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UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

For the period ended October 31, 2003

OR

For the transition period from                      to                     

Commission File Number 0-6715

ANALOGIC CORPORATION

(978) 977-3000

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. Yesx Noo

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yesx Noo

The number of shares of Common Stock outstanding at November 28, 2003 was 13,517,281.

ANALOGIC CORPORATION

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Part I. FINANCIAL INFORMATION

ITEM 1. Financial Statements

ANALOGIC CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In thousands, except per share data)

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

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ANALOGIC CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands, except per share data)

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

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ANALOGIC CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)

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

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ANALOGIC CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands except per share data)

1. Basis of presentation:

The unaudited condensed consolidated financial statements of Analogic Corporation (the “Company”) presented herein have been prepared pursuant to the rules of the Securities and Exchange Commission for quarterly reports on Form 10-Q and do not include all of the information and note disclosures required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of management, the accompanying unaudited condensed consolidated financial statements contain all adjustments (consisting solely of normal recurring adjustments) necessary for a fair presentation of the results for all periods presented. The results of operations for the three months ended October 31, 2003, are not necessarily indicative of the results to be expected for the fiscal year ending July 31, 2004, or any other interim period.

These statements should be read in conjunction with the consolidated financial statements and notes thereto for the year ended July 31, 2003, included in the Company’s Form 10-K as filed with the Securities and Exchange Commission on October 29, 2003.

The financial statements have not been audited by independent certified public accountants. The condensed consolidated balance sheet as of July 31, 2003, contains data derived from audited financial statements.

Certain financial statement items have been reclassified to conform to the current year’s financial presentation format. The Company reclassified certain intangibles and goodwill balances related to the Company’s 19% ownership of Cedara Software Corporation to investment in and advances to affiliated companies in the Condensed Consolidated Balance Sheets as follows:

The Company also reclassified in the Condensed Consolidated Statements of Operations the amortization of intangible assets related to Cedara Software Corporation from general and administrative expense to equity in unconsolidated affiliates as follows:

2. Stock-based compensation:

As permitted by Statement of Financial Accounting Standards No. 148 (“SFAS 148”), “Accounting for Stock-Based Compensation-Transition and Disclosure, an amendment of FASB statement No. 123,” and Statement of Financial Accounting Standards No. 123 (“SFAS 123”) “Accounting for Stock-Based Compensation,” the Company continues to apply the accounting provisions of the Accounting Principle Board (“APB”) No. 25, and related interpretations, with regard to the measurement of compensation cost for options granted under the Company’s equity compensation plans.

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ANALOGIC CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

If the Company had adopted the fair value method described in SFAS 123, the results of operations would have been reported as follows:

3. Balance sheet information:

     Additional information for certain balance sheet accounts is as follows for the dates indicated:

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ANALOGIC CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

4. Business combinations:

On October 20, 2003, Analogic’s 100% owned subsidiary Camtronics Medical Systems acquired certain assets and liabilities from Quinton, Inc. (“QTN”), a Washington corporation, primarily related to intellectual property rights and interests associated with QTN’s Q-Cath hemodynamics and monitoring system business. The Company’s total investment amounted to $1,750, with payments of $1,000 due at closing and $750 due one year from the closing date. In connection with the above transaction, the parties also entered into a Transition Service Agreement and a Cooperative Marketing Agreement. Under the terms of the Transition Service Agreement, QTN has agreed to provide maintenance service to existing and new customers for a period of six months from the closing date. The Cooperative Marketing Agreement, which has a term of four years, provides for QTN to earn up to an additional $1,500 in commissions upon the successful conversion of QTN Q-Cath systems to Camtronics Physiolog and Vericis products. The majority of the purchase price has been included in intangibles assets in the Condensed Consolidated Balance Sheets. The Company is in the process of finalizing the allocation of the purchase price and the estimated useful life of the assets acquired.

