ANALOGIC CORP - 10-Q Quarterly Report

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 þ No o

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes þ No o

The number of shares of Common Stock outstanding at February 27, 2004 was 13,599,572.

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

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 generally accepted accounting principles 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 the operations for the three and six months ended January 31, 2004, 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 in the prior fiscal year have been reclassified to conform to the current year’s financial presentation format. The Company reclassified $2,183 of intangibles and $1,290 of goodwill related to the Company’s 17.6% ownership of Cedara Software Corporation (“Cedara”) to investment in and advances to affiliated companies in the Condensed Consolidated Balance Sheets as of July 31, 2003.

The Company also reclassified amortization of intangible assets of $252 and $504 related to Cedara from general and administrative expense to equity in unconsolidated affiliates in the Condensed Consolidated Statements of Operations for the three and six months period ended January 31, 2004, respectively.

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.

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

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

On October 20, 2003, Analogic’s 100% owned subsidiary Camtronics Medical Systems Ltd. (“Camtronics”) 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. Camtronics decision to acquire these assets and liabilities was based on its desire to expand its current product offerings and gain access to QTN’s existing customer base. 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. In addition QTN will market the electronic medical records products of Camtronics through its specialized sales force in the primary care market. The Company allocated the purchase price of $1,750 to the acquired assets, $250 to inventory and $1,500 to the customer list, based on their relative fair value. The customer list will be amortized over the estimated useful life of four years, commencing in November 2003.

During the second quarter of fiscal year 2004 the Company’s investment in Cedara as a percentage of Cedara’s total shares outstanding decreased from 19% to 17.6%. The reduction in the investment was a result of the Company’s decision not to exercise its preemptive right to maintain its ownership interest of 19% at the time Cedara converted its outstanding convertible debentures into common shares and issued common shares on the exercise of employees stock options.

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

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.

The increase of $1,617 in intangible assets relates primarily to the customer list acquired as part of the acquisition of certain assets from Quinton.

Amortization of acquired intangible assets was $1,568 and $681 for the six months ended January 31, 2004 and 2003, 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:

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:

The Company declared dividends of $.08 per common share on December 8, 2003, payable on January 5, 2004 to shareholders of record on December 22, 2003 and $.08 per common share on October 14, 2003, payable November 11, 2003 to shareholders of record on October 28, 2003.

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

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

The effective tax rate for the three and six months ended January 31, 2004 was 28% and 27%, respectively, as compared to 38% for the same periods last year. The decrease in the effective tax rates from prior year was due primarily to a relative increase in the estimated benefits from tax exempt interest and research and development credits as a result of a lower dollar base of pre-tax income.

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


(A)	Includes cash equivalents and marketable securities of $147,066 and $167,229 at January 31, 2004, and July 31, 2003, respectively.

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 January 31, 2004.

In the fiscal year 2002, the Company acquired a 19% interest in 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 $11,300 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 January 31, 2004.

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 24 months from the date of delivery. The Company provides for the estimated cost of product and service warranties based on specific warranty claims, claims history and engineering estimates, where applicable.

The following table presents the Company’s product warranty liability for the reporting periods:

In January 2003, the Financial Accounting Standards Board issued Financial Accounting Standards Board Interpretation No. 46 (FIN 46), “Consolidation of Variable Interest Entities.” FIN 46 requires that if an entity has a controlling financial interest in a variable interest entity, the assets, liabilities and results of activities of the variable interest entity should be included in the consolidated financial statements of the entity. FIN 46 is effective immediately for all new variable interest entities created or acquired after January 31, 2003. The Company did not acquire any variable interest entities after this date. For variable interest entities created or acquired prior to February 1, 2003, the provisions of FIN 46 must be applied for the first interim or annual period beginning after December 15, 2003. The Company will adopt the provisions of FIN 46 in the third quarter of fiscal 2004 and is uncertain at this time if the adoption will have a material impact on its financial position or results of operations.

On March 12, 2004, the Company announced that its Board of Directors, on March 11, 2004, declared dividends of $0.08 per common share payable on April 9, 2004 to shareholders of record on March 25, 2004.

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.

The following is a summary of the areas that management believes are important in understanding the results of the periods indicated. This summary is not a substitute for the detail provided in the following pages or for the unaudited condensed consolidated financial statements and notes that appear elsewhere in this document.

Net sales for the six months ended January 31, 2004 were $119,198 lower than the same period last year. Net sales for the three months ended January 31, 2004 were $61,883 lower than the same period last year. The sales decrease in these periods was primarily the result of the number of EXACT systems sold to L-3 Communications. The short fall in the EXACT systems sales was partially offset by higher demand for ultrasound, data acquisition systems and high speed computers products, the recognition of the prior years Camtronics deferred revenue of $9,500, the sale of a license of intellectual property for $2,775, and revenue of $2,500 resulting from a multi-year, multi-million dollar Original Equipment Manufacturer’s (“OEM”) agreement, in which a level of margin based on a certain amount of revenue per year is guaranteed annually for the next three years.

