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 statements about product development, market and industry trends, strategic initiatives, regulatory approvals, sales, profits, expenses, price trends, R&D 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 2012 Overview

• Results of Operations

• Liquidity and Capital Resources

• 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 original equipment manufacturers, or OEMs, and end users primarily in the healthcare and airport 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 computed tomography, or CT, ultrasound, magnetic resonance imaging, or MRI, digital mammography, and CT-based automated explosive detection systems 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 into clinical end-user markets through our direct worldwide sales force under the brand name B-K Medical.

Our business is strategically aligned into three business segments-Medical Imaging, Ultrasound, and Security Technology. At the end of fiscal year 2011, we combined our OEM Ultrasound transducer business, which was previously reported in the Medical Imaging segment, and our B-K Medical direct Ultrasound systems business in the Ultrasound segment, under one management team. The combined business is now reported as the Ultrasound segment consistent with how our principal executive officer began monitoring the business in the first quarter of fiscal year 2012. All periods presented have been revised accordingly to reflect the new reporting segments.

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 products generally incorporate those products as components in their systems, which are in turn sold to end users, who are primarily hospitals and medical clinics. In our Security Technology segment, our OEM customers purchase and resell our products to end users including domestic and foreign airports as well as the TSA in the U.S. Those customers' purchasing dynamics are affected by the level of government funding, the expansion of airport terminals and fluctuations in airline passenger volume.

Fiscal Year 2012 Overview

The following table sets forth the percentage of total net revenue by reporting
segment for fiscal years 2012 and 2011. All periods presented have been revised
accordingly to reflect our new reporting segments.



                                               Fiscal Year
                                             2012       2011
                       Medical Imaging          59 %       62 %
                       Ultrasound               29 %       27 %
                       Security Technology      12 %       11 %

                       Total                   100 %      100 %

The following is a summary of the metrics from our Consolidated Statement of Operations that our 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
                                                   2012             2011              Change
Total net revenue                                $ 516,571        $ 473,595                   9 %
Gross profit                                       193,184          172,963                  12 %
Gross margin                                            37 %             37 %
Income from operations                              39,963           20,736                  93 %
Operating margin                                         8 %              4 %
Income from continuing operations                $  43,071        $  16,620                 159 %
Diluted net income per share from continuing
operations                                            3.42             1.33                 157 %

During fiscal year 2012 our total net revenue increased by 9% as compared to the prior year due primarily to growth in revenue in our Security and Ultrasound segments of 24% and 17%, respectively.

Gross margin remained relatively consistent in fiscal year 2012 versus the prior year due to gross margin increases in our Ultrasound and Security Technology Segments partially offset by a gross margin decline in our Medical Imaging segment.

Income from operations increased in fiscal year 2012 from the prior year comparable period due primarily to increased gross profit from an increase in sales volumes and headcount reductions made in fiscal year 2011. Also contributing to the increase was a reduction in internally funded research and product development expenses and restructuring charges partially offset by an increase in selling, general and administrative expenses.

During fiscal year 2012, we received a refund of $12,007 as the result of the completion of an IRS audit of U.S. Federal income tax returns for the fiscal years ended July 31, 2003, 2005, and 2008. The refund was largely the result of U.S. Federal research and experimentation credits that carryover from the fiscal years ended July 31, 1991 through 2000 into the audited returns. We recorded a tax benefit for this refund, including the related interest, in the audited Consolidated Statement of Operations of $10,025 in fiscal year 2012. The tax benefit from the refund and interest were partially offset by related contingent professional fees of $2,714 recorded in general and administrative expenses within income from operations in the audited Consolidated Statement of Operations in fiscal year 2012. In connection with the conclusion of the IRS audit, we also recorded a reversal and re-measurement of related tax reserves of $2,308 in the audited Consolidated Statement of Operations in fiscal year 2012.

In addition to the positive impact from the growth in income from operations and the tax benefit of $10,025, income from continuing operations and diluted net income per share from continuing operations in fiscal year 2012 were favorably impacted by a gain of $2,500 on the sale of our remaining 25% ownership interest in a China-based affiliate.

During the first quarter of fiscal year 2011, we sold our hotel business, and realized net proceeds of $10,467, after transaction costs. We recorded a gain on sale of the hotel business of $924, net of a tax provision of $505, or $0.07 per diluted share in fiscal year 2011. The hotel business is being reported as a discontinued operation.

