray products are marketed to private and governmental organizations through a sales force that contacts potential customers and responds to public tenders and other expressions of interest. This sales force includes Company personnel based in the United States as well as representatives under contracts to sell in foreign countries who are generally on a commission basis. Most Micro-Dose-Registered Trademark-Systems are built for existing orders, and the Company maintains an inventory of common parts and sub-assemblies for the systems in order to meet expected customer delivery requirements. The Company is heavily dependent upon sales to agencies of the U.S. Government, and reductions or delays in procurements of the Company's systems by these agencies may have a material adverse effect on the Company. The Company's strategy includes reducing this dependence by emphasizing sales to foreign governments, which accounted for more than half of sales in fiscal 2000. Sales to U.S. Government agencies, in general, are generated by responding to a "Request for Quote" and are subject to standard and routine U.S. Government pre and post contract award audit as well as review of the Company's compliance with the Federal Acquisition Regulations. During fiscal 2000, less than half of sales of X-ray products were under (i) direct contracts with the U.S. Government, and (ii) subcontracts with prime contractors working under direct contracts with the U.S. Government. Some of the Company's contracts with the government are on a cost reimbursement basis, including provisions preventing final billing until completion of the contract, and virtually all are cancelable at the government's discretion. The Company has not experienced any material losses as the result of such contractual provisions. The governments of Egypt and Mexico were major customers of the Company with sales to each country of 20 percent and 21 percent, respectively, of the Company's consolidated revenues in fiscal 2000. 4 While the Company's emphasis on international sales has had the desired effect of reducing the Company's dependence on the U.S. Government, it has increased the Company's exposure to the very long sales cycles and project financing requirements often associated with such sales. The Company manages these risks in a number of ways including actively increasing the number of opportunities it is pursuing at any one time and by working with international funding sources to help clients finance these projects. The Company has many competitors in the X-ray product market, including several large and well-established manufacturers of security X-ray equipment with financial and other resources greater than those of the Company. Certain X-ray security system customers select such systems based largely on price. Other customers, notably the U.S. Government and users in countries with high levels of concern over security, tend to select systems based largely on performance and detection capability. The Company's systems offer premium performance and have in the past, with the exception of the CargoSearch-TM- family, generally been priced higher than many 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 and/or competitive pricing will give it a strong position to increase its sales of X-ray systems. The Company has not experienced during the last year, and does not currently anticipate, any hardware delivery delays due to raw material shortages. Most procured material is from U.S. sources. However, the Company is dependent upon certain overseas sole source providers of important components. No rare or exotic materials are utilized. The Company complies with applicable Health and Human Services regulations outlined under the "Regulations for the Administration and Enforcement of the Radiation Control for Health and Safety Act of 1968" (21CFR 1020.40), published by the U.S. Department of Health and Human Services. All X-ray products of the Company comply with all applicable U.S. Government regulatory standards. |_| RESEARCH AND DEVELOPMENT The Company conducted approximately $416,000 of government sponsored research primarily focused on technologies for the detection of illicit drugs, explosives, and other security issues in fiscal 2000. This compares to $2,664,000 and $2,785,000 of government sponsored research and development in fiscal 1999 and 1998, respectively. In addition, the Company spent approximately $5,902,000 of its own funds for research relating to the development of new products or services during fiscal 2000, compared to $6,380,000 and $2,856,000 in fiscal 1999 and 1998, respectively. A significant amount of the Company's government sponsored research and development work is obtained via contracts or subcontracts that typically provide for reimbursement of allowable costs plus a fixed fee. The Company's contracts in these areas are obtained by submitting research and development proposals to various organizations, sometimes in response to requests for such proposals. The Company's contract research ranges from advances in X-ray systems and image analysis to integrated system development for niche security inspection problems. 5 |_| PERSONNEL As of March 31, 2000 the Company had 323 employees compared to 301 employees at the end of the prior year. All Company employees sign nondisclosure agreements as a condition of employment. |_| SALES BACKLOG The Company's firm (under signed contracts) sales backlog was $25,420,000 at March 31, 2000 and $38,723,000 at March 31, 1999. A majority of the Company's contracts with the U.S. Government contain clauses permitting the government to terminate the contract for convenience upon certain terms and conditions, including payment to the Company of an appropriate fee or profit on work performed. The total of such contracts in the backlog was $5,976,000 at the end of fiscal year 2000 and $3,563,000 at the end of fiscal year 1999. It is estimated that approximately 71% of the 2000 backlog will be filled within the fiscal year ending March 31, 2001. 6 FINANCIAL INFORMATION ABOUT FOREIGN AND DOMESTIC OPERATIONS AND EXPORT SALES All export sales are made in U.S. dollars, and virtually all export sales are either secured by irrevocable letters of credit or paid in advance. Export sales are believed by the Company to be at least as profitable as similar domestic sales. All of the Company's assets and operations are maintained in the United States. The Company has not encountered, nor does it anticipate encountering, risks attendant to export sales that are greater than risks attendant to domestic sales. The following chart provides information about the breakdown between domestic and export sales for the indicated fiscal years. Net Sales and Contract Revenues (Dollars in thousands)

2000 1999 1998 ------------- --------------- -------------- Domestic $ 27,360 $ 26,274 $ 26,799 Export $ 33,314 $ 31,021 $ 5,900 Percent of Export Revenue by Major Region: Middle East & Africa 48.7 % 54.2 % 59.7 % Mexico 38.1 29.6 -- Europe 5.7 5.0 8.9 Pacific Rim 4.1 10.5 28.3 All Other 3.4 0.7 3.1

ITEM 2. PROPERTIES The Company's executive offices and its research, manufacturing and warehouse facilities are located in Billerica, Massachusetts and Santa Clara, California. In Billerica, the Company occupies 118,300 square feet of space in a 160,000 square foot single-story; concrete and brick building owned by an unaffiliated real estate limited partnership. The remaining space in the building is currently leased by the owner to an unaffiliated manufacturing company. The Company occupies the space under a long-term lease with a ten-year initial term that commenced March 1, 1995, and its one (1) ten-year optional extension term. In October 1999, the Company leased an additional 56,000 square feet of manufacturing and office space in an office park near the main office. This lease has a term of five years. In May 2000, the Company sub-leased 12,700 square feet of separate manufacturing and office space to an unaffiliated company. The facilities are currently utilized on a one-shift basis. The Company can add additional capacity by adding second and third shifts if necessary. In August 1998, the Company established the High Energy Systems Division. Located in Santa Clara, California, the Division leases 11,700 square feet of manufacturing, research and office space. The lease has a term of three years that commenced on August 18, 1998. The lease has two three-year optional extension terms. The facilities are currently utilized on a one-shift basis. The Company can add additional capacity by adding second and third shifts if necessary. 7 ITEM 3. LEGAL PROCEEDINGS The United States Court of Appeals for the Federal Circuit in Washington, D.C., in a decision issued December 29, 1999, ruled that American Science & Engineering may pursue a patent infringement claim against Vivid Technologies which produces x-ray detection devices used in baggage scanning equipment. The Appeals Court overturned a 1998 decision in Vivid's favor by the Massachusetts Federal District Court. The lawsuit, filed by Vivid Technologies in May 1996, concerns whether Vivid's x-ray detection devices infringed on AS&E's patent. The District Court had ruled that AS&E could not assert a claim that Vivid's devices infringed on AS&E's patent. The Appeals Court also reversed the district court's finding on summary judgment that Vivid did not infringe on AS&E's patent, as well as the district court's denial of AS&E's request for discovery to oppose Vivid's summary judgment motion. In September 1998, the Company filed suit against EG&G Astrophysics Research Corp. (EG&G) in U.S. District Court in Boston, Massachusetts alleging that EG&G is infringing on at least two patents owned by the Company and that EG&G has misappropriated certain trade secrets of the Company. In February 1999, the Company filed a related action in the same court against the U.S. Customs Service ("Customs") alleging that Customs had either misappropriated the Company's trade secrets or facilitated their misappropriation by EG&G and that Customs had improperly entered into a contract with EG&G for the acquisition of a product functionally equivalent to the Company's MobileSearch -TM- X-ray inspection system. In May 1999, the Court held a hearing on the Company's motion for a preliminary injunction against both Customs and EG&G prohibiting further performance of the contested contract and preventing EG&G from utilizing the Company's' trade secrets. In August 1999, the Court issued a ruling denying the request for the preliminary injunction. In December 1999, EG&G filed a Motion for Summary Judgment that EG&G did not misappropriate the Company's trade secrets and in March 2000 EG&G filed a Motion for Summary Judgment that EG&G did not infringe the Company's patents. The Company has filed opposition to EG&G's motions and the Court has not yet ruled on these motions. The Company is continuing to pursue its claims against EG&G, but has filed a motion to dismiss the suit against U.S. Customs. In a related matter, EG&G has filed a request with the U.S. Patent and Trademark Office for reexamination of the two patents that currently are at issue in the patent infringement action described above. The Company filed oppositions to the reexamination requests and believes that significant claims of its patents, covering activities by EG&G, will be upheld. In February 2000, Heimann Systems GmBH filed a civil action in U.S. District Court in Boston, Massachusetts against the Company alleging that the Company infringed a Heimann patent relating to a mobile vehicle and x-ray examining device. The Company denies Heimann's assertions and believes that Heimann's claims are without merit. The Company does not expect the outcome of this litigation to have a material impact to its financial position or results of operations. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matter was submitted to a vote of the Company's security holders during the fourth quarter of the fiscal year covered by this report. 8 PART II ITEM 5. MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Company's Common Stock is listed on the American Stock Exchange (ticker symbol: ASE). The market price range for the Common Stock for the last two fiscal years follows:

FISCAL YEAR QUARTER ENDED HIGH LOW ----------- ------------- ---- --- 2000 March 31, 2000 7 3/4 6 1/8 December 31, 1999 8 1/2 6 5/8 September 30, 1999 7 7/8 6 June 30, 1999 9 5/8 8 3/16 1999 March 31, 1999 11 1/16 7 1/8 December 31, 1998 12 1/4 9 3/8 September 30, 1998 13 1/16 11 5/16 June 30, 1998 16 7/16 13 1/2

As of June 16, 2000, there were approximately 1,196 holders of record of the Company's Common Stock. No cash dividends have been declared in the two most recent fiscal years and the Board of Directors does not contemplate paying any dividends in the immediate future. The Company's credit facility restricts the payment of dividends (except in shares of the Company's stock) without consent of the bank. ITEM 6. SELECTED FINANCIAL DATA (Dollars in thousands, except per share amounts)

Fiscal Year 2000 1999 1998 1997 1996 ------------ ----------- ----------- ----------- ------------ Net sales and contract revenues $ 60,674 $ 57,295 $ 32,699 $ 28,479 $ 17,815 Net income (loss) 1,459 2,045 4,661 1,925 802 Income (loss) per share-diluted .29 .40 .95 .40 .18 Total assets 38,205 30,204 25,993 15,514 14,295 Obligations under capital leases 16 40 42 60 75 Stockholders' investment 21,375 19,347 16,084 10,150 7,501 Book value per share 4.31 3.97 3.39 2.21 1.67