Gross margin for the six months ended January 31, 2004 decreased slightly to 42.3% from 42.5% the same period last year. Gross margin for the three months ended January 31, 2004 improved to 42.4% from 41.0% from the same period last year, mainly the result of the benefit of $2,500 of margin guaranteed by an OEM customer.

Total operating expenses increased $7,611 for the six months ended January 31, 2004 over the same period last year, and $2,896 for the quarter ended January 31, 2004 over the same period last year. The increase in operating expenses is primarily the result of increased research and product development expenses related to the Company’s continued focus on developing new generations of medical imaging equipment and security systems and subsystems. Sales and marketing expenses increased primarily as a result of salaries, related expenses, and other operating expenses for the Company’s newly established subsidiary, Anexa. General and administrative expenses increased mainly due to incremental costs of certain recently acquired businesses and increased accounting and legal costs.

Diluted earnings per share declined to $0.41 per share for the six months ended January 31, 2004 from $3.07 per share for the six months ended January 31, 2003. Diluted earnings per share declined for the quarter ended January 31, 2004 to $0.36 from $1.59 for the same period last year. In both periods the decline in earnings per share over the same periods in the prior year was primarily the result of lower sales of the EXACT systems and associated spare parts.

Cash, cash equivalents and marketable securities decreased $13,609 to $164,352 at January 31, 2004 from $177,961 at July 31, 2003. The decrease was primarily due to capital expenditures of $14,483 of which $8,121 relates to the Company’s new addition to its headquarters facility in Peabody, MA, dividends paid to shareholders of $2,161 and the acquisition of businesses and assets of $1,891, offset by $6,287 of cash generated by operating activities.

The U.S. Securities and Exchange Commission (“SEC”) has suggested that companies provide additional disclosure and commentary on their critical accounting policies. The SEC considers critical

accounting policies to be 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, judgments, and estimates include:

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, collectibility 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 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.

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.

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.

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 24 months from the date of delivery.

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 entities operate. 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.

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.

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.

Product revenue for the six months ended January 31, 2004 was $153,929 compared to $273,208 for the same period last year, a decrease of $119,279 or 44%. The decrease in product revenue was primarily due to sales of Imaging Technology Products which decreased $123,443 or 47% to $140,375 for the six months ended January 31, 2004 from $263,818 for the six months ended January 31, 2003. This was primarily the result of

reduced sales of the EXACT systems and spare parts which the Company supplied to L-3 Communications from $161,054 for the six months ended January 31, 2003 to $9,756 for the six months ended January 31, 2004. This was partially offset by increased sales of $27,855, or 27% over prior year sales, of systems and subsystems for medical imaging equipment due to increased demand of ultrasound and data acquisition systems. This increase also includes approximately $9,400 of prior years’ deferred revenue which was recognized in the current period, and approximately $2,500 of revenue resulting from a multi-year, multi-million dollar OEM agreement, in which a level of margin based on a certain amount of revenue per year is guaranteed annually for the next three years.

Engineering revenue for the six months ended January 31, 2004 was $12,121 compared to $11,855 for the same period last year, an increase of $266 or 2%. This increase was primarily due to the sale of a license of intellectual property for $2,775 to the Company’s affiliate Shenzhen Anke High-Tech Co., Ltd. (“SAHCO”).

Other revenue of $4,181 and $4,366 represents revenue for the hotel operation for the six months ended January 31, 2004 and 2003, respectively.

Product gross margin was $62,979 for the six months ended January 31, 2004 compared to $117,524 for the same period last year. Product gross margin as a percentage of product revenue was 41% and 43% for the six months ended January 31, 2004 and 2003, respectively. The decrease in product gross margin percentage over the prior year was primarily attributable to lower sales of security imaging technology products, which have higher gross margin than most of the Company’s other products, partially offset by the benefit of $2,500 of margin guaranteed by an OEM customer.

Engineering gross margin was $7,185 for the six months ended January 31, 2004 compared to $3,452 for the same period last year. Engineering gross margin as a percentage of engineering revenue was 59% and 29% for the six months ended January 31, 2004 and 2003, respectively. The increase in engineering gross margin as a percentage of revenue over the prior year was primarily due to the sale of a license of intellectual property to the Company’s affiliate SAHCO for $2,775 with no corresponding cost and lower costs related to customer funded projects.

Research and product development expenses were $29,785 for the six months ended January 31, 2004 or 18% of total revenue, compared to $25,948, or 9% of total revenue for the same period last year. The increase of $3,837 was primarily 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. 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 for security imaging systems to meet diverse, evolving security needs in the United States and abroad.

Selling and marketing expenses were $18,038 or 11% of total revenue for the six months ended January 31, 2004, as compared to $16,390 or 6% of total revenue for the same period last year. The increase in selling expenses was primarily the result of salaries, related expenses and other operating expenses for the Company’s newly established subsidiary, Anexa, to sell the next generation of digital imaging solutions to select end-user markets in the United States.

