NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited, in millions, except share and per share data)

1. Business

Company

Throughout this Quarterly Report on Form 10-Q, unless the context states otherwise, the words “we,” “us,” “our” and “Analogic” refer to Analogic Corporation and all of its subsidiaries taken as a whole, and “our board of directors” refers to the board of directors of Analogic Corporation.

Description of Business

Analogic (NASDAQ:ALOG) provides leading-edge healthcare and security technology solutions to advance the practice of medicine and save lives. We are recognized around the world for advanced imaging systems and technology that enable computed tomography (“CT”), ultrasound, magnetic resonance imaging (“MRI”) and digital mammography, as well as automated threat detection for aviation security. Our CT, MRI, digital mammography, and ultrasound transducer products are sold to original equipment manufacturers (“OEMs”), providing state-of-the-art capability and enabling them to enter new markets and expand their existing market presence. Our state-of-the-art ultrasound systems are sold directly to clinical end users through our sales force and distributor network under the BK Medical and Ultrasonix brands and are primarily used for procedure guidance markets such as urology, surgery, and point-of-care.

We were incorporated in the Commonwealth of Massachusetts in November 1967 and our headquarters is based just north of Boston in Peabody, Massachusetts.

Our business is strategically aligned into three segments: Medical Imaging, Ultrasound, and Security Technology. Our business segments are described as follows:

Basis of Presentation

Our unaudited condensed consolidated financial statements presented herein have been prepared pursuant to the rules of the United States Securities and Exchange Commission (“SEC”) for quarterly reports on Form 10-Q. Preparing financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, and expenses.

We report our financial condition and results of operations on a fiscal year basis ending on July 31st of each year.

In our opinion, the accompanying unaudited condensed consolidated financial statements contain all adjustments (consisting solely of normal recurring adjustments) necessary for a fair statement of the results for all interim periods presented. These statements should be read in conjunction with the consolidated financial statements and notes thereto for the fiscal year ended July 31, 2013 (“fiscal year 2013”), included in our Annual Report on Form 10-K as filed with the SEC on September 30, 2013. The year-end condensed balance sheet data was derived from audited financial statements, but does not include all disclosures required by generally accepted accounting principles (“GAAP”) in the United States of America.

Consolidation

The unaudited condensed consolidated financial statements presented herein include our accounts and those of our subsidiaries, all of which are wholly owned. Investments in companies in which our ownership interests range from 10% to 50%, and in which we exercise significant influence over operating and financial policies are accounted for using the equity method. Other investments are accounted for using the cost method.

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(Unaudited, in millions, except share and per share data)

In determining whether we are the primary beneficiary of an entity and therefore required to consolidate, we apply a qualitative approach that determines whether we have both (1) the power to direct the economically significant activities of the entity and (2) the obligation to absorb losses of, or the right to receive benefits from, the entity that could potentially be significant to that entity. We have not been required to consolidate the activity of any entity due to these considerations.

2. Recent Accounting Pronouncements

Recently adopted

Comprehensive income

In January 2013, the Financial Accounting Standards Board (“FASB”) issued an update which seeks to improve the reporting of reclassifications out of accumulated other comprehensive income by requiring an entity to report the effect of significant reclassifications out of accumulated other comprehensive income on the respective line items in net income if the amount being reclassified is required under U.S. GAAP to be reclassified in its entirety to net income. For other amounts that are not required under U.S. GAAP to be reclassified in their entirety to net income in the same reporting period, an entity is required to cross-reference other disclosures required under U.S. GAAP that provide additional detail about those amounts. This update is effective for the annual or interim reporting periods beginning after December 15, 2012. We adopted this standard in the third quarter of fiscal year 2013 and presented this information in Note 11. Accumulated Other Comprehensive Income. The adoption of this standard did not have an impact on our financial condition or results of operations.