9 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |_| 2000 COMPARED TO 1999 |_| OVERVIEW Net sales and contract revenues for fiscal 2000 improved by 6% to $60,674,000 versus fiscal 1999 net sales and contract revenues of $57,295,000. The Company had income before taxes of $466,000, a decrease of 86% compared to $3,409,000 income before taxes in the previous year. During fiscal 2000, the Company recorded a net tax benefit of $993,000 consisting principally of a substantial, non-recurring research and development tax credit as well as tax benefits associated with the Company's foreign sales corporation. Net income for fiscal 2000 was $1,459,000 ($.29 per share, on a diluted basis) as compared to $2,045,000 ($.40 per share, on a diluted basis) in fiscal 1999. Backlog at March 31, 2000 was $25,420,000, a 34% decrease from the backlog reported at previous fiscal year end. CHANGES IN FINANCIAL CONDITION - Cash and cash equivalents at year-end increased by $880,000 to $1,246,000, compared to $366,000 in 1999. Accounts receivable decreased by $1,682,000 from the prior year due to the decreased shipments made during the fourth quarter of fiscal 2000. Unbilled Receivables increased by $6,743,000 due to performance achieved on several contracts. Deferred income taxes increased $1,325,000 as a result of the Company recording tax benefits associated with the above mentioned research and development tax credits and tax benefits associated with the Company's foreign sales corporation. The Company's borrowings under its Line of Credit increased by $3,000,000 due to additional borrowings to primarily support working capital needs. Customer deposits increased $928,000 due to advances on certain long-term contracts. Deferred revenue increased $1,046,000 due to advances for extended warranty and service contracts. RESULTS OF OPERATIONS - Net sales and contract revenues increased by $3,379,000 or 6% during fiscal year 2000. In fiscal 2000, security systems revenues of $60,258,000 represented an increase of $5,627,000 or 10% over 1999. Contract research and engineering revenues of $416,000 decreased by $2,248,000 or 84% below 1999. Cost of sales and contracts in fiscal 2000 of $43,494,000 was $5,138,000 higher than the previous year primarily due to increased equipment sales and performance on several contracts. Cost of sales and contracts represented 72% of revenues during fiscal 2000, compared to 67% in fiscal 1999. This increase in the cost of sales ratio was due to a shift in product mix as well as continued investments made in operations infrastructure, global technical support capability and the introduction of new or enhanced products in response to growing domestic and international demand. Selling, general and administrative expenses of $10,480,000 were $1,397,000 higher than the previous year and represented 17% of revenues, compared to 16% in 1999. The increased spending level was primarily due to the inclusion of the Company's High Energy Systems division for a full year as well as outside legal costs associated with the Company's protection of its intellectual property rights. Company funded research and development spending decreased to $5,902,000 in fiscal 2000, a 7% decrease compared to the $6,380,000 in spending in fiscal 1999. Research and development spending in fiscal 2000 and fiscal 1999 was 10% and 11% of revenues, respectively. In the fourth quarter of fiscal 2000, the Company recorded a tax benefit of $1,675,000 consisting principally of a nonrecurring research and development tax credit as well as a benefit related to the fourth quarter loss. This resulted in a net tax benefit of $933,000 for the full fiscal year. In fiscal 1999, the Company recorded a provision for income taxes of 40%, of which the significant components included federal and state income taxes. The Company recorded net income of $1,459,000 for fiscal year 2000, a decrease of $586,000, or 29% below net income of $2,045,000 in the previous year. On a comparative basis, using fiscal 1999 tax provision rate of 40%, fiscal 2000 net profits would have been $280 resulting in an decrease in fiscal 2000 net profits of 86% below fiscal 2000. The Company was profitable in all quarters. 10 LIQUIDITY AND CAPITAL RESOURCES - Net cash provided by operating activities was $681,000, compared to $785,000 net cash used for operating activities in 1999. During 2000, the Company received $91,000 from the exercise of stock options. Cash and cash equivalents at March 31, 2000 stood at $1,246,000, an increase of $880,000 over the prior year-end. Working capital at the end of fiscal 2000 increased 6.1% to $14,906,000. The Company's current ratio decreased to 2.0 as compared to 2.4 at the end of fiscal 1999. Fiscal 2000 capital expenditures totaled $2,858,000. This was an decrease of 15%, or $500,000, from the prior year capital expenditures of $3,358,000. Capital expenditures were comprised primarily of investments in information technology, leasehold improvements, and furniture and fixtures. Capital expenditures are funded by cash generated by operations or from the lines of credit available to the Company. At the end of fiscal 2000, the Company had $35.5 million in approved bank lines of credit to be used either for short term cash borrowings to support working capital growth or for standby letters of credit to support the bonding requirements of foreign contracts. At the end of fiscal 2000, $4.0 million in borrowings were outstanding and $2.2 million in standby letters of credit were in effect against this credit facility. The Company's credit facility restricts the payment of dividends, except in shares of the Company's stock, without consent of the bank. The existing line of credit expires on August 31, 2000. The Company anticipates either an extension of the existing line of credit or a new credit facility will be in place by August 31, 2000. |_| YEAR 2000 The Company has experienced no major impact due to Year 2000 issues. The Company's year 2000 initiatives included (i) testing and upgrading internal business systems and facilities; (ii) testing and developing necessary upgrades for the Company's current products and certain discontinued products; (iii) contacting key suppliers, vendors, and customers to determine their year 2000 compliance status; and (iv) developing contingency plans. THE COMPANY'S STATE OF READINESS The Company has completed the process of upgrading or replacing its non-compliant systems. In most cases, such upgrades or replacements were made in the ordinary course of business. The Company's material information technology systems were year 2000 compliant in time for the Year 2000 transition. All major information systems were tested before January 1, 2000 on a separate network to ensure the overall information systems architecture was Year 2000 compliant. The Company has had no major issues with the products that it manufactures and sells. The Company has had no Year 2000 issues with suppliers, and vendors significant to the Company's business operations. CONTINGENCY PLANS The Company's contingency plans included standby generators and computer systems. None of these systems were needed. Costs to Address the Company's Year 2000 Issues To date, costs incurred in connection with the year 2000 issue have not been material. The Company does not expect total year 2000 remediation costs to be material, but there can be no assurance that the Company will not encounter unexpected costs or delays in achieving year 2000 compliance. RISKS OF THE COMPANY'S YEAR 2000 ISSUES The Company believes it has an effective Year 2000 program and the major risks have been averted. However, since it is not possible to anticipate all possible future outcomes there could be "worst case scenarios" in which the Company would be unable to conduct its business. Possible "worst case scenarios" include problems that do not surface immediately. These problems could cause delays or 11 disruptions in the Company's business. If any of the Company's material suppliers, vendors or customers experience business disruptions due to similar latent problems, the Company might also be materially adversely affected. There can be no assurance that the Company will not incur material costs in defending or bringing lawsuits related to the Year 2000 issue. Any unexpected costs or delays arising from the year 2000 issue could have an adverse impact on the Company's business, operations, and financial condition. 12 |-| 1999 COMPARED TO 1998 |_| OVERVIEW Net sales and contract revenues for fiscal 1999 improved by 75% to $57,295,000 versus fiscal 1998 net sales of $32,699,000. The Company had income before taxes of $3,409,000, an increase of 26% compared to $2,698,000 of income before taxes in the previous year. Net income for fiscal 1999 was $2,045,000 ($.40 per share, on a diluted basis) as compared to $4,661,000 ($.95 per share, on a diluted basis) in fiscal 1998. Backlog at March 31, 1999 was $38,723,000, a 124% increase over the backlog reported at previous fiscal year end. During fiscal 1998, the Company recorded a net tax benefit associated with net operating loss carryforwards and other tax items of $1,963,000, or $.40 per share. CHANGES IN FINANCIAL CONDITION - Cash and cash equivalents at year-end decreased by $1,924,000 to $366,000, compared to $2,290,000 in 1998. Accounts receivable increased by $1,232,000 from the prior year due to the increased shipments made during 1999. Inventories increased by $2,513,000 during 1999 to support the growth in X-ray equipment shipments and backlog. Prepaid expenses and other current assets increased $943,000 due to advances for certain long lead inventory. Deferred income taxes decreased $932,000 as a result of the Company utilizing a tax benefit associated with its net operating loss carryforwards. RESULTS OF OPERATIONS - Net sales and contract revenues increased by $24,596,000 or 75% during fiscal year 1999. In 1999, security systems revenues of $54,631,000 represented an increase of $24,717,000 or 83% over 1998. Contract research and engineering revenues of $2,664,000 decreased by $121,000 or 4% over 1998. Cost of sales and contracts in 1999 of $38,356,000 was $18,540,000 higher than the previous year primarily due to increased equipment sales and performance on several contracts. Cost of sales and contracts represented 67% of revenues during 1999, compared to 61% in 1998. This increase in the cost of sales ratio was due to an expected shift in product mix, investments made in operations infrastructure, and introduction of new or enhanced products in response to growing domestic and international demand. Selling, general and administrative expenses of $9,083,000 were $1,658,000 higher than the previous year and represented 16% of revenues, compared to 23% in 1998. The increased spending level was primarily due to expanded international sales and marketing activities and costs associated with recruiting for the Company's expanded staff requirements. The decreased ratio of selling, general and administrative expenses to sales is due to the larger revenue base over which to spread these costs. Company funded research and development spending increased to $6,380,000 in 1999, a 123% increase compared to the $2,856,000 in spending in 1998. Research and development spending in fiscal 1999 and fiscal 1998 was 11% and 9% of revenues, respectively. In fiscal 1999, the Company recorded a provision for income taxes of 40%, of which the significant components included federal and state income taxes. In fiscal 1999, the effective tax rate exceeded the statutory federal income tax rate primarily due to the impact of state income taxes and non-deductible expenses. In the fourth quarter of fiscal 1998, the Company recorded a tax benefit associated with net operating loss carryforwards and other tax assets as explained in Footnote 5 to the Financial Statements. The aggregate tax benefit recognized was $2,072,000, which resulted in a net tax benefit for the year of $1,963,000. The Company recorded net profits of $2,045,000 for fiscal year 1999, a decrease of $2,616,000, or 56% below net income of $4,661,000 in the previous year. On a comparative basis, using fiscal 1999 tax provision rate of 40%, fiscal 1998 net profits would have been $1,619,000 resulting in an increase in fiscal 1999 net profits of 26% over fiscal 1998. The Company was profitable in all quarters. LIQUIDITY AND CAPITAL RESOURCES - Net cash provided by operating activities was $785,000, compared to $696,000 net cash used for operating activities in 1998. During 1999, the Company received 13 $815,000 from the exercise of stock options. Cash and cash equivalents at March 31, 1999 stood at $366,000, a decrease of $1,924,000 over the prior year-end. Working capital at the end of 1999 decreased 3.6% to $14,046,000. The Company's current ratio decreased to 2.4 as compared to 2.6 at the end of 1998. Fiscal 1999 capital expenditures totaled $3,358,000. This was an increase of 210%, or $2,276,000, from the prior year capital expenditures of $1,082,000. Capital expenditures were comprised primarily of investments in information technology, leasehold improvements, and furniture and fixtures. Capital expenditures are funded by cash generated by operations or from the lines of credit available to the Company. At the end of fiscal 1999, the Company had $23.3 million in approved bank lines of credit to be used either for short term cash borrowings to support working capital growth or for standby letters of credit to support the bonding requirements of foreign contracts. At the end of fiscal 1999, $1.0 million in borrowings were outstanding and $12.1 million in standby letters of credit were in effect against this credit facility. The Company's credit facility restricts the payment of dividends, except in shares of the Company's stock, without consent of the bank. After the end of the fiscal year, the Company had applied for a $5 million expansion of the credit line. |_| YEAR 2000 The Company has assessed the potential impact of the year 2000 on the Company's internal business systems, products and operations. The Company's year 2000 initiatives include (i) testing and upgrading internal business systems and facilities; (ii) testing and developing necessary upgrades for the Company's current products and certain discontinued products; (iii) contacting key suppliers, vendors, and customers to determine their year 2000 compliance status; and (iv) developing contingency plans. THE COMPANY'S STATE OF READINESS The Company has evaluated its critical information technology systems for year 2000 compliance, including its significant computer systems, software applications, and related equipment. The Company is currently in the process of testing its non-compliant systems in order to determine the need for upgrade or replacement. The Company expects that its information technology systems will be year 2000 compliant before October, 1999. All identified problems will be remediated. The Company will continue testing of its critical internal business systems as the upgrades are placed in production. The Company believes that all of the products that it currently manufactures and sells are year 2000 compliant. The Company has identified and contacted suppliers, vendors, and customers that are believed to be significant to the Company's business operations in order to assess their year 2000 readiness. As part of this effort, the Company distributed questionnaires relating to year 2000 compliance to its significant suppliers and vendors. It is developing a more detailed follow-up to ensure its most critical suppliers and vendors have adequate year 2000 plans in place. CONTINGENCY PLANS The Company is developing a contingency plan that will allow its primary business operations to continue despite possible disruptions due to year 2000 problems. These plans include emergency power for information technology in case of a general power failure and redundant data in similar computer systems to be used in case of a failure of the existing IT system. As the Company continues to evaluate the year 2000 readiness of its business systems and facilities, products and significant suppliers, vendors, and customers, it will modify and adjust its contingency plan as may be required. COSTS TO ADDRESS THE COMPANY'S YEAR 2000 ISSUES 14 The primary costs of the year 2000 program relate to existing internal resources. These additional costs will not be material. However, since there is no uniform definition of year 2000 "compliance" and there is no way to anticipate all possible situations, there can be no assurance that the Company will not encounter unexpected costs or delays in achieving year 2000 compliance. RISKS OF THE COMPANY'S YEAR 2000 ISSUES The company believes it has an effective program in place to resolve the year 2000 issue. However, since it is not possible to anticipate all possible future outcomes there could be "worst case scenarios" in which the company would be unable to conduct its business. While the Company anticipates completion of testing and upgrades on a timely basis, possible "worst case scenarios" include delays in upgrading mission critical IT systems and unexpected costs and delays or disruptions in the Company's business. If any of the Company's material suppliers, vendors or customers experience business disruptions due to year 2000 issues, the Company might also be adversely affected. There is expected to be a significant amount of litigation relating to the year 2000 issue and there can be no assurance that the Company will not incur material costs in defending or initiating lawsuits. Any unexpected costs or delays arising from the year 2000 issue could have a significant adverse impact on the Company's business, operations, and financial condition. |_| ACQUISITION OF BUSINESS On August 18, 1998, the Company established its High Energy Systems Division by purchasing certain assets relating to the industrial linear accelerator business of Schonberg Research Corporation of Santa Clara, California for $1,100,000. The components of the purchase price consisted of the following: Fixed assets $ 658 Raw material inventory 26 Patents and other intangible assets 416 ----------- Total $ 1,100 =========== This acquisition has been accounted for under the purchase method of accounting, and its results are included with the Company's results from the date of acquisition. 15 ITEM 7(A). QUANTITIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK N/A ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The financial statements and supplementary financial information listed in the Index to Consolidated Financial Statements and Schedule on page 26 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. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY |_| DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY AS OF MAY 31, 2000.