Revenues and net income (loss) for the hotel business for fiscal years 2011 and 2010 were as follows:

                                          Year Ended July 31,
                                           2011           2010
                    Total net revenue   $    2,906       $ 8,784
                    Net income (loss)          289          (244 )

We had cash and cash equivalents and marketable securities of $187,011 and $169,656 at July 31, 2012 and 2011, respectively. As of July 31, 2012 our investment portfolio primarily consisted of demand deposits at highly rated banks and financial institutions. The following table sets forth an overview of our cash flows for fiscal years 2012 and 2011. See Note 1 to the Notes to Consolidated Financial Statements included in this Annual

Report on Form 10-K for information regarding certain items in our fiscal year 2011 audited Consolidated Statement of Cash Flows being reclassified to conform to the current period presentation.

                                                                 Year Ended July 31,
                                                                2012             2011

Net cash provided by continuing operations for operating
activities                                                    $  73,710        $  30,228
Net cash used by continuing operations for investing
activities                                                      (27,899 )        (10,986 )
Net cash used for financing activities                          (26,527 )        (20,152 )
Net cash used by discontinued operations                             -              (335 )
Effect of exchange rate changes on cash                          (1,929 )          1,647

Net increase in cash and cash equivalents                     $  17,355        $     402

During fiscal year 2012, we generated $73,710 of cash provided by continuing operations for operating activities as compared to $30,228 in the prior year. The increase was due primarily to an increase in sales volume and improved operating efficiency in fiscal year 2012 as compared to the prior year comparable period as well as an income tax refund and related interest received in fiscal year 2012 of $12,007. Net cash used by continuing operations for investing activities in fiscal year 2012 was due primarily to capital spending of $30,606, which includes the construction of a manufacturing facility in Shanghai, China, and the purchase of a new facility in State College, Pennsylvania. Prior year cash used by continuing operations for investing activities was due primarily to capital spending of $22,430, which included the construction of the Shanghai, China manufacturing facility. This was partially offset by the proceeds from the sale of our hotel business of $10,467, after transaction costs. The net cash used for financing activities in fiscal years 2012 and 2011 primarily reflected cash used to repurchase common stock of $23,260 and $15,187, respectively.

Results of Operations

Fiscal Year 2012 Compared to Fiscal Year 2011

Net Revenue

Product Revenue

Product revenue for fiscal year 2012 as compared with fiscal year 2011 is
summarized in the table below.



                                     Year Ended July 31,         Percentage
                                      2012          2011           Change
             Product Revenue:
             Medical Imaging       $  290,665     $ 283,615                2 %
             Ultrasound               151,201       129,313               17 %
             Security Technology       52,809        34,694               52 %

             Total                 $  494,675     $ 447,622               11 %

Medical Imaging

The increase for fiscal year 2012 versus the prior year primarily reflects growth in our MRI and digital mammography product lines driven by higher sales volume of existing products. This increase was offset by fewer shipments in our CT product line due primarily to customer ordering patterns and lower sales of our motion control products, reflecting a decline in the semiconductor market and the sale of a subsidiary of our motion control business in the fourth quarter of fiscal year 2011.

Ultrasound

The increase for fiscal year 2012 versus the prior year was due primarily to increased sales of our Flex Focus platform of products in the U.S. through our expanded sales force and internationally through both our

direct sales force and our distributor network. Also contributing to the increase was the acquisition of an OEM ultrasound transducer business in the second quarter of fiscal year 2011.

Security Technology

The increase for fiscal year 2012 versus the prior year was due primarily to increased sales of baggage scanners, driven by demand for our new high speed and small footprint systems as well as growth in demand for our medium speed systems.

Engineering Revenue

Engineering revenue for fiscal year 2012 as compared with fiscal year 2011 is
summarized in the table below.



                                      Year Ended July 31,        Percentage
                                       2012           2011         Change
             Engineering Revenue:
             Medical Imaging        $    11,101     $  9,417              18 %
             Ultrasound                      -           124            -100 %
             Security Technology         10,795       16,432             -34 %

             Total                  $    21,896     $ 25,973             -16 %

Medical Imaging

The increase in fiscal year 2012 versus the prior year was due primarily to increased work on customer funded engineering projects and the timing of project milestones being completed.

Security Technology

The decrease for fiscal year 2012 versus the prior year was due primarily to the timing of work performed on a significant development project for a large OEM customer.

Gross Margin

Product Gross Margin

Product gross margin for fiscal year 2012 as compared with fiscal year 2011 is
summarized in the table below.