Testing indefinite-lived intangible assets for impairment

In July 2012, the FASB issued an update regarding testing indefinite-lived intangible assets for impairment. This update gives an entity the option first to assess qualitative factors to determine whether the existence of events and circumstances indicates that it is more likely than not that the indefinite-lived intangible asset is impaired. If, after assessing the totality of events and circumstances, an entity concludes that it is more likely than not that the indefinite-lived intangible asset is not impaired, then the entity is not required to take further action. However, if an entity concludes otherwise, then it is required to determine the fair value of the indefinite-lived intangible asset and perform the quantitative impairment test by comparing the fair value with the carrying amount. An entity also has the option to bypass the qualitative assessment for any indefinite-lived intangible asset in any period and proceed directly to performing the quantitative impairment test. An entity will be able to resume performing the qualitative assessment in any subsequent period. The guidance is effective for the interim period ended October 31, 2013, and did not have an impact on our financial condition or results of operations.

Presentation of unrecognized tax benefits

In July 2013, the FASB issued an update which is intended to eliminate the diversity that is in practice with regard to the financial statement presentation of unrecognized tax benefits when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists. The guidance is effective for our interim period ending January 31, 2014. We adopted this standard in the first quarter of fiscal year 2014 and presented this information in Note 15. Income Taxes . The adoption of this standard did not have a material impact on our consolidated financial statements.

Not yet effective

Foreign currency matters

In March 2013, the FASB issued an update which amends guidance on foreign currency matters and consolidations to address diversity in practice related to the release of cumulative translation adjustments (“CTA”), into earnings upon the occurrence of certain derecognition events. The update reflects a compromise between the CTA release guidance included within foreign currency matters and the loss of control concepts included within consolidation guidance. It precludes the release of CTA for derecognition events that occur within a foreign entity, unless such events represent a complete or substantially complete liquidation of the foreign entity.

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(Unaudited, in millions, except share and per share data)

Derecognition events related to investments in a foreign entity result in the release of all CTA related to the derecognized foreign entity, even when a noncontrolling financial interest is retained. The update also amends guidance on business combinations and for transactions that result in a company obtaining control of a business in a step acquisition by increasing an investment in a foreign entity from one accounted for under the equity method to one accounted for as a consolidated investment. The update is effective for us beginning after August 1, 2014. This update should be applied prospectively and prior periods should not be adjusted. This update is not expected to have an impact on our financial condition or results of operations. Early adoption is permitted as of the beginning of an entity’s fiscal year.

3. Business Combinations

PocketSonics, Inc. (“PocketSonics”)

In April 2010, we entered into an agreement with PocketSonics, Inc., a privately held ultrasound technology company based in Charlottesville, Virginia, which granted us an exclusive license to certain ultrasound technology owned or controlled by PocketSonics and a ten percent (10%) equity interest in PocketSonics. The equity investment was recorded as in-process research and development (“IPR&D”) of $1.9 million. Over the last three years, we have been collaborating with PocketSonics to develop patented ultrasound technology to enable the acceleration of high acuity guided procedures to lower cost point-of-care settings and other technical applications. On September 20, 2013, we acquired all of the remaining stock of PocketSonics. The purchase price includes base consideration of $11.1 million paid in cash at closing, fair value of contingent consideration of $1.9 million, and revaluation of the initial equity investment. We undertook this acquisition to further strengthen our competitive position in procedure guidance for point-of-care and other advanced guidance applications. The acquisition was funded from our existing cash on hand and has been accounted for as an acquisition of a business.

The fair value of assets acquired and the liabilities assumed were based on estimates at the acquisition date. The following table summarizes the estimated fair values of the separately identifiable assets acquired and liabilities assumed as of September 20, 2013:

In determining the fair value, we considered, among other factors, market participants’ intentions to use the acquired assets and the historical and estimated future demand for PocketSonics products and services. We recognized an IPR&D asset of $11.5 million. The fair value of the asset was determined by a probability adjusted cash flow analysis. This intangible asset is currently an indefinite-lived asset and is subject to our annual impairment testing process. We expect to begin amortizing the IPR&D asset over the product life cycle once production of the product begins, which is expected within the next six to eighteen months. We anticipate that the amortization period of the IPR&D asset to be approximately 10 years.

