The Company has restated its financial statements for the fiscal years ended July 31, 2002 and July 31, 2003 (the “Restatement”). All financial information reported for those fiscal years in this Annual Report on Form 10-K reflects the Restatement. Please see Note 1 of Notes to Consolidated Financial Statements for more information regarding the Restatement.

      The following discussion provides an analysis of the Company’s financial condition and results of operations and should be read in conjunction with the Consolidated Financial Statements and notes thereto included elsewhere in this Annual Report on Form 10-K. 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.

Critical Accounting Policies, Judgments, and Estimates

      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

10

Table of Contents

Revenue Recognition and Accounts Receivable

      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

11

Table of Contents

      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. If VSOE does exist 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.

Inventories

      The Company values inventory at the lower of cost or market using the first-in, first-out (FIFO) method. Management assesses the recoverability of inventory based on types and levels of inventory held, forecasted demand and changes in technology. These assessments require management judgments and estimates, and valuation adjustments for excess and obsolete inventory may be recorded based on these assessments. As of July 31, 2004 and 2003, the Company had valuation reserve balances equal to $10.8 million and $10.4 million, respectively.

Concentration of Credit Risk

      Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of cash and cash equivalents, marketable securities and accounts receivable. The Company places its cash investments and marketable securities in high credit quality financial instruments and, by policy, limits the amount of credit exposure to any one financial institution. The Company grants credit to domestic and foreign original equipment manufacturers, distributors and end users, and performs ongoing credit evaluations on its 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.

Warranty Reserve

      The Company provides for the estimated cost of product warranties at the time products are shipped. Although the Company engages in extensive product quality programs and processes, its warranty obligation is affected by product failure rates and service delivery costs incurred to correct a product failure. Should actual

12

Table of Contents

Investments in and Advances to Affiliated Companies

      The Company has investments in affiliated companies related to areas of the Company’s strategic focus. The Company accounts for these investments using the equity method of accounting. In assessing the recoverability of these investments, the Company must make certain assumptions and judgments based 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.

Goodwill, Intangible Assets, and Other Long-Lived Assets

      Intangible assets consist of: goodwill, intellectual property, licenses, and capitalized software. Other long-lived assets consist primarily of property, plant, and equipment. Intangible assets and property, plant, and equipment, excluding goodwill, are amortized using the straight-line method over their estimated useful life. The carrying value of goodwill and other intangible assets is reviewed on a quarterly basis for the existence of facts and circumstances both internally and externally that may suggest impairment. Factors which the Company considers important and that could trigger an impairment review, include significant underperformance relative to expected historical or projected future operating results and significant negative industry or economic trends. The Company determines whether an impairment has occurred based on gross expected future cash flows, and measures the amount of the impairment based on the related future discounted cash flows. The cash flow estimates used to determine impairment, if any, contain management’s best estimates, using appropriate and customary assumptions and projections at the time. 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.

Income Taxes

      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.

13

Table of Contents

Results of Operations

Fiscal 2004 Compared to Fiscal 2003

      Product revenue for fiscal 2004 was $327.1 million as compared with $442.4 million in fiscal 2003, a decrease of $115.3 million or 26%. The decrease in product revenue was primarily due to a reduction in sales of Security Technology Products of $175.8 million resulting from reduced sales of the EXACT systems and spare parts which the Company supplies to L-3 Communications. The reduced sales of security products were partially offset by increased sales of $60.5 million; $51.9 million of Medical Technology Products, a 23% increase over prior year’s revenue, and $8.6 million primarily related to embedded signal-processing products. The increase in Medical Technology Products revenue was due to an increase in revenues of Medical Imaging Products of $35.0 million, primarily due to increased sales of CT systems, DR systems and patient monitors. The increase was also attributable to approximately $2.5 million of revenue resulting from a payment received related to a multi-year, multi-million dollar OEM agreement that involves an annual minimum purchase commitment from the customer which had not been met in 2004; increased Camtronics revenues of $11.3 million, primarily due to the recognition in fiscal 2004 of prior period deferred revenue; and increased B-K Medical revenues of $5.6 million resulting from increased demand for ultrasound systems.