5. Investments in and advances to affiliated companies:

Summarized results of operations of the Company’s partially owned equity affiliates are as follows:

6. Goodwill and acquired intangible assets:

As of August 1, 2002, Analogic adopted Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets” (“SFAS No. 142”). Under SFAS No. 142, goodwill and certain other intangible assets with indefinite lives are no longer amortized, but instead are reviewed for impairment annually, or more frequently if impairment indicators arise. SFAS No. 142 requires that the Company identify its reporting units and determine the carrying value of each of those reporting units by assigning assets and liabilities, including existing goodwill and intangible assets, to those reporting units. The Company performed its annual goodwill impairment test during the quarter ended October 31, 2003, and determined that goodwill was not impaired. The Company will continue to perform its annual goodwill impairment test during the first quarter of each fiscal year, as well as on an event-driven basis, as required under SFAS No. 142.

Acquired amortizable intangible assets consist of the following:

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ANALOGIC CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

The increase of $1,476 in intellectual property relates to intellectual property acquired as part of the Quinton acquisition.

Amortization of acquired intangible assets was $735 and $111 for the three months ended October 31, 2003 and 2002, respectively.

The estimated future amortization expense related to acquired intangible assets in the current fiscal year, and each of the five succeeding fiscal years, is expected to be as follows:

7. Net income per share:

Basic earnings per share are computed using the weighted average number of common shares outstanding during the period. Diluted earnings per share are computed using the sum of the weighted average number of common shares outstanding during the period and, if dilutive, the weighted average number of potential shares of common stock, including unvested restricted stock and the assumed exercise of stock options using the treasury stock method.

The following table sets forth the computation of basic and diluted earnings per share:

Options to purchase 34 and 264 shares of common stock with exercise prices greater than the average market price of the Company’s common stock during the three months ended October 31, 2003 and 2002, respectively, were not included in the computation of diluted earnings per share because their inclusion would have been antidilutive.

8. Dividends:

The Company declared dividends of $.08 per common share on October 14, 2003, payable on November 11, 2003 to shareholders of record on October 28, 2003.

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ANALOGIC CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

9. Comprehensive income:

The following table presents the calculation of total comprehensive income and its components:

10. Supplemental disclosure of cash flow information:

Changes in operating assets and liabilities, net of the impact of acquisitions, are as follows:

11. Taxes:

The effective tax rate for the first quarter of fiscal 2004 was 20% as compared to 38% for the same period last year. The decrease in the tax rate of 18% was primarily due to estimated benefits from tax exempt interest, extraterritorial income and the research and development credit on a lower dollar base of pretax income for fiscal year 2004 when compared to the first quarter of fiscal 2003.

12. Segment information:

The Company operates in three reporting segments. The two primary reporting segments conduct business within the electronics industry: Imaging Technology Products and Signal Processing Technology Products. Imaging Technology Products consist primarily of electronic systems and subsystems for medical imaging equipment and advanced explosive detection systems. Signal Processing Technology Products consist of Analog to Digital (A/D) converters and supporting modules, and high-speed digital signal processors. The Company’s Corporate and Other segment represents the Company’s hotel business and net interest income.

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ANALOGIC CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

Assets of Corporate and Other consist primarily of the Company’s cash equivalents, marketable securities, fixed and other assets, not specifically identifiable. The table below presents information about the Company’s reportable segments:

(A)

Includes cash equivalents and marketable securities of $152,718 and $167,229 at October 31, 2003, and July 31, 2003, respectively.

13. Commitments and guarantees:

During the third quarter of fiscal 2003, the Company commenced the construction of a 100,000 square foot addition to its headquarters building in Peabody, Massachusetts. This two-story addition will enable the Company to further consolidate its existing Massachusetts operations and to expand production capacity for its medical and security imaging system businesses. The building, including fit-up, is estimated to cost approximately $12,500 and will be financed by internally generated cash.