General and administrative expenses were $18,554, or 11% of total revenue, for the six months ended January 31, 2004, as compared to $16,428 or 6% of total revenue for the same period last year. The increase of $2,126 was due to amortization related to acquired intangible assets of $887, incremental costs of approximately $700 related to recently acquired subsidiaries, Sound Technology Inc. and VMI Medical Inc., which were not included in the same period last year, approximately $200 related to programs initiated by the Company to comply with Sarbanes-Oxley Act of 2002, and approximately $550 in accounting and legal expenses related to the restatement of the Company’s financial statements for fiscal years 2001, 2002 and the first three quarters of fiscal 2003, partially offset by lower bad debt expenses of approximately $600 primarily related to an unsecured note receivable in the prior year.

Interest income was $2,086 for the six months ended January 31, 2004, compared to $2,509 for the same period last year. The decrease was due to lower invested cash balances resulting primarily for payments made for the construction of the new building and effective interest rates.

The Company recorded equity income of $1 and a loss of $2,093 related to equity in unconsolidated affiliates for the six months ended January 31, 2004, and 2003, respectively. The equity income of $1 for the six months ended January 31, 2004 was primarily due to a gain of $304 reflecting the Company’s share of profit in Cedara Software Corporation primarily offset by the Company’s share of losses of $262 in SAHCO. The equity loss of $2,093 for the six months ended January 31, 2003 was primarily due to the Company’s share of losses of $790 in SAHCO and $1,436 in Cedara, partially offset by an equity gain of $160 reflecting the Company’s share of profit in Enhanced CT Technology LLC.

Other income, consisting primarily of currency exchange gain, was $5 and $1,644 for the six months ended January 31, 2004 and 2003, respectively. The currency exchange gain for the six months ended January 31, 2003 was the result of the weakening US dollar on the US dollar denominated intercompany loans from the Company’s Danish and Canadian subsidiaries. The Company converted to equity the Danish and Canadian subsidiaries’ intercompany loans which were outstanding during July 2003.

The effective tax rate for the six months of fiscal 2004 was 27% as compared to 38% for the same period last year. The decrease of 11% was primarily due to a relative increase in the estimated benefits from tax exempt interest and research and development credits as a result of a lower dollar base of pre tax income for fiscal 2004 when compared to the same period for fiscal 2003.

Net income for the six months ended January 31, 2004 was $5,489 or $0.41 per basic and diluted share, as compared to $40,964 or $3.10 per basic share and $3.07 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.

Second Quarter Fiscal 2004 (01/31/04) vs. Second Quarter Fiscal 2003 (01/31/03)

Product revenue for the three months ended January 31, 2004 was $90,017 compared to $149,980 for the same period last year, a decrease of $59,963 or 40%. The decrease in product revenue was primarily due to sales of Imaging Technology Products which decreased $63,647 or 44% to $82,523 for the quarter ended January 31, 2004 from $146,170 for the quarter ended January 31, 2003. This was primarily the result of reduced sales of the EXACT systems and spare parts which the Company supplied to L-3 Communications from $88,088 for the quarter ended January 31, 2003 to $6,456 for the quarter ended January 31, 2004. This was partially offset by increased sales of $17,985, or 31% over prior year sales, of systems and subsystems for medical imaging equipment due to increased demand of ultrasound and data acquisition systems. This increase also includes approximately $8,300 of prior years’ deferred revenue which was recognized in the current period, and approximately $2,500 of revenue resulting from a multi-year, multi-million dollar OEM agreement, in which a level of margin based on a certain amount of revenue per year is guaranteed annually for the next three years.

Engineering revenue for the three months ended January 31, 2004 was $3,500 compared to $5,475 for the same period last year, a decrease of $1,975 or 36%. This decrease in engineering revenue was primarily due to a decrease in funding projects for developing medical and security imaging equipment.

Other revenue of $1,745 and $1,690 represents revenue for the hotel operation for the three months ended January 31, 2004 and 2003, respectively.

Product gross margin was $38,375 for the quarter ended January 31, 2004 compared to $61,929 for the same period last year. Product gross margin as a percentage of product revenue was 43% and 41% for the three months ended January 31, 2004 and 2003, respectively. The increase in product gross margin percentage over the prior year quarter was primarily attributable to the benefit of $2,500 of margin guaranteed by an OEM customer.

Engineering gross margin was $1,368 for the three months ended January 31, 2004 compared to $1,968 for the same period last year. Engineering gross margin as a percentage of engineering revenue was 39% and 36% for the three months ended January 31, 2004 and 2003, respectively.

Research and product development expenses were $14,482 for the three months ended January 31, 2004 or 15% of total revenue, compared to $14,571, or 9% of total revenue for the same period last year. The increase in research and product development as a percentage of revenue was primarily the result of lower EXACT revenue from a year ago.

Selling and marketing expenses were $9,955 or 10% of total revenue for the three months ended January 31, 2004, as compared to $8,456 or 5% of total revenue for the same period last year. The increase was primarily due to salaries and related expenses including other operating expenses for the Company’s newly established subsidiary, Anexa, to sell the next generation of digital imaging solutions to select end-user markets in the United States.