Positions Offices Date Assumed Name Age of Company Held Each Position ---- --- ------------ ------------- DIRECTORS --------- William E. Odom 67 Director September 1996 Chairman September 1998 Hamilton W. Helmer 53 Director February 1993 Donald J. McCarren 60 Director February 1993 Herman Feshbach 83 Director September 1975 Carl W. Vogt 64 Director June 1997 Roger P. Heinisch 62 Director August 1999 Ralph S. Sheridan 50 Director January 1994 President & CEO September 1993 EXECUTIVE OFFICERS (Who are not also Directors) William L. Adams 67 Vice President, Chief September 1998 Engineer Joseph Callerame 50 Vice President, Technology June 1998 Chief Technology Officer Ralph G. Foose 56 Vice President, Operations September 1999 Edwin L. Lewis 54 Vice President, General March 2000 Counsel and Clerk Lee C. Steele 50 Vice President, Finance September 1994 Treasurer & CFO Robert J. Peters 39 Vice President, Business November 1997 and Commercial Development

All Directors and Executive Officers hold office until the next annual meeting of Stockholders and until their successors are duly elected and qualified. No family relationship exists between any of the listed Directors and Executive Officers. 16 Dr. Herman Feshbach is an Institute Professor Emeritus at the Massachusetts Institute of Technology, a position he has held for more than five years, and has previously served as Chairman of the Physics Department at MIT and Director of the MIT Center for Theoretical Physics. He is a past President of the American Physical Society and the American Academy of Arts and Sciences and is a Fellow of both those Organizations and of the American Association for the Advancement of Sciences. He is on the Board of Governors for Tel Aviv University and the Weizmann Institute of Science, is on the Board of Editors for Daedalus and Editor of the Annals of Physics, and has served as Chairman or Member on numerous committees for the Department of Energy, the National Science Foundation, the National Academy of Sciences, and the American Physical Society. He was awarded the National Medal of Science by President Reagan in 1986. Dr. Feshbach received his Ph.D. from MIT. Dr. Roger P. Heinisch joined the Honeywell Corporation in 1968 where he served in various scientific and engineering positions before becoming Director of Research in 1978. In 1980, Dr. Heinisch became the Director of the Systems and Research Center and was named Vice President of the Center in 1982. He became Vice President of Honeywell's Flight Systems Operations in 1985. In 1988, Dr. Heinisch was appointed Corporate Vice President of Advanced Technology. In 1990, he became Vice President of Materials and Manufacturing for the Defense Systems Group. When Alliant Techsystems was spun off from Honeywell in 1991, he assumed the position of Vice President, Engineering with the new Company. From 1995 until April of 1997 he also assumed responsibility for Information Systems and Technology at Alliant. Dr. Heinisch holds a B.S. in Nuclear Engineering from Marquette University, a M.S. in Nuclear Engineering from Marquette University and a Ph.D. in Engineering Science from Purdue University. Dr. Heinisch is a former member of the Army Science Board and has been a member of various Department of Defense review panels and technical boards. Currently, Dr. Heinisch serves on the boards of Nichols Research Corp., Nonvolatile Electronics, Inc., Theseus Logic Inc., Third Wave Systems, Point Cloud and Superior Vocabulary. Dr. Hamilton W. Helmer has, for the last 15 years, been Managing Partner of Helmer & Associates, a strategic consulting firm located in Los Altos, California. Prior to that, Dr. Helmer worked for Bain & Co. Dr. Helmer holds a Ph.D. in Economics from Yale University. Dr. Donald J. McCarren is President of an early stage, privately held, functional genomics research organization, Alpha Gene, Inc. Previously, Dr. McCarren served as President of the National Center for Genome Resources, a non-profit corporation located in Santa Fe, New Mexico, which supports genome projects and related research by providing resources such as expertise in bioinformatics. Prior to assuming that position in 1997, Dr. McCarren was the founder of Tacora Corporation, a medical technology company located in Seattle, Washington. From July 1992 to June 1994, he was President and Chief Operating Officer of ImmunoGen, Inc., a small molecule cancer research and development company located in Cambridge, Massachusetts. Prior to that, Dr. McCarren spent almost 9 years in Erbamont N.V. serving as President (1990 to 1992) of the Adria Laboratories Division of Erbamont N.V. in Columbus, Ohio, and Corporate Vice President of Worldwide Marketing and Business Development (1989 to 1990) and Vice President of Far East and Austral-Asian Operations (1986 to 1989) of Erbamont, N.V. Dr. McCarren holds a Ph.D. in Developmental Economics. General William E. Odom is the Director of National Security Studies for the Hudson Institute in Washington, D.C. and an adjunct Professor in the Department of Political Science at Yale University. Prior to joining the Hudson Institute in 1988, General Odom spent 34 years as an officer in the United States Army, retiring with the rank of Lieutenant General. While on active duty, General Odom served as Director of the National Security Agency for three years, Assistant Chief of Staff for Intelligence for the Department of the Army for four years and Military Assistant to the President's National Security Advisor for four years. General Odom received his B.S. degree from West Point and Masters and Ph.D. degrees from Columbia University. General Odom is on the Board of Directors of Nichols Research Corporation of Huntsville, Alabama, V-ONE Corporation of Rockville, Maryland, Middlebury College, from which he received an honorary doctorate, and the Institute for the Study of Diplomacy at Georgetown University. General Odom is the author of five books and numerous articles. Mr. Ralph S. Sheridan was elected President and Chief Executive Officer of the Company in September 1993, and in January of 1994, he was elected a Director. Prior to joining the Company, Mr. Sheridan ran his own consulting and investment firm, Value Management Corporation, in Waltham, 17 Massachusetts. Prior to that, Mr. Sheridan was President and CEO (1988-1989) and Vice President of Marketing and Operations (1987-1988) of HEC Energy Corp., in Boston, Massachusetts. Before joining HEC, Mr. Sheridan held the position of Vice President of Operations for the Engineered Systems and Controls Group (1984-1986) and Vice President of Corporate Business Development (1981-1984) at Combustion Engineering, Inc. in Stamford, Connecticut. Mr. Sheridan holds a B.S. in Chemistry and an M.B.A., both from Ohio State University. Mr. Carl W. Vogt was elected to the Board in June, 1997. He is a partner in the Washington, D.C. office of the national law firm of Fulbright & Jaworski. Mr. Vogt has been with that firm since 1966, with various periods away from the firm to perform government service. In 1992, he was appointed by President Bush as the Chairman of the National Transportation Safety Board, where he served until 1994. Mr. Vogt earned his bachelor's degree from Williams College and his law degree from the University of Texas Law School. Dr. Joseph Callerame joined American Science & Engineering in June 1998 as Vice President, Technology, and Chief Technology Officer. Prior to joining AS&E, Dr. Callerame spent over twenty years at Raytheon Company, most recently as Manager, Engineering and Technology Development and Consulting Scientist, at Raytheon Electronic Systems. Prior to that appointment, Dr. Callerame was Deputy General Manager of Raytheon's Corporate Research Division. Dr. Callerame received his B.A. in Physics from Columbia College, and his M.A. and Ph.D., also in Physics, from Harvard University. After receiving his Ph.D. and prior to his employment at Raytheon, Dr. Callerame served as a Post-Doctoral Fellow in Nuclear Physics at M.I.T. Mr. Lee C. Steele joined the Company in September 1994 as Vice President of Finance and Chief Financial Officer. From 1991 until he joined the Company, Mr. Steele was a principal of Asset Management Corporation, a Waltham, Massachusetts consulting firm specializing in the analysis and resolution of complex financial and operational challenges for small and medium size businesses. Until 1991, Mr. Steele was a Partner at Deloitte & Touche, specializing in profit planning, corporate finance and troubled company situations. He holds a M.B.A. from Harvard Business School and an engineering degree from Case Western Reserve University. Dr. William Adams is President of Adtech Consulting, Inc., a technology and management consulting firm located in Columbus, Ohio. Dr. Adams joined AS&E in July 1997 as acting Chief Technology Officer. In August 1998 he became the acting Vice President of Operations and he now serves as Chief Engineer. Prior to joining AS&E Dr. Adams spent over thirty years in engineering and general management in process automation firms including AccuRay, Combustion Engineering, and ABB. During this period he held positions as Vice President of Field Service, VP of Engineering, Senior Vice President of Engineering, Manufacturing, and Marketing, and Vice President of Quality. In 1987 Dr. Adams established a process automation joint venture in Russia for Combustion Engineering. Dr. Adams and his wife moved to Moscow in 1991 where he managed the joint venture for ABB after Combustion Engineering was acquired by ABB. Dr. Adams retired from ABB in 1994 and established Adtech Consulting, Inc. Dr. Adams holds a B.S. in Electrical Engineering from Michigan Technological University, a SM in Electrical Engineering from MIT, and a Ph.D. from Purdue University. Mr. Robert J. Peters joined the Company in November of 1997 as the Director of Product Development Engineering, and was promoted to his current position in March of 1998. He is responsible for all of the marketing, application and sales engineering, as well as communications. Prior to joining AS&E, Mr. Peters spent 14 years in the Defense industry, working for General Dynamics, Lockhead Martin, General Electric and RCA. Through various positions in engineering, program management and sales and marketing, Mr. Peters has led new product development of combat vehicles, stabilization systems, diagnostic systems and paperless documentation environments. He has developed joint ventures in the U.K. and worked extensively throughout Asia and Europe. Mr. Peters earned a B.S. in Electrical Engineering and an M.E. in Biomedical Engineering from Worcester Polytechnic Institute and an M.S. in Electrical Engineering from Northeastern University in Boston, MA. Mr. Ralph Foose joined AS&E as Vice President of Operations in September, 1999 after three years as President and Chief Financial Officer of Sight in Systems, a software manufacturing company. Prior to 18 his work at Sight in Systems, Mr. Foose was President of IRD Mechanalysis where he led a company turnaround. In 1986 Mr. Foose joined Combustion Engineering as President of Taylor Instrument Systems. During his six year tenure, the company split into two divisions and grew from $20 million in annual sales to $150 million. Early on in his career, Mr. Foose held various technical consulting and managerial positions with Booz-Allen Hamilton, AccuRay Corporation and NASA. Mr. Foose holds a B.S. in Electrical Engineering from Florida Institute of Technology and an M.S. in Computer Science from Ohio State University. Mr. Edwin L. Lewis joined the Company in March 2000 after over two years as President of the Atlantic Legal Foundation, a public interest law firm in New York City. From 1995 to 1997, Mr. Lewis was Vice President, General Counsel and Corporate Secretary of Borg-Warner Corporation and from 1983 to 1995 was general counsel for its subsidiaries, Burns International and Wells Fargo Alarm Services. Prior to that, Mr. Lewis was senior attorney for Atlantic Richfield Company. Mr. Lewis holds a Juris Doctor Degree from Temple University School of Law and a Bachelor of Arts Degree in International Affairs from Lafayette College. Mr. Lewis is a member of the Legal Advisory Board of the National Federation of Independent Business Legal Foundation. |_| SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE Section 16(a) of the Securities Exchange Act of 1934 requires certain persons, including the Company's Directors and Executive Officers, to file initial reports of beneficial ownership of the Company's securities and reports of changes in beneficial ownership with the Securities and Exchange Commission. For fiscal year 2000, the Company filed a late report for Lee C. Steele for one transaction and a late report for Ralph S. Sheridan for one transaction. 19 ITEM 11. EXECUTIVE COMPENSATION |_| THE FOLLOWING CHART PROVIDES INFORMATION CONCERNING COMPENSATION PAID BY THE COMPANY DURING THE YEAR ENDED MARCH 31, 2000 TO THE CHIEF EXECUTIVE OFFICER AND EACH OF THE FOUR MOST HIGHLY COMPENSATED EXECUTIVE OFFICERS OF THE COMPANY WHOSE AGGREGATE COMPENSATION EXCEEDED $100,000. SUMMARY COMPENSATION

