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 December 31, 2004 was 13,688,954.

The Company is restating its financial statements for the quarterly period ended October 31, 2003 (the “Restatement”). All financial information reported for that quarterly period in this Quarterly Report on Form 10-Q reflects the Restatement. Please see Note 1 of Notes to Unaudited Condensed Consolidated Financial Statements for more information regarding the Restatement.

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

Analogic Corporation (“the Company”) is restating its Consolidated Financial Statements for fiscal 2002 and 2003 and for each of the first three quarters of fiscal 2004, to reflect the application of the appropriate accounting principles to (1) the recognition of software revenue and related costs by its 100% owned U.S. subsidiary Camtronics Medical Systems, Ltd. (“Camtronics”) and (2) the treatment of a license of intellectual property sold to the Company’s affiliate Shenzhen Anke High-Tech Ltd. (“SAHCO”) for each of the first three quarters of fiscal 2004. As restated, the Company’s financial results for the quarter ended October 31, 2003 reflect a reduction in revenues of $3,260, a reduction of net income of $2,232 and a reduction in diluted earnings per share of $0.17, compared to the Company’s financial results previously reported for the quarter ended October 31, 2003.

Summarized below is a more detailed discussion of the restatement affecting the quarter ended October 31, 2003 along with a comparison of the amounts previously reported in the Condensed Consolidated Statements of Income in the Company’s Form 10-Q for the quarter ended October 31, 2003.

Camtronics’ revenues are derived primarily from the sales 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 American Institute of Certified Public Accountants (“AICPA”) Statement of Position 97-2, “Software Recognition” (“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 vendor-specific objective evidence (“VSOE”) of fair value exists for all 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 VSOE of fair value of the maintenance portion of the arrangement based on the renewal price of the maintenance charged to clients; determines the VSOE of fair value of the professional services portion of the arrangement, other than installation services, based on hourly rates which Camtronics charges for these service when sold apart from a software license; and determines the VSOE of fair value of the hardware and software sublicenses based on the prices for these elements when they are sold separately from the software. If evidence of the VSOE of 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 the VSOE of fair value for the remaining undelivered elements is established.

Inherent in the revenue recognition process are significant management estimates and judgments, which influence the timing and amount of revenue recognition. In particular, the application of SOP 97-2 requires judgment concerning whether a software arrangement includes multiple elements; if so, whether all such elements have been delivered; and if not, whether VSOE of fair value exists for the undelivered elements.

The restatements are required due to the incorrect application of software revenue recognition procedures with respect to certain Camtronic’s transactions. Under software revenue recognition rules, revenue cannot be recognized on a multiple-element software arrangement until such time as Camtronics has delivered or performed all elements of the arrangement or has VSOE of fair value for each undelivered or non-performed element of the arrangement. In the majority of the transactions underlying the restatement, Camtronics has

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

delivered and the customer has paid for the software. However, revenue cannot be recognized from the transactions because some element of the transaction — such as the delivery of a software upgrade or the performance of customization services — has not been delivered or performed or VSOE of fair value for those elements cannot be determined.

During the first quarter of fiscal 2004, the Company recorded engineering revenue of $2,775 in connection with the sale of a license of intellectual property to the Company’s affiliate SAHCO. The contract agreement between the Company and SAHCO provided for extended payment terms whereby SAHCO was required to make a payment of $500 within the first 30 days from the date of the contract and the balance over the next twelve months. Upon further review of the agreement, the Company has determined that this license revenue should have been recorded as the payments were received from SAHCO and not in its entirety at the date of the contract because collectibility was not reasonably assured. The Company received a total of $1,750 from SAHCO during fiscal 2004, and received an additional $750 during the quarter ended October 31, 2004.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The following tables show the effect of the restatement on the Company’s Statement of Income for the quarter ended October 31, 2003:

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Statements of Income components increased (decreased) as a result of the following:

The unaudited condensed consolidated financial statements of 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, 2004, are not necessarily indicative of the results to be expected for the fiscal year ending July 31, 2005, or any other interim period.

These statements should be read in conjunction with the consolidated financial statements and notes thereto for the fiscal year ended July 31, 2004, included in the Company’s Annual Report on Form 10-K as filed with the Securities and Exchange Commission on January 31, 2005.

The financial statements have not been audited by independent certified public accountants. The condensed consolidated balance sheet as of July 31, 2004, contains data derived from audited financial statements.

