UNITEDTable STATES SECURITIESof AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 Contents

Table Forwardof Looking Statements Contents

TheTable Companyof brings to market advanced detection and inspection products by adapting various medical and laboratory technologies for government and commercial uses, such as security, defense and process control. Contents

Table Productsof and Services Contents

Table Market of Contents

Table Distribution of Contents

$52.2 millionTable for the FAA to purchase certified explosive detection technology, consisting of the Company's CTX 5000 systems. As a result, the Company had sales to the FAA of the Company's products and services of $30.8 million in fiscal 2000, $37.1 million in fiscal 1999 and $37.9 million in fiscal 1998. The Company's largest sales contract to date, for 105 CTX Series systems, all of which have been shipped, was with the FAA. The FAA signed three new contracts with the Company in March 2000 to purchase up to 60 of each of the Company's CTX 2500, CTX 5500 and CTX 9000 systems. The Company cannot assure that the FAA will obtain funding to purchase or will purchase more than the 11 CTX 9000 systems, 15 CTX 5500 systems and 13 CTX 2500 systems for which the Company has received orders to date. Contents

CTTable Based Competitor. In 1994, the Company introduced the first CT based explosive detection system, which was subsequently certified by the FAA. In November 1998 L-3 Communications Corporation ("L-3"), a spin-off of Lockheed Martin Corporation, entered the market with a CT based system that was certified by the FAA. In January 2001, L-3 announced that the FAA had certified a more compact and lower throughput version of its CT based product. The Company believes that its CTX Series is superior to the L-3 products for the following reasons: Contents

Table Quantum of Contents

Distribution. TheTable Companyof seeks government funding through the grant application process. The application process involves a team comprising senior research and development employees and senior management. The Company markets its commercialized products through a marketing manager and a direct sales person, working with research and development employees to prepare and present proposals. Contents

Inovec. TheTable Company's current Inovec products include the StereoScan™ 3-D log scanner and grade optimizer, YieldMaster™ headrig carriage optimizer, LogMaster™ small log optimizer, TrimMaster™ trim optimizer, CantMaster™ cant optimizer and WaneMaster™ edger optimizer. These systems use laser scanners to measure the size of logs or sawn wood before further sawing. Using proprietary optimizing algorithms, the systems develop cutting solutions to maximize the volume of usable wood, and then control the relative positions of the saw and the wood. In addition to providing generally a one year parts and service warranty, the Company offers fee-based primary and back-up service contracts to its customers. Contents

Table Backlog of Contents

EDSTable U.S. Patents. The Company has two United States patents for automatic concealed object detection systems using a pre-scan stage as used in the CTX Series. These patents expire in the years 2010 and 2011. Outside the United States, the time period for filing foreign counterparts of these patents has expired, and the Company did not seek or obtain patent protection. The patents have not prevented competition from CT based competitors because such system does not use a pre-scan stage. The Company also has a patent application pending covering a number of new features contained in the CTX 9000 model. In accordance with the terms of the Company's development contracts with the FAA, the U.S. Government has rights to use certain of the Company's proprietary technology developed after the award of the Contracts and funded by the contracts. The U.S. Government may use such rights to produce or have produced for the U.S. Government competing products using such technology. Contents

17Table of Contents

Table of EXECUTIVE OFFICERS OF THE REGISTRANT Contents

FluctuationsTable in Operating Results. The Company's past operating results have been, and its future operating results will be, subject to fluctuations resulting from a number of factors. These factors include: Contents

Table Financialof Information about Domestic and Foreign Sales Contents

Table ITEMof 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Contents

23Table of Contents

EDS. TheTable Companyof develops, manufactures, markets and supports explosive detection systems for civil aviation security based on advanced computed tomography ("CT") technology. The Company's products were the first automated explosive detection systems to be certified by the Federal Aviation Administration ("FAA") as meeting its stringent requirements. The Company has sold 231 systems to the FAA, foreign aviation security agencies and domestic and foreign airports and airlines. Contents

27Table of Contents

Wood productTable revenues and service revenues were $11.9 million and $1.5 million in 2000, respectively. These revenues were primarily attributable to revenues from the Inovec subsidiary acquired with an effective date of January 1, 2000. As of December 31, 2000, the Company had in backlog Inovec equipment orders and service agreements of $1.8 million. In the first quarter of 2001, the Company received orders valued at approximately $2.2 million for laser-based optimization and scanning systems for lumber manufacturing. WoodVision is still developing the CT based log scanner and had no revenues or backlog as of December 31, 2000. Contents

Table Comparison of Fiscal Years 1999 and 1998 Contents

Table Noncashof Charges Contents

The CompanyTable previously borrowed against a committed equipment line of credit agreement with a bank, which converted into a term loan after draw down. Borrowings are secured by the assets purchased or financed. At December 31, 2000, the Company had an outstanding $331,000 term loan due June 2003 and a $196,000 term loan due November 2001. The term loans bear interest at the bank's prime rate plus 1.5% (11.0% at December 31, 2000). Contents

Table of ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Contents

Table of ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Contents

37Table of Contents

Pursuant toTable the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant in the capacities and on the dates indicated. Contents

REPORTTable OFof INDEPENDENT ACCOUNTANTS Contents

F-3Table of Contents

F-5Table of Contents

EDS. TheTable Companyof develops, manufactures, markets and supports explosive detection systems for civil aviation security based on advanced CT technology. The Company's products were the first automated explosive detection system, to be certified by the Federal Aviation Administration ("FAA") as meeting its stringent requirements. The Company has sold 231 systems to the FAA, to foreign aviation security agencies and to domestic and foreign airports and airlines. Contents

ShareTable information for all periods presented has been retroactively adjusted to reflect a 1-for-11 reverse stock split of Common Stock and Preferred Stock effected on March 15, 1996, and a 2-for-1 Common Stock dividend effected on February 7, 1997. Contents