LONG-TERM COMPEN- ANNUAL SATION ALL COMPENSATION ---------- OTHER NAME AND PRINCIPAL FISCAL ---------------------------- OPTION COMPEN- POSITION YEAR SALARY ($) BONUS ($) AWARDS (#) SATION ($) (1) -------- ---- ---------- --------- ---------- -------------- Ralph S. Sheridan 2000 267,120 172,500 225,000 4,058 President and CEO 1999 245,495 230,000 -- 5,658 1998 240,000 230,000 -- 7,729 William L. Adams 2000 213,000 --(4) -- -- Vice President, Chief 1999 174,500 -- 10,000 -- Engineer 1998 112,800 -- -- -- Joseph Callerame 2000 211,964 58,500(5) -- 2,719 Vice President 1999 160,828 -- 50,000 2,212 CTO 1998 -- -- -- -- Lee C. Steele 2000 201,357 133,200(5) -- 2,194 Vice President and 1999 135,664 -- 10,000 774 CFO 1998 125,077 29,750 30,000 752 Robert J. Peters 2000 141,081 --(4) 3,000 290 Vice President, 1999 126,568 16,500 15,000 224 Business and 1998 35,260(2) -- 5,000 -- Commercial Development

(1) All Other Compensation includes imputed income from taxable life insurance premiums paid by the Company, and, for Mr. Sheridan, a leased automobile. (2) The indicated years were years of partial employment with the Company for the named executive. (3) Mr. Sheridan's bonus is paid in respect of "contract years" ending September 30th in each year and is paid in cash, except in fiscal years 1996 and 1997 when the bonus also included Company stock and payments made to him to alleviate the tax impact of the stock bonus. (4) The bonus amount for these officers has not been determined for fiscal year 2000. (5) Represents bonus earned in fiscal 1999 and fiscal 2000. 20 Mr. Sheridan has an employment contract with the Company that provides for his employment as President and Chief Executive Officer, and as a Director, through September 2002, at an annual salary of $270,000, subject to annual review, plus performance bonuses tied to specific accomplishments. This contract replaces Mr. Sheridan's prior contract with the Company, which expired in September 1999. Under the contract, Mr. Sheridan is eligible to receive an annual bonus of up to $270,000 in each contract year, based on his accomplishment of goals established by the Compensation Committee. In addition, the Company granted Mr. Sheridan options to purchase 225,000 shares of the Company's Common Stock at an exercise price of $7.44 per share, the fair market value of the Company's Common Stock on the date of grant. The options become exercisable at the rate of 75,000 options per year on the first three anniversaries of the grant. Mr. Sheridan recognized no income upon the issuance of the options. When the options are exercised, Mr. Sheridan will recognize ordinary income in an amount equal to the difference between the fair market value of the Common Stock received upon the exercise of the option and the amount paid for the Common Stock. At that time, the Company will be allowed a deduction equal to the amount recognized as ordinary income by Mr. Sheridan. The options provide that to the extent that exercise of an option would give rise to compensation expense that the Company reasonably expects will not be deductible for tax purposes in any given taxable year pursuant to Section 162(m) of the Internal Revenue Code of 1986, as amended, the number of shares as to which the options may be exercised during that taxable year shall be limited. Under his initial employment contract, Mr. Sheridan purchased 160,000 treasury shares of the Company's Common Stock payable by promissory note. The note is due on the earlier of September 15, 2003 or the termination of Mr. Sheridan's employment. The Company has agreed to reimburse Mr. Sheridan for the interest payable under the note in most circumstances. Mr. Sheridan is entitled to receive the same benefits as other senior executives of the company, as well as to the use of a car. In the event that Mr. Sheridan's employment with the Company is terminated without "Cause", or by him for Good Reason (as defined in the employment contract), he will receive twelve months' pay and any previously earned bonuses. In the event that Mr. Sheridan's employment with the Company is terminated for "Cause", or by him other than for Good Reason (as defined in the employment contract), or by his death or disability, he will not be entitled to receive any salary beyond the date of termination, and he will only be entitled to receive previously earned bonuses if the termination is caused by death or disability. Dr. Callerame and Mr. Steele each have agreements with the Company granting each of them severance payments equal to one year's salary if he is terminated in connection with a change of control of the Company as defined in the agreement. The agreement also provides that if each of them is terminated for any reason other than "Cause" as defined in the agreement, he will be entitled to receive an amount equal to at least six months salary. 21 |_| THE FOLLOWING TABLES PROVIDE INFORMATION CONCERNING THE GRANT OF OPTIONS IN FISCAL YEAR 2000 TO EXECUTIVE OFFICERS NAMED IN THE SUMMARY COMPENSATION TABLE AND OPTIONS EXERCISED BY THOSE OFFICERS. OPTION GRANTS IN THE LAST FISCAL YEAR

Individual Grants Potential Realizable -------------------------------------------- Value at Assumed Annual % of Total Rates of Stock Price Options Appreciation for Option Granted to Term ($) Options All Exercise Expiration ------------------------ Granted Employees Price ($) Date 5%/year 10%/year ----------------------------------------------------------------------------------------- Ralph S. Sheridan 225,000 33.4% 7.44 9/25/09 983,134 2,557,042 William L. Adams 0 N/A N/A N/A N/A N/A Joseph Callerame 0 N/A N/A N/A N/A N/A Lee C. Steele 0 N/A N/A N/A N/A N/A Robert J. Peters 3,000 (1) 7.50 9/23/09 13,108 34,094

(1) Less than 1% AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR END OPTION VALUES

Number of Value of Unexercised Unexercised Options In-The-Money Options at Fiscal Year End - at Fiscal Year End - Shares MARCH 31, 2000 (#) MARCH 31, 2000 ($) Acquired on Value --------------------- ----------------------- Exercise Realized Exerc- Unexerc- Exerc- Unexerc- (#) ($) isable isable isable isable -------------------------------------------------------------------------------------------- Ralph S. Sheridan 0 0 345,000 225,000 480,000 -- William L. Adams 0 0 10,000 -- -- -- Joseph Callerame 0 0 25,000 25,000 -- -- Lee C. Steele 0 0 76,600 13,400 271,875 -- Robert J. Peters 0 0 10,000 13,000 -- --

22 |_| COMPENSATION OF DIRECTORS Directors who are also employees of the Company do not receive additional compensation as Directors. Non-Employee Directors (other than the Chairman) receive annual compensation of 2,000 shares of Company Common Stock issuable on January 10th in each year, and options to purchase 7,000 shares of Common Stock at the closing price on the date of the Annual Meeting in each year. Dr. Feshbach, a former chairman of the board of directors, receives 2,500 shares of Common Stock on January 10th in each year and continues to receive deferred compensation under a now discontinued plan described below. No meeting fees or other fees are payable to any Director. See Item 13 - Certain Relationships and Related Transactions for additional information concerning certain Directors. Dr. Feshbach is covered by a nonfunded deferred compensation plan (adopted in 1976 and amended in 1977, 1980, 1986, 1990 and 1992) that provides for periodic payments beginning at age 65, based on length of service. During the year, Dr. Feshbach received $4,752 under the Plan. |_| COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION AND SECTION 16 REPORTING During the fiscal year ended March 31, 2000, the Company's Compensation Committee consisted of General William Odom and Mr. Carl Vogt. No reportable relationship existed with respect to any member of the Compensation Committee. |_| BOARD COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION The Compensation Committee of the Board of Directors (consisting of the two outside Directors whose names appear below this Report) has sole responsibility for compensation issues relating to the Chief Executive Officer. Compensation practices and policies for the other executive officers are set by the Chief Executive Officer with the advice of the Compensation Committee. The Compensation Committee has formulated an approach to all executive compensation that emphasizes the establishment of goals and objectives for each executive and for the Company as a whole and ties a substantial portion of executive compensation to the performance of the executive and the Company with respect to these goals and objectives. Base compensation for executive officers (and many other Company employees) is established on the basis of an analysis of salaries received by comparable employees of high-tech and manufacturing companies in the Greater Boston area, company financial results and prospects, and individual contributions relative to the job description and past performance of each officer. In line with this approach, the Company entered into a new employment agreement with its President and Chief Executive Officer, Mr. Ralph S. Sheridan, in 1999 (effective as of September 1999). This Agreement was based, in part, on an independent consultant's analysis of compensation arrangements for chief executives of comparable companies, and was also based on a careful review of the most important goals and objectives for the Company. The Agreement provided for initial annual cash compensation of $270,000, subject to annual adjustment in the Committee's discretion, plus annual incentive bonuses of up to $270,000 tied to specific, agreed upon annual performance criteria. In addition, in order to provide for long-term incentives, the Company has issued to Mr. Sheridan nonstatutory stock options to purchase 225,000 shares of Common Stock which vest ratably over three years. For the contract year ended in September 1999, the Committee awarded Mr. Sheridan a cash bonus of $172,500, representing 74% of the potential award under his contract. Also in keeping with its performance-based compensation philosophy, in the spring of 1994, the Company implemented an incentive compensation program for all executives who report directly to the Office of the President. Under this new policy, these executives receive a specified portion of their total compensation (ranging from 10% to 50%) based upon two factors: their completion of agreed upon goals and objectives, and the performance of the entire Company. Report Submitted By: William Odom and Carl Vogt. 23 STOCK PERFORMANCE CHART The following chart graphs the performance of the cumulative total return to shareholders (stock price appreciation plus dividends) during the previous five years in comparison to the returns of the Standard & Poor's 500 Composite Stock Price Index and the Standard & Poor's 500 High-Tech Composite Stock Price Index. [GRAPHIC]

INDEXED RETURNS Base Period Years Ending ----------------------------------------------------------------------------------------------------------------------- COMPANY / INDEX Mar95 Mar96 Mar97 Mar98 Mar99 Mar00 ----------------------------------------------------------------------------------------------------------------------- AMERICAN SCIENCE ENGINEERING 100 158 194 218 114 116 ----------------------------------------------------------------------------------------------------------------------- S&P 500 COMP-LTD 100 132 158 234 278 327 ----------------------------------------------------------------------------------------------------------------------- TECHNOLOGY-500 100 135 183 276 442 783 ----------------------------------------------------------------------------------------------------------------------

Note: Assumes $100 invested at the close of trading on the last trading day preceding the first day of the fifth preceding fiscal year (and reinvestment of dividends) in the Company's Common Stock, Standard & Poor's 500 Composite Stock Price Index and the Standard & Poor's 500 High-Tech Composite Stock Price Index. 24 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT |_| THE FOLLOWING CHART SHOWS THE COMPANY COMMON STOCK BENEFICIALLY OWNED BY OFFICERS AND DIRECTORS OF THE COMPANY ON JUNE 16, 2000. BASED ON INFORMATION AVAILABLE TO IT, THE COMPANY BELIEVES THAT NO OTHER PERSON OR ENTITY OWNED 5 PERCENT OR MORE OF THE COMPANY'S COMMON STOCK ON THAT DATE.