Certain financial statement items have been reclassified to conform to the current year’s financial presentation format.

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 applies the accounting provisions of the Accounting Principle Board (“APB”)

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

No. 25, “Accounting for Stock Issued to Employees,” 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, using the Black-Scholes option-pricing model the Company would have reported the following results of operations:

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

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The Company had a 14.6% equity ownership interest in Cedara Software Corporation (“Cedara”) as of October 31, 2004. During the quarter ended October 31, 2004, Analogic vacated two seats on Cedara’s seven person board of directors. The Company purchased approximately $1,200 of certain engineering services and licenses from Cedara during the first quarter ended October 31, 2004.

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 paid at closing and $750 paid 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 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, which included $274 to inventory and $1,476 to the customer list, based on their relative fair value. The customer list is being amortized over its estimated life of four years.

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

Beginning in fiscal 2003, Analogic adopted Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets” (“SFAS 142”). As a result, the Company discontinued amortizing goodwill beginning August 1, 2002 and adopted a policy to evaluate goodwill on an annual basis for potential impairment during the first quarter of each fiscal year, or at any time that events or changes in circumstances suggest that the carrying amount may not be recoverable from estimated future cash flows. The Company performed its annual assessment of goodwill for impairment during the first quarter of fiscal 2005 and determined that goodwill was not impaired.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Intangible assets at October 31, 2004 and July 31, 2004, which will continue to be amortized, consisted of the following:

Amortization expense related to acquired intangible assets was $762 and $735 for the three months ended October 31, 2004 and 2003, respectively. Amortization lives of intangibles range from two to five years.

The estimated future amortization expense related to current 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. Because the inclusion of potential common stock would be anti-dilutive for the first quarter of fiscal 2003, diluted net loss per share is the same as basic net loss per share.

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

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The Company declared dividends of $.08 per common share on October 8, 2004, payable on November 5, 2004 to shareholders of record on October 22, 2004.

Components of comprehensive income include net income and certain transactions that have generally been reported in the consolidated Statement of Stockholder’s Equity. 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:

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

for the impact, in the current quarter, of the reinstatement of the research and development credit back to June 30, 2004. The low effective rate for both periods is the result of the estimated benefits of tax-exempt interest, the extraterritorial income exclusion, research and development credits and a favorable foreign tax rate differential.

The Company operates primarily within two major markets within the electronics industry: Medical Technology Products and Security Technology Products. Medical Technology Products consist of three reporting segments: Medical Imaging Products which consist primarily of electronic systems and subsystems for medical imaging equipment and patient monitoring; Camtronics for information management systems for the cardiology market; and B-K Medical Systems ApS (“B-K Medical”) for ultrasound systems and probes in the urology, surgery and radiology markets. Security Technology Products consist of advanced weapon and threat detection systems and subsystems. The Company’s Corporate and Other represents the Company’s hotel business, net interest income, and other Company operations, primarily analog to digital (A/ D) converters and supporting modules, and high speed digital processing, which do not meet the materiality requirements for separate disclosure. The accounting policies of the segments are the same as those described in the summary of significant accounting policies. The segment information for prior years has been restated to conform to the provision of Statement of Financial Standards No. 131, “Disclosures about Segment of an Enterprise and Related Information.”

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(A)	Includes cash equivalents and marketable securities of $169,481 at October 31, 2004, and $156,753 and at July 31, 2004.

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 of Organization or By-laws, the Company believes that its estimated exposure for these indemnification obligations is currently minimal.

Accordingly, the Company has no liabilities recorded for these indemnity agreements and requirements as of October 31, 2004.

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 obligations. 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, 2004.

Generally, 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 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, claim history and engineering estimates,