General and administrative expenses were $10,081, or 11% of total revenue, for the three months ended January 31, 2004, as compared to $8,595 or 6% of total revenue for the same period last year. The increase of $1,486 was due to amortization related to acquired intangible assets of $264, approximately $200 related to programs initiated by the Company to comply with Sarbanes-Oxley Act of 2002, and approximately $550 in accounting and legal expenses related to the restatement of the Company’s financial statements for fiscal years 2001, 2002 and the first three quarters of fiscal 2003.

Interest income was $962 for the three months ended January 31, 2004, compared to $1,221 for the same period last year. The decrease was due to lower invested cash balances resulting primarily for payments made for the construction of the new building and effective interest rates.

The Company recorded equity income of $158 and a loss of $855 related to equity in unconsolidated affiliates for the three months ended January 31, 2004, and 2003, respectively. The equity income of $158 for the three months ended January 31, 2004 was primarily due to a gain of $312 reflecting the Company’s share of profit in Cedara Software Corporation partially offset by a loss of $134 for the Company’s share of losses in SAHCO. The equity loss of $855 for the prior year’s period was primarily due to a loss of $689 and $321, representing the Company’s share of losses in Cedara and SAHCO, respectively, partially offset by an equity gain of $160 reflecting the Company’s share of profit in Enhanced CT Technology LLC.

Other loss was $101 for the three months ended January 31, 2004 compared to other income of $1,301 for the same period last year. Other income and loss consist primarily of foreign currency exchange. The currency gain last year was primarily the result of the weakening US dollar on the US dollar denominated intercompany loans from the Company’s Danish and Canadian subsidiaries. The Company converted to equity the Danish and Canadian subsidiaries’ intercompany loans which were outstanding during July 2003.

The effective tax rate for the second quarter of fiscal 2004 was 28% as compared to 38% for the same period last year. The decrease in the tax rates of 10% was primarily due to a relative increase in the estimated benefits from tax exempt interest and research and development credits as a result of a lower dollar base of pre tax income for fiscal 2004 when compared to the same period for fiscal 2003.

Net income for the three months ended January 31, 2004 was $4,858 or $0.36 per basic and diluted share, as compared to $21,314 or $1.61 per basic share and $1.59 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.

The Company’s balance sheet reflects a current ratio of 4.2 to 1 at January 31, 2004 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 .24 to 1 at January 31, 2004

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 January 31, 2004, 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 provided by operations was $6,287 for the six months ended January 31, 2004, compared with cash flow generated of $25,853 for the same period last year. The decrease in cash flows from operations was primarily the result of a decrease in net income of $35,475 and a net decrease in changes in operating assets and liabilities of $17,053.

Net cash used in investing activities was $11,405 for the six months ended January 31, 2004 compared to $12,427 for the same period last year. The decrease in net cash used of $1,022 was primarily due to maturity of marketable securities, and a reduction in spending related to business acquisitions. These decreases were partially offset by increased capital expenditures of $14,483 of which $8,121 was related to the Company’s new addition to its headquarters facility in Peabody, Massachusetts.

Net cash used by financing activities was $1,875 for the six months ended January 31, 2004 versus net cash provided of $91 for the prior year period. The increase in net cash used of $1,966 was primarily due to lower proceeds from the issuances of stock pursuant to employee stock option and employee stock purchase plans of $1,006 and a payment of a loan obligation from a business acquisition of $925.

The Company’s contractual obligations at January 31, 2004, 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 $24,000 in revolving credit facilities with various banks available for direct borrowings. As of January 31, 2004, 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 $11,300.

This Quarterly Report on Form 10-Q contains statements, which, to the extent that they are not recitation of historical facts, constitute “forward-looking statements” pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Investors are cautioned that all forward-looking statements, including statements about product development, market and industry trends, strategic initiatives, regulatory approvals, sales, profits, expenses, price trends, research and development expenses and trends, and capital expenditures involve risk and uncertainties, and actual events and results may differ significantly from those indicated in any forward-looking statements as a result of a number of important factors, including those discussed below and elsewhere herein.

You should carefully consider the risks described below before making an investment decision with respect to Analogic Common Stock. Additional risks not presently known to us, or that we currently deem immaterial, may also impair our business. Any of these could have a material and negative effect on our business, financial condition or results of operations.

Because a significant portion of our revenue currently comes from a small number of customers, any decrease in revenue from these customers could harm our operating results.

We depend on a small number of customers for a large portion of our business, and changes in our customers’ orders may have a significant impact on our operating results. If a major customer significantly reduces the amount of business it does with us, there would be an adverse impact on our operating results. The following table sets forth the percentages of our net product and engineering revenue for our three largest customers in any of the last three fiscal years and the percentage of our total net sales to our ten largest customers in those years:

Although we are seeking to broaden our customer base, we will continue to depend on sales to a relatively small number of major customers. Because it often takes significant time to replace lost business, it is likely that our operating results would be adversely affected if one or more of our major customers were to cancel,

delay or reduce significant orders in the future. Our customer agreements typically permit the customer to discontinue future purchases after timely notice.