------------------------------------------ ------------------------------------- ---------------------- NAME OF AMOUNT AND NATURE OF BENEFICIAL PERCENT BENEFICIAL OWNER OWNERSHIP(1) OF CLASS ------------------------------------------ -------------------------- ---------- ---------------------- William L. Adams 20,000 (2) ------------------------------------------ -------------------------- ---------- ---------------------- Joseph Callerame 47,928 (2) ------------------------------------------ -------------------------- ---------- ---------------------- Herman Feshbach 21,540 (2) ------------------------------------------ -------------------------- ---------- ---------------------- Ralph G. Foose 12,500 (2) ------------------------------------------ -------------------------- ---------- ---------------------- Roger P. Heinisch 10,500 (2) ------------------------------------------ -------------------------- ---------- ---------------------- Hamilton W. Helmer 64,781 1.29% ------------------------------------------ -------------------------- ---------- ---------------------- Edwin L. Lewis 0 (2) ------------------------------------------ -------------------------- ---------- ---------------------- Donald J. McCarren 72,581 1.45% ------------------------------------------ -------------------------- ---------- ---------------------- William E. Odom 35,000 (2) ------------------------------------------ -------------------------- ---------- ---------------------- Robert J. Peters 15,000 (2) ------------------------------------------ -------------------------- ---------- ---------------------- Ralph S. Sheridan 551,936 10.39% ------------------------------------------ -------------------------- ---------- ---------------------- Lee C. Steele 89,223 1.77% ------------------------------------------ -------------------------- ---------- ---------------------- Carl W. Vogt 38,916 (2) ------------------------------------------ -------------------------- ---------- ---------------------- Directors and Officers as a Group (13 persons) 979,905 17.44% ------------------------------------------ -------------------------- ---------- ----------------------

(1) Includes shares that may be acquired under stock options and warrants exercisable within sixty days after the date of this table, as follows: Dr. Adams - 10,000; Dr. Callerame - 37,500; Dr. Feshbach - 2,500; Mr. Foose - 12,500; Mr. Heinisch - 8,167; Dr. Helmer - 53,000; Dr. McCarren - 54,000; Mr. Odom - 21,000; Mr. Peters - 15,000; Mr. Sheridan - 345,000; Mr. Steele - 76,600; Mr. Vogt - 15,750; and all Directors and Officers as a group - 651,017. All ownership reported herein includes sole voting and investment power. (2) Amount owned constitutes less than one percent. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Mr. Al Gladen, a director of the Company until June, 1999, provides engineering and management services to the Company. The compensation paid to Dabster, Inc., a corporation of which Mr. Gladen is the President, in fiscal years 2000, 1999 and 1998 was approximately $20,600, $212,000 and $256,750, for services rendered, respectively. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) The financial statements and schedules listed in the Index to Consolidated Financial Statements and Schedule on page 26 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 48-50 are filed as part of this report, and such Index is incorporated in this Item by reference. (b) Reports on Form 8-K. There were no reports on Form 8-K filed during the fourth quarter of the fiscal year covered by this report. 25 AMERICAN SCIENCE AND ENGINEERING, INC., AND SUBSIDIARY INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULE (Submitted in answer to Item 8 and Item 14 of Form 10-K, Securities and Exchange Commission)

CONSOLIDATED FINANCIAL STATEMENTS PAGE --------------------------------- ---- Report of Independent Public Accountants 27 Consolidated Balance Sheets - March 31, 2000 and March 31, 1999 28-29 Consolidated Statements of Operations 30 For the Years Ended March 31, 2000, March 31, 1999, and March 31, 1998 Consolidated Statements of Stockholders' Investment 31 For the Years Ended March 31, 2000, March 31, 1999, and March 31, 1998 Consolidated Statements of Cash Flows 32 For the Years Ended March 31, 2000, March 31, 1999 and March 31, 1998 Notes to Consolidated Financial Statements - March 31, 2000 33-44 CONSOLIDATED SUPPLEMENTARY FINANCIAL INFORMATION Unaudited quarterly consolidated financial data for the years ended March 31, 2000 and March 31, 1999 45 (Separate Financial Statements of the Company have been omitted since the net assets of its wholly owned subsidiary are not so restricted with respect to payment of loans, advances and cash dividends to the Company as to require such disclosure.) FINANCIAL STATEMENT SCHEDULE Schedule II - Valuation and Qualifying Accounts and Reserves 46

Other schedules have been omitted because of the absence of conditions under which they are required or because the required information is given in the financial statements or notes thereto. 26 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To American Science and Engineering, Inc.: We have audited the accompanying consolidated balance sheets of American Science and Engineering, Inc. (a Massachusetts corporation) and subsidiary as of March 31, 2000 and March 31, 1999 and the related consolidated statements of operations, stockholders' investment and cash flows for each of the three years in the period ended March 31, 2000. These consolidated financial statements and the schedule referred to below are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and schedule based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of American Science and Engineering, Inc. and subsidiary as of March 31, 2000 and March 31, 1999 and the results of their operations and their cash flows for each of the three years in the period ended March 31, 2000 in conformity with accounting principles generally accepted in the United States. Our audits were made for the purpose of forming an opinion on the basic consolidated financial statements taken as a whole. The schedule listed in the index to consolidated financial statements and schedule is presented for purposes of complying with the Securities and Exchange Commission's rules and is not part of the basic consolidated financial statements. This schedule has been subjected to the auditing procedures applied in the audit of the basic consolidated financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic consolidated financial statements taken as a whole. Boston, Massachusetts May 24, 2000 27 AMERICAN SCIENCE AND ENGINEERING, INC. AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS MARCH 31, 2000 AND MARCH 31, 1999 Dollars in thousands

ASSETS 2000 1999 ---- ---- CURRENT ASSETS: Cash and cash equivalents (Note 2) $1,246 $366 Accounts receivable, net of allowances of $250 in 2000 and $259 in 1999 (Note 1) 6,276 7,958 Unbilled costs and fees, net of allowances of $447 in 2000 and 1999 (Note 1) 9,117 2,374 Inventories (Note 1) 10,446 11,083 Deferred income taxes (Notes 1 and 5) 1,911 1,370 Prepaid expenses and other current assets 1,118 1,224 --------- --------- TOTAL CURRENT ASSETS 30,114 24,375 --------- --------- Non-current deferred income taxes (Notes 1 and 5) 1,038 254 Deposits 44 17 Other Assets 132 115 Patents and other intangibles, net of accumulated amortization of $165 in 2000 and $55 in 1999 (Notes 1 and 3) 300 401 Property, equipment and leasehold Improvements, net of accumulated depreciation of $11,000 in 2000 and $9,677 in 1999 (Notes 1 and 3) 6,577 5,042 ----------- --------- $38,205 $30,204 =========== =========

The accompanying notes are an integral part of these consolidated financial statements. 28 AMERICAN SCIENCE AND ENGINEERING, INC. AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS (CONTINUED) MARCH 31, 2000 AND MARCH 31, 1999 Dollars in thousands

LIABILITIES & STOCKHOLDERS' INVESTMENT 2000 1999 ---- ---- CURRENT LIABILITIES: Line of Credit $4,000 $1,000 Current maturities of obligations under capital leases (Note 3) 16 20 Accounts payable 5,714 4,456 Accrued salaries and benefits 1,136 868 Accrued warranty costs (Note 1) 698 374 Accrued income taxes (Notes 1 and 5) -- 350 Deferred revenue (Note 1) 756 756 Customer deposits (Note 1) 2,209 1,281 Other current liabilities 679 1,224 -------------- --------------- TOTAL CURRENT LIABILITIES 15,208 10,329 -------------- --------------- NON-CURRENT LIABILITIES: Obligations under capital leases, net of current maturities (Note 3) -- 20 Deferred revenue (Note 1) 1,113 67 Deferred compensation (Note 10) 146 149 Deferred rent (Note 1) 363 292 -------------- --------------- TOTAL NON-CURRENT LIABILITIES 1,622 528 -------------- --------------- COMMITMENTS AND CONTINGENCIES (Notes 3, 4, and 10) STOCKHOLDERS' INVESTMENT: (Notes 6 and 7) Preferred stock, no par value Authorized - 100,000 shares Issued - None Common stock, $.66-2/3 par value Authorized - 20,000,000 shares Issued 4,961,874 shares in 2000 and 4,877,767 shares in 1999 3,308 3,252 Capital in excess of par value 17,907 17,394 Retained Earnings/Accumulated deficit 800 (659) -------------- --------------- 22,015 19,987 Note receivable-Officer (Note 7) (640) (640) -------------- --------------- TOTAL STOCKHOLDERS' INVESTMENT 21,375 19,347 -------------- --------------- $38,205 $30,204 ============== ===============

The accompanying notes are an integral part of these consolidated financial statements. 29 AMERICAN SCIENCE AND ENGINEERING, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEARS ENDED MARCH 31, 2000, MARCH 31, 1999, AND MARCH 31, 1998 Dollars in thousands, except per share amounts

2000 1999 1998 ---- ---- ---- NET SALES AND CONTRACT REVENUES (Notes 1 and 9) $60,674 $57,295 $32,699 Cost of sales and contracts (Note 1) 43,494 38,356 19,816 ------- ------- ------- GROSS PROFIT 17,180 18,939 12,883 EXPENSES: Selling, general and administrative 10,480 9,083 7,425 Research and development (Note 1) 5,902 6,380 2,856 ------- ------- ------- TOTAL EXPENSES 16,382 15,463 10,281 ------- ------- ------- OPERATING INCOME 798 3,476 2,602 ------- ------- ------- OTHER INCOME/(EXPENSE): Interest, net (257) 83 118 Other, net (75) (150) (22) ------- ------- ------- TOTAL OTHER INCOME (EXPENSE) (332) (67) 96 ------- ------- ------- INCOME BEFORE PROVISION FOR (BENEFIT FROM) INCOME TAXES 466 3,409 2,698 PROVISION FOR (BENEFIT FROM) INCOME TAXES (NOTE 5) (993) 1,364 (1,963) ------- ------- ------- NET INCOME $ 1,459 $ 2,045 $ 4,661 ======= ======= ======= INCOME PER SHARE - BASIC $ .30 $ .43 $ 1.00 ======= ======= ======= - DILUTED $ .29 $ .40 $ .95 ======= ======= ======= WEIGHTED AVERAGE SHARES - BASIC 4,925 4,813 4,646 ======= ======= ======= - DILUTED 5,021 5,071 4,917 ======= ======= =======

The accompanying notes are an integral part of these consolidated financial statements. 30 AMERICAN SCIENCE AND ENGINEERING, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF STOCKHOLDERS' INVESTMENT FOR THE YEARS ENDED MARCH 31, 2000, MARCH 31, 1999, AND MARCH 31, 1998 Amounts in thousands, except share amounts

RETAINED EARNINGS/ COMMON STOCK CAPITAL IN ACCU- NOTE -------------------- EXCESS OF MULATED RECEIVABLE TREASURY STOCK SHARES AMOUNT PAR VALUE DEFICIT OFFICER SHARES AMOUNT TOTAL ------ ------ --------- ------- ------- ------ ------ ----- BALANCE, MARCH 28, 1997 4,585,209 $ 3,058 $ 15,273 $ (7,365) $ (640) 62,841 $(176) $ 10,150 Net income -- -- -- 4,661 -- -- -- 4,661 Exercise of stock Options (Note 6) 152,735 101 783 -- -- -- -- 884 Issuance of stock 5,625 3 222 -- -- (56,163) 164 389 --------- -------- --------- -------- ------- -------- ----- ------- BALANCE, MARCH 31, 1998 4,743,569 3,162 16,278 (2,704) (640) 6,678 (12) 16,084 Net income -- -- -- 2,045 -- -- -- 2,045 Exercise of stock Options (Note 6) 108,485 72 743 -- -- -- -- 815 Retirement of Treasury stock (6,178) (4) (8) -- -- (6,678) 12 -- Issuance of stock 31,891 22 381 -- -- -- -- 403 --------- -------- --------- -------- ------- -------- ----- ------- BALANCE, MARCH 31, 1999 4,877,767 $ 3,252 $ 17,394 $ (659) $ (640) -- $ -- $ 19,347 Net income -- -- -- 1,459 -- -- -- 1,459 Exercise of stock Options (Note 6) 18,308 12 79 -- -- -- -- 91 Issuance of stock 65,799 44 434 -- -- -- -- 478 --------- -------- --------- -------- ------- -------- ----- ------- BALANCE, MARCH 31, 2000 4,961,874 $ 3,308 $ 17,907 $ 800 $ (640) -- $ -- $ 21,375 --------- -------- --------- -------- ------- -------- ----- ------- --------- -------- --------- -------- ------- -------- ----- ------- The accompanying notes are an integral part of these consolidated financial statements