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

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

On December 7, 2004, the Company announced that its Board of Directors, on December 7, 2004, declared dividends of $.08 per common share payable on January 4, 2005 to shareholders of record on December 21, 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 within the meaning of the Securities Exchange Act of 1934. All statements, other than statements of historical fact, the Company makes in this document or in any document incorporated by reference are forward-looking. Such forward-looking statements involve known and unknown risks, uncertainties, and other factors, which may cause the actual results, performance, or achievements of the Company to differ from the projected results. See “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 first quarter ended October 31, 2004 were $12,382 higher than the same period last year primarily due to an increase in the sale of EXACT systems and security related engineering services, increased demand for the Company’s digital X-ray, data acquisition and ultrasound systems, partially offset by weak demand for the Company’s embedded multiprocessing equipment. Gross margin for the quarter ended October 31, 2004 was 37.4% versus 40.5% for the same period last year. This reduction was primarily due to higher margin customer funded projects in the prior year compared to lower margin customer funded projects in the current period. Total operating expenses increased $1,017 over the same period last year, mainly in general and administrative expenses due to legal and accounting expenses associated with the Company’s recent L-3 litigation, and its in depth review of revenue recognition procedures followed by its Camtronics subsidiary. Diluted earning per share increased by $0.13 per share over the same period last year, primarily the result of profit derived from the sale of the EXACT systems. The Company’s cash, cash equivalent and marketable securities increased $17,140 from July 31, 2004, primarily due to advance payments related to orders received for the EXACT systems and improvement in collection of accounts receivable.

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. 104, “Revenue Recognition in Financial Statements”. Revenue related to product sales is recognized upon shipment provided that title and risk of loss have 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. Our sales contracts generally provide for the customer to accept title and risk of loss when the product leaves our facilities. When shipping terms or local laws do not allow for passage of title and risk of loss at shipping point, we defer recognizing revenue until title and risk of loss transfer to the customer.

The Company’s transactions sometimes involve multiple elements (i.e., systems and services). Revenue under multiple element arrangements is recognized in accordance with Emerging Issues Task Force (“EITF”) Issue No. 00-21, “Accounting for Revenue Arrangements with Multiple Deliverables”. Under this method, if an element is determined to be a separate unit of accounting, the revenue for the element is based on fair value and determined by verifiable objective evidence, and recognized at the time of delivery. Maintenance or service 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. Hardware and software maintenance is marketed under annual and multi-year arrangements and revenue is recognized ratably over the contracted maintenance term. Service revenues are recognized ratably over the life of the contracts.

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.

Inherent in the revenue recognition process are significant management estimates and judgments, which influence the timing and the amount of revenue recognition. Camtronics, one of the Company’s subsidiaries, provides several models for the procurement of its digital cardiac information systems and for each model, its management must make significant estimates and judgments regarding revenue recognition. 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 service revenues 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 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. If Camtronics has VSOE for the consulting services, the timing of the software license revenue is not impacted. However, Camtronics commonly performs consulting services for which the Company does not have VSOE; accordingly, the software license revenue is deferred until the services are completed. Professional consulting service revenue is recognized as the services are performed.

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 vendor specific objective evidence of 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 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.

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. The Company had valuation reserve balances equal to $10,762 and $10,773 as of October 31, 2004 and July 31, 2004, respectively.

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 customers’ 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 collectibility of accounts receivable 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 to correct a product failure. Should actual product failure rates or service delivery 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. Generally, 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 from 12 to 24 months beginning at 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 upon

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. Beginning in fiscal 2003, the Company adopted SFAS No. 142, “Goodwill and Other Intangible Assets.” As a result, the Company discontinued amortizing goodwill as of August 1, 2002 and adopted a policy to evaluate goodwill on an annual basis for potential impairment during the first quarter of each fiscal year, or at any time that events or changes in circumstances suggest that the carrying amount may not be recoverable from the estimated future cash flows.

The Company is required to estimate its income taxes in each of the jurisdictions within 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 than likely, 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 and results of operations could be materially impacted. The Company does not provide for US Federal income taxes on undistributed earnings of consolidated foreign subsidiaries as such earnings are intended to be indefinitely reinvested in those operations. Determination of the potential deferred income tax liability on these undistributed earnings is not practicable because such liability, if any, is dependent on circumstances existing if and when remittance occurs.

Three Months Fiscal 2005 (10/31/04) vs. Three Months Fiscal 2004 (10/31/03)

Product revenue for the three months ended October 31, 2004 was $76,086 compared to $62,677 for the same period last year, an increase of $13,409 or 21%. The increase in product revenue was due to sales of Medical Technology Products of $12,475 or 23%, primarily due to increased demand for the Company’s digital X-ray systems, data acquisition and ultrasound systems, and cardiology information systems, and an increase in sales of Security Technology Products related to the sale of EXACT systems of $4,346. These were partially offset by a decrease in other sales of $3,412 primarily due to lower demand for embedded multiprocessing equipment.