The Company has agreements whereby it indemnifies its officers and directors for certain events or occurrences while the officer or director is, or was serving, at the Company’s request in such capacity. The term of the indemnification period is for the officer’s or director’s lifetime. The potential amount of future payments the Company could be required to make under these indemnification agreements is unlimited. Also, to the extent permitted by Massachusetts law, the Company’s Articles of Organization, require the Company to indemnify directors of the Company and the Company’s by-laws require the Company to indemnify the present or former directors and officers of the Company, and also permit indemnification of other employees and agents of the Company for whom the Board of Directors from time to time authorizes indemnification. In no instance, however, will indemnification be granted to a director otherwise entitled thereto who is determined to have (a) committed a breach of loyalty to the Company or its stockholders, (b) committed acts or omissions not in good faith or which involved intentional misconduct or a knowing violation of the law, or (c) derived any improper personal benefit in connection with a particular transaction. Because no claim for indemnification has been made by any person covered by said agreements, and/or the relevant provisions of the Company’s Articles or By-laws, the Company believes that its estimated exposure for these indemnification obligations is currently minimal.

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ANALOGIC CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

Accordingly, the Company has no liabilities recorded for these indemnity agreements and requirements as of October 31, 2003.

The Company’s standard original equipment manufacturing and supply agreements entered into in the ordinary course of business typically contain an indemnification provision pursuant to which the Company indemnifies, holds harmless, and agrees to reimburse the indemnified party for losses suffered or incurred by the indemnified party in connection with any United States patent, or any copyright or other intellectual property infringement claim by any third party with respect to the Company’s products. Such provisions generally survive termination or expiration of the agreements. The potential amount of future payments the Company could be required to make under these indemnification provisions is, in some instances, unlimited. The Company has never incurred costs to defend lawsuits or settle claims related to these indemnification agreements. As a result, the Company believes that its estimated exposure on these agreements is currently minimal. Accordingly, the Company has no liabilities recorded for these agreements as of October 31, 2003.

In fiscal 2002, the Company acquired a 19% interest in Cedara Software Corporation (“Cedara”) of Mississauga, Ontario, Canada. As part of the Company’s investment agreement, the Company has guaranteed certain debt owed by Cedara to its bank lender through the provision of a credit facility with the Company’s principal bank for approximately $11,400 based upon Cedara’s funding requirements. To date, no claims have been asserted against the Company in connection with the guarantee of Cedara’s debt. Accordingly, the Company has no liabilities recorded in connection with the Cedara guarantee as of October 31, 2003.

The Company warrants that its products will perform in all material respects in accordance with its standard published specification in effect at the time of delivery of the products to the customer for a period ranging from 12 to 18 months from the date of delivery. The Company provides for the estimated cost of product and service warranties based on specific warranty claims, claim history and engineering estimates, where applicable. The following table presents the Company’s product warranty liability for the reporting periods:

14. Subsequent events:

On December 10, 2003, the Company announced that its Board of Directors, on December 8, 2003, declared dividends of $.08 per common share payable on January 5, 2004 to shareholders of record on December 22, 2003.

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ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion provides an analysis of the Company’s financial condition and results of operations and should be read in conjunction with the Unaudited Condensed Consolidated Financial Statements and notes thereto included elsewhere in this Quarterly Report on Form 10-Q. The discussion below contains forward-looking statements that involve risks and uncertainties. See “Business Environment and Risk Factors” below.

Critical Accounting Policies, Judgments, and Estimates

The U.S. Securities and Exchange Commission (“SEC”) has issued Financial Reporting Release No. 60, “Cautionary Advice Regarding Disclosure About Critical Accounting Policies” (“FRR 60”), suggesting companies provide additional disclosure and commentary on their critical accounting policies. In FRR 60, the SEC defined the most critical accounting policies as the ones that are most important to the portrayal of a company’s financial condition and operating results, and require management to make its most difficult and subjective judgments, often as a result of the need to make estimates of matters that are inherently uncertain. In the case of the Company’s critical accounting policies, these judgments are based on its historical experience, terms of existing contracts, the Company’s observance of trends in the industry, information provided by its customers and information available from other outside sources, as appropriate. The Company’s critical accounting policies include:

Revenue Recognition

The Company recognizes the majority of its revenue in accordance with SEC Staff Accounting Bulletin No. 101, “Revenue Recognition in Financial Statements” (“SAB 101”). Revenue related to product sales is recognized upon shipment provided that title and risk of loss has passed to the customer, there is persuasive evidence of an arrangement, the sales price is fixed or determinable, collection of the related receivable is reasonably assured and customer acceptance criteria, if any, have been successfully demonstrated. For product sales with acceptance criteria that are not successfully demonstrated prior to shipment, revenue is recognized upon customer acceptance provided all other revenue recognition criteria have been met. Hardware maintenance revenues are recognized ratably over the life of the contracts. For business units that sell software licenses, the Company recognizes revenue in accordance with the American Institute of Certified Public Accountants (“AICPA”)’s Statement of Position 97-2, “Software Revenue Recognition” (“SOP 97-2”). The application of SOP 97-2 requires judgment, including whether a software arrangement includes multiple elements, and if so, whether vendor-specific objective evidence (VSOE) of fair value exists for those elements. License revenue is recognized upon delivery, provided that persuasive evidence of an arrangement exists, no significant obligations with regards to installation or implementation remain, fees are fixed or determinable, collectability is reasonably assured and customer acceptance, when applicable, is obtained. Software maintenance revenues are recognized ratably over the life of the contracts. Service revenues are recognized at the time the services are rendered. The Company provides engineering services to some of its customers on a contractual basis and recognizes revenue using the percentage of completion method. The Company estimates the percentage of completion on contracts with fixed fees on a monthly basis utilizing hours incurred to date as a percentage of total estimated hours to complete the project. If the Company does not have a sufficient basis to measure progress towards completion, revenue is recognized upon completion of the contract. When total cost estimates exceed revenues, the Company accrues for the estimated losses immediately. Revenue related to the hotel operations is recognized as services are performed.

Camtronics’ revenues are derived primarily from the sale of Digital Cardiac Information Systems. System sales revenues consist of the following components: computer software licenses, computer hardware, installation support, and sublicensed software. In addition, Camtronics generates revenues related to system sales for software support, hardware maintenance, training, consulting and other professional services.

Camtronics recognizes revenue in accordance with the provisions of SOP 97-2. SOP 97-2 requires revenue earned on software arrangements involving multiple-elements to be allocated to each element based on the fair values of those elements or by use of the residual method. Under the residual method, revenue is recognized in a multiple-element arrangement when company-specific objective evidence of fair value exists for all of the undelivered elements in the arrangement, which is determined by the price charged when that element is sold separately (i.e. professional services, software support, hardware maintenance, hardware and sublicensed software), but does not exist for one or more of the delivered elements in the arrangement (i.e. software solutions). Specifically, Camtronics determines the fair value of the maintenance

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portion of the arrangement based on the renewal price of the maintenance charged to clients, professional services portion of the arrangement, other than installation services, based on hourly rates which Camtronics charges for these services when sold apart from a software license, and the hardware and sublicensed software based on the prices for these elements when they are sold separately from the software. If evidence of the fair value cannot be established for the undelivered elements of a license agreement, the entire amount of revenue under the arrangement is deferred until these elements have been delivered or objective evidence of fair value for the remaining undelivered element is established.

Inherent in the revenue recognition process are significant management estimates and judgments, which influence the timing and the amount of revenue recognition. Camtronics provides several models for the procurement of its digital cardiac information systems. The predominant model includes a perpetual software license agreement, project-related installation services, professional consulting services, computer hardware and sub-licensed software and software support.

Camtronics provides installation services, which include project-scoping services, conducting pre-installation audits, detailed installation plans, actual installation of hardware components, and testing of all hardware and software installed at the customer site. Because installation services are deemed to be essential to the functionality of the software, software license and installation services fees are recognized upon completion of installation.

Camtronics also provides professional consulting services, which include consulting activities that fall outside of the scope of the standard installation services. These services vary depending on the scope and complexity requested by the client. Examples of such services may include additional database consulting, system configuration, project management, interfacing to existing systems, and network consulting. Professional consulting services generally are not deemed to be essential to the functionality of the software, and thus, do not impact the timing of the software license revenue recognition. Professional consulting service revenue is recognized as the services are performed.

Hardware and software maintenance fees are marketed under annual and multi-year arrangements and are recognized as revenue ratably over the contracted maintenance term.