In addition, we generate significant accounts receivable in connection with the products we sell and the services we provide to our major customers. Although our major customers are large corporations, if one or more of our customers were to become insolvent or otherwise be unable to pay for our services, our operating results and financial condition could be adversely affected.

Competition from existing or new companies in the medical and security imaging technology industry could cause us to experience downward pressure on prices, fewer customer orders, reduced margins, the inability to take advantage of new business opportunities and the loss of market share.

We operate in a highly competitive industry. We are subject to competition based upon product design, performance, pricing, quality and services and we believe our innovative engineering and product reliability have been important factors in our growth. While we try to maintain competitive pricing on those products which are directly comparable to products manufactured by others, in many instances our products will conform to more exacting specifications and carry a higher price than analogous products manufactured by others.

Our competitors include divisions of some larger, more diversified organizations as well as several specialized companies. Some of them have greater resources and larger staffs than we have.

Many of our OEM customers and potential OEM customers have the capacity to design and manufacture themselves the products we manufacture for them. We face competition from research and product development groups and the manufacturing operations of our current and potential customers, who continually evaluate the benefits of internal research and product development and manufacturing versus outsourcing.

We depend on our suppliers, some of which are the sole source for our components, and our production would be substantially curtailed if these suppliers are not able to meet our demands and alternative sources are not available.

We order raw materials and components to complete our customers’ orders, and some of these raw materials and components are ordered from sole-source suppliers. Although we work with our customers and suppliers to minimize the impact of shortages in raw materials and components, we sometimes experience short-term adverse effects due to price fluctuations and delayed shipments. In the past, there have been industry-wide shortages of electronics components. If a significant shortage of raw materials or components were to occur, we might have to delay shipments or pay premium pricing, which could adversely affect our operating results. In some cases, supply shortages of particular components will substantially curtail production of products using these components. We are not always able to pass on price increases to our customers. Accordingly, some raw material and component price increases could adversely affect our operating results. We also depend on a small number of suppliers, some of which are affiliated with customers or competitors and others of which may be small, poorly financed companies, for many of the other raw materials and components that we use in our business. If we are unable to continue to purchase these raw materials and components from our suppliers, our operating results could be adversely affected. Because many of our costs are fixed, our margins depend on our volume of output at our facilities and a reduction in volume could adversely affect our margins.

If we are left with excess inventory, our operating results will be adversely affected.

Because of long lead times and specialized product designs, we typically purchase components and manufacture products for customer orders or in anticipation of customer orders based on customer forecasts. For a variety of reasons, such as decreased end-user demand for the products we are manufacturing, our customers might not purchase all the products we have manufactured or for which we have purchased components. In either event, we would attempt to recoup our materials and manufacturing costs by means such as returning components to our vendors, disposing of excess inventory through other channels or requiring our OEM customers to purchase or otherwise compensate us for such excess inventory. Some of our

significant customer agreements do not give us the ability to require our OEM customers to do this. To the extent we are unsuccessful in recouping our material and manufacturing costs, not only would our net sales be adversely affected, but also our operating results would be disproportionately adversely affected. Moreover, carrying excess inventory would reduce the working capital we have available to continue to operate and grow our business.

Uncertainties and adverse trends affecting our industry or any of our major customers may adversely affect our operating results.

Our business depends primarily on a specific segment of the electronics industry, medical and security imaging technology products, which is subject to rapid technological change and pricing and margin pressure. This industry has historically been cyclical and subject to significant downturns characterized by diminished product demand, rapid declines in average selling prices and production over-capacity. In addition, changes in government policy relating to reimbursement for the purchase and use of medical and security related capital equipment could also affect our sales. Our customers’ markets are also subject to economic cycles and are likely to experience recessionary periods in the future. The economic conditions affecting our industry in general, or any of our major customers in particular, might adversely affect our operating results. Our businesses outside the medical instrumentation and security technology product sectors are subject to the same or greater technological and cyclical pressures.

Our customers’ delay or inability to obtain any necessary United States or foreign regulatory clearances or approvals for their products could have a material adverse effect on our business.

Our products are used by a number of our customers in the production of medical devices that are subject to a high level of regulatory oversight. A delay or inability to obtain any necessary United States or foreign regulatory clearances or approvals for products could have a material adverse effect on our business. The process of obtaining clearances and approvals can be costly and time-consuming. There is a further risk that any approvals or clearances, once obtained, may be withdrawn or modified. Medical devices cannot be marketed in the United States without clearance or approval by the FDA. Medical devices sold in the United States must also be manufactured in compliance with FDA rules and regulations, which regulate the design, manufacture, packing, storage and installation of medical devices. Moreover, medical devices are required to comply with FDA regulations relating to investigational research and labeling. States may also regulate the manufacture, sale and use of medical devices. Medical device products are also subject to approval and regulation by foreign regulatory and safety agencies.