In connection with this acquisition, we recorded a fair value contingent consideration obligation of $1.9 million with potential exposure of up to $3.0 million payable upon the achievement of certain milestones relating to the PocketSonics technology. The contingent earn out payments to the sellers of PocketSonics would be met upon commercial launch and a volume sales target. The $1.9 million fair value was estimated through a valuation model that incorporates probability adjusted assumptions relating to the achievement of these milestones and the likelihood of us making payments. This fair value measurement is based upon significant

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(Unaudited, in millions, except share and per share data)

inputs not observable in the market and therefore represents a Level 3 input measurement. Subsequent changes in the fair value of this obligation will be recognized as adjustments to contingent consideration liability and reflected within our condensed consolidated statement of operations within general and administrative operating expenses. For additional information related to the fair value of this obligation, please refer to Note 8. Fair Value Measurements .

We also recorded a goodwill asset of $6.9 million, representing the value of the opportunity of further strengthening our competitive position in procedure guidance for point-of-care and other advanced guidance applications. The goodwill will not be deductible for tax purposes.

We recognized a loss of $0.5 million related to our 10% pre-acquisition equity interest, which is reflected as a component of other expense, net within our condensed consolidated statement of operations for the three months ended October 31, 2013.

During the three months ended October 31, 2013, we incurred acquisition costs of approximately $0.1 million which consisted primarily of legal and due diligence expenses that are included in our general and administrative expenses in our condensed consolidated statement of operations.

Ultrasonix Medical Corporation (“Ultrasonix”)

On March 1, 2013, we completed our acquisition of all of the outstanding equity securities of Ultrasonix Medical Corporation, a Nevada Corporation, whose principal assets included customer lists and intangibles related solely to sales destined to the U.S. On March 2, 2013, we completed our acquisition of all of the outstanding equity securities of Ultrasonix Medical Corporation, a Canadian Corporation, pursuant to a “plan of arrangement” under Canadian law. Ultrasonix is a supplier of advanced ultrasound systems for point-of-care and general imaging applications. We undertook the acquisition to accelerate our expansion into the point-of-care ultrasound market. The purchase price, net of cash acquired, was $79.9 million. The acquisition was funded from our existing cash on hand and has been accounted for as an acquisition of a business.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited, in millions, except share and per share data)

The fair value of assets acquired and the liabilities assumed were based on estimates as of the acquisition date. The fair value measurements of inventory, intangibles, property, plant and equipment and deferred revenue were based upon significant inputs not observable in the market and therefore represent fair value measurements based on Level 3 inputs. The purchase accounting was finalized during fiscal year 2014. The following table summarizes the purchase price allocation that includes the estimated fair values of the separately identifiable assets acquired and liabilities assumed as of March 2, 2013:

During the three months ended October 31, 2013, we incurred acquisition costs of approximately $2.4 million primarily related to intangible amortization expense of $1.9 million and inventory step up of $0.5 million that are included in our general and administrative expenses and cost of sales, respectively, in our condensed consolidated statement of operations.

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(Unaudited, in millions, except share and per share data)

4. Accounts Receivable, Net

Our accounts receivable arise primarily from products sold and services provided in the U.S., Europe and Asia. The balance in accounts receivable represents the amount due from our OEM customers and our customers in the healthcare and airport security markets. We grant credit to domestic and foreign original equipment manufacturers, distributors, and end users. The majority of our accounts receivable have standard payment terms that require payment within 30 days. We perform ongoing credit evaluations of our customers’ financial condition and continuously monitor collections and payments from our customers and maintain a provision for estimated credit losses based upon specific customer collection issues that have been identified. We accrue reserves against trade receivables for estimated losses that may result from a customer’s inability to pay. Amounts determined to be uncollectible are charged or written off against the reserve. To date, our historical write-offs of accounts receivable have been minimal.

Our top ten customers combined accounted for approximately 62% and 71% of our total net revenue for the three months ended October 31, 2013 and 2012, respectively. We had three customers, as set forth in the table below, which individually accounted for 10% or more of our net revenue.