In December 1999,Table the Securities and Exchange Commission issued Staff Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition," which provides guidance on the recognition, presentation and disclosure of revenue in financial statements filed with the Securities and Exchange Commission. SAB 101 outlines the basic criteria that must be met to recognize revenue and provides guidance for disclosures related to revenue recognition policies. SAB 101 is effective for the fiscal quarter beginning October 2, 2000, however earlier adoption is permitted. The adoption of SAB 101 did not have a material impact on the consolidated financial statements. Contents

Table Researchof and Development Costs Contents

TheTable Company's ability to timely deliver its products is dependent upon the availability of quality components and subsystems used in these products. The Company depends in part upon subcontractors to manufacture, assemble and deliver certain items in a timely and satisfactory manner. The Company obtains certain components and subsystems from single or a limited number of sources. A significant interruption in the delivery of such items could have a material adverse effect on the Company's financial condition and results of operations. Contents

The CompanyTable believes the recorded value of financial instruments, including cash and cash equivalents, accounts receivable and long-term debt, approximate fair value at each balance sheet date. Contents

The followingTable is a reconciliation between the components of the basic and diluted net income (loss) per share calculations for the periods presented below (in thousands, except per share data): Contents

TheTable Company has been awarded various research and development contracts and grants by the FAA and other government agencies to share in the costs of developing and enhancing the Company's products. During 2000, 1999 and 1998, the Company was entitled to reimbursements of $0.9 million, $0.7 million and $3.6 million, respectively, under research and development contracts and grants. Such reimbursements have been reflected as a reduction to research and development expense in each period presented. Billings under such research and development contracts and grants are rendered monthly on the basis of actual costs incurred. At December 31, 2000 and 1999, the related receivable balances from these contracts and grants were $626,000 and $47,000, respectively. Contents

Under theTable terms of the acquisition of Quantum in September 1997, 777,000 shares of common stock have been either issued to Quantum shareholders in exchange for all the Quantum capital stock outstanding or reserved for issuance in connection with Quantum common stock options outstanding prior to the acquisition which were converted into options to purchase InVision common stock. Contents

F-15Table of Contents

throughTable 2012.of Future minimum lease payments under these leases at December 31, 2000 are as follows (in thousands): Contents

Table Theof Company's effective tax rate for 2000, 1999 and 1998 differs from the U.S. statutory income tax rate as follows: Contents

InTable recognition of development costs incurred by Quantum Design, Inc. ("QD") prior to the spin-out of Quantum, Quantum agreed to pay QD a royalty rate of 4% of net sales of certain products, whether sold by Quantum or any licensee, for a period of six years from the effective date of the agreement, April 15, 1994. Quantum paid the minimum royalty of $50,000 in 1998. In 1999 and 2000, there was no minimum royalty payment and no sales that would have resulted in a royalty payment to QD. The agreement expired in April 2000. Contents

~~FORM~~UNITED ~~10-K~~ STATES SECURITIES AND EXCHANGE COMMISSION

~~(Mark~~Washington, ~~One)~~ D.C. 20549

~~/x/~~FORM ~~ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934~~10-K

~~For~~(Mark ~~the fiscal year ended DECEMBER 31, 2000~~ One)

or x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

/For /the ~~TRANSITION~~fiscal ~~REPORT~~year ~~PURSUANT~~ended TODecember 31, ~~SECTION~~2003 ~~13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934~~or

~~For~~o ~~the~~TRANSITION ~~transition~~REPORT ~~period~~PURSUANT ~~from to .~~ TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

~~Commission~~For ~~File~~the ~~Number:~~transition ~~0-20815~~period from to

~~INVISION~~Commission ~~TECHNOLOGIES, INC. (Exact~~file ~~name~~number: ~~of registrant as specified in its charter)~~ 0-28236

DELAWARE		94-3123544
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

INVISION TECHNOLOGIES, INC.

~~7151 GATEWAY BOULEVARD, NEWARK, CALIFORNIA 94560~~ (~~Address~~Exact Name of ~~principal~~Registrant ~~executive~~as ~~offices,~~Specified ~~including~~in ~~zip~~Its ~~code~~Charter)

DELAWARE (~~510) 739-2400 (Registrant's~~State ~~telephone~~or ~~number,~~Other ~~including~~Jurisdiction ~~area~~of ~~code~~Incorporation or Organization) 94-3123544 (I.R.S. Employer Identification No.)

~~Securities Registered~~7151 ~~Pursuant~~GATEWAY toBOULEVARD, ~~Section 12(b)~~NEWARK, ofCALIFORNIA ~~the Act: NONE~~ 94560

~~Securities Registered Pursuant to Section 12~~(g)Address of ~~the~~Principal Executive ~~Act: COMMON STOCK~~Offices, ~~$.001~~including ~~PAR~~Zip ~~VALUE~~ Code)

~~Indicate by check mark whether the registrant~~ (1510) ~~has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act~~739-2400 ~~of 1934 during the preceding 12 months~~ (orRegistrant’s ~~for~~Telephone ~~such shorter period that the registrant was required to file such reports)~~Number, ~~and~~Including ~~(2) has~~Area ~~been subject to such filing requirements for the~~Code) ~~past 90 days. Yes /x/ No / /~~

~~Indicate by~~Securities ~~check~~Registered ~~mark~~Pursuant ~~if disclosure of delinquent filers pursuant~~ to ~~Item~~Section 12(b) ~~405~~ of ~~Regulation S-K is not contained herein and will not be contained, to~~ the ~~best of~~Act: ~~Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this~~NONE ~~Form 10-K. / /~~