Our business strategy involves the pursuit of acquisitions or business combinations, which may be difficult to integrate, disrupt our business, dilute stockholder value or divert management attention.

As part of our business strategy, we may consummate additional acquisitions or business combinations. Acquisitions are typically accompanied by a number of risks, including the difficulty of integrating the operations and personnel of the acquired companies, the potential disruption of our ongoing business and distraction of management, expenses related to the acquisition and potential unknown liabilities associated with acquired businesses.

If we are not successful in completing acquisitions that we may pursue in the future, we may have incurred substantial expenses and devoted significant management time and resources in seeking to complete proposed acquisitions that will not generate benefits for us. In addition, substantial portions of our available cash might be utilized as consideration for these acquisitions.

Our annual and quarterly operating results are subject to fluctuations, which could affect the market price of our Common Stock.

Our annual and quarterly results may vary significantly depending on various factors, many of which are beyond our control, and may not meet the expectations of securities analysts or investors. If this occurs, the price of our Common Stock would likely decline. These factors include:


	•	variations in the timing and volume of customer orders relative to our manufacturing capacity;

	•	introduction and market acceptance of our customers’ new products;

	•	changes in demand for our customers’ existing products;

	•	the timing of our expenditures in anticipation of future orders;

	•	effectiveness in managing our manufacturing processes;

	•	changes in competitive and economic conditions generally or in our customers’ markets;

	•	changes in the cost or availability of components or skilled labor;

	•	foreign currency exposure; and

	•	investor and analyst perceptions of events affecting the Company, our competitors and/or our industry.

As is the case with many technology companies, we typically ship a significant portion of our products in the last month of a quarter. As a result, any delay in anticipated sales is likely to result in the deferral of the associated revenue beyond the end of a particular quarter, which would have a significant effect on our operating results for that quarter. In addition, most of our operating expenses do not vary directly with net sales and are difficult to adjust in the short term. As a result, if net sales for a particular quarter were below our expectations, we could not proportionately reduce operating expenses for that quarter, and, therefore, that revenue shortfall would have a disproportionate adverse effect on our operating results for that quarter.

Loss of any of our key personnel could hurt our business because of their industry experience and their technological expertise.

We operate in a highly competitive industry and depend on the services of our key senior executives and our technological experts. The loss of the services of one or several of our key employees or an inability to attract, train and retain qualified and skilled employees, specifically engineering and operations personnel, could result in the loss of customers or otherwise inhibit our ability to operate and grow our business successfully.

If we are unable to maintain our technological expertise in research and product development and manufacturing processes, we will not be able to successfully compete.

We believe that our future success will depend upon our ability to provide research and product development and manufacturing services that meet the changing needs of our customers. This requires that we successfully anticipate and respond to technological changes in design and manufacturing processes in a cost-effective and timely manner. As a result, we continually evaluate the advantages and feasibility of new product design and manufacturing processes. We cannot, however, be certain that our development efforts will be successful.

As of February 27, 2004, the Bernard M. Gordon Charitable Remainder Unitrust owned approximately 13% of Analogic’s outstanding Common Stock. Bernard M. Gordon, Chairman of the Board of Directors of Analogic, and Julian Soshnick, Vice President of Analogic, serve as trustees of this trust and have full power to vote or dispose of the shares held by the trust. The trust, based on its ownership interest in Analogic, has the ability to exert substantial influence over the actions of Analogic.

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 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 Company maintains a bond investment portfolio of various issuers, types, and maturities. The Company’s cash and investments include cash equivalents, which the Company considers to be investments purchased with original maturities of three months or less. Investments having original maturities in excess of three months are stated at amortized cost, which approximates fair value, and are classified as available for sale. Total interest income for the three and six months ended January 31, 2004 was $962,000 and $2,086,000, respectively. An interest rate change of 10% would not have a material impact to the fair value of the portfolio or to future earnings.

The Company’s three largest customers for the fiscal year ended July 31, 2003, each of which is a significant and valued customer, were L-3 Communications, General Electric and Toshiba, which accounted for approximately 43%, 9% and 7%, respectively, of product and engineering revenue. For the first six months ended January 31, 2004, the Company’s three largest customers, Toshiba, General Electric, and Siemens accounted for approximately 13%, 11% and 8%, respectively, of product and engineering revenue. Loss of any one of these customers would have a material adverse effect upon the Company’s business.

The Company’s management, with the participation of the Company’s chief executive officer and chief financial officer, evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”) as of January 31, 2004. In designing and evaluating the Company’s disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applied its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on this evaluation, the Company’s chief executive officer and chief financial officer concluded that, as of January 31, 2004, the Company’s disclosure controls and procedures were (1) designed to ensure that material information relating to the Company, including its consolidated subsidiaries, is made known to the Company’s chief executive officer and chief financial officer by others within those entities, particularly during the period in which this report was being prepared and (2) effective, in that they provide reasonable assurance that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.