Engineering revenue for the three months ended October 31, 2004 was $5,240 compared to $6,596 for the same period last year, a decrease of $1,356 or 21%. The decrease was primarily due to a reduction in certain customers funded projects, which were completed in the prior period last year, partially offset by revenue

generated by funding received from the Transportation Security Administration (“TSA”), to design and develop continuous performance enhancements for the existing explosive detection systems.

Other revenue of $2,765 and $2,436 represents revenue for the hotel operations for the three months ended October 31, 2004 and 2003, respectively.

Product gross margin was $28,947 for the three months ended October 31, 2004 compared to $24,002 for the same period last year. Product gross margin as a percentage of product revenue was unchanged at 38%.

Engineering gross margin was $1,178 for the three months ended October 31, 2004 compared to $3,792 for the same period last year. Engineering gross margin as a percentage of engineering revenue was 22% and 57% for the three months ended October 31, 2004 and 2003, respectively. The decrease in engineering gross margin was primarily the result of higher margin customer funded projects in the prior year compared to lower margin customer funded projects in the current period.

Research and product development expenses were $13,937 for the three months ended October 31, 2004 or 17% of total revenue compared to $15,303, or 21% of total revenue for the same period last year. The decrease of $1,366 was mainly due to a reallocation of existing engineering resources to revenue generated engineering projects. The Company is continuing to focus substantial resources on developing new generations of medical imaging equipment, including innovative Computed Tomography (“CT”) systems for niche markets and an extended family of multislice CT data acquisition systems for both medical and security markets. In addition, the Company continues its investment in a number of other development projects for security systems to meet diverse, evolving security needs in the United States and abroad.

Selling and marketing expenses were $8,887 for the three months ended October 31, 2004, as compared to $8,024 for the same period last year, or 11% of total revenue in both periods. The increase in selling and marketing expenses of $863 mainly consists of salaries, other employee-related costs, travel expenses and trade show expenses associated with the Company’s subsidiary ANEXA Corporation which was established during the second quarter of fiscal 2004 to sell Digital Radiography (“DR”) and other systems to select end user markets in the United States.

General and administrative expenses were $9,993 for the three months ended October 31, 2004 or 12% of total revenue, compared to $8,473 or 12% of total revenue for the same period last year. The increase of $1,520 was primarily for legal and accounting expenses associated with the Company’s recent L-3 litigation, and its in depth review of certain transactions for revenue recognition procedures followed by its Camtronics subsidiary, and increased salaries and related personnel costs.

Interest income was $856 for the three months ended October 31, 2004, compared with $1,124 for the same period last year. The decrease was primarily due to the lower effective interest rates on higher invested cash balances.

The Company recorded an equity gain of $117 for the three months ended October 31, 2004 versus an equity loss of $157 for the same period last year, related to equity in unconsolidated affiliates. The equity gain consists primarily of $318 for the three months ended October 31, 2004, versus an equity loss of $128 for the same period last year, related to the Company’s equity share in SAHCO and an equity loss of $191 and $8 reflecting the Company’s share of equity in Cedara for the three months ended October 31, 2004 and 2003, respectively.

Other income was $592 for the three months ended October 31, 2004 versus income of $106 for the same period last year. Other income consists predominantly of unrealized foreign currency exchange gains incurred by the Company’s Canadian and Danish subsidiaries.

The effective tax rate for the first quarter of fiscal 2005 and fiscal 2004 was 10.3% and 10%, respectively. The rate for the first quarter of fiscal 2005 includes the projected rate for the year of 10.8% reduced by 0.5% for the impact, in the current quarter, of the reinstatement of the research and development credit back to June 30, 2004. The low effective rate compared to the statutory rate for both periods is the result of the estimated benefits of tax-exempt interest, the extraterritorial income exclusion, research and development credits and a favorable foreign tax rate differential.

Net income was $165 for the three months ended October 31, 2004 compared to a net loss of $1,601 for the same period last year. Basic and diluted earnings per share were $0.01 compared to a basic and diluted loss per share of $0.12 for the same period last year. The increase in net income over the prior year’s period was primarily the result of profit derived from the sale of the EXACT systems.

The Company’s balance sheet reflects a current ratio of 3.6 to 1 at October 31, 2004 compared to 4.0 to 1 at July 31, 2004. 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, 2004 and ..23 to 1 at July 31, 2004. 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, 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 length 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 $24,378 for the three months ended October 31, 2004, compared with cash used for operations of $2,231 for the same period last year. The increase in cash flows from operations was primarily the result of net improvement in operating assets and liabilities of $25,520 primarily from advance payments related to orders received for the EXACT systems and improvement in accounts receivable, and an increase in net income of $1,766.