~~Based on~~Securities ~~the~~Registered ~~closing~~Pursuant ~~price~~to ~~of $3.00 on March~~Section ~~26,~~12(g) ~~2001, the aggregate market value~~ of the ~~voting stock held by non-affiliates of the Registrant was $28,264,821. For~~Act: ~~purposes~~COMMON ~~of this computation~~STOCK, ~~voting stock held by directors and executive officers of the Registrant and stockholders holding 5% or more of the Registrant's outstanding Common Stock has been excluded~~$0.001 ~~Such~~PAR ~~exclusion is not intended, and shall not be deemed, to be an admission that such directors, executive officers and stockholders are affiliates of the Registrant.~~ VALUE

On Indicate by check mark whether the registrant: (1) has filed all reports ~~March~~required ~~26,~~to ~~2001,~~be ~~there~~filed ~~were~~by ~~12,650,281~~Section ~~shares~~13 or 15(d) of the ~~Registrant's~~Securities ~~Common~~Exchange ~~Stock~~Act ~~outstanding~~of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o

~~DOCUMENTS~~ Indicate ~~INCORPORATED~~by BYcheck ~~REFERENCE~~ mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x

~~Portions~~ Indicate ofby ~~the~~check ~~Registrant's~~mark ~~definitive~~whether ~~Proxy Statement which will be filed with~~ the ~~Securities~~registrant ~~and~~is ~~Exchange~~an ~~Commission~~accelerated infiler ~~connection with the Registrant's~~(as ~~Annual~~defined ~~Meeting~~in ofExchange ~~Stockholders~~Act ~~to be held June~~Rule ~~21,~~12b-2). ~~2001~~Yes ~~are~~x ~~incorporated~~No ~~by reference in Part III, Items 10, 11, 12 and 13 of this report.~~ o

~~INVISION~~ On ~~TECHNOLOGIES~~June 27, 2003, which was the last business day of the registrant’s most recently completed second fiscal quarter, the registrant had 17,259,884 shares of common stock outstanding, and the aggregate market value of the voting stock held by non-affiliates of the registrant was approximately $375.7 ~~INC~~million (based on the closing price of $24.55 on that day). For purposes of this ~~TABLE~~computation, OFvoting ~~CONTENTS~~ stock held by directors and executive officers of the registrant and stockholders holding 5% or more of the registrant’s outstanding common stock has been excluded. Such exclusion is not intended, and shall not be deemed, to be an admission that such directors, executive officers and stockholders are affiliates of the registrant.

		PAGE
COVER PAGE
TABLE OF CONTENTS		i
PART I.		1
Item 1. Business		1
Item 2. Properties		22
Item 3. Legal Proceedings		22
Item 4. Submission of Matters to a Vote of Security Holders		22
PART II.		23
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters		23
Item 6. Selected Financial Data		24
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations		25
Item 7A. Quantitative and Qualitative Disclosures About Market Risk		33
Item 8. Financial Statements And Supplementary Data		34
Item 9. Changes In And Disagreements With Accountants On Accounting And Financial Disclosure		34
PART III.		35
Item 10. Directors And Executive Officers Of The Registrant		35
Item 11. Executive Compensation		35
Item 12. Security Ownership of Certain Beneficial Owners and Management		35
Item 13. Certain Relationships and Related Transactions		35
PART IV.		36
Item 14. Exhibits, Financial Statement Schedules And Reports On Form 8-K		36
SIGNATURES		38

On March 1, 2004, there were 17,297,789 shares of the registrant’s common stock outstanding.

iINVISION TECHNOLOGIES, INC TABLE OF CONTENTS

TABLE OF ~~PART I.~~ CONTENTS

ITEM 1. BUSINESS


PART I
	ITEM 1. BUSINESS
	ITEM 2. PROPERTIES
	ITEM 3. LEGAL PROCEEDINGS
	ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
PART II
	ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
	ITEM 6. SELECTED FINANCIAL DATA
	ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
	ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
	ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
	ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
	ITEM 9A. CONTROLS AND PROCEDURES
PART III
	ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
	ITEM 11. EXECUTIVE COMPENSATION
	ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
	ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
	ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
PART IV
	ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
SIGNATURES
EXHIBIT INDEX
EXHIBIT 2.2
EXHIBIT 10.34
EXHIBIT 14.1
EXHIBIT 21.1
EXHIBIT 23.1
EXHIBIT 31.1
EXHIBIT 31.2
EXHIBIT 32.1

This Annual Report on Form 10-K of InVision Technologies, Inc. (the "Company") contains forward-looking statements which involve risks and uncertainties. When used in this Annual Report on Form 10-K, the words "anticipate," "believe," "estimate," and "expect" and similar expressions identify such forward-looking statements. The Company's actual results, performance, or achievements could differ materially from the results expressed in, or implied by, these forward-looking statements. Factors that could cause or contribute to such differences include:


PART I.
Item
1.		Business
2.		Properties
3.		Legal Proceedings
4.		Submission of Matters to a Vote of Security Holders
PART II.
Item
5.		Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
6.		Selected Financial Data
7.		Management’s Discussion and Analysis of Financial Condition and Results of Operations
7A.		Quantitative and Qualitative Disclosures About Market Risk
8.		Financial Statements and Supplementary Data
9.		Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
9A.		Controls and Procedures
PART III.
Item
10.		Directors and Executive Officers of the Registrant
11.		Executive Compensation
12.		Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
13.		Certain Relationships and Related Transactions
14.		Principal Accountant Fees and Services
PART IV.
Item
15.		Exhibits, Financial Statement Schedules and Reports on Form 8-K
Signature Page

InVision, ~~General~~ Quantum Magnetics, Yxlon, Hapeg, CTX, CTX 5500 DS, CTX 9000 DSi, QScan, QScan QR 2000S, XES 3000 and XES 3500, among others, are trademarks of InVision Technologies, Inc. or one of its subsidiaries in the United States and other countries. InVision, Quantum Magnetics, Yxlon and QScan, among others, are registered trademarks marks of InVision Technologies, Inc. or one of its subsidiaries in the United States.