                                     Year Ended July 31,         Percentage
                                     2012           2011           Change
            Product gross profit   $ 192,387      $ 169,469             13.5 %
            Product gross margin        38.9 %         37.9 %

Product gross margin increased in fiscal year 2012 versus the prior year due primarily to improved gross margin in our Ultrasound and Security Technology segments, partially offset by a decline in gross margin in our Medical Imaging segment. The improvement in our Ultrasound segment was driven by cost savings following consolidation of our manufacturing operations at the end of fiscal year 2011, growth in overall sales volume, as well as an increase in shipments of higher-margin premium systems, while the improvement in our Security Technology segment was driven by favorable product mix and higher sales volume. The Medical Imaging segment decline was driven by vendor component quality issues in our digital mammography business and unfavorable product mix.

Engineering Gross Margin

Engineering gross margin for fiscal year 2012 as compared with fiscal year 2011
is summarized in the table below.



                                       Year Ended July 31,          Percentage
                                       2012            2011           Change
          Engineering gross profit   $    797        $  3,494             -77.2 %
          Engineering gross margin        3.6 %          13.5 %

The decreases in the engineering gross profit and engineering gross margin in fiscal year 2012 versus the prior year were due primarily to the mix of engineering projects we worked on in our Security Technology segment in fiscal year 2012 as compared to the prior year. Also contributing to the decrease in gross margin was an increase in share-based and cash-based incentive compensation on improved operating results.

Operating Expenses

Operating expenses increased $994, or less than 1%, in fiscal year 2012 as
compared with fiscal year 2011 as shown below.



                                                Fiscal Year                 Percentage of Net Revenue
                                           2012            2011             2012                 2011
Research and product development         $  57,230       $  63,125              11.1 %               13.3 %
Selling and marketing                       44,238          41,413               8.6 %                8.7 %
General and administrative                  51,753          40,623              10.0 %                8.6 %
Restructuring charges                           -            7,066               0.0 %                1.5 %

Total operating expenses                 $ 153,221       $ 152,227              29.7 %               32.1 %

Research and product development costs included in operating expenses are related to projects not funded by our customers. These expenses decreased $5,895 in fiscal year 2012 versus the prior year due primarily to cost savings from work force reductions made throughout fiscal year 2011 as well as decreases in consulting and material costs and less investment in internally funded research and product development projects.

Selling and marketing expenses increased $2,825 in fiscal year 2012 versus the prior year due primarily to new product launches and increased trade show activity in the Ultrasound segment.

General and administrative expenses increased $11,130 in fiscal year 2012 versus the prior year due primarily to the impact of contingent consulting fees of $2,714 in fiscal year 2012 related to the income tax refund and related interest received in that period, as well as increased share-based and cash-based incentive compensation costs of $3,530, on improved operating results. Also contributing to the increase was inquiry costs of $1,288 in fiscal year 2012 related to a distributor matter at B-K Medical and the favorable impact in fiscal year 2011 of an acquisition bargain purchase gain included in general and administrative expenses of $1,042. These increases were partially offset by $386 of amortization for the intangible assets and inventory fair value adjustment associated with this acquisition.

Restructuring charges in fiscal year 2011 included severance and personnel related costs for our plan to reduce our headcount by 155 employees worldwide. We expect that this restructuring will result in annual expense savings of approximately $11,500, a portion of which will fund strategic growth initiatives.

Other Income (Expense)



                                                  Year Ended July 31,
                                                   2012            2011
            Interest income, net                $       532       $  711
            Gain on sale of other investments         2,500           -
            Other income (expense), net               1,204         (515 )

The gain on sale of other investments for fiscal year 2012 was due to $2,500 from the sale of our 25% equity interest in a China-based affiliate. The book value of this investment was written down to $0 in the fiscal year ended July 31, 2006, which we refer to as fiscal year 2006.

Net other income (expense) during fiscal years 2012 and 2011 consisted predominantly of foreign currency exchange gains (losses) from our foreign subsidiaries in Denmark and Canada. Also contributing to fiscal year 2012 was income of approximately $350 from the resolution of obligations for the fit out of a former facility.

Provision for Income Taxes



                                               Year Ended July 31,
                                                2012           2011
                Provision for income taxes   $    1,128       $ 4,312
                Effective tax rate                    3 %          21 %

Our effective income tax rate on continuing operations is based upon income for the year, the composition of the income in different countries, and adjustments, if any, in the applicable quarterly periods for the potential tax consequences, benefits, resolutions of tax audits or other tax contingencies.