Net cash used for investing activities was $643 for the three months ended October 31, 2004, compared to $4,534 for the same period last year. The decrease for cash used for investing activities of $3,891 was primarily due to lower capital expenditures and funds used for the acquisition of assets, investment in an affiliated company, partially offset by capitalized software for certain Company products.

Net cash used for financing activities was $515 for the three months ended October 31, 2004, versus $795 net cash provided by financing activities for the same period last year. The decrease in net cash provided by (used for) financing activities of $1,310 was primarily due to the payment of a debt related to certain assets acquired of $743 and a decrease in cash received from the issuance of stock pursuant to exercise of stock options of $691 over the same period last year.

The Company’s contractual obligations at October 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 $23,700 in revolving credit facilities with various banks available for direct borrowings. As of October 31, 2004, there were no direct borrowings.

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.

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 from our four largest customers in each 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 internally 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 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 two segments within the electronics industry, medical and security technology products, which are subject to rapid technological change and pricing and margin pressure. These segments have 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 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 do not successfully complete acquisitions that we pursue in the future, we may incur substantial expenses and devote 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.

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 period ended October 31, 2004 was $0.9 million. An interest rate change of 10% would not have a material impact on the fair value of the portfolio or on future earnings.

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) as of October 31, 2004. The Company’s chief executive officer and chief financial officer believe that the Company’s disclosure controls and procedures were 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.

However, in the course of preparing its Annual Report on Form 10-K, the Company further evaluated certain information leading it to question whether appropriate software revenue recognition procedures had been followed in all cases by its Camtronics Medical Systems Ltd. subsidiary. The Company conducted a review of Camtronics transactions and the revenue recognition procedures followed, which has led the Company to restate its financial statements for the first three quarters of the fiscal year ended July 31, 2004 and for the fiscal years ended July 31, 2002 and 2003 and each of the interim periods within those years (see Note 1 of Notes to Unaudited Condensed Consolidated Financial Statements). Based upon the evaluation of the effectiveness of the Company’s disclosure controls and procedures performed by management, as well as the information learned as a result of its review of Camtronics transactions, the Company’s chief executive officer and chief financial officer have concluded that, as of October 31, 2004, there were a number of significant deficiencies in the controls and procedures relating to the Company’s Camtronics subsidiary that together constitute a material weakness in the Company’s internal control over financial reporting. Accordingly, the Company’s chief executive officer and chief financial officer concluded that the Company’s disclosure controls and procedures were not operating effectively as of October 31, 2004.

The principal internal control issues identified by the Company’s management are:


	•	the software revenue recognition expertise of Company management needs to be improved;

	•	the Company needs to enhance its written accounting policies and procedures related to software revenue recognition;

	•	the Company needs to enhance the training provided to employees with respect to software revenue recognition; and

	•	the business processes and procedures of Camtronics need to be improved to ensure that they do not have unintended consequences with respect to software revenue recognition.

Since identifying these issues, the Company has taken the following steps to improve its disclosure controls and procedures and internal control over financial reporting:


	•	Appointment of an interim President of Camtronics, succeeding the former President who left the employ of the Company, until such time that a full time President has been appointed.

	•	Appointment of an interim Controller, replacing Camtronics’ Vice President and Controller who left the employ of the Company, until such time that a full time Controller has been appointed.

	•	All subsidiary Controllers, who formerly reported to subsidiary General Managers, also now report directly to the Company’s Corporate finance organization.

	•	Detailed quarterly review of all software revenue transactions by the Company’s Corporate finance organization

In addition, the Company plans to take the following additional actions to further improve its disclosure controls and procedures and internal control over financial reporting:


	•	Review and revise, as required, Camtronics software revenue recognition policies, procedures and processes to ensure compliance with SOP 97-2.


	•	Conduct periodic internal audit reviews of Camtronic’s business practices and software revenue recognition policies and procedures.

	•	Conduct software revenue recognition training for all Camtronics personnel who have responsibility for generating, administering, and recording software revenues.

The Company believes that the above steps taken and the planned additional actions will address and resolve the material weaknesses in the Company’s internal controls over financial reporting at its Camtronics subsidiary. With respect to planned additional actions, the Company will initiate and, where practicable, complete these actions on or before the end of its third quarter ending April 30, 2005.