~~The Company~~PART ~~is the worldwide leader in explosive detection technology~~I. ~~The Company develops, manufactures, markets and supports explosive detection systems for civil aviation security~~ ~~based on advanced computed tomography ("CT") technology. The Company's products were the first automated explosive detection systems to be certified by the Federal Aviation Administration ("FAA") as~~ ~~meeting its stringent requirements. The Company has sold an aggregate of 231 systems to the FAA, foreign aviation security agencies, and domestic and foreign airports and airlines.~~

~~The Company,~~ITEM ~~through its wholly owned subsidiary Quantum Magnetics, Inc~~1. ("Quantum"), develops for commercialization patented and proprietary technology for inspection, detection and analysis of explosives and other materials. Quantum's products are based on passive magnetic sensing technology and quadrupole resonance ("QR") technology, a form of magnetic resonance. The Company believes that QR technology is more accurate than conventional x-ray bulk detection techniques because QR identifies the explosive itself compared to other techniques that predict the presence of explosives by measuring object density or atomic number. Quantum receives grants from a variety of US government agencies for research and development of military and humanitarian landmine detection, carry-on luggage screening, concealed weapon detection, drug detection, and in-process materials inspection. BUSINESS

~~In February 2000~~ References to “we,” ~~the~~“us” ~~Company~~and ~~announced~~“our” ~~the~~mean ~~formation~~InVision ofTechnologies, ~~the~~Inc. ~~WoodVision~~and its ~~division~~consolidated ~~("WoodVision")~~subsidiaries, toincluding ~~develop~~Yxlon ~~the~~International ~~Company's~~X-Ray CTGmbH, ~~technology~~Yxlon International toSecurity ~~optimize~~GmbH, ~~the~~Quantum ~~value~~Magnetics, Inc. and ~~yield~~Inovec, ofInc. ~~harvested~~

1Forward Looking Statements

~~timber.~~ This ~~Previous~~Annual ~~studies~~Report ~~indicated~~on ~~that~~Form CT10-K ~~technology~~of ~~can~~InVision beTechnologies, ~~applied~~Inc. toincludes forward-looking ~~see~~statements ~~inside~~within athe ~~log~~meaning ~~before~~of itSection 27A isof ~~sawn.~~the ~~The~~Securities Act ~~Company~~of ~~believes~~1933, ~~that~~and aSection 21E ~~market~~of ~~for~~the aSecurities ~~product~~Exchange ~~that~~Act ~~does~~of ~~this exists~~1934. ~~The~~We ~~Company is~~intend ~~conducting~~these ~~field~~forward-looking ~~trials,~~statements ~~which~~to ~~started~~be incovered ~~1999,~~by tothe ~~develop~~safe ~~such~~harbor aprovisions for ~~system.~~forward-looking Instatements ~~connection~~contained ~~with~~in the ~~formation~~Private Securities Litigation Reform Act of ~~WoodVision~~1995, ~~the~~and ~~Company~~we ~~acquired,~~are asincluding athis ~~wholly-owned~~statement ~~subsidiary,~~for ~~Inovec, Inc.~~purposes of ~~("Inovec"),~~complying ~~effective~~with asthese ofsafe ~~January 1,~~harbor ~~2000~~provisions. ~~Inovec~~We ~~manufactures,~~have ~~markets~~based these forward-looking statements on our current expectations and ~~supports~~projections ~~advanced~~about future ~~optimization~~events. ~~equipment~~These ~~for~~forward-looking ~~sawmills~~statements ~~based~~are onnot ~~laser~~guarantees ~~scanning~~of future performance and ~~other~~are ~~optimization~~subject ~~technologies. Since~~to ~~inception~~risks, ~~Inovec~~uncertainties ~~has~~and ~~installed~~assumptions, ~~over~~including those ~~600~~in ~~laser~~the ~~scanners~~section ~~and~~entitled ~~other~~“Risk ~~optimization~~Factors” ~~systems~~at inthe ~~over~~end ~~300~~of ~~sawmills~~this ~~worldwide~~Item 1. Actual results may vary materially from these forward-looking statements as a result of these and other risks.

~~InVision was~~ Words ~~incorporated~~such inas ~~Delaware~~“expect,” in“anticipate,” ~~1990.~~“intend,” ~~Its~~“plan,” ~~headquarters~~“believe,” “estimate” and ~~principal~~variations ~~manufacturing~~of ~~facilities~~these words and similar expressions are ~~located~~intended to inidentify ~~Newark,~~forward-looking ~~California~~statements. ~~InVision~~We ~~acquired~~undertake ~~Quantum~~no obligations to publicly update or revise any forward-looking statements, whether as a ~~wholly~~result ~~owned~~of new ~~subsidiary~~information, infuture ~~1997.~~events ~~Quantum~~or isotherwise, aunless ~~California~~we ~~corporation~~are ~~located~~required into ~~San~~do ~~Diego,~~so ~~California~~by law. ~~Inovec~~In islight aof ~~Delaware~~these ~~corporation~~risks, ~~with~~uncertainties ~~its~~and ~~headquarters~~assumptions, ~~and~~the forward-looking ~~manufacturing~~events ~~facilities~~discussed ~~located~~below inmight ~~Eugene, Oregon.~~not occur.

We ~~Industry~~were ~~Segments~~ incorporated in Delaware in 1990. We maintain our principal offices at 7151 Gateway Boulevard, Newark, California 94560, and our telephone number is (510) 739-2400. Our website is located at www.invision-tech.com. Information contained on our website does not constitute part of this annual report.