31 AMERICAN SCIENCE AND ENGINEERING, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED MARCH 31, 2000, MARCH 31, 1999 AND MARCH 31, 1998 Dollars in thousands

2000 1999 1998 ---- ---- ---- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 1,459 $ 2,045 $ 4,661 Adjustments to reconcile net income to net cash provided by (used for) operating activities: Depreciation and amortization 1,434 905 534 Provisions for contract, inventory, accounts receivable and warranty reserves 572 1,135 896 Deferred income tax (1,325) 932 (2,556) Change in assets and liabilities: Accounts receivable 1,532 (1,232) (2,070) Unbilled costs and fees (6,743) 816 (2,409) Inventories 637 (2,513) (4,151) Prepaid expenses, other assets, and deposits 64 (943) (7) Accounts payable 1,258 96 2,107 Accrued income taxes (350) (265) 525 Customer deposits 928 130 1,151 Deferred revenue 1,046 (649) 286 Accrued expenses and other current liabilities 101 321 326 Noncurrent liabilities 68 7 11 ------- ------- -------- Total adjustments (778) (1,260) (5,357) ------- ------- -------- NET CASH PROVIDED BY (USED FOR) OPERATING ACTIVITIES 681 785 (696) ------- ------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of property and equipment, net (2,858) (3,358) (1,082) Acquisition of business assets -- (1,100) -- Purchase of patents and intangibles (10) (40) -- ------- ------- -------- Cash used in investing activities (2,868) (4,498) (1,082) ------- ------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from borrowings (Note 11) 3,000 1,000 -- Proceeds from exercise of stock options 91 815 884 Principal payments of capital lease obligations (24) (26) (18) ------- ------- -------- Cash provided by financing activities 3,067 1,789 866 ------- ------- -------- NET INCREASE/(DECREASE) IN CASH AND CASH EQUIVALENTS 880 (1,924) (912) CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 366 2,290 3,202 ------- ------- -------- CASH AND CASH EQUIVALENTS AT END OF YEAR $ 1,246 $ 366 $ 2,290 ------- ------- -------- ------- ------- -------- SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Interest paid $ 346 $ 43 $ 6 Income taxes paid 791 667 40 NON-CASH TRANSACTIONS: Issuance of stock in lieu of fees $ 478 $ 403 $ 225 Capital lease obligation for equipment -- 24 -- Issuance of treasury stock in lieu of fees -- -- 164

The accompanying notes are an integral part of these consolidated financial statements. 32 AMERICAN SCIENCE AND ENGINEERING, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 2000 1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES American Science and Engineering, Inc., is engaged in the development and manufacture of sophisticated X-ray inspection systems for critical detection and security screening solutions for sale primarily to U.S. and foreign government agencies. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of the Company and its wholly owned subsidiary. All significant intercompany balances and transactions have been eliminated in consolidation INVENTORIES Inventories are stated at the lower of cost, computed on a first-in, first-out basis, or market and generally include material, labor and factory overhead. The components of inventories at March 31, 2000 and 1999 were as follows (dollars in thousands):

2000 1999 ---- ---- Raw materials and completed Subassemblies $ 6,416 $ 5,570 Work-in-process 4,030 5,513 ----------- ---------- $10,446 $11,083 ----------- ----------

PROPERTY, EQUIPMENT AND LEASEHOLD IMPROVEMENTS The Company provides for depreciation and amortization of its fixed assets, principally equipment, using straight-line and accelerated methods over estimated useful lives of 3-10 years. Expenditures for normal maintenance and repairs are charged to expense as incurred. Significant additions, renewals or betterments that extend the useful lives of the assets are capitalized. The cost and accumulated depreciation applicable to equipment and leasehold improvements sold or otherwise disposed of are removed from the accounts, and any resulting gain or loss is included in the consolidated statements of operations. WARRANTY COSTS The Company provides currently for estimated future warranty and installation costs on units sold covering the estimated replacement and installation costs related to parts and labor. METHODS OF RECORDING PROFITS ON CONTRACTS Revenues and profits are generally recorded on cost reimbursement and long-term fixed-price contracts as costs are incurred using the percentage-of-completion method. Percentages-of-completion are determined by relating the actual cost of work performed to date for each contract to its estimated final cost. 33 AMERICAN SCIENCE AND ENGINEERING, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) MARCH 31, 2000 Revenues and profits are recorded on other fixed price contracts as shipments are made. Profit on fixed price contracts is determined by applying the estimated average profit rate to the contract value of the items shipped. If a loss is anticipated on a contract, provision is made at that time for the full amount of the estimated loss without reference to the percentage of completion or to performance milestones. The types of milestones contained in contracts vary based on negotiations with each customer, but may include acceptance of equipment prior to shipment, shipment of equipment, arrival of equipment in the country, installation of equipment and final customer acceptance. Individual customer deposits are reduced by the amount of revenue recognized on the contract until a zero balance is reached. Additional revenues earned in excess of a customer's deposit are included in accounts receivable or unbilled costs and fees until paid or billed, respectively. Under the terms of most of its cost-reimbursement contracts, the Company is not permitted to bill customers a specified portion of the contract value until completion. Such retainages (approximately $253,000 in 2000 and $424,000 in 1999) result from both commercial contract retentions and government contract withholdings generally for 15% of fees, as well as differences 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. Included in accounts receivable and unbilled costs and fees at March 31, 2000 and 1999 are $4,084,000 and $8,257,000, respectively, attributable to both prime and subcontracts with the U.S. Government. WARRANTY COSTS AND DEFERRED REVENUE The Company generally provides a one-year parts and labor warranty with the purchase of equipment. The anticipated cost for this one-year warranty is accrued for at time of the sale and is captioned as a balance sheet liability, Accrued Warranty or included in contract costs for contracts accounted for using the percentage of completion method. The Company also offers to its customers extended warranty and service contracts beyond the initial year of warranty. The coverage period of these contracts will typically range from one to five years, with payment in advance recorded as Deferred Revenue. Approximately 65% of the deferred revenue included in the accompanying 2000 balance sheet will be recognized within 2 years. CUSTOMER DEPOSITS For most international orders, the Company generally includes, as part of its terms and conditions, an advance deposit with order acceptance. For long-term international contracts, the Company will generally include milestone payments tied to a specific event and/or passage of time. These deposit amounts are recorded as a liability under "Customer Deposit" until reduced by revenue recognized against the specific contract. As of March 31, 2000 and 1999, total customer deposits amounted to $2,209,000 and $1,281,000, respectively. DEFERRED RENT The Company entered into a lease for its office and manufacturing facilities. This lease has escalation clauses. Generally accepted accounting principles require normalization of the rental expense over the life of the lease, resulting in deferred rent being reflected in the accompanying consolidated balance sheets. RESEARCH AND DEVELOPMENT Research and development costs are expensed as incurred. FAIR VALUE OF FINANCIAL INSTRUMENTS The Company's financial instruments consist primarily of cash and cash equivalents, accounts receivable and accounts payable. The carrying amounts of the Company's cash and cash equivalents, accounts receivable and accounts payable approximate fair value due to their short-term nature. 34 AMERICAN SCIENCE AND ENGINEERING, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) MARCH 31, 2000 INCOME PER COMMON AND COMMON EQUIVALENT SHARES Basic earnings per common share is computed by dividing net income by the weighted average number of shares of common stock outstanding during the year. No dilution for any potentially dilutive securities is included. Diluted earnings per share includes the dilutive impact of options and warrants using the average share price of the Company's common stock for the period. INCOME TAXES The Company accounts for incomes taxes in accordance with SFAS No. 109, "Accounting for Income Taxes." Accordingly, the Company recognizes deferred income taxes based on the expected future tax consequences of differences between the financial statement basis and the tax basis of assets and liabilities, calculated using enacted tax rates in effect for the year in which the differences are expected to be reflected in the tax return. The Company records a valuation allowance against any net deferred tax assets if it is more likely than not that they will not be realized. NEW ACCOUNTING PRONOUNCEMENTS In June 1998, the FASB issued SFAS 133, "Accounting for Derivative Instruments and Hedging Activities" (SFAS 133). The Statement establishes accounting and reporting standards requiring that every derivative instrument (including certain derivative instruments embedded in other contracts and for hedging activities) be recorded in the balance sheet as either an asset or liability measured at its fair value. SFAS 133 requires that changes in the derivative's fair value be recognized currently in earnings unless specific hedge accounting criteria are met. Special accounting for qualifying hedges allows a derivative's gains and losses to offset related results on the hedged item in the income statement, and requires that a company must formally document, designate, and assess the effectiveness of transactions that receive hedge accounting. SFAS 133 is effective for all fiscal quarters of fiscal years beginning after June 15, 2000. The Company does not anticipate any impact on its financial statements from the adoption of SFAS 133. The Securities and Exchange Commission released Staff Accounting Bulletin (SAB) No. 101 "Revenue Recognition in Financial Statements" on December 3, 1999. This SAB provides additional guidance on the accounting for revenue recognition, including both broad conceptual discussions, as well as certain industry specific guidance. The new guidance that is most likely to have a potential impact on the Company concerns customer acceptance and installation terms. The Company is in the process of quantifying the potential impact of the new guidance, which is effective for the fourth quarter of fiscal 2001, with retroactive application to April 1, 2000. 35 AMERICAN SCIENCE AND ENGINEERING, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) MARCH 31, 2000 PRESENTATION Certain amounts in 1999 and 1998 have been reclassified to conform to the 2000 financial statement presentation. 2. CASH AND CASH EQUIVALENTS The Company considers all investments with original maturities of 90 days or less to be cash equivalents. Cash and cash equivalents are carried at cost, which approximates fair market value at year end 2000 and 1999. The Company has repurchase agreements with a regional bank. The repurchase agreements are collateralized by investments principally consisting of U.S. Government Agency securities in the amount of at least 100% of such obligation. 3. OPERATING AND CAPITAL LEASE AGREEMENTS The Company leases its office and manufacturing facilities in Billerica, Massachusetts under a 10 year lease which began on March, 1 1995 with an option to extend for an additional 10 years. During fiscal year 1998 the Company leased additional space in the current building and amended the lease. Escalation clauses provide for rent increases after the first and fifth year of the rental term. In January 1998, the Company leased additional manufacturing and office space at a nearby location; this space is under a sublease agreement as of May 2000 to an unrelated party. In October 1999, the Company leased additional manufacturing space in another nearby location. The term of this lease is 5 years with an option to extend for 5 additional years. During August 1998, the Company entered into a three-year lease agreement for a facility located in Santa Clara, CA. The lease has two three-year optional extension terms. The Company incurred $901,000, $649,000, and $541,000 of rent expense in 2000, 1999, and 1998 respectively. The security deposits on these leases amount to $142,000. Future minimum rental payments under the Company's operating leases, excluding real estate taxes, insurance and operating costs paid by the Company required over the initial terms of the leases are as follows (in thousands):

------------------------------ YEAR ENDING MARCH 31, 2001 $ 1,147 2002 1,066 2003 987 2004 928 2005 797 Thereafter -- ---------- $ 4,925 ==========

36 AMERICAN SCIENCE AND ENGINEERING, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) MARCH 31, 2000 Future minimum rental receivables under the Company's operating sub-lease, excluding real estate taxes, insurance and operating costs paid by the Company required over the terms of the lease is as follows (in thousands):

YEAR ENDING MARCH 31, ------------------------------ 2001 $ 67 2002 76 2003 60 2004 -- 2005 -- Thereafter -- ---------- $ 203 ==========

The Company leases certain equipment under capital leases which expire in 2001 and have interest rates ranging from 7.0% to 11.5%.