The components of inventory are summarized as follows:

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(Unaudited, in millions, except share and per share data)

6. Property, Plant and Equipment, Net

Property, plant and equipment are recorded at historical cost, net of accumulated depreciation. The following table summarizes property, plant, and equipment, net:

For the three months ended October 31, 2013 and 2012, total depreciation of property, plant and equipment was $3.6 million and $3.2 million, respectively.

7. Goodwill and Other Intangible Assets

Goodwill

The carrying value of our goodwill at October 31, 2013 and July 31, 2013 was $57.0 million and $50.1 million, respectively. The difference between the two periods relates to goodwill associated with the acquisition of PocketSonics of $6.9 million. We recorded a goodwill asset of $2.8 million, representing the value of the opportunity of further strengthening our competitive position. The goodwill associated with the acquisition was increased by an additional $4.1 million for the deferred tax liability on the IPR&D. Please refer to Note 3. Business Combinations for more information on the acquisition of PocketSonics.

Other intangible assets

Other intangible assets include the value assigned to intellectual property and other technology, patents, customer contracts and relationships, tradenames, and IPR&D. Except for IPR&D and one tradename asset which are considered to have indefinite lives, all intangible assets have estimated useful lives of between 1 and 14 years.

Other intangible assets are summarized as follows:

Amortization expense related to acquired intangible assets was $1.9 million and $0.8 million for the three months ended October 31, 2013 and 2012, respectively.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited, in millions, except share and per share data)

The estimated future amortization expenses related to intangible assets for each of the five succeeding fiscal years is expected to be as follows:

We test our goodwill for impairment on an annual basis during the second quarter of each fiscal year or, between annual tests, when certain events occur that may indicate the fair value of the reporting unit is more likely than not below its carrying value. Goodwill represents the purchase price in excess of the net amount assigned to assets acquired and liabilities assumed by us in connection with historical acquisitions.

One of our tradenames and our IPR&D intangible assets are deemed indefinite-lived and are subject to the annual impairment testing. They may be tested for impairment more frequently if events or changes in circumstances indicate that the fair value of the assets is below their carrying value. Tradenames are valued at fair market value during the acquisition process. Our IPR&D asset arises from our acquisition of PocketSonics. We expect to begin amortizing the IPR&D over the product life cycle once production of the product begins, which is expected within the next six to eighteen months.

8. Fair Value Measurements

Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in a principal or the most advantageous market for the asset transaction between market participants on the measurement date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs. We use a fair value hierarchy based on three levels of inputs, of which the first two are considered observable and the last unobservable, that may be used to measure fair value:

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(Unaudited, in millions, except share and per share data)

The tables below present information about our assets and liabilities that are regularly measured and carried at fair value and indicate the level within the fair value hierarchy of the valuation techniques we utilized to determine such fair value:

Assets held in the deferred compensation plan will be used to pay benefits under our non-qualified deferred compensation plan. The investments primarily consist of mutual funds which are publicly traded on stock exchanges. Thus, these assets are categorized as Level 1.

Our cash equivalents consist of highly liquid demand deposits. The fair value of these deposits, does not deviate from the face value. Thus, they are categorized as Level 2.

The fair value of the liabilities arising from our foreign currency forward contracts is determined by valuation models based on market observable inputs, including forward and spot prices for currencies. Thus, these liabilities are categorized as Level 2.

The fair value of our contingent consideration obligation is based on significant unobservable inputs, including management estimates and assumptions, and are measured based on the probability-weighted present value of the payments expected to be made. Accordingly, the fair value of contingent consideration obligation has been classified as Level 3 within the fair value hierarchy.

The fair value of these contingent payments associated with the acquisition of PocketSonics were calculated utilizing a probability-weighted income approach based on estimated sales utilizing a discount rate of 2.3% for the earnout associated with commercial launch and 26.3% for the earnout associated with a volume sales target. Each quarter we will revalue the contingent consideration obligations associated with the acquisition to their then fair value and record changes in the fair value as contingent consideration expense. Changes in contingent consideration expense result from changes in the assumptions regarding probabilities of the estimated timing of launch, volume sales target, payments and the discount rate used to estimate the fair value of the liability. The assumptions used in estimating fair value require significant judgment. The use of different assumptions and judgments could result in a different estimate of fair value.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited, in millions, except share and per share data)

The following table reconciles the changes in the fair value of contingent consideration obligations that have been classified as Level 3:

We have an equity investment in a privately-held company which is accounted for under the cost method. The carrying value of this investment is zero.