~~The Company reports its financial information in three segments, based on types of technology and consolidated applications. Financial information for each~~Introduction ~~segment, including revenue, profits and total assets, is reported in Note 10 of the Consolidated Financial Statements in Part IV of this Report.~~

~~EDS. The~~ We ~~"EDS"~~are ~~segment~~the isleading ~~comprised~~provider of ~~the~~Transportation ~~business~~Security ~~unit~~Administration, ~~that~~or TSA ~~develops,~~(formerly ~~manufactures~~Federal Aviation Administration, ~~markets~~or ~~and~~FAA) ~~supports~~certified ~~explosive~~explosives detection systems, ~~based~~or onEDS, CTused ~~technology.~~at ~~For~~airports ~~the~~for ~~years~~screening ~~ended~~checked passenger baggage. From inception through December 31, ~~2000~~2003, ~~1999~~we ~~and~~shipped ~~1998,~~872 ~~the~~EDS ~~Company~~for installation ~~had~~at ~~EDS~~U.S. ~~product~~airports and ~~service~~202 ~~revenues~~EDS offor ~~$54.8 million,~~installation ~~$47.6 million and~~in ~~$63.3 million,~~airports ~~respectively.~~outside of ~~At December 31, 2000,~~ the ~~Company~~United ~~had~~States. inWe ~~backlog~~believe ~~equipment~~that ~~orders~~the ~~and~~EDS ~~service~~products ~~agreements~~we ofhave ~~approximately~~shipped ~~$8.1~~through December ~~million~~31, ~~primarily~~2003 ~~consisting~~represent ~~of service~~approximately ~~agreements.~~two-thirds Inof the ~~first~~total ~~quarter~~number of FAA/TSA-certified ~~2001,~~EDS ~~the~~products ~~Company~~delivered ~~received~~for ~~orders~~screening ~~valued~~checked baggage at ~~approximately $10~~U.~~5 million~~S. airports ~~from~~and ~~the~~an ~~FAA~~even ~~and~~larger anpercentage ~~international~~of ~~customer~~the ~~for~~total ~~multiple~~number ~~explosive~~of ~~detection~~FAA/TSA-certified ~~systems,~~EDS ~~accessories~~products ~~and~~delivered ~~service~~internationally.

~~Quantum. The~~ Our ~~"Quantum"~~EDS ~~segment~~products isare ~~comprised~~based ofon ~~the~~advanced ~~business~~computed ~~unit~~tomography, ~~that~~or ~~develops~~CT, ~~for~~which is ~~commercialization~~the only technology for ~~inspection,~~ bulk explosives detection that has met the FAA/TSA certification standards. We were the first manufacturer, and ~~analysis~~are currently one of ~~explosives~~only two manufacturers, ~~primarily~~whose ~~landmine~~EDS ~~detection,~~products ~~and~~have ~~other~~been ~~materials~~certified ~~based~~by onthe FAA/TSA ~~quadrupole~~for ~~resonance~~screening ~~and~~checked ~~passive~~baggage ~~magnetic~~for ~~sensing~~bulk explosives. ~~For~~Our ~~the~~installed base ~~years~~of ~~ended~~EDS ~~December 31,~~products ~~2000,~~provides ~~1999~~us ~~and~~with ~~1998,~~significant ~~the~~opportunities ~~Company~~for ~~had~~recurring revenue ~~government~~through ~~contract~~our ~~revenues~~offering of ~~$10.6 million,~~aftermarket ~~$10.7 million~~services and ~~$7.2 million,~~hardware ~~respectively~~and software upgrades. ~~The~~We ~~Company~~offer ~~also had~~to aour ~~small~~customers ~~amount~~the ofopportunity ~~product~~to ~~revenue~~buy ina ~~2000~~service ~~and~~contract from ~~1999.~~us, Aswhich ofprovides ~~December 31~~for scheduled maintenance, ~~2000~~repairs and parts, ~~the~~and ~~Company~~field service ~~had~~once ~~$23.6 million~~a warranty period on one of ~~government~~our ~~research~~CTX ~~and~~products ~~development~~has ~~contracts~~expired in(which ~~backlog.~~is typically a one-year period).

~~Wood. The~~ Through ~~"Wood"~~our ~~segment~~acquisition ~~is comprised~~ of ~~those~~Yxlon ~~business~~International ~~units~~Holding ~~that develop~~GmbH, ~~manufacture,~~a ~~market and support technology~~privately toheld ~~optimize~~company ~~the value and yield of harvested timber~~ based onin ~~different~~Hamburg, ~~types of scanning technologies~~Germany, ~~including~~on ~~CT technology. The Company conducts the business of this segment through its WoodVision division and its Inovec subsidiary. For the year ended December~~March 31, ~~2000~~2003, ~~Inovec~~we ~~had~~now ~~product~~offer ~~and~~a ~~service~~wide range ~~revenues~~ of ~~$13.4 million.~~non-destructive ~~At December 31~~testing, ~~2000~~or NDT, ~~Inovec~~systems. ~~had~~Our inNDT ~~backlog~~products are based ~~equipment~~on ~~orders~~X-ray and ~~service~~CT ~~agreements~~technologies ofand ~~approximately~~are ~~$1.8 million.~~used Infor ~~the~~inspection ~~first quarter~~ of ~~2001,~~finished ~~the~~products and ~~Company~~materials ~~received~~in ~~orders~~a ~~valued~~wide atrange ~~approximately~~of $2industries.~~2 million~~ ~~for~~Our ~~laser-based optimization~~NDT ~~and~~equipment ~~scanning~~is ~~sysetms~~used ~~for~~in ~~lumber~~more than ~~manufacturing.~~sixty ~~WoodVision~~countries, isincluding ~~still developing~~ the CTUnited ~~based log scanner and had no revenues or backlog as of December 31, 2000~~States.