Deferred revenue is comprised of 1) license fee, maintenance and other service revenues for which payment has been received and for which services have not yet been performed and 2) revenues related to delivered components of a multiple-element arrangement for which fair value has not been determined for components not yet delivered or accepted by the customer. Deferred costs represent costs related to these revenues; for example, costs of goods sold and services provided and sales commission expenses.

Inventories

The Company values inventory at the lower of cost or market using the first-in, first-out (FIFO) method. Management assesses the recoverability of inventory based on types and levels of inventory held, forecasted demand and changes in technology. These assessments require management judgments and estimates, and valuation adjustments for excess and obsolete inventory may be recorded based on these assessments.

Concentration of Credit Risk

Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of cash and cash equivalents, marketable securities and accounts receivable. The Company places its cash investments and marketable securities in high credit quality financial instruments and, by policy, limits the amount of credit exposure to any one financial institution. The Company grants credit to domestic and foreign original equipment manufacturers, distributors and end users, and performs ongoing credit evaluations on its customer’s financial condition. The Company continuously monitors collections and payments from its customers and maintains a provision for estimated credit losses based upon historical experience and any specific customer collections issues that have been identified. While such credit losses have historically been within expectations and provisions established, there is no guarantee that the Company will continue to experience the same credit loss rates as in the past. Since the accounts receivable are concentrated in a relatively few number of customers, a significant change in liquidity or financial position of any one of these customers could have a material adverse impact on the collectability of accounts receivables and future operating results.

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Warranty Reserve

The Company provides for the estimated cost of product warranties at the time products are shipped. Although the Company engages in extensive product quality programs and processes, its warranty obligation is affected by product failure rates and service delivery costs incurred in correcting a product failure. Should actual product failure rates or service costs differ from the Company’s estimates, which are based on specific warranty claims, historical data and engineering estimates, where applicable, revisions to the estimated warranty liability would be required. Such revisions could adversely affect the Company’s operating results. The Company warrants that its products will perform in all material respects in accordance with its standard published specifications in effect at the time of delivery of the products to the customer for a period ranging for 12 to 18 months from the date of delivery.

Investments in and Advances to Affiliated Companies

The Company has investments in affiliated companies related to areas of the Company’s strategic focus. The Company accounts for these investments using the equity method of accounting. In assessing the recoverability of these investments, the Company must make certain assumptions and judgments based on changes in the Company’s overall business strategy, the financial condition of the affiliated companies, market conditions and the industry and economic environment in which the entity operates. Adverse changes in market conditions or poor operating results of affiliated companies could result in losses or an inability to recover the carrying value of the investments, thereby requiring an impairment charge in the future.

Goodwill, Intangible Assets, and Other Long-Lived Assets

Intangible assets consist of goodwill, intellectual property, licenses, and capitalized software. Other long-lived assets consist primarily of property, plant, and equipment. Intangible assets and property, plant, and equipment, excluding goodwill, are amortized using the straight-line method over their estimated useful life. The carrying value of goodwill and other intangible assets is reviewed on a quarterly basis for the existence of facts and circumstances both internally and externally that may suggest impairment. Factors which the Company considers important and that could trigger an impairment review include significant underperformance relative to expected historical or projected future operating results and significant negative industry or economic trends. The Company determines whether an impairment has occurred based on gross expected future cash flows, and measures the amount of the impairment based on the related future discounted cash flows. The cash flow estimates used to determine impairment, if any, contain management’s best estimates, using appropriate and customary assumptions and projections at the time. In accordance with SFAS No. 142, “Goodwill and Other Intangible Assets,” the Company has ceased amortizing goodwill as of August 1, 2002 and will annually review goodwill for potential impairment during the first quarter of each fiscal year, as well as on an event-driven basis, using a fair value approach.

Income Taxes

As part of the process of preparing the Company’s financial statements, the Company is required to estimate its income taxes in each of the jurisdictions in which it operates. This process involves assessing temporary differences resulting from different treatment of items for tax and accounting purposes. These differences result in deferred tax assets and liabilities, which are included within the balance sheet. The Company must then assess the likelihood that the deferred tax assets will be recovered from future taxable income and, to the extent that recovery is not more likely than not, a valuation allowance must be established. To the extent a valuation allowance is established, the Company must include an expense within the tax provision in the statement of operations. In the event that actual results differ from these estimates, the provision for income taxes could be materially impacted.