No change in the Company’s internal control over financial reporting (as defined in Rules 13a-15 (f) and 15d-15(f) under the exchange act) occurred during the fiscal quarter ended January 31, 2004 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

On January 16, 2004, the Company held its 2004 Annual Meeting of Stockholders. At the meeting, the votes cast for and against the matters presented to the Company’s stockholders, as well as the number of abstentions and broker-non-votes, were as follows.

1. Election of three (3) Class III Directors for a three (3) year term, to hold office until the 2007 Annual Meeting of Stockholders and until their respective successors are elected and qualified.

2. Approval of an amendment to the Company’s Key Employee Stock Bonus Plan dated October 12, 2000.

3. Approval of an amendment to the Company’s Non-Qualified Stock Option Plan for Non Employee Directors dated January 31, 1997.

Please see the Company’s Proxy Statement filed with the Securities and Exchange Commission in connection with this Annual Meeting for a description of the matters voted upon.

On December 9, 2003, Analogic furnished a Current Report on Form 8-K dated December 9, 2003 (as amended by Amendment No. 1 to the Current Report on Form 8-K/ A furnished to the Securities and Exchange Commission on December 10, 2003) for the purpose of furnishing under Item 12 (Results of Operation and Financial Condition) to the Securities and Exchange Commission as an exhibit thereto Analogic’s corrected press release dated December 9, 2003 announcing Analogic’s financial results for the quarter ended October 31, 2003.

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

		For the period ended January 31, 2004

or

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

		For the transition period from to


Massachusetts		04-2454372
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

8 Centennial Drive, Peabody, Massachusetts (Address of principal executive offices)		01960 (Zip Code)


		Page No.

Part I. Financial Information
Item 1. Financial Statements
	Unaudited Condensed Consolidated Balance Sheets as of January 31, 2004 and July 31, 2003		2
	Unaudited Condensed Consolidated Statements of Operations for the Three and Six Months Ended January 31, 2004 and 2003		3
	Unaudited Condensed Consolidated Statements of Cash Flows for the Six Months Ended January 31, 2004 and 2003		4
	Notes to Unaudited Condensed Consolidated Financial Statements		5-12
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			13-24
Item 3. Quantitative and Qualitative Disclosures about Market Risk			25
Item 4. Controls and Procedures			25
Part II. Other Information
Item 5. Submission of Matters to a Vote of Security Holders			25
Item 6. Exhibits and Reports on Form 8-K			26
Signatures			27
Exhibit Index			28-32
Section 302 CEO Certification
Section 302 CFO Certification
Section 906 CEO Certification
Section 906 CFO Certification


			January 31,			July 31,
			2004			2003

ASSETS
Current assets:
	Cash and cash equivalents		$	130,132		$	136,806
	Marketable securities, at market			34,220			41,155
	Accounts and notes receivable, net of allowance for doubtful accounts of $2,711 at January 31, 2004 and $4,189 at July 31, 2003			56,474			53,875
	Inventories			70,871			69,548
	Costs related to deferred revenue			12,780			14,796
	Refundable and deferred income taxes			10,230			13,058
	Other current assets			8,245			6,069

		Total current assets		322,952			335,307
Property, plant and equipment, net				92,207			83,926
Investments in and advances to affiliated companies				12,029			14,050
Capitalized software, net				7,315			6,339
Goodwill				2,306			2,306
Intangible assets, net				12,012			11,708
Costs related to deferred revenue				206			206
Other assets				1,881			2,533

		Total Assets	$	450,908		$	456,375

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
	Mortgage and other notes payable		$	1,017		$	1,277
	Obligations under capital leases			162			180
	Accounts payable, trade			17,426			21,162
	Accrued liabilities			19,581			24,412
	Deferred revenue			23,733			30,084
	Advance payments and other			8,382			5,798
	Accrued income taxes			6,006			5,867

		Total current liabilities		76,307			88,780

Long-term liabilities:
	Mortgage and other notes payable			3,718			3,837
	Obligations under capital leases			249			327
	Deferred revenue			1,522			1,743
	Deferred income taxes			4,248			5,175

		Total long-term liabilities		9,737			11,082

Commitments and guarantees (Note 13)
Stockholders’ equity:
	Common stock, $.05 par value			710			710
	Capital in excess of par value			48,456			47,229
	Retained earnings			323,656			320,328
	Accumulated other comprehensive income			3,302			709
	Treasury stock, at cost			(6,380	)		(6,777	)
	Unearned compensation			(4,880	)		(5,686	)

		Total stockholders’ equity		364,864			356,513

		Total Liabilities and Stockholders’ Equity	$	450,908		$	456,375



			Three Months Ended						Six Months Ended
			January 31,						January 31,

			2004			2003			2004			2003

Net revenue:
	Product		$	90,017		$	149,980		$	153,929		$	273,208
	Engineering			3,500			5,475			12,121			11,855
	Other			1,745			1,690			4,181			4,366

Total net revenue				95,262			157,145			170,231			289,429

Cost of sales:
	Product			51,642			88,051			90,950			155,684
	Engineering			2,132			3,507			4,936			8,403
	Other			1,140			1,125			2,349			2,366