~~EDS~~ 1

~~Products. The~~ In ~~Company's~~addition, ~~current~~we ~~EDS~~offer explosives detection products ~~are~~based ~~the~~on ~~CTX~~Yxlon’s ~~2500™~~X-ray based diffraction, ~~CTX~~or ~~5500~~XRD, ~~DS™~~technology and ~~CTX~~products ~~9000 DSi™~~using ~~systems~~quadrupole ~~(together~~resonance, or QR, and magnetic sensing technologies for the ~~"CTX~~inspection, ~~Series")~~detection and analysis of explosives, concealed weapons and other materials. ~~These~~We also offer products, some of which are ~~designed~~based on other technologies, ~~through~~that ~~variation~~are inused for non-aviation applications, including landmine detection and maximization of timber industry output.

2Products and Technologies

~~price,~~ Explosives ~~size~~ and ~~throughput,~~Weapons toDetection ~~provide a "family" of explosive detection systems for the inspection of checked baggage on commercial flights around the world.~~ Products

~~All~~ We provide explosives and weapons detection products for use at key ~~three~~security ~~models~~checkpoints ~~are~~within ~~certified~~airports, byincluding ~~the~~checked ~~FAA~~baggage, carry-on baggage and passenger screening. The following table summarizes our key products, as ~~automated~~well ~~explosive~~as ~~detection~~their ~~systems.~~applications and key features:

Service. In addition to providing generally a one year parts and service warranty with the sale of each system, the Company offers fee-based primary and back-up service contracts to its customers to provide system maintenance, ongoing technical support, documentation, training and, where no new hardware is required, periodic software releases.


Products	Status	Applications	Key Features
CTX 9000 DSi	In use; FAA certified in 1999	Explosives detection for checked baggage	• •	Utilizes CT technology Designed for integration into baggage handling systems with a unique, 1-meter-wide gantry aperture
			•	FAA-certified at 542 bags per hour

CTX 5500 DS	In use; FAA certified in 1998	Explosives detection for	•	Utilizes CT technology
		checked baggage	•	Can be configured as integrated or stand-alone system
			•	FAA-certified at 362 bags per hour

CTX 2500	In use; FAA certified in 1999	Explosives detection for	•	Utilizes CT technology
		checked and carry-on baggage	•	Designed for small airports and low-traffic areas
			•	Designed for stand-alone lobby installation
			•	FAA-certified at 128 bags per hour

CTX 1000	In development; TSA	Explosives detection for	•	Utilizes CT technology
	certification expected in 2004	checked and carry-on baggage	•	Designed for small airports and low-traffic areas
			•	Designed for stand-alone lobby installation
			•	Compact, portable, low cost

XES 3500	In development	Explosives detection for	•	Utilizes XRD technology
		checked baggage	•	High detection rate with low false alarm rate
			•	More compact, lighter and faster throughput than XES 3000

XES 3000	In use in Europe; TSA	Explosives detection for	•	Utilizes XRD technology
	certification expected in first half of 2004	checked baggage	•	High detection rate with low false alarm rate

QScan QR 2000S	In test markets	Explosives detection for	•	Utilizes QR technology
		carry-on baggage and mail packages	•	Compact, lightweight design

QR Wand	In development	Weapons and explosives detection	•	Utilizes QR technology
		for personnel screening	•	Non-intrusive detection

~~Training. The Company believes that operator qualification and training in the utilization of the CTX system is~~2 important to the detection of explosives. The Company provides operator training and testing as a critical component of each sale and installation. It licenses its training materials to FAA approved customers for a nominal fee. The Company also offers a standalone training console that simulates a CTX system for sale to customers to train operators to use a CTX system without disrupting the operation of a deployed CTX system.

~~Market~~Products ~~Size. There~~Status ~~are~~Applications ~~over~~Key ~~1,400~~Features ~~airports~~QR ~~worldwide~~Portal ~~providing~~In ~~scheduled~~development ~~service~~Explosives detection for an• ~~aggregate~~Utilizes ofQR ~~approximately 2.5 billion~~technology ~~passengers~~personnel ~~per~~screening ~~year.~~• ~~Of these airports~~Rapid, ~~over~~accurate ~~550~~scanning ~~are located in the United States. A substantial portion~~ of ~~the~~personnel ~~remainder~~QR ~~are~~Shoe ~~located~~Scanner inIn ~~Europe~~development ~~and~~Explosives ~~the~~detection ~~Asia/Pacific region. The market~~ for ~~checked~~• ~~baggage~~Utilizes ~~inspection~~QR ~~systems depends on both the volume of checked baggage to be inspected~~ and ~~the~~metal ~~applicable~~detection ~~government~~technology ~~regulation~~screening of ~~baggage~~shoes ~~inspection.~~• Non-intrusive detection