While there have been significant changes (described above) in the Company’s internal control over financial reporting since October 31, 2004, 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 October 31, 2004 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

The certifications of the Company’s chief executive officer and chief financial officer attached as Exhibits 31.1 and 31.2 to this Quarterly Report on Form 10-Q include, in paragraph 4 of such certifications, information concerning the Company’s disclosure controls and procedures and internal control over financial reporting. Such certifications should be read in conjunction with the information contained in this Item 4 for a more complete understanding of the matters covered by such certifications.

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 October 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 October 31, 2004 and July 31, 2004		2
	Unaudited Condensed Consolidated Statements of Income for the Three Months Ended October 31, 2004 and 2003 (Restated)		3
	Unaudited Condensed Consolidated Statements of Cash Flows for the Three Months Ended October 31, 2004 and 2003 (Restated)		4
	Notes to Unaudited Condensed Consolidated Financial Statements		5-15
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			16-25
Item 3. Quantitative and Qualitative Disclosures about Market Risk			25
Item 4. Controls and Procedures			26-27
Part II. Other Information
Item 6. Exhibits			27
Signatures			28
Exhibit Index			29
EX-31.1 Certification of CEO
EX-31.2 Certification of CFO
EX-32.1 Certification of CEO Pursuant to Section 906
EX-32.2 Certification of CFO Pursuant to Section 906


			October 31,			July 31,
			2004			2004

ASSETS
Current assets:
	Cash and cash equivalents		$	172,167		$	149,549
	Marketable securities, at market			21,610			27,088
	Accounts and notes receivable, net of allowance for doubtful accounts of $2,461 at October 31, 2004 and $2,493 at July 31, 2004			49,562			55,498
	Inventories			67,103			65,952
	Costs related to deferred revenue			12,412			12,723
	Refundable and deferred income taxes			11,738			10,861
	Other current assets			7,401			6,450

		Total current assets		341,993			328,121

Property, plant and equipment, net				92,609			91,077
Investments in and advances to affiliated companies				10,325			10,967
Capitalized software, net				11,208			9,502
Goodwill				1,640			1,565
Intangible assets, net				8,682			9,223
Costs related to deferred revenue				219			219
Other assets				1,227			1,397

		Total Assets	$	467,903		$	452,071

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
	Notes payable		$	42		$	785
	Obligations under capital leases			180			177
	Accounts payable, trade			24,310			21,707
	Accrued liabilities			21,912			21,380
	Deferred revenue			28,467			26,281
	Advanced payments			13,223			6,125
	Accrued income taxes			5,894			5,791
	Accrued dividends payable			1,095			—

		Total current liabilities		95,123			82,246

Long-term liabilities:
	Obligations under capital leases			119			155
	Deferred revenue			1,459			1,459
	Deferred income taxes			2,190			810

		Total long-term liabilities		3,768			2,424

Commitments and guarantees (Note 14)
Stockholders’ equity:
	Common stock, $.05 par value			714			713
	Capital in excess of par value			48,139			47,257
	Retained earnings			323,094			324,025
	Accumulated other comprehensive income			3,929			2,141
	Unearned compensation			(6,864	)		(6,735	)

		Total stockholders’ equity		369,012			367,401

		Total Liabilities and Stockholders’ Equity	$	467,903		$	452,071



			Three Months Ended
			October 31,

			2004			2003

						Restated
Net revenue:
	Product		$	76,086		$	62,677
	Engineering			5,240			6,596
	Other			2,765			2,436

Total net revenue				84,091			71,709

Cost of sales:
	Product			47,139			38,675
	Engineering			4,062			2,804
	Other			1,438			1,209

Total cost of sales				52,639			42,688

Gross margin				31,452			29,021

Operating expenses:
	Research and product development			13,937			15,303
	Selling and marketing			8,887			8,024
	General and administrative			9,993			8,473

				32,817			31,800

Loss from operations				(1,365	)		(2,779	)

Other (income) expense:
	Interest income			(856	)		(1,124	)
	Interest expense			16			73
	Equity (gain) loss in unconsolidated affiliates			(117	)		157
	Other			(592	)		(106	)

				(1,549	)		(1,000	)

Income (loss) before income taxes				184			(1,779	)
Provision for income taxes				19			(178	)

Net income (loss)			$	165		$	(1,601	)

Net income (loss) per common share:
		Basic	$	0.01		$	(0.12	)
		Diluted		0.01			(0.12	)
Weighted average shares outstanding:
		Basic		13,521			13,381
		Diluted		13,546			13,381

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			Three Months Ended
			October 31, 2003

			Previously
			Reported			Restated			Change

Net revenue:
	Product		$	63,912		$	62,677		$	(1,235	)(a)
	Engineering			8,621			6,596			(2,025	)(b)
	Other			2,436			2,436

Total net revenue				74,969			71,709			(3,260	)

Cost of sales:
	Product			39,308			38,675			(633	)(c)
	Engineering			2,804			2,804
	Other			1,209			1,209

Total cost of sales				43,321			42,688			(633	)

Gross margin				31,648			29,021			(2,627	)

Operating expenses:
	Research and product development			15,303			15,303
	Selling and marketing			8,083			8,024			(59	)(d)
	General and administrative			8,473			8,473

				31,859			31,800			(59	)

Loss from operations				(211	)		(2,779	)		(2,568	)

Other (income) expense:
	Interest income			(1,124	)		(1,124	)
	Interest expense			73			73
	Equity (gain) loss in unconsolidated affiliates			157			157
	Other			(106	)		(106	)

				(1,000	)		(1,000	)		—

Income (loss) before income taxes				789			(1,779	)		(2,568	)
Provision for income taxes				158			(178	)		(336	)(e)

Net income (loss)			$	631		$	(1,601	)	$	(2,232	)

Net income (loss) per common share:
		Basic	$	0.05		$	(0.12	)	$	(0.17	)(f)
		Diluted		0.05			(0.12	)		(0.17	)(g)
Weighted average shares outstanding:
		Basic		13,381			13,381
		Diluted		13,547			13,381


Adjust recognition of revenue for application of SOP 97-2	$	(1,235	)


Adjustment to revenue for the sale of a license to SAHCO	$	(2,775	)
License revenue recognized as the payments were received from SAHCO		750

Net decrease	$	(2,025	)


Adjust cost of sales related to transactions for which revenue has been deferred	$	(633	)


Adjust commission expense related to transaction for which revenue has been deferred	$	(59	)


Net effect to basic earnings per share due to above adjustments	$	(0.17	)


Net effect to diluted earnings per share due to above adjustments	$	(0.17	)



		October 31, 2004						July 31, 2004

				Accumulated						Accumulated
		Cost		Amortization		Net		Cost		Amortization		Net

Amortizable Intangible Assets:
	Software Technology	$	4,805	$	2,131	$	2,674	$	4,805	$	2,028	$	2,777
	Intellectual Property		8,364		3,463		4,901		8,364		3,118		5,246
	Customer list		1,476		369		1,107		1,476		276		1,200

		$	14,645	$	5,963	$	8,682	$	14,645	$	5,422	$	9,223


2005 (Remaining nine months)	$	2,655
2006		3,045
2007		2,562
2008		381
2009		39


11.	Supplemental disclosure of cash flow information:


1.	Restatement:


	*License of intellectual property*


	*Statement of Income:*


	(a) Net revenue: Product


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


			Less						More
			Than						Than
Contractual Obligations	Total		1 Year		1-3 Years		4-5 Years		5 Years

Notes payable	$	42	$	42
Capital leases obligations		324		199	$	108	$	17
Operating leases		9,193		2,390		2,397		1,945	$	2,461
Purchasing obligations		35,834		31,529		4,305

	$	45,393	$	34,160	$	6,810	$	1,962	$	2,461



				Year Ended July 31,
	Three Months Ended
	October 31, 2004			2004			2003			2002


General Electric		13	%		10	%		9	%		12	%
Siemens		11	%		9	%		6	%		5	%
Toshiba		11	%		12	%		7	%		5	%
L-3 Communications		9	%		8	%		43	%		10	%
Philips		7	%		7	%		4	%		18	%
Ten largest customers as a group		63	%		61	%		77	%		67	%


Item 3.	*Quantitative and Qualitative Disclosures about Market Risk*


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-16(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



Date: January 31, 2005		/s/ JOHN W. WOOD JR. John W. Wood Jr. President and Chief Executive Officer (Principal Executive Officer)

Date: January 31, 2005		/s/ JOHN J. MILLERICK John J. Millerick Senior Vice President, Chief Financial Officer and Treasurer (Principal Financial Officer)