YEAR ENDING MARCH 31 --------------------- 2001 $ 16 ---------- $ 16 ==========

37 AMERICAN SCIENCE AND ENGINEERING, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) MARCH 31, 2000 4. LINE OF CREDIT In November 1999, the Company expanded its domestic credit facilities with State Street Bank and Trust Company, Fleet National Bank, and the Export Import Bank of the United States (ExIm). The expanded line of credit, which is secured by accounts receivable from ongoing customers as well as inventory, has two components. The first component includes a $20,000,000 revolving line of credit to support working capital and the issuance of standby letters of credit; the second component includes a $15,500,000 ExIm guaranteed export credit agreement to support foreign export contracts. Monthly interest payments on this line of credit are at the prime interest rate. There is a quarter percent (.25%) commitment fee on the unused portion of the line. As of March 31, 2000 and 1999, there was $4,000,000 and $1,000,000 of borrowings against the line, respectively. As of March 31, 2000 there were $2.2 million of outstanding letters of credit in effect against the credit facilities. The Company's credit facility restricts the payment of dividends, except in shares of the Company's stock, without consent of the bank. The credit facility requires the Company to meet certain financial covenants. As of March 31, 2000, the Company was in compliance with all of the financial covenants. The existing line of credit expires on August 31, 2000. The Company anticipates either an extension of the existing line of credit or a new credit facility will be in place by August 31, 2000. 5. INCOME TAXES The provision (benefit) for income taxes for the years ended March 31, 2000, March 31, 1999, and March 31, 1998 consisted of the following (in thousands):

2000 1999 1998 ---- ---- ---- Current: Federal $ 238 $ 83 $ 51 State 94 349 353 -------------- ------------ ------------ 332 432 404 Deferred/(Prepaid): Federal (1,223) 975 1,244 State (102) (43) (49) -------------- ------------ ------------ (1,325) 932 1,195 -------------- ------------ ------------ Change in valuation allowance -- -- (3,562) -------------- ------------ ------------ Total $ (993) $ 1,364 $ (1,963) ============== ============ ============

The difference between the total expected provision (benefit) for income taxes computed by applying the statutory federal income tax rate to income before provision (benefit) for income taxes and the recorded provision (benefit) for income taxes for the three years in the period ended March 31, 2000 follows (in thousands):

2000 1999 1998 ---- ---- ---- Provision for income taxes at statutory rate $ 174 $ 1,159 $ 917 State tax provision (benefit) net of federal effect (5) 202 233 Permanent non-deductible expenses 32 30 17 Expiration of tax credits -- -- 190 Change in valuation allowance -- -- (3,562) Effect of FSC exclusion (430) (19) -- R&D tax credit (700) -- -- Other (64) (8) 242 ------------- ------------ ------------ $ (993) $ 1,364 $ (1,963) ============= ============ ============

38 AMERICAN SCIENCE AND ENGINEERING, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) MARCH 31, 2000 The significant components of the net deferred tax asset at March 31, 2000 and 1999 follow (in thousands):

2000 1999 ----------------------------- ---------------------------- Current Non-current Current Non-current ----------------------------- ---------------------------- ASSETS: Net operating loss carryforwards $ 8 $ -- $ -- $ -- Accounts receivable And unbilled costs and fees 234 -- 275 -- Inventory 222 -- 232 -- Deferred revenue -- 551 233 -- Accrued vacation 261 -- 195 -- Accrued warranty costs 256 -- 146 -- Research & Development 855 -- 67 -- And other tax Credits Other 75 487 222 254 ---------- ------ ------- ------- Net deferred income tax assets $ 1,911 $ 1,038 $ 1,370 $ 254 ---------- ------ ------- ------- ---------- ------ ------- -------

The Company has available general business and other credits of approximately $855,000 expiring at various times through 2018. 39 AMERICAN SCIENCE AND ENGINEERING, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) MARCH 31, 2000 6. COMMON STOCK STOCK OPTION PLANS The Company has various stock option plans for directors, officers, and employees. The Company has the following stock option plans outstanding as of March 31, 2000: 1981, 1984, 1985, and 1987 Stock Option Plans; 1993, 1994-1995 and 1996 Stock Option Plan for Non-employee Directors; two CEO Employment Agreement Plans; 1995 Combination Plan; 1997 and 1998 Non-Qualified Option Plan; 1994-95 Stock Option Plan for New Employees and a 1999 Combination Plan. As of March 31, 2000, 469,183 shares have been reserved and are available for future grant. Vesting periods on these plans range from immediate vesting to four years. Options under these plans are granted at fair market value and generally become exercisable within one to two years of the grant date and terminate ten years from the date of grant. In addition, the Company has a common stock installment purchase plan under which the Board of Directors may grant to key personnel the right to purchase shares of the Company's common stock at fair market value and to pay the purchase price in twelve equal monthly installments. As of March 31, 2000, no shares have been reserved or granted under this plan. The Company has instituted two common stock purchase plans. The Executive Equity Incentive Plan allows an executive officer of the Company to buy original issue Company common stock in any dollar amount up to the gross amount of the annual bonus granted to the Officer and to receive half the number of shares purchased in restricted stock which vests after 3 years. If the employee leaves the Company prior to 3 years then the shares revert back to the Company. The Reload Option Plan allows any eligible employee designated by the Board of Directors to receive new stock options (at an exercise price equal to the fair market value of the common stock on the date of sale of the stock) for every share of Company common stock sold or used to exercise stock options. As of March 31, 2000 and 1999, 2,251 and 0 shares have been reserved and restricted under this plan. PRO FORMA STOCK-BASED COMPENSATION EXPENSE As permitted by SFAS No. 123, "Accounting for Stock-Based Compensation", the Company has elected to continue to apply Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," to account for its stock-based compensation plans. Had compensation cost for awards in 2000, 1999 and 1998 under the Company's stock-based compensation plans been determined based on the fair value at the grant dates consistent with the method set forth under SFAS No. 123, the effect on the Company's net income and earnings per share would have been as follows:

In thousands except per share amounts 2000 1999 1998 --------- ---------- ----------- Net income: As reported $ 1,459 $ 2,045 $ 4,661 Pro forma 186 86 3,200 Income per share - Basic: As reported $ .30 $ .43 $ 1.00 Pro forma .04 .02 .69 Income per share - Diluted: As reported $ .29 $ .40 $ .95 Pro forma .04 .02 .65

40 AMERICAN SCIENCE AND ENGINEERING, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) MARCH 31, 2000 Because the method prescribed by SFAS No. 123 has not been applied to options granted prior to April 1, 1995, the resulting pro forma compensation expense may not be representative of the amount to be expensed in future years. Pro forma compensation expense for options granted is reflected over the vesting period; therefore, future pro forma compensation expense may be greater as additional options are granted. The fair value of each option granted was estimated on the grant date using the Black-Scholes option pricing model with the following weighted average assumptions: risk-free interest rates of 5.97% to 6.83%, 4.38% to 5.79%, and 5.42% to 6.57% for 2000, 1999, and 1998, respectively, and expected life of 5 years, expected volatility of 55%, 47%, and 38% for 2000, 1999, and 1998, respectively, and an expected dividend yield of 0% for all three years. STOCK OPTION ACTIVITY A summary of the Company's stock option activity is as follows:

2000 1999 1998 ----------------- ----------------- --------- WEIGHTED WEIGHTED WEIGHTED AVERAGE AVERAGE AVERAGE NUMBER OF EXERCISE NUMBER OF EXERCISE NUMBER OF EXERCISE SHARES PRICE SHARES PRICE SHARES PRICE Options outstanding, beginning of year 1,338,798 $ 10.60 1,116,030 $ 9.59 1,001,141 $ 10.16 Options granted 672,917 7.75 395,850 12.58 286,608 11.47 Options exercised (18,308) 5.99 (108,485) 7.39 (152,735) 5.79 Options expired (209,008) 11.60 (64,597) 10.74 (18,984) 10.99 --------- -------- -------- Options outstanding, end of year 1,784,399 9.45 1,338,798 10.60 1,116,030 9.59 ========= ========= ========= Options exercisable 1,056,785 10.45 857,283 9.54 652,830 7.90 ========= ======= ======= Options available For grant 469,183 333,292 580,042 ======= ======= ======= Weighted average fair value per share of options granted during the year 2.83 5.86 4.33

41 AMERICAN SCIENCE AND ENGINEERING, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) MARCH 31, 2000 The following summarizes certain data for options outstanding at March 31, 2000:

WEIGHTED WEIGHTED AVERAGE AVERAGE REMAINING NUMBER OF RANGE OF EXERCISE CONTRACTUAL SHARES EXERCISE PRICES PRICE LIFE ------ --------------- ----- ---- Options outstanding, End of year: 123,640 $ 3.25 - $5.25 $ 4.00 3.80 808,900 5.25 - 8.25 7.14 8.60 342,209 8.25 - 11.38 10.66 7.50 509,650 11.38 - 16.25 13.68 7.30 ---------- 1,784,399 9.53 7.70 ---------- ---------- Options Exercisable: 123,640 $ 3.25 - $ 5.25 $ 4.00 200,850 5.25 - 8.25 6.20 296,376 8.25 - 11.38 10.67 435,919 11.38 - 16.25 13.70 ---------- 1,056,785 $ 10.45 ---------- ----------

On April 15, 1998, the Company announced that its Board of Directors adopted a Shareholders' Rights Plan (the Plan) and declared a dividend of one preferred stock purchase right for each outstanding share of common stock. The dividend is payable to all holders of record of shares of common stock as of the close of business on April 17, 1998. The rights become exercisable ten days after a person or group acquires 15% or more of the Company's common stock, and in certain other situations described in the Plan. As of March 31, 2000, no options have been granted or exercised under this plan. 7. NOTE RECEIVABLE FROM OFFICER In January 1994, the Company's Chief Executive Officer purchased 160,000 shares of common stock at a price of $4.00 per share (the fair market value) financed under a note agreement for $640,000 from the Company. This note accrues interest at a rate of 6.26% and will be payable on or before September 15, 2003 or 90 days after termination, as defined. As of March 31, 2000, no interest has been received or paid against this note. 42 8. RELATED PARTY TRANSACTIONS Mr. Al Gladen, a director of the Company until June, 1999, provides engineering and management services to the Company. The compensation paid to Dabster, Inc., a corporation of which Mr. Gladen is the President, in fiscal years 2000, 1999 and 1998 was approximately $20,600, $212,000 and $256,750, for services rendered, respectively. 9. BUSINESS SEGMENT INFORMATION In accordance with the provisions of Statement of Financial Accounting Standards No. 131 (SFAS 131) "Disclosures about Segments of an Enterprise and Related Information", the Company has determined that it has only one operating segment, the X-ray product segment. This includes X-ray detection and imaging products used primarily for the detection of illegal drugs, terrorist explosives, and smuggled goods. The equipment is purchased by sophisticated government and commercial clients who place a premium on the detection of organic material in complex backgrounds and the ability to see the contents of containers with precision. GEOGRAPHICAL DATA All of the Company's export sales originate from the U.S. No assets or operations are maintained in any foreign country. The following table shows the breakdown of Net Sales and Contract revenues to foreign and domestic customers and the major region(s) of export activity (dollars in thousands):

2000 1999 1998 -------------- ------------- ------------- Domestic $ 27,360 $ 26,274 $ 26,799 Export $ 33,314 $ 31,021 $ 5,900 Percent of Export Revenue by Major Region: Middle East & Africa 48.7 % 54.2% 59.7 % Mexico 38.1 29.6 -- Europe 5.7 5.0 8.9 Pacific Rim 4.1 10.5 28.3 All Other 3.4 0.7 3.1