~~Worldwide~~ Products ~~Standards~~Based on CT Technology. In ~~the~~We ~~1970's,~~began indeveloping ~~response~~our toCT-based ~~hijackings~~EDS technology in 1990, ~~airports~~pioneering ~~worldwide~~our ~~began~~proprietary tocombination ~~install~~of xX-ray and CT ~~systems~~technology towith ~~screen~~sophisticated ~~carry-on~~image ~~baggage~~processing ~~for~~capabilities ~~weapons~~in ~~such~~a astwo-step process ~~guns~~for ~~and~~the ~~knives~~detection of explosives. ~~Following~~CT ~~the~~technology ~~December 1988~~uses ~~bombing~~a source of ~~Pan~~X-rays rotating ~~American~~around ~~Flight~~an ~~103~~object ~~over~~to ~~Lockerbie~~create multiple two-dimensional images, ~~Scotland~~commonly known as “slices,” of the ~~European~~density ~~Civil~~distribution of the object in cross-section. ~~Aviation~~CT ~~Commission~~technology ~~("ECAC")~~compares ~~mandated~~parameters aderived ~~goal~~from ~~for~~the ~~all~~analysis of ~~its~~the ~~member~~density images ~~states~~ to ~~implement~~a ~~100%~~database ~~checked~~of ~~baggage~~explosives’ ~~screening~~density ~~using~~characteristics. ~~equipment~~CT ~~based~~is onthe ~~existing~~only technology ~~technologies.~~to ~~According~~base toits ~~ECAC,~~detection on the ~~vast majority~~density of ~~ECAC~~the ~~member~~object ~~states~~examined. ~~report~~We believe ~~themselves~~that asour ~~being~~EDS onproducts ~~course~~produce tohigher ~~achieve~~resolution ~~100%~~images ~~screening~~than our competitors’ products by ~~the~~displaying ~~target~~more ~~date~~pixels and providing more useful views of ~~December 31,~~suspicious ~~2002~~objects.

Our FAA/TSA-certified ~~Certification. In~~EDS ~~response~~product tooffering, ~~airline~~the ~~bombings~~CTX series, inconsists ~~the~~of our ~~late~~CTX ~~1970's~~9000 ~~the~~DSi, ~~FAA~~CTX ~~established~~5500 aDS ~~program~~and toCTX ~~develop~~2500 products. Our CTX series is designed ~~automated~~to ~~explosive~~provide a family of checked baggage explosives detection ~~capabilities~~systems ~~based~~for airports onof ~~existing~~various ~~x-ray~~sizes ~~technology~~and design. InFor ~~response~~example, towe ~~the~~offer ~~1988~~variations ~~Lockerbie~~in throughput ~~bombing~~speeds, belt width and aperture size, installation and integration options and price through the ~~United~~different ~~States~~products ~~enacted~~in the ~~Aviation~~series. ~~Security~~We ~~Improvement~~believe ~~Act~~that all of ~~1990~~ ~~(the~~our ~~"Aviation~~CTX ~~Security~~products ~~Act").~~feature, Inin ~~1993~~comparison to our competition, asan ~~required~~ability to bydetect the ~~Aviation~~greatest ~~Security~~variety ~~Act,~~and ~~the~~smallest ~~FAA~~amount ~~adopted~~of explosives, a ~~certification~~lower ~~protocol~~false alarm ~~regarding~~rate ~~explosive~~and ~~detection~~greater ~~systems~~operational ~~for~~reliability. ~~use~~We onbelieve ~~checked~~customers ~~baggage.~~favor ~~The~~our ~~FAA~~CTX ~~certification~~products ~~process~~over ~~was~~competitors’ ~~developed~~products tobecause ~~certify~~of ~~equipment~~our ~~that~~experience in installing systems in airports, ~~alone~~our orservice asengineering ~~part~~force and the reliable performance of anour ~~integrated~~CTX products. The following provides a more detailed description of our CTX series:

3• The CTX 9000 DSi model, certified in 1999, is designed to have significantly higher throughput and to be more easily integrated into airports’ baggage handling systems than other CT-based explosives detection systems. It also has a larger aperture than competing CT-based products that matches the width of conveyor belts in airport baggage handling systems, and a compact active curtain that allows the system to provide proper X-ray shielding during high throughput operation. The system has an FAA-certified throughput of 542 bags per hour.

~~system,~~• ~~can~~The ~~detect,~~CTX ~~under~~5500 ~~realistic~~DS ~~air~~model ~~carrier~~was ~~operating~~certified ~~conditions~~in 1998 as an upgraded version of our first EDS product, the ~~amounts~~CTX 5000 model, ~~configurations~~which ~~and~~was ~~types~~certified ofin ~~explosive~~1994. ~~material~~The ~~which~~CTX ~~would~~5500 beDS ~~likely~~system tocan be ~~used~~integrated tointo ~~cause~~baggage ~~catastrophic~~handling ~~damage~~systems ~~to commercial~~or ~~aircraft~~used as a stand-alone machine. The system has an FAA-certified throughput of 362 bags per hour.

~~Multi-Level~~• ~~Screening~~The ~~Processes. Certain~~CTX ~~airports~~2500 ~~around~~model, ~~the~~also ~~world~~certified ~~have~~in ~~sought~~1999, tois ~~augment~~a ~~their~~less ~~detection~~expensive ~~capabilities by~~EDS ~~implementing~~operating ~~various~~at ~~multi-level~~slower ~~screening~~throughputs ~~processes.~~with Toa ~~date,~~smaller ~~two~~footprint ~~distinct~~than ~~processes~~other ~~have~~CT-based ~~become~~explosives ~~most~~detection ~~prevalent:~~systems. aThe ~~system~~CTX ~~first~~2500 ~~implemented~~system inis ~~the~~designed ~~United~~for ~~Kingdom~~use ~~(the~~in ~~"Technology~~small ~~Based~~airports ~~Multi-Level Approach");~~ and alow-traffic ~~system~~stations ~~endorsed~~within bylarger ~~the~~airports. ~~FAA~~The ~~following~~system ~~the~~has ~~advent~~an of FAA-certified ~~detection~~throughput ~~technology~~of ~~(the~~128 ~~"CAPPS~~bags ~~and~~per ~~Detection Approach")~~hour.