Total cost of sales				54,914			92,683			98,235			166,453

Gross margin				40,348			64,462			71,996			122,976

Operating expenses:
	Research and product development			14,482			14,571			29,785			25,948
	Selling and marketing			9,955			8,456			18,038			16,390
	General and administrative			10,081			8,595			18,554			16,428

Total operating expenses				34,518			31,622			66,377			58,766

Income from operations				5,830			32,840			5,619			64,210

Other (income) expense:
	Interest income			(962	)		(1,221	)		(2,086	)		(2,509	)
	Interest expense			119			82			192			151
	Equity in unconsolidated affiliates			(158	)		855			(1	)		2,093
	Other			101			(1,301	)		(5	)		(1,644	)

Total other (income) expense				(900	)		(1,585	)		(1,900	)		(1,909	)

Income before income taxes				6,730			34,425			7,519			66,119
Provision for income taxes				1,872			13,111			2,030			25,155

Net income			$	4,858		$	21,314		$	5,489		$	40,964

Net income per common share:
		Basic	$	0.36		$	1.61		$	0.41		$	3.10
		Diluted		0.36			1.59			0.41			3.07
Weighted average shares outstanding:
		Basic		13,412			13,215			13,397			13,194
		Diluted		13,464			13,412			13,505			13,332

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		January 31, 2004						July 31, 2003

				Accumulated						Accumulated
		Cost		Amortization		Net		Cost		Amortization		Net

Amortizable Intangible Assets:
	Software Technology	$	4,946	$	1,503	$	3,443	$	4,805	$	1,118	$	3,687
	Intellectual Property		9,346		2,161		7,185		9,346		1,325		8,021
	Customer List		1,476		92		1,384		—		—		—

		$	15,768	$	3,756	$	12,012	$	14,151	$	2,443	$	11,708


2004 (Remaining six months)	$	1,617
2005		3,228
2006		3,177
2007		2,724
2008		652
2009		614

	$	12,012


		January 31, 2004		July 31, 2003

Identifiable assets:
	Imaging technology products	$	231,584	$	222,799
	Signal processing technology products		12,113		13,105
	Corporate and other(A)		207,211		220,471

Total		$	450,908	$	456,375


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


	*Six Months Fiscal 2004 (01/31/04) vs. Six Months Fiscal 2003 (01/31/03)*


			Less						More
			than						than
Contractual Obligations	Total		1 year		1-3 years		4-5 years		5 years

Mortgage and notes payable	$	5,651	$	1,133	$	704	$	704	$	3,110
Capital leases		468		197		231		40		—
Operating leases		9,272		2,837		2,706		1,203		2,526
Other commitments		367		367		—		—		—

	$	15,758	$	4,534	$	3,641	$	1,947	$	5,636



	Six Months Ended		Year Ended July 31,

	January 31, 2004		2003		2002		2001

Toshiba		13%		7%		5%		7%
General Electric		11%		9%		12%		11%
Siemens		8%		6%		5%		4%
Philips		8%		4%		18%		23%
L-3 Communications		6%		43%		9%		1%
Ten largest customers as a group		61%		77%		67%		63%


	Votes For		Votes Withheld

Bernard M. Gordon		11,846,596		669,251
John A Tarello		11,469,663		1,046,184
John W. Wood Jr.		12,037,873		477,974


Votes For		Votes Against		Votes Abstaining		Broker Non-Votes

	10,209,796		905,511		15,754		1,384,786


Exhibit		Description

	31.1	Certification of Chief Executive Officer pursuant to Rule 13a-14(a)/ Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended
	31.2	Certification of Chief Financial Officer pursuant to Rule 13a-14(a)/ Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended
	32.1	Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
	32.2	Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002


3.	Balance sheet information:


4.	Acquisition of assets:


14.	New accounting pronouncements


	*Off-balance sheet arrangements*


Date: March 15, 2004		/s/ JOHN W. WOOD JR. -------------------------------------------------------- John W. Wood Jr. President and Chief Executive Officer (Principal Executive Officer)

Date: March 15, 2004		/s/ JOHN J. MILLERICK John J. Millerick Senior Vice President, Chief Financial Officer and Treasurer (Principal Financial and Accounting Officer)


Exhibit		Description

	10.1	Key Employee Stock Bonus Plan dated October 12, 2000, as amended March 11, 2003 was filed with the Securities and Exchange Commission on December 15, 2003 as an appendix to the Registrant’s Definitive Proxy Statement on Schedule 14A.
	10.2	Non-Qualified Stock Option Plan, dated January 31, 1997, as amended on December 8, 2003 was filed with the Securities and Exchange Commission on December 15, 2003 as an appendix to the Registrant’s Definitive Proxy Statement on Schedule 14A.
	31.1	Certification of Chief Executive Officer pursuant to Rule 13a-14(a)/ Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended
	31.2	Certification of Chief Financial Officer pursuant to Rule 13a-14(a)/ Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended
	32.1	Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
	32.2	Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002