MAJOR CUSTOMERS Sales to major customers (representing in excess of 10% of consolidated revenues) consisted of X-ray product sales of the following: FISCAL 2000: $12,644,000 and $11,779,000 to two customers. FISCAL 1999: $13,306,000, $9,168,000, $6,853,000 and $6,027,000 to four customers. FISCAL 1998: $11,670,000 to one customer. 43 AMERICAN SCIENCE AND ENGINEERING, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) MARCH 31, 2000 10. COMMITMENTS AND CONTINGENCIES DEFERRED COMPENSATION The Company has an unfunded deferred compensation plan, originally adopted in 1976 and amended at various times, for certain current and former directors. This plan provides for periodic payments beginning at age 65, the amount of which depends on their length of service. The Company paid $4,752 in 2000, $4,752 in 1999, and $21,000 in 1998 under this deferred compensation plan. LITIGATION In May, 1996, Vivid Technologies, Inc., filed a civil action against the Company, seeking INTER ALIA a declaratory judgment that Vivid had not infringed upon certain of the Company patents relating to its backscatter technology. The Company responded to Vivid's claim denying their allegations and counter-claiming that Vivid infringed upon one or more of the Company's patents. On May 12, 1997, Vivid filed a proposed Amended Complaint narrowing its claim and seeking INTER ALIA a declaratory judgment that Vivid had not infringed on AS&E United States Patent number 5,253,283, entitled "Inspection Method and Apparatus with Single Color Pixel Imaging" The Company denies Vivid's assertions, and contends that Vivid's claims are without merit and that Vivid is not entitled to the relief sought. The Company served Vivid with discovery requests to which Vivid failed to respond. In September 1997, Vivid filed a motion seeking a stay of discovery and a motion for a summary judgement. The Company responded by seeking a denial or stay of Vivid's motion for summary judgement until discovery could be completed. The Court denied the Company's motion and declared that Vivid is not infringing on the patent. The Company is currently appealing the Court's award of summary judgement and its denial of discovery. The Company appealed and the Court of Appeals overturned the District Court's decision ruling that the District Court's refusal to accept AS&E's claim that Vivid was infringing on AS&E's patent "exceeded the district court's discretionary authority." The Court of Appeals also reversed the district court's finding on summary judgment that Vivid did not infringe on AS&E's patent, as well as the district court's denial of AS&E's request for discovery to oppose Vivid's summary judgment motion. The Company does not expect the outcome of this litigation to have a material impact to its financial position or results of operations. In February 2000, Heimann Systems GmBH filed a civil action in U.S. District Court against the Company alleging that the Company infringed a Heimann patent relating to a mobile vehicle and x-ray examining device. The Company denies Heimann's assertions and believes that Heimann's claims are without merit. The Company does not expect the outcome of this litigation to have a material impact to its financial position or results of operations. 44 AMERICAN SCIENCE AND ENGINEERING, INC. AND SUBSIDIARY UNAUDITED QUARTERLY CONSOLIDATED FINANCIAL DATA FOR THE YEARS ENDED MARCH 31, 2000 AND MARCH 31, 1999 Dollars in thousands, except per share amounts

2000 BY QUARTER 1999 BY QUARTER --------------- --------------- 1ST 2ND 3RD 4TH 1ST 2ND 3RD 4TH --- --- --- --- --- --- --- --- Net sales and contract revenues $14,316 $15,459 $17,217 $ 13,682 $11,692 $14,361 $16,214 $ 15,028 Gross profit 4,445 4,534 4,945 3,256 4,453 4,749 4,967 4,770 Operating Income 346 657 1,111 (1,316)(1) 914 922 1,042 598 Net income $ 192 $ 390 $ 601 $ 276 (2) $ 526 $ 554 $ 617 $ 348 Net income per share - Basic (Note 1) $ .04 $ .08 $ .12 $ .06 $ .11 $ .12 $ .13 $ .07 - Diluted (Note 1) .04 .08 .12 .05 .10 .11 .12 .07

(1) The fourth quarter operating loss is due primarily to three factors (a) lower revenues due to delays in planned awards by government clients, (b) continuance of significant R & D investments on new product development and product enhancements, and (c) continued recruiting, training and infrastructure investment in a global technical support capability. (2) Fourth quarter net income includes a substantial, non-recurring research and development tax credit, as well as the tax benefit relating to the fourth quarter operating loss. 45 SCHEDULE II AMERICAN SCIENCE AND ENGINEERING, INC. AND SUBSIDIARY VALUATION AND QUALIFYING ACCOUNTS AND RESERVES FOR THE YEARS ENDED MARCH 31, 2000, MARCH 31, 1999, AND MARCH 31,1998 DESCRIPTION - ACCOUNTS RECEIVABLE DOLLARS IN THOUSANDS

BALANCE AT CHARGED TO DEDUCTIONS BALANCE BEGINNING COSTS AND FROM AT END OF YEAR EXPENSES RESERVES OF YEAR ---------- ------------ ------------- ------------- 2000 $ 259 $ 150 $ 159 $ 250 1999 $ 116 $ 228 $ 85 $ 259 1998 $ 148 $ -- $ 32 $ 116

DESCRIPTION - ALLOWANCES FOR UNBILLED COST AND FEES DOLLARS IN THOUSANDS

Balance at CHARGED TO DEDUCTIONS BALANCE Beginning COSTS AND FROM AT END of Year EXPENSES RESERVES OF YEAR ---------- ------------ ------------- ------------- 2000 $ 447 $ -- $ -- $ 447 1999 $ 549 $ -- $ 102 $ 447 1998 $ 462 $ 200 $ 113 $ 549

46 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. AMERICAN SCIENCE AND ENGINEERING, INC. DATED: 16 June 2000 By /S/ RALPH S. SHERIDAN ----------------------------- Ralph S. Sheridan, President Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Company and in the capacities and on the dates indicated:

SIGNATURE TITLE DATE --------- ----- ---- President /S/ RALPH S. SHERIDAN and Director (Principal ------------------------------------------ Executive Officer) Ralph S. Sheridan 16 June 2000 Chief Financial Officer, Treasurer and Vice President, Finance /S/ LEE C. STEELE (Principal Financial Officer) 16 June 2000 ------------------------------------------ Lee C. Steele Vice President, Financial Operations /S/ JOSEPH MOFFA and Corporate Controller 16 June 2000 ------------------------------------------ Joseph Moffa /S/ HERMAN FESHBACH Director 16 June 2000 ------------------------------------------ Herman Feshbach /S/ ROGER P. HEINISCH Director 16 June 2000 ------------------------------------------ Roger P. Heinisch /S/ HAMILTON W. HELMER Director 16 June 2000 ------------------------------------------ Hamilton W. Helmer /S/ DONALD J. MCCARREN Director 16 June 2000 ------------------------------------------ Donald J. McCarren /S/ WILLIAM E. ODOM Chairman of the Board 16 June 2000 ------------------------------------------ Director William E. Odom /S/ CARL W. VOGT Director 16 June 2000 ------------------------------------------ Carl W. Vogt

47 EXHIBIT INDEX

EXHIBIT DESCRIPTION OF EXHIBIT (AND STATEMENT PAGE NUMBER NUMBER OF INCORPORATION BY REFERENCE, IF APPLICABLE) (IF FILED) ------ --------------------------------------------- ----------- (3)(a) Restated Articles of Organization of the Company (filed as an Exhibit to Company's Annual Report on Form 10-K for the year ended September 30,1967, and incorporated herein by reference) (3)(b) Articles of Amendment to Restated Articles of Organization of Company (filed as Exhibit 2(a)(ii)(B) to the Company's Registration Statement on Form S-7, No. 2-56452, filed May 25, 1976, and incorporated herein by reference) (3)(c) Articles of Amendment to Restated Articles of Organization of Company (filed as Exhibit 12 to the Company's Annual Report on Form 10-K for the year ended March 31, 1976, and incorporated herein by reference) (3)(d) By-laws of Company, as amended (filed as Exhibit 2(a)(iii) to Company's Registration Statement on Form S-7, No. 2-56452, filed May 25, 1976, and incorporated herein by reference) (4) Shareholders Rights Plan (filed as Exhibit to the Company's filing on Form dated , 1992 and incorporated herein by references) (10)(a)(ii) Deferred Compensation Plan for Herman Feshbach (filed as Exhibit 20 to the Company's Annual Report on Form 10-K for the year ended March 31, 1976, and incorporated herein by reference) (10)(a)(iv) Amendment to Deferred Compensation Plans for Ismael Escobar and Herman Feshbach (filed as Exhibit 7 to the Company's Annual Report on Form 10-K for the fiscal year ended March 31, 1980, and incorporated herein by reference) (10)(a)(v) Deferred Compensation Plan for Marie Spaulding (filed as Exhibit (10)(a)(v) to the Company's Annual Report on Form 10-K for the year ended March 31, 1988, and incorporated herein by reference) (10)(b)(I) 1981 Incentive Stock Option Plan (filed as Exhibit (10)(b)(I) to the Company's Annual Report on Form 10-K for the year ended March 31, 1988, and incorporated herein by reference) (10)(b)(iii) 1984 Incentive Stock Option Plan (filed as Exhibit (10)-3 to the Company's Annual Report on Form 10-K for the year ended March 31, 1985, and incorporated herein by reference) (10)(b)(iv) Amendment 1 to 1981 Incentive Stock Option Plan (filed as Exhibit (10)(b)(iv) to the Company's Annual Report on Form 10-K for the year ended March 31, 1988, and incorporated herein by reference) (10)(b)(v) Amendment 1 to 1984 Incentive Stock Option Plan (filed as Exhibit (10)(b)(v) to the Company's Annual Report on Form 10-K for the year ended March 31, 1988, and incorporated herein by reference) (10)(b)(vi) 1987 General Stock Option Plan (filed as an exhibit to the Company's current report on Form 8-K for the month of October 1987, and incorporated herein by reference)

48 EXHIBIT INDEX

EXHIBIT DESCRIPTION OF EXHIBIT (AND STATEMENT PAGE NUMBER NUMBER OF INCORPORATION BY REFERENCE, IF APPLICABLE) (IF FILED) ------ --------------------------------------------- ----------- (10)(b)(ix) 1996 Stock Plan For Non-Employee Directors (filed as Exhibit 99 to the Company's Registration Statement on Form S-8, File No. 333-09257, filed on July 31, 1996, and incorporated herein by reference) (10)(b)(x) Executive Equity Incentive Plan (filed as Exhibit 99 to the Company's Registration Statement on Form S-8, File No. 333-27929, filed on May 28, 1997 and incorporated herein by reference) (10)(b)(xi) Reload Option Plan (filed as Exhibit (10)(b)(xi) to the Company's Annual Report on Form 10-K for the year ended March 28, 1997 and incorporated herein by reference) (10)(b)(xii) 1997 Non-Qualified Stock Option Plan (filed as Exhibit 99 to the Company's Registration Statement on Form S-8, File No. 333-27927, filed on May 28, 1997 and incorporated herein by reference) (10)(b)(xiii) 1998 Non-Qualified Stock Option Plan (filed as Exhibit (10) (b) (xiii) to the Annual Report on Form 10-K for the year ended March 31, 1998, and incorporated herein by reference) (10)(b)(xv) Employment Agreement between the Company and Dr. Joseph Callerame dated May 6, 1998, (filed as Exhibit (10) (b) (xv) to the Annual Report on Form 10-K for the year ended March 31, 1998, and incorporated herein by reference) (10)(b)(xvii) Employment Agreement between the Company and Lee C. Steele dated September 29, 1997, (filed as Exhibit (10) (b) (xvii) to the Annual Report on Form 10-K for the year ended March 31, 1998, and incorporated herein by reference) (10)(c)(i) Lease of Billerica property (filed as Exhibit 10(c) to the Company's Annual Report on Form 10-K for the year ended March 31, 1995 and incorporated herein by reference) (10)(c)(ii) Amendment to Lease of Billerica property (filed as to the Company's Annual Report on Form 10-K for the year ended March 28, 1997 and incorporated herein by reference) (22) Identification of Company's subsidiary, AS&E Radiography, Inc., incorporated in Massachusetts (filed as Exhibit (22) to Company's Annual Report on Form 10-K for the year ended March 31, 1988, and incorporated herein by reference) (23) Consent of Independent Public Accountants (10)(c)(iii) Lease of 33 Manning Road, Billerica, MA (10)(c)(iv) 1999 Combination Stock Option Plan (filed as Exhibit 99 to the Company's Registration Statement on Form S-8, File No 333-91801, filed on November 30, 1999 and incorporated herein by reference). (10)(c)(v)* Employment Agreement between the Company and Ralph S. Sheridan dated September 25, 1999. (10)(c)(vi)* Employment Agreement between the Company and Ralph G. Foose dated September 1, 1999.

49 EXHIBIT INDEX

EXHIBIT DESCRIPTION OF EXHIBIT (AND STATEMENT PAGE NUMBER NUMBER OF INCORPORATION BY REFERENCE, IF APPLICABLE) (IF FILED) ------ --------------------------------------------- ----------- (10)(c)(vii)* Employment Agreement between the Company and Edwin L. Lewis dated February 3, 2000. (10)(c)(viii) Sub-lease from the Company of 30 Manning Road, Billerica, Massachusetts (filed as Exhibit (10)(c)(viii) to the Annual Report on Form 10-K for the year ended March 31, 2000, and incorporated herein by reference). (27) Financial Data Schedule.

*Contract with Management 50