The effective tax rate for fiscal year 2012 of 3% was due primarily to a discrete benefit of $10,025 from the receipt of an IRS tax refund, including the related interest, and reversal and re-measurement of related tax reserves of $2,308. The decrease in the effective rate in fiscal year 2012 was partially offset by the unfavorable impact of the expiration of the federal research and experimentation credit on December 31, 2011. In the next four quarters, the statute of limitations for our fiscal years ended July 31, 2009 and July 31, 2006 may expire for U.S. Federal and state income taxes and for foreign subsidiaries, respectively, and it is reasonably expected that net unrecognized benefits, including interest, of approximately $900 may be recognized.

For fiscal year 2011, the effective tax rate of 21% as compared to the U.S. statutory rate of 35% was due primarily to the full year benefit of the federal research and experimentation credit, the discrete tax benefit of $536 for the reinstatement of the federal research and experimentation credit back to January 1, 2010, lower foreign tax rates as compared to the U.S statutory rate of 35%, the discrete benefit of $599 from the reversal of tax reserves as a result of the expiration of the statute of limitations for the fiscal year ended July 31, 2007, which we refer to as fiscal year 2007, and settlements with various taxing authorities. In addition, taxes of $621 related to the bargain purchase gain from the acquisition of an OEM ultrasound transducer and probe business were recorded in operating expenses in fiscal year 2011.

Income from continuing operations and diluted net income per share from continuing operations

Income from continuing operations and diluted net income per share from continuing operations for fiscal years 2012 and 2011 were as follows:

                                                             Year Ended July 31,
                                                              2012           2011
 Income from continuing operations                         $   43,071      $ 16,620
 % of net revenue                                                 8.3 %         3.5 %
 Diluted net income per share from continuing operations   $     3.42      $   1.33

The increase in income from continuing operations and diluted net income per share from continuing operations for fiscal year 2012 versus the prior year was due primarily to cost savings following consolidation of our manufacturing operations and from other operational headcount reductions in fiscal year 2011. Also contributing to the increase was gross profit from an increase in sales volume in fiscal year 2012, declines in research and product development costs and restructuring charges, an income tax benefit from the refund and related interest in fiscal year 2012, and a gain on sale of an equity interest in fiscal year 2012. These items were partially offset by the increases in selling and marketing and general and administrative expenses.

Discontinued Operations

Discontinued Operations for fiscal year 2012 as compared with fiscal year 2011 is summarized in the table below.

Year Ended July 31, 2012 2011 Income from discontinued operations, net of tax $ - $ 289

During the first quarter of fiscal year 2011, we sold our hotel business.

Fiscal Year 2011 Compared to Fiscal Year 2010

Net Revenue

Product Revenue

Product revenue for fiscal year 2011 as compared with fiscal year 2010 is summarized in the table below.

                                     Year Ended July 31,         Percentage
                                      2011          2010           Change
             Product Revenue:
             Medical Imaging       $  283,615     $ 241,952               17 %
             Ultrasound               129,313       112,669               15 %
             Security Technology       34,694        39,144              -11 %

             Total                 $  447,622     $ 393,765               14 %

Medical Imaging

The increase for fiscal year 2011 versus the prior year was driven primarily by growth in our CT product line as well as growth in our digital mammography and MRI product lines. The growth in our CT and MRI product lines was driven primarily by higher sales volume of new and existing products. The growth in our digital mammography product line was due primarily to increased sales volumes with a large OEM customer.

Ultrasound

The increase for fiscal year 2011 versus the prior year was due primarily to increased sales volume of our Flex Focus platform of products, with notable growth of 10% in the U.S. market over fiscal year 2010, and growth in our OEM ultrasound transducer and probe business. The growth in our ultrasound probe product line was due primarily to the acquisition of an OEM ultrasound transducer and probe business, which contributed approximately $6,500 of product revenue in fiscal year 2011.

Security Technology

The decreases in product revenues for fiscal year 2011 versus the prior year were due primarily to sales of fewer baggage scanners as demand from our customer was negatively impacted by the timing of bridge orders from the TSA, which was in the process of moving to a new procurement process, and product mix.

Engineering Revenue

Engineering revenue for fiscal year 2011 as compared with fiscal year 2010 is
summarized in the table below.


. . .