Results of Operations
Three Months Fiscal 2004 (10/31/03) vs. Three Months Fiscal 2003 (10/31/02)

Product revenue for the three months ended October 31, 2003 was $63,912 compared to $123,228 for the same period last year, a decrease of $59,316 or 48%. The decrease in product revenue was primarily due to sales of Imaging Technology Products which decreased $59,796 or 51% to $57,852 for the quarter ended October 31, 2003 from $117,648 for the quarter ended October 31, 2002. The decrease in sales of Imaging Technology Products was primarily the result of a reduction in sales of the EXACT systems and spare parts which the Company supplied to L-3 Communications from $72,966 for the quarter ended October 31, 2002 to $3,300 for the quarter ended October 31, 2003. This was partially offset by increased sales of systems and subsystems for medical imaging equipment.

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Engineering revenue for the three months ended October 31, 2003 was $8,621 compared to $6,380 for the same period last year, an increase of $2,241 or 35%. This increase was primarily due to revenue of $2,775 for the sale of a license of intellectual property to the Company’s affiliate Shenzen Anke High-Tech Co. Ltd. (“SAHCO”) related to the manufacturing of anatom whole-body CT systems in China.

Other revenue of $2,436 and $2,676 represents revenue for the hotel operation for the three months ended October 31, 2003 and 2002, respectively.

Cost of product sales was $39,308 for the quarter ended October 31, 2003 compared to $67,633 for the same period last year. Cost of product sales as a percentage of product revenue was 62% and 55% for the three months ended October 31, 2003 and 2002, respectively. The increase in cost of product sales percentage over the prior year quarter was primarily attributable to lower sales of security imaging technology products, which have lower cost of sales then most of the Company’s other products.

Cost of engineering sales was $2,804 for the three months ended October 31, 2003 compared to $4,896 for the same period last year. Cost of engineering sales as a percentage of engineering revenue was 33% and 77% for the three months ended October 31, 2003 and 2002, respectively. The decrease in engineering cost of sales percentage over the prior year was primarily due to the license sale to SAHCO with no corresponding cost, and lower costs related to customer funded projects.

Research and product development expenses were $15,303 for the three months ended October 31, 2003 or 20% of total revenue, compared to $11,377, or 9% of total revenue for the same period last year. The increase of $3,926 was due to the Company continuing to focus substantial resources on developing new generations of medical imaging equipment, including innovative CT systems for niche markets, advanced digital X-ray systems and subsystems for general radiography and mammography, and an extended family of multislice CT Data Acquisition Systems for both medical and security markets. In addition, the Company is developing security-imaging systems for a variety of applications. The Company is in the initial stages of testing prototypes of an automated, CT-based portal screening system that can scan carry-on baggage at airports, “carry-in” baggage at public buildings, and parcels for corporations and delivery services. In addition, the Company continues to increase its investment in a number of other development projects to meet diverse, evolving security needs in the United States and abroad.

Selling and marketing expenses were $8,083 or 11% of total revenue for the three months ended October 31, 2003, as compared to $7,934 or 6% of total revenue for the same period last year. The percentage increase was primarily due to lower revenues than in the same period last year.

General and administrative expenses were $8,473, or 11% of total revenue, for the three months ended October 31, 2003, as compared to $7,833 or 6% of total revenue for the same period last year. The increase of $640 was primarily due to intangible amortization related to acquired intangible assets of $632, and incremental costs due to the acquisition of Sound Technology Inc. and VMI Medical Inc. of $551, partially offset by a reduction in general operating expenses of $543.

Interest income was $1,124 for the three months ended October 31, 2003, compared to $1,288 for the same period last. The decrease was due to lower invested cash balances and effective interest rates.