9. Derivative Instruments

Certain of our foreign operations have revenue and/or expenses transacted in currencies other than the U.S. dollar. In order to mitigate foreign currency exchange risk, we use forward contracts to lock in exchange rates associated with a portion of our forecasted international expenses.

As of October 31, 2013, we had forward contracts outstanding with notional amounts totaling $3.2 million in the Canadian dollar. These contracts have been designated as cash flow hedges and the unrealized loss of $0.1 million, net of tax, on these contracts is reported in accumulated other comprehensive income. Liability and asset derivatives designated as hedging instruments are presented in other assets and other liabilities, respectively, on our consolidated balance sheets. Realized gains (losses) on the cash flow hedges are recognized in our consolidated statement of operations in the period when the payment of expenses is recognized. During the three months ended October 31, 2013 and 2012, we recorded a realized (loss) gain of approximately ($0.1) million and $0.1 million, respectively, which were included in cost of revenue and operating expenses in our condensed consolidated statements of operations. We expect all contracts currently outstanding to settle as of January 31, 2014 and any amounts in accumulated other comprehensive income (loss) to be reported as an adjustment to operating expenses.

10. Common Stock Repurchases

On December 8, 2011, we announced that our board of directors had authorized the repurchase of up to $30 million of our common stock. The repurchase program will be funded using our available cash. During the three months ended October 31, 2013, we repurchased and retired 46,638 shares of common stock under this repurchase program for $3.7 million at an average purchase price of $79.97 per share. During the three months ended October 31, 2012, we repurchased and retired 56,324 shares of common stock under this repurchase program for $3.9 million at an average purchase price of $69.86 per share under this program. As of October 31, 2013, in total we have repurchased and retired 296,045 shares of common stock under this repurchase program for $20.1 million at an average purchase price of $67.98 per share.

11. Accumulated Other Comprehensive Income

Components of comprehensive income include net income and certain transactions that have generally been reported in the Consolidated Statements of Changes in Stockholders’ Equity. Other comprehensive income consists of reported foreign currency translation gains and losses (net of taxes), actuarial gains and losses on pension plan assets (net of taxes), and changes in the unrealized value on foreign currency forward contracts (net of taxes). Deferred taxes are not provided on cumulative translation adjustments where we expect earnings of a foreign subsidiary to be indefinitely reinvested. The income tax effect of currency translation adjustments related to foreign subsidiaries that are not considered indefinitely reinvested is recorded as a component of deferred taxes with an offset to other comprehensive income.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited, in millions, except share and per share data)

The following table summarizes components of accumulated other comprehensive income as follows:

The ineffective portion of the unrealized gains or losses on foreign currency forward contracts and unrealized gains or losses on currency translation are included in other expense, net on our condensed consolidated statement of operations.

12. Share-based Compensation

The following table presents share-based compensation expense included in our condensed consolidated statements of operations:

We recognize compensation expense on performance-based restricted stock grants with earnings per share (“EPS”)-related and total shareholder return (“TSR”)-related conditions along with time-based stock options and restricted stock award conditions. The following table summarizes share-based compensation expense associated with each of our share-based compensation programs:

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(Unaudited, in millions, except share and per share data)

Stock options

We estimate the fair value of stock options using the Black-Scholes valuation model. Key input assumptions used to estimate the fair value of stock options include the exercise price of the award, the expected option term, the expected volatility of our stock over the option’s expected term, the risk-free interest rate over the option’s expected term, and our expected annual dividend yield. Estimates of fair value are not intended to predict actual future events or the value ultimately realized by persons who receive equity awards.