~~Effect~~ In ofMay 2000, ~~Customer~~we ~~Operations. The~~were ~~Company's~~selected ~~newer~~as ~~customers~~one ~~have only limited experience with the operation~~ of ~~the~~three ~~CTX Series~~participants in ~~high~~an FAA-~~volume~~funded ~~airport~~research ~~operations.~~program ~~Many~~known ofas ~~the~~ARGUS. ~~factors~~The ~~necessary~~FAA toasked ~~make~~participants ~~the~~to develop ~~overall baggage scanning system~~ a ~~success,~~smaller ~~such as the CTX Series' integration with the baggage handling system~~EDS, ~~are~~which ~~beyond~~would ~~the~~be ~~control~~less ofexpensive ~~the~~than ~~Company.~~existing ~~Also~~products, and ~~unsatisfactory~~which ~~performance~~could ofbe ~~operators~~used ~~can lead~~ to ~~reduced~~scan ~~effectiveness~~carry-on ofbaggage ~~the~~in ~~CTX~~addition ~~Series.~~to ~~In particular, once the CTX system identifies a~~scanning ~~threat,~~checked ~~the~~baggage ~~operator~~for ~~must~~low ~~make~~throughput aapplications ~~determination~~in ~~whether~~small ~~the~~airports. ~~threat~~We isdeveloped our ~~actual~~CTX or1000 amodel ~~false~~under ~~alarm~~this program. ~~The~~We ~~failure~~have ofsubmitted ~~the~~our CTX ~~Series~~1000 tomodel ~~perform successfully in deployments, whether due~~ to the ~~limited experience~~TSA offor ~~a customer~~certification, ~~operator~~and ~~error~~expect orto ~~any~~obtain ~~other~~TSA ~~reason,~~certification ~~may~~in ~~have an adverse effect on the market's perception of the Company and its products~~2004.

~~Export~~ We ~~Control. The~~continue ~~Company is subject~~ to ~~risks~~incorporate ~~associated~~improvements ~~with~~into ~~regulations~~our ~~relating~~CTX toseries ~~the~~based ~~export of high technology~~upon ~~products.~~customer ~~In particular~~requirements, ~~the~~operational ~~Company's~~airport ~~automated~~experience, ~~explosive~~a ~~detection~~need ~~systems~~ for ~~aviation~~more ~~security~~advanced detection ~~are~~capabilities ~~commodities~~and ~~subject~~a tonumber ~~export~~of ~~control~~TSA byre-certifications ~~the U.S. Department~~ of ~~Commerce.~~various ~~They may also be deemed~~models. toFor beexample, ~~defense~~we ~~articles~~are ~~subject~~developing tonew ~~export~~upgrades ~~control~~for byour ~~the~~EDS ~~U.S.~~products, ~~Department~~which ofare designed ~~State. Exports may be prohibited or limited~~ to ~~a small number of countries.~~ significantly

~~Risk of Changing Standards. There currently is no requirement that U.S. or international airlines or airports deploy~~3 FAA-certified explosive detection systems. There is also no requirement that U.S. airlines or airports (or most international airlines or airports) deploy explosive detection systems at all. However, the FAA has the responsibility to set and maintain performance standards for explosive detection systems for all U.S. airlines, both in the U.S. and abroad. Should the FAA increase its certification standards, the Company cannot assure that its products would meet such standards.

~~Direct~~reduce ~~and~~false ~~Indirect~~alarm ~~Sales~~rates ~~Personnel. The~~and ~~Company~~increase ~~markets~~throughput ~~its~~rates. ~~EDS~~This ~~products both directly through internal sales~~detection ~~personnel~~upgrade ~~and~~has ~~indirectly~~been ~~through~~submitted ~~authorized~~to ~~agents,~~the ~~distributors~~TSA ~~and~~for ~~systems integrators~~certification.

4 Products Based on XRD Technology. We offer explosives detection products based XRD technology that has been developed by Yxlon or licensed from Philips. Yxlon’s XRD technology utilizes an energy-dispersive diffraction technique to precisely identify the chemical composition of a wide range of explosive substances, even in small quantities. Explosives detection products with Yxlon’s XRD technology offer three dimensional threat resolution with high detection rate for explosives and low false-alarm rates.

As XRD-based ofsystems ~~December 31,~~can ~~2000,~~be ~~the~~used ~~Company~~alone ~~employed~~or ato ~~total~~complement ofexisting 21CT-based screening ~~people~~systems. ~~including~~The ~~four~~current ~~contractors~~system inavailable ~~sales~~for ~~and~~sale ~~marketing.~~is ~~In North America,~~ the ~~Company~~XES ~~markets~~3000 ~~its~~system to ~~EDS~~screen ~~products~~checked ~~primarily~~baggage ~~through direct~~at ~~sales~~airports. ~~personnel,~~Yxlon ~~which~~has asreceived oforders ~~December 31,~~for ~~2000,~~18 ~~consisted~~ of ~~three individuals. Internationally, the~~its ~~Company~~XES ~~utilizes~~systems ~~both~~from asix ~~direct~~European ~~sales~~airports ~~force~~ and ~~authorized~~the ~~agents~~Israeli toAirport ~~sell its products~~Authority. Yxlon’s AsXES ofsystem ~~December 31,~~is ~~2000,~~currently ~~the~~undergoing ~~Company~~certification ~~had~~testing ~~four~~by ~~direct~~the ~~international sales personnel broadly covering Europe~~TSA, and ~~Asia,~~we ~~the~~anticipate ~~Middle~~that ~~East~~it ~~and~~will ~~Africa~~receive ~~and~~TSA ~~additional~~certification ~~authorized~~during ~~representatives representing~~ the ~~Company~~first inhalf of ~~specific countries~~2004. ~~For~~We ~~sales~~are ~~through~~currently ~~its~~developing ~~authorized~~the ~~representatives~~XES ~~and~~3500 ~~distributors~~system, ~~the~~ ~~Company~~which ~~generally~~ is ~~directly~~intended ~~involved~~to be inmore ~~developing~~compact ~~proposal~~and ~~documents~~lighter ~~and~~while ~~negotiating~~providing ~~contract~~faster ~~terms.~~