The Company recorded a loss of $157 and $1,238 related to equity in unconsolidated affiliates for the three months ended October 31, 2003, and 2002, respectively. The loss consists primarily of $128 and $469 reflecting the Company’s share of losses in SAHCO, a gain of $244 versus a loss of $495 reflecting the Company’s share of equity in Cedara Software, for the three months ended October 31, 2003 and 2002, respectively. In addition, the Company recognized expenses of $252 related to the amortization of certain intangibles of Cedara Software, for both the three months ended October 31, 2003 and 2002.

Other income, consisting primarily of currency exchange gain, was $106 and $343 for the three months ended October 31, 2003 and 2002, respectively.

The effective tax rate for the first quarter of fiscal 2004 was 20% as compared to 38% for the same period last year. The decrease in the tax rate of 18% was primarily due to estimated benefits from tax exempt interest, extraterritorial income and the research and development credit on a lower dollar base of pretax income for fiscal year 2004 when compared to the first quarter of fiscal 2003.

Net income for the three months ended October 31, 2003 was $631 or $0.05 per basic and diluted share, as compared to $19,650 or $1.49 per basic share and $1.48 per diluted share for the same period last year. The decrease in net income over the prior year was primarily the result of lower sales of the EXACT systems and associated spare parts.

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Liquidity and Capital Resources

The Company’s balance sheet reflects a current ratio of 3.9 to 1 at October 31, 2003 compared to 3.8 to 1 at July 31, 2003. Liquidity is sustained principally through funds provided from operations, with short-term deposits and marketable securities available to provide additional sources of cash. The Company places its cash investments in high credit quality financial instruments and, by policy, limits the amount of credit exposure to any one financial institution. The Company’s debt to equity ratio was .27 to 1 at October 31, 2003 and .28 to 1 at July 31, 2003. The Company believes that its balances of cash and cash equivalents, marketable securities and cash flows expected to be generated by future operating activities will be sufficient to meet its cash requirements over at least the next twelve months.

The Company faces limited exposure to financial market risks, including adverse movements in foreign currency exchange rates and changes in interest rates. These exposures may change over time as business practices evolve and could have a material adverse impact on the Company’s financial results. The Company’s primary exposure has been related to local currency revenue and operating expenses in Canada and Europe.

The carrying amounts reflected in the unaudited condensed consolidated balance sheets of cash and cash equivalents, trade receivables, and trade payables approximate fair value at October 31, 2003, due to the short maturities of these instruments.

The Company maintains a bond investment portfolio of various issuers, types, and maturities. This portfolio is classified on the balance sheet as either cash and cash equivalents or marketable securities, depending on the lengths of time to maturity from original purchase. Cash equivalents include all highly liquid investments with maturities of three months or less from the time of purchase. Investments having maturities from the time of purchase in excess of three months are stated at amortized cost, which approximates fair value, and are classified as available for sale. A rise in interest rates could have an adverse impact on the fair value of the Company’s investment portfolio. The Company does not currently hedge these interest rate exposures.

Cash used in operations was $2,231 for the three months ended October 31, 2003, compared with cash flow generated of $5,608 for the same period last year. The decrease in cash flows from operations was primarily the result of a decrease in net income of $19,019 and a net decrease based on changes in operating assets and liabilities of $11,995.

Net cash used in investing activities was $4,534 for the three months of fiscal 2004 compared to $4,938 for the same period last year. The decrease in net cash used of $404 was primarily due to $780 of marketable securities which matured, partially offset by a reduction in spending of $751 related to business acquisitions, and a reduction of $516 related to return of investment from an affiliated company.

Net cash provided by financing activities was $795 for the three months of fiscal 2004 versus $34 for the prior year period. The increase in cash provided by financing activities of $761 was primarily the result of issuance of stock pursuant to employee stock option and employee stock purchase plans.

The Company’s contractual obligations at October 31, 2003, and the effect such obligations are expected to have on liquidity and cash flows in future periods are as follows:

The Company currently has approximately $30,900 in revolving credit facilities with various banks available for direct borrowings. As of October 31, 2003, there were no direct borrowings. However, the Company has guaranteed through a provision of a credit facility with its principal bank the debt owed by Cedara to its bank lender for approximately $11,400.