During the three months ended October 31, 2013 and 2012, we granted 107,767 and 97,300 non-qualified stock options, respectively. The fair value of each option grant was estimated on the grant date using the Black-Scholes valuation model with the following assumptions:

Restricted stock

We estimate the fair value of restricted stock and restricted stock units that vest based on time by the quoted market price of our common stock on the date of grant. We estimate the fair value of performance-based restricted stock and restricted stock units with market conditions based on the use of a Monte-Carlo simulation model. Estimates of fair value are not intended to predict actual future events or the value ultimately realized by persons who receive equity awards.

Stock compensation expense is amortized over each award’s vesting period on a straight-line basis for all awards with service conditions, while the graded vesting method applies to all awards with both service and performance conditions.

For awards with an EPS-related condition, we recognize compensation expense over the performance period, net of estimated forfeitures, based on the number of shares that are deemed probable of vesting at the end of the three-year performance cycle. This probability assessment is performed each quarter and changes in estimates can result in significant expense fluctuations due to the cumulative catch-up adjustment.

For awards with a TSR-related condition, we recognize compensation expense on a straight-line basis, net of estimated forfeitures, over an average derived service period of 2.8 years for the awards granted in fiscal years 2014, 2013, and 2012. The total compensation expense for awards with a TSR-related condition is not contingent on the performance outcome. The weighted average grant date fair values of restricted stock units granted with a TSR-related condition was $115.45 and $106.36 per share for the three months ended October 31, 2013 and 2012, respectively.

At October 31, 2013 and 2012, we had 189,039 and 326,585 target performance contingent restricted stock units outstanding, respectively. These awards vest if specific pre-established levels of performance have been achieved at the end of a three-year performance cycle. The three-year performance cycles for restricted stock units outstanding at October 31, 2013 end on July 31, 2014,

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(Unaudited, in millions, except share and per share data)

2015, and 2016. The three-year performance cycles for restricted stock units outstanding at October 31, 2012 ended or will end on July 31, 2013, 2014, and 2015. The actual number of shares/units to be issued will be determined at the end of the three-year performance cycle and can range from zero to 200% of the target award. We grant performance restricted stock units with either an EPS-related performance condition or a TSR-related performance condition as determined against a specified peer group condition. During the three months ended October 31, 2013, we granted 35,562 performance restricted stock units with an EPS-related performance condition and 27,355 performance restricted stock units with a TSR-related performance condition. As of October 31, 2013, of the 189,039 restricted stock units outstanding, 102,182 had an EPS-related performance condition and 86,857 had a TSR-related performance condition.

The fair value of the restricted stock units with a TSR-related condition at date of grant was estimated using the Monte-Carlo simulation model with the following assumptions:

Employee Stock Purchase Plan (“ESPP”)

We estimate the fair value of ESPP shares using the Black-Scholes valuation model. For the three months ended October 31, 2013 and 2012, the financial impact from ESPP shares was minimal.

13. Restructuring Charges

During fiscal year 2013, we implemented a restructuring plan that involved involuntary termination of 126 employees, as well as consolidation of manufacturing and certain support activities conducted at the Ultrasonix facility in Vancouver, into operations at our existing facilities, closure of the Ultrasonix sales subsidiary in Paris, France, closure of our Englewood, Colorado facility as we consolidate manufacturing and development activities into our State College, Pennsylvania facility, and optimization of our operations in Montreal, Canada and Peabody, Massachusetts.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited, in millions, except share and per share data)

The following table summarizes charges related to the accrued restructuring activities during the first quarter of fiscal year 2014:

Restructuring and related charges, including actions associated with acquisitions, by segment are as follows:

14. Net (Loss) Income Per Share

Basic net (loss) income per share is computed using the weighted average number of common shares outstanding during the period. Diluted net (loss) income per share is 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. Options to purchase common shares with exercise prices that exceeded the market value of the underlying common stock are excluded from the computation of diluted earnings per share. Application of the treasury stock method could be antidilutive to unvested restricted shares if due to unrecognized compensation and windfall tax profits the hypothetical repurchase of shares exceeds the number of restricted shares to be exercised.

Basic and diluted net (loss) income per share are calculated as follows: