The following discussion provides an analysis of our financial condition and results of operations and should be read in conjunction with the audited Consolidated Financial Statements and notes thereto included elsewhere in this Annual Report on Form 10-K. The discussion contains statements, which, to the extent that they are not a recitation of historical facts, constitute "forward-looking statements" pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. All statements, other than statements of historical fact, including, without limitation, 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, we make 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 our actual results, performance, or achievements to differ from the projected results. See "Risk Factors" in Item 1A for a discussion of the primary risks and uncertainties known to us at this time.

Our Management's Discussion and Analysis is presented in six sections as follows:

• Business Overview

• Fiscal Year 2009 Overview

• Results of Operations

• Critical Accounting Policies

• New Accounting Pronouncements

We report our financial condition and results of operations on a fiscal year basis ending July 31. All dollar amounts in this Item 7 are in thousands except per share data.

Business Overview

Analogic is a high technology company that designs and manufactures advanced medical imaging and security systems and subsystems sold to OEMs and end users in the healthcare and homeland security markets. We were incorporated in the Commonwealth of Massachusetts in November 1967 and are recognized worldwide for advancing state-of-the-art technology in the areas of medical CT, MRI, Digital Radiography, Specialized Ultrasound, and EDS for airport security. Our OEM customers incorporate our technology into systems they in turn sell for various medical and security applications. We also sell our ultrasound products directly to specialized clinical end-user markets through our direct worldwide sales force under the business name B-K Medical.

We operate within two major markets: Medical Technology Products and Security Technology Products. Medical Technology Products consists of three reporting segments: Medical Imaging Products, Digital Radiography Products, and B-K Medical.

A significant portion of our products are sold to OEMs, whose purchasing dynamics have an impact on our reported sales. OEMs that purchase our Medical Imaging and Digital Radiography Products generally incorporate those products as components in their systems, which are in turn sold to end users, primarily hospitals and medical clinics. In our Security Technology Products business, a major OEM customer purchases and resells our products to end users including domestic and foreign airports as well as the Transportation Security Administration ("TSA"). In Security Technology Products, our OEM customer's purchasing dynamics are affected by the level of government funding, the expansion of airport terminals and fluctuations in airline passenger volume.

Fiscal Year 2009 Overview

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

                                               Fiscal Year          Percentage
                                           2009           2008        Change
         Total net revenue               $ 396,149      $ 413,509           -4 %
         Income (loss) from operations      (4,185 )       24,311         -117 %
         Net income                          3,705         23,486          -84 %
         Diluted net income per share         0.29           1.77          -84 %

The decline in net revenue, income from operations, net income, and diluted net income per share in fiscal year 2009 as compared to fiscal year 2008 was primarily related to the deterioration of global economic conditions during fiscal year 2009, which reduced endowments and philanthropic funding of hospitals and medical clinics. As a result, capital available for investment by these end users in new facilities, expansions, or upgrades was limited, thereby reducing immediate demand for our products and those of our OEM customers. In addition, the adoption of the DRA in fiscal year 2008 reduced government reimbursement rates for doctors

utilizing medical imaging procedures for their patients, which, in turn, reduced demand for our OEM customers' products. Both of these factors negatively impacted the performance of the Medical Imaging Products segment during fiscal year 2009. Partially mitigating this impact was the full year benefit in fiscal year 2009 of the Copley business, which was acquired late in the third quarter of fiscal year 2008.

In response to lower demand, we implemented cost control programs throughout fiscal year 2009. In the second quarter of fiscal year 2009, we reduced our workforce by 145 employees worldwide (then 9% of our total workforce) and recorded a restructuring charge of $3,488 for severance and personnel related costs. Included in the workforce reduction were 29 Copley employees whose severance and personnel related costs of $323 had been previously accrued in fiscal year 2008 in connection with the acquisition. In the fourth quarter of fiscal year 2009, we recorded a restructuring charge of $3,131. The restructuring charge was primarily related to $2,073 in severance and personnel related costs for the reduction of our workforce by 85 employees worldwide (6% of total workforce). Also included in the restructuring was $1,058 for facility exit costs, due primarily to our vacating 50% of our office facility in Canton, MA on July 31, 2009 as a result of moving certain operations to our Peabody, MA facility. The savings from both restructuring programs on an annual basis is estimated to be approximately $14,800. Despite these programs, income from operations declined from $24,311 in fiscal year 2008 to a loss of ($4,185) in fiscal year 2009.

In August 2009, we reached a settlement with a former distributor of Medical Imaging Products, CAS Medical Systems, Inc. ("CAS"), in which we agreed to pay CAS the sum of $811 in full satisfaction of all matters in dispute. The $811 was recorded in general and administrative expenses in fiscal year 2009. We and CAS have negotiated an orderly conclusion to our contractual relationship by allowing CAS to continue distributing products until July 31, 2010. In connection with the settlement agreement, we also incurred $534 of related charges in fiscal year 2009.

Tax benefits more than offset the ($4,185) loss from operations. In fiscal year 2009, we received IRS refunds of $8,143 which included $1,262 of interest. These refunds resulted in a reduction of unrecognized tax benefits by approximately $3,280, of which $1,356 was recorded as a tax benefit in fiscal year 2009. Also contributing to the income tax benefit for fiscal year 2009 was the reversal of $920 of tax reserves due to the expiration of statutes of limitations, and $1,820 for the reversal of a valuation allowance in Belgium net operating loss carryforwards that management has determined are more likely than not to be realized.

We had cash and cash equivalents and marketable securities of $160,293 and $186,442 at July 31, 2009 and 2008, respectively. The interest earned on our cash and cash equivalents over the past 15 months has been impacted by a reduction in interest rates. We have historically invested in U.S government backed securities, bonds, and certificates of deposit, the interest rates of which have declined significantly over the last year. Also contributing to the decline in interest income of approximately 68% for fiscal year 2009 as compared to fiscal year 2008 were Copley acquisition related costs of $73,332 in the third quarter of fiscal year 2008 and repurchases of Common Stock of $25,022 during fiscal year 2009. The following table sets forth an overview of cash flows for fiscal years 2009 and 2008.

                                                      Year ended July 31,
                                                      2009           2008

        Net cash provided by operating activities   $  16,728      $  47,810
        Net cash used for investing activities        (38,495 )      (99,050 )
        Net cash used for financing activities        (30,185 )       (2,376 )
        Effect of exchange rate changes on cash        (2,105 )          983

        Net decrease in cash and cash equivalents   $ (54,057 )    $ (52,633 )

During fiscal year 2009, we continued to generate cash from our operating activities. The net cash provided by operating activities in fiscal year 2009 decreased from fiscal year 2008 due primarily to the decline in net

income of $19,781. The most significant adjustments to reconcile net income to net cash provided by operating activities in fiscal year 2009 were depreciation and amortization of $17,964, share-based compensation expense of $3,968, restructuring and voluntary retirement charges of $6,619, and a gain on sale of other investments of $838, partially offset by a net change in operating assets and liabilities of $13,912.

The net cash used for investing activities in fiscal year 2009 was due primarily to the purchase of short-term held-to-maturity marketable securities of $220,945, partially offset by the maturity of $193,037 of short-term held-to-maturity marketable securities.

The net cash used for financing activities in fiscal year 2009 was due primarily to the repurchase of our Common Stock under a repurchase program authorized by our Board on October 13, 2008. We completed the repurchase program, which was funded using our available cash, in the second quarter of fiscal year 2009. During fiscal year 2009, we repurchased 736,694 shares of Common Stock under this repurchase program for $25,022 at an average purchase price per share of $33.97. Included in the $25,022 paid for the Common Stock under this program was $22 of commissions and fees to our broker.

Results of Operations

Fiscal Year 2009 Compared to Fiscal Year 2008

Net Revenue

Product Revenue

Product revenue for fiscal year 2009 as compared with fiscal year 2008 is
summarized in the table below.



                                             Year Ended July 31,     Percentage
                                              2009         2008        Change
       Product Revenue:
       Medical Technology Products:
       Medical Imaging Products            $   210,691   $ 224,905           -6 %
       Digital Radiography Products             31,902      26,676           20 %
       B-K Medical                              82,599      92,968          -11 %

       Total Medical Technology Products       325,192     344,549           -6 %

       Security Technology Products             40,578      43,957           -8 %

       Total                               $   365,770   $ 388,506           -6 %

Medical Imaging Products

The decrease in product revenue for Medical Imaging Products for fiscal year 2009 versus the prior year was due primarily to a decline in demand for data acquisition systems detectors and CT subsystems, which reflects the impact of the DRA and the global economic slowdown. The decrease was partially offset by the full-year impact of net revenue from the Copley business, which was acquired in April 2008, and accounted for $62,490 and $18,300 of product revenue in fiscal year 2009 and 2008, respectively.

Digital Radiography Products

The increase in product revenue for Digital Radiography Products for fiscal year 2009 versus the prior year was due primarily to an increase in shipments of mammography detectors to an OEM customer partially offset by the winding down of non-mammography product sales to another OEM customer. We expect this business to transition primarily to the sale of mammography detectors in fiscal year 2010.

B-K Medical

The decrease in B-K Medical product revenue in fiscal year 2009 versus the prior year was due primarily to unfavorable changes in the foreign currency exchange rate and a decline in demand due to the global economic slowdown. Also contributing to the decrease were customer order delays in anticipation of the introduction of two new ultrasound product lines, one of which we introduced late in the second quarter of fiscal year 2009, and the other of which we introduced late in the third quarter of fiscal year 2009.

Security Technology Products

The decrease in product revenue for Security Technology Products in fiscal year 2009 versus the prior year was due primarily to a decrease in sales of spare parts and accessories of approximately $5,500. The decrease was partially offset by more baggage scanners being shipped in fiscal year 2009 as compared to fiscal year 2008.

Engineering Revenue

Engineering revenue for fiscal year 2009 as compared with fiscal year 2008 is
summarized in the table below.



                                             Year Ended July 31,     Percentage
                                              2009          2008       Change
       Engineering Revenue:
       Medical Technology Products:
       Medical Imaging Products            $    11,554    $  6,775           71 %
       Digital Radiography Products              1,058       1,444          -27 %
       B-K Medical                                  -           -             0 %

       Total Medical Technology Products        12,612       8,219           53 %

       Security Technology Products              8,478       5,870           44 %

       Total                               $    21,090    $ 14,089           50 %

Medical Imaging Products

The increase in Medical Imaging Products engineering revenue in fiscal year 2009 versus the prior year was due primarily to an increase in activity on customer funded engineering projects. Our large OEM customers have continued to fund new product development despite the current market conditions.

Digital Radiography Products

The decrease in Digital Radiography Products engineering revenue in fiscal year 2009 versus the prior year was due primarily to less activity on a funded engineering project for an OEM customer.

Security Technology Products

The increase in Security Technology Products engineering revenue in fiscal year 2009 versus the prior year was due primarily to engineering revenue on a time and materials project with the TSA to transition the eXaminer XLB from a prototype into a product that can be manufactured. This increase was partially offset by the completion of a project in fiscal year 2008, which was accounted for under the completed contract method and generated revenue of $2,417 in fiscal year 2008.

Other Revenue

Other Revenue for fiscal year 2009 as compared with fiscal year 2008 is
summarized in the table below.



                                   Year Ended July 31,     Percentage
                                    2009         2008        Change
                Other Revenue:
                Hotel            $    9,289    $  10,914          -15 %

The decrease in fiscal year 2009 versus the prior year was due primarily to lower occupancy of the hotel and lower rates due to lower business and personal travel as a result of the economic slowdown.

Gross Margin

Product Gross Margin

Product gross margin for fiscal year 2009 as compared with fiscal year 2008 is
summarized in the table below.



                                      Year Ended July 31,         Percentage
                                      2009           2008           Change
           Product gross margin     $ 122,913      $ 147,849           -16.9 %
           Product gross margin %        33.6 %         38.1 %

Product gross margin percentage decreased in fiscal year 2009 versus the prior year due primarily to a decline in the gross margin of Medical Imaging Products, offset in part by growth in higher margin B-K Medical sales as a percentage of total net revenue. The decline in the Medical Imaging Products gross margin percentage was due primarily to pricing reductions on Medical Imaging Products, reduced manufacturing efficiency caused by lower production volumes, and a higher mix of lower margin Copley products. The decline in the Medical Imaging Products gross margin percentage was partially offset by an increase in the product gross margin percentage of Digital Radiography Products due primarily to higher volume and improved manufacturing yields.

Engineering Gross Margin

Engineering gross margin for fiscal year 2009 as compared with fiscal year 2008
is summarized in the table below.



                                           Year Ended July 31,          Percentage
                                         2009              2008           Change
     Engineering gross margin (loss)   $    (308 )      $     (391 )         -21.2 %
     Engineering gross margin %             -1.5 %            -2.8 %

We incurred a gross loss on engineering revenue in fiscal year 2009 primarily as a result of the write down of deferred engineering costs of $365 due to the settlement agreement that was reached with CAS in August 2009. We had a gross loss on engineering revenue in fiscal year 2009 and the prior year, due primarily to costs incurred in excess of revenue on certain customer funded Medical Imaging Products projects.

Operating Expenses

Operating expenses increased $2,594, or 2.0%, in fiscal year 2009 as compared
with fiscal year 2008 as shown below.



                                               Fiscal Year              Percentage of Net Revenue
                                           2009          2008           2009                 2008
Research and product development         $  45,276     $  48,947           11.5 %               11.8 %
Selling and marketing                       37,320        34,528            9.4 %                8.3 %
General and administrative                  40,166        39,296           10.1 %                9.6 %
Restructuring and voluntary
retirement charges                           6,619         4,016            1.7 %                1.0 %

Total operating expenses                 $ 129,381     $ 126,787           32.7 %               30.7 %

Research and product development expenses decreased $3,671 for fiscal year 2009 versus the prior year. The decrease was due primarily to an increase in customer funded engineering projects whose costs are recorded in engineering cost of sales. Also contributing to the decrease were reductions in our workforce late in fiscal year 2008 and during fiscal year 2009 to align our cost structure with market conditions as well as lower performance-based incentive compensation expenses. These decreases were partially offset by the acquisition of Copley in April 2008, which accounted for research and product development expenses of $6,923 and $1,971 in fiscal years 2009 and 2008, respectively.

Selling and marketing expenses increased $2,792 for fiscal year 2009 versus the prior year. The increase was due primarily to the acquisition of Copley in April 2008, which accounted for selling and marketing expenses of $3,706 and $1,548 in fiscal years 2009 and 2008, respectively. The increase was partially offset by reductions in our workforce late in fiscal year 2008 and during fiscal year 2009 to align our cost structure with market conditions as well as lower performance-based incentive compensation expenses.

General and administrative expenses increased $870 for fiscal year 2009 versus the prior year. The increase was due primarily to the full-year impact of the general and administrative expenses of Copley, which was acquired in April 2008. Copley accounted for general and administrative expenses of $2,699 and $866 in fiscal years 2009 and 2008, respectively. Also, contributing to the increase was $811 related to the settlement agreement reached with CAS in August 2009 and $1,160 of contingent professional fees related to income tax refunds and related interest of $8,389 received from the IRS and the State of Massachusetts in fiscal year 2009. These increases were partially offset by reductions in our workforce late in fiscal year 2008 and during fiscal year 2009 to align our cost structure with market conditions as well as lower performance-based incentive compensation expenses.

Restructuring and voluntary retirement charges increased $2,603 for fiscal year 2009 versus the prior year. The fiscal year 2009 amount includes severance and personnel related costs of $5,561 for involuntary terminations and $1,058 for facility exit costs primarily related to vacating 50% of our office facility in Canton, MA on July 31, 2009 as a result of moving certain operations to our Peabody, MA facility. The fiscal year 2008 amount includes severance and personnel related costs of $3,419 for our voluntary retirement program and severance and personnel related costs of $597 for involuntary terminations.

Other Income (Expense)



                                                   Year Ended July 31,
                                                    2009           2008
             Interest income, net                $    2,573       $ 7,935
             Gain on sale of other investments          838         2,084
             Other, net                                (436 )         715

The decrease in net interest income in fiscal year 2009 versus the prior year was due primarily to lower invested cash balances as a result of the acquisition of Copley, our $25,022 Common Stock repurchase in the first and second quarters of fiscal year 2009, and a decline in interest rates.

The gain on sale of other investments for fiscal year 2009 is due primarily to the receipt of escrow proceeds of $838 in fiscal year 2009 relating to the sale of our 17% ownership interest in BIR in fiscal year 2007. Fiscal year 2008 includes $2,000 from the sale of 20% of our 45% equity interest in SAHCO (for a remaining interest of 25%) and the receipt of escrow proceeds of $84 in fiscal year 2008 relating to the sale of our 17% ownership interest in BIR in fiscal year 2007.

Net other income (loss) during fiscal year 2009 consisted predominantly of foreign currency exchange losses from our Canadian, Danish, and British subsidiaries. Net other income during fiscal year 2008 consisted primarily of $555 we received from our insurance company as reimbursement for legal fees incurred in relation to an indemnification matter related to the sale of our wholly owned subsidiary, Camtronics.

Provision (Benefit) for Income Taxes



                                                    Year Ended July 31,
                                                     2009           2008
           Provision (benefit) for income taxes   $   (4,915 )    $ 11,559
           Effective tax rate                           -406 %          33 %

For fiscal year 2009, the benefit for income taxes was due primarily to an $1,820 valuation allowance reversal on Belgium net operating loss carryforwards that management has determined are more likely than not to be recognized and to IRS refunds of $8,143 received in fiscal year 2009. The refunds, which included $1,262 of interest, were for the carryback of a loss and research and development credits from fiscal year 2004 and from additional research and development tax credits and timing items claimed on amended income tax returns for fiscal years 2001 through 2006. We had recognized $2,701 of these refunds and related interest within stockholders' equity upon the adoption of Financial Accounting Standards Board ("FASB") Interpretation ("FIN") No. 48, "Accounting for Uncertainty in Income Taxes", which is an interpretation of Statement of Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes", in fiscal year 2008. The impact of these refunds and related interest was a reduction of unrecognized tax benefits by approximately $3,280, of which $1,356 was recorded as a tax benefit in fiscal year 2009. Also contributing to the benefit for income taxes in fiscal year 2009 was the reversal of $920 of tax reserves due to the expiration of statutes of limitations. These benefits were partially offset by additional provisions for agreed federal and state adjustments and typical taxes owed related to our operations in that period.

For fiscal year 2008, our effective tax rate varied from the statutory tax rate primarily as a result of the mix of income attributable to foreign versus domestic jurisdictions. Our effective tax rate for fiscal year 2008 included benefits of 3% and 1% from foreign operations and the U.S. domestic production deduction, respectively, as well as a benefit of 1% for the U.S. research and experimentation credit, which expired on December 31, 2007. These benefits were offset by a 3% provision due to an increase in tax reserves.

Net Income and Diluted Net Income per Share

Net income and diluted net income per share for fiscal year 2009 and fiscal year
2008 were as follows:



                                                    Fiscal Year
                                                2009          2008
                Net income                     $ 3,705      $ 23,486
                % of net revenue                   0.9 %         5.7 %
                Diluted net income per share   $  0.29      $   1.77

The decrease in net income and diluted net income per share for fiscal year 2009 versus the prior year were due primarily to declines in sales volumes, gross margins, and interest income, as well as an increase in the amount of restructuring charges in fiscal year 2009 versus the prior year comparable . . .