      Engineering revenue for fiscal 2004 was $20.1 million compared to $20.9 million in fiscal 2003, a decrease of $0.8 million or 4%. The decrease in engineering revenue was primarily due to a reduction in a customer funded project for digital X-ray systems, partially offset by a license of intellectual property of $1.8 million sold to the Company’s affiliate Shenzhen Anke High-Tech Co., Ltd. (“SAHCO”).

      Other revenue of $8.3 million and $8.4 million for fiscal 2004 and 2003, respectively, represents revenue from the Company’s hotel operation.

      Product gross margin was $131.2 million in fiscal 2004 compared to $186.1 million for the same period last year. Product gross margin as a percentage of product revenue was 40% and 42% for fiscal 2004 and 2003, respectively. The decrease in product gross margin percentage over the prior year was primarily attributable to lower sales of security technology products, which have higher margins than most of the Company’s other products. This decrease was partially offset by the benefit of approximately $2.5 million of margin guaranteed by an OEM customer.

      Engineering gross margin was $6.6 million in fiscal 2004 compared to $6.0 million in fiscal 2003. Engineering gross margin as a percentage of engineering revenue was 33% and 29% for the fiscal 2004 and 2003, respectively. The increase in engineering gross margin as a percentage of engineering revenue over the prior fiscal year was primarily due to the sale of a license of intellectual property to the Company’s affiliate SAHCO for $1.8 million with no corresponding cost, partially offset by additional costs incurred by the Company in connection with work currently being done on behalf of the Transportation Security Administration.

      Research and product development expenses were $58.7 million in fiscal 2004, or 17% of total revenue, compared to $55.1 million in fiscal 2003, or 12% of total revenue. The increase in research and product development expenses of $3.6 million was due to the Company continuing to focus 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 multi-slice CT Data Acquisition Systems for both medical and security markets. The Company is 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 systems to meet diverse, evolving security needs in the United States and abroad.

      Selling and marketing expenses were $37.0 million in fiscal 2004, or 10% of total revenue, as compared to $34.9 million in fiscal 2003, or 7% of total revenue. The increase in selling and marketing expenses of $2.1 million was mainly attributable to salaries and related expenses of the Company’s newly established subsidiary, Anexa, and increased commission expenses attributable to the year over year increase in

14

Table of Contents

      General and administrative expenses were $39.2 million in fiscal 2004 or 11% of total revenue, compared to $35.0 million in fiscal 2003, or 7% of total revenue. The increase of $4.2 million was primarily attributable to incentive bonus and related payroll expenses of approximately $1.0 million, amortization of acquired intangible assets of $0.9 million, incremental cost of approximately $0.4 million related to acquired subsidiaries STI, and VMI Medical Inc., which were not included in the same period last year. The increase was also due to approximately $0.7 million related to programs initiated by the Company to comply with the Sarbanes-Oxley Act of 2002, approximately $0.8 million 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, and approximately $1.1 million in additional facilities operating costs.

      Computer software costs of $4.8 million and $3.5 million were capitalized in fiscal 2004 and 2003, respectively. Amortization of capitalized software costs amounted to $1.8 million in both fiscal years 2004 and 2003, and is included in product cost of sales.

      Interest income for fiscal 2004 was $3.7 million compared to $5.0 million for fiscal 2003. The decrease of $1.3 million was primarily the result of a lower effective interest rate on short term investments and to a lesser extent to lower invested cash balances resulting primarily from the Company internally funding its new addition to its headquarters facility.

      The Company recorded equity income of $0.6 million related to equity in unconsolidated affiliates in fiscal 2004 compared to an equity loss of $3.5 million for fiscal 2003. The equity gain in fiscal 2004 consists of a gain of $1.2 million for the Company’s share of profit in Cedara Software Corporation, offset by a loss of $0.6 million for the Company’s share of losses in SAHCO. The equity loss of $3.5 million in fiscal 2003 consists primarily of losses of $2.5 million and $1.1 million reflecting the Company’s share of losses in Cedara Software Corporation and SAHCO, respectively.

      Other expense, consisting primarily of foreign currency exchange gains and losses, was $0.2 million in fiscal 2004 compared to other income of $5.8 million in fiscal 2003. Other income in fiscal 2003 included $3.9 million of currency exchange gain resulting from the weakening U.S. dollar, primarily due to a $1.8 million gain on U.S. dollar loans to the Company’s Danish subsidiary and a $2.1 million gain on U.S. dollar loans to Anrad, the Company’s Canadian subsidiary, and a $1.6 million gain from the sale of a building the Company owned in Peabody, Massachusetts to a related party.

      The effective tax rate for fiscal 2004 was 17% as compared to 36% for fiscal 2003. The decrease of 19% was primarily due to a relative increase in the estimated benefits from tax exempt interest, the extraterritorial income exclusion and research and development credits as a result of a lower dollar base of pre-tax income for fiscal 2004 when compared to fiscal 2003. In addition, the effective tax rate reflects a benefit resulting from the release of the German valuation allowance reflecting net operating loss carryforwards which management has determined are more likely than not to be realized.

      Net income for fiscal 2004 was $8.4 million compared to $49.5 million in fiscal 2003. Basic earnings per share were $0.62 in fiscal 2004 compared to $3.74 in fiscal 2003. Diluted earnings per share were $0.62 in fiscal 2004 compared to $3.70 in fiscal 2003. The decrease in net income over the prior year was primarily the result of decreased revenue and profit derived from the sale of the EXACT systems, partially offset by increased revenue and profit of Medical Technology Products, including the deferred revenue and profit recognized in fiscal 2004 by Camtronics.

Fiscal 2003 Compared to Fiscal 2002

      Product revenue for fiscal 2003 was $442.4 million as compared with $268.8 million in fiscal 2002, an increase of $173.6 million or 65%. The increase was primarily due to an increase of $171.6 million in sales of Security Technology Products for sales of EXACT systems and spare parts, primarily to L-3. The increase in Medical Technology Products revenues of $12.5 million was primarily offset by a decrease in revenues of $10.5 million attributable to reduced demand for embedded multiprocessing equipment. The increase in Medical Technology Product revenue was the result of $8.6 million of increased sales by Camtronics of

15

Table of Contents

      Engineering revenue for fiscal 2003 was $20.9 million compared to $26.5 million in fiscal 2002, a decrease of 21%. The decrease in engineering revenue was primarily due to a decrease in customer funded projects for developing medical and security equipment.

      Other revenue of $8.4 million and $9.6 million for fiscal 2003 and 2002, respectively represent revenue from the Company’s hotel operation. The decrease in revenues is mostly the result of lower occupancy.

      Cost of product sales was $256.3 million in fiscal 2003 compared to $169.0 in fiscal 2002. Cost of product sales as a percentage of revenue was 58% in fiscal 2003, compared to 63% in fiscal 2002. The decrease in cost of product sales percentage over prior year was primarily attributable to the increase sales of security technology products, which have lower cost of sales then most of the Company’s other products.

      Cost of engineering sales was $14.9 million in fiscal 2003 compared with $23.2 million in fiscal 2002. The total cost of engineering sales as a percentage of engineering revenue decreased to 71% in fiscal 2003, 88% in fiscal 2002. This percentage decrease was primarily attributable to license revenue recognized in fiscal 2003 for which there was no associated cost.

      Other costs of sales were $4.7 million and $5.2 million from the Company’s hotel operation for fiscal 2003 and 2002, respectively.

      Research and product development expenses were $55.1 million in fiscal 2003, or 12% of total revenue, compared to $39.1 million in fiscal 2002, or 13% of total revenue. The increase in research and product development expenses of $16.0 million was due to the Company continuing to focus substantial resources in developing new generations of medical imaging equipment, including innovative CT systems for niche markets, and advanced digital x-ray systems and subsystems for general radiography and mammography, and an extended family of multi-slice CT Data Acquisition Systems for both medical and security markets. In addition, the Company is developing security systems for a variety of applications. The Company is in the initial stages of testing prototypes of automated, CT-based portal screening system that can scan carry-on baggage at airports, “carry-in” baggage at public buildings, and parcels for corporations and delivery services. In addition, the Company continues to increase its investment in a number of other development projects to meet diverse, evolving security need in the United States and abroad.

      Selling and marketing expenses were $34.9 million in fiscal 2003, or 7% of total revenue, as compared to $32.4 million in fiscal 2002, or 11% of total revenue. The increase in selling and marketing expense of $2.5 million was mainly attributable to exchange rate differential for our B-K Medical subsidiary in Denmark.

      General and administration expenses were $35.0 million in fiscal 2003, or 7% of total revenue, compared to $28.4 million in fiscal 2002 or 9% of total revenue. The increase of $6.6 million was primarily attributable to increased salaries and related payroll expenses of approximately $1.3 million, amortization of approximately $2.1 million related to acquired intangible assets, and approximately $1.3 million related to incremental costs due the acquisition of Sound Technology Inc. and VMI Medical, Inc. Also, included in general and administrative expenses was a provision for bad debt of approximately $2.4 million, of which $1.6 million related to certain old invoices of SAHCO, and approximately $0.7 million for an unsecured note, all of which the Company deemed uncollectible.

      Computer software costs of $3.5 million and $2.4 million were capitalized in fiscal 2003 and 2002 respectively. Amortization of capitalized software costs amounted to $1.8 million in both fiscal 2003 and 2002, and is included in the product cost of sales.

16

Table of Contents

      Interest income for fiscal 2003 was $5.0 million compared to $4.4 million for fiscal 2002. The increase of $0.6 million was primarily the result of higher invested cash balances partially offset by lower effective interest rate on short term investments.

      The Company recorded a loss of $3.5 million relates to equity in unconsolidated affiliates in fiscal 2003 compared to a loss of $0.2 million for fiscal 2002. The equity loss in fiscal 2003 consists primarily of losses of $1.1 million and $2.5 million reflecting the Company’s share of losses in SAHCO and Cedara Software Corporation, respectively. The equity loss in fiscal 2002 consists of a gain of $1.4 million reflecting the Company’s share of gains in Enhanced CT Technology LLC, partially offset by equity losses of $1.3 million and $0.2 million reflecting the Company’s share of losses in SAHCO and Cedara Software Corporation, respectively.

      Other income was $5.8 million in fiscal 2003, compared with $0.8 in fiscal 2002. Other income in fiscal 2003 includes $3.9 million of currency exchange gain resulting from the weakening U.S. dollars, primarily due to $1.8 million gain on U.S. dollar loans to the Company’s Danish subsidiary, and a $2.1 million gain on U.S. dollar loans to Anrad, the Company’s Canadian subsidiary, and $1.6 million gain from the sale of a building the Company owned in Peabody, Massachusetts to a related party.

      The effective tax rate for fiscal 2003 was 36% compared to 19% in fiscal 2002. The increase was due primarily to the lower impact related to the benefit realized from tax exempt interest and extraterritorial income benefit on a higher pre-tax income when compared to 2002.

      Net income for fiscal 2003 was $49.5 million compared to $2.7 million in fiscal 2002. Basic earnings per share were $3.74 compared to $0.20 in fiscal 2002. Diluted earnings per share were $3.70 in fiscal 2003 compared to $0.20 in fiscal 2002. The increase in net income over the prior year’s period was primarily the result of increased revenue and profit derived from the sale of EXACT systems. The prior year’s income included a pre-tax asset impairment charge of $8.9 million related to the write down of certain assets of the Company’s telecommunications subsidiary, Anatel, and the Company’s Test and Measurement Division.

Liquidity and Capital Resources

      Cash and cash equivalents and marketable securities totaled $176.6 million and $178.0 million at July 31, 2004 and 2003, respectively. Working capital was $245.9 million and $246.3 million at July 31, 2004 and 2003, respectively. The Company’s balance sheet reflects a current ratio of 4.0 to 1 at July 31, 2004 compared to 3.7 to 1 at July 31, 2003. Liquidity is sustained principally through funds provided from operations, with short-term time deposits and marketable securities available to provide additional sources of cash.

      The Company faces 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 consolidated balance sheets of cash and cash equivalents, trade receivables, and trade payables approximate fair value at July 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.

      Net cash provided by operating activities was $33.2 million in fiscal 2004, $35.4 million in fiscal 2003 and $94.8 million in fiscal 2002. The decrease in cash flows from operations in fiscal 2004 over fiscal 2003 of

17

Table of Contents

      Net cash used for investing activities was $15.2 million in fiscal 2004, compared to $18.1 million in fiscal 2003 and $15.0 million in fiscal 2002. The decrease in net cash used for investment activities of $2.9 million was primarily due to lower funds used in the acquisition of businesses and assets, partially offset by an increase in capital expenditures, primarily for the Company’s new addition to its headquarters facility.

      Net cash used for financing activities was $5.5 million and $3.1 million in fiscal years 2004 and 2002, respectively. Net cash provided by financing activities was $0.8 million in fiscal 2003. The net cash used for financing activities in fiscal 2004 consisted primarily of the pay-off of a long term mortgage loan of $3.9 million, and dividend payments of $4.3 million, partially offset by cash received from the issuance of stock pursuant to exercise of stock options and employee stock purchase plan of $3.9 million.

      The Company’s contractual obligations at July 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 $23.5 million in revolving credit facilities with various banks available for direct borrowings. There were no direct borrowings in fiscal 2004 or in fiscal 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 for at least the next 12 months.

Impact of Inflation

      Overall, inflation has not had a material impact on the Company’s operations during the past three fiscal years.

New Accounting Pronouncements

      In November 2002, the EITF reached a consensus on issue 00-21, “Accounting for Revenue Arrangements with Multiple Deliverables” (“EITF 00-21”). EITF 00-21 addresses revenue recognition on arrangements encompassing multiple elements that are delivered at different points in time, defining criteria that must be met for elements to be considered to be a separate unit of accounting. If an element is determined to be a separate unit of accounting, the revenue for the element is recognized at the time of delivery. EITF 00-21 is effective for revenue arrangements entered into in fiscal periods beginning after June 15, 2003. The adoption of EITF 00-21 did not have a material effect on the Company’s financial position or results of operations.

      In January 2003, the Financial Accounting Standards Board issued Financial Accounting Standards Board Interpretation No. 46 (“FIN 46”), “Consolidation of Variable Interest Entities”, and amended it by issuing FIN 46R in December 2003. FIN 46R 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 create or acquire any variable interest entities after this date. The adoption of the provisions of FIN 46R in the third quarter of fiscal 2004 did not have a material effect on its financial position or results of operations.

18

Table of Contents

      In December 2003, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 104 (“SAB 104”), “Revenue Recognition.” SAB 104 was effective upon issuance and supersedes Staff Accounting Bulletin No. 101 (“SAB 101”), “Revenue Recognition in Financial Statements.” SAB 104’s primary purpose is to rescind the accounting guidance in SAB 101 related to multiple-element arrangements as the guidance has been superseded with the issuance of EITF 00-21. The adoption of SAB 104 did not have a material effect on the Company’s financial position or results of operations.

      In December 2004, FASB issued a revision to Financial Accounting Standards No. 123 (“FAS 123R”). FAS 123R is focused primarily on the accounting for transactions in which a company obtains employee services in exchange for stock options or share-based payments. Currently, the Company grants stock options to their employees and discloses the pro forma effect of compensation expense for these stock options. Under FAS 123R, the Company will be required to record this compensation expense in the Company’s results of operations. FAS 123R is effective for the beginning of the first fiscal reporting period that begins after June 15, 2005. The adoption of FAS 123R will have a material effect on the Company’s financial position and results of operations.

      In December 2004, FASB issued Financial Accounting Standards No. 151 (“FAS 151”). FAS 151 clarifies the accounting for inventory when there are abnormal amounts of idle facility expense, freight, handling costs, and wasted materials. Under existing GAAP, items such as idle facility expense, excessive spoilage, double freight, and re-handling costs may be “so abnormal” as to require treatment as current period charges rather than recorded as adjustments to the value of the inventory. FAS 151 requires that those items be recognized as current-period charges regardless of whether they meet the criterion of “so abnormal.” In addition, this Statement requires that allocation of fixed production overheads to the costs of conversion be based on the normal capacity of the production facilities. The provisions of this Statement shall be effective for inventory costs incurred during fiscal years beginning after June  15, 2005. Earlier application is permitted for inventory costs incurred during fiscal years beginning after the date this Statement is issued. The adoption of FAS 151 is not expected to have a material effect on the Company’s financial position or results of operations.

Risk Factors

Forward-Looking Statements

      This Annual Report on Form 10-K 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.

Risk Factors

      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

19

Table of Contents

      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

20

Table of Contents

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

21

Table of Contents

      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.

22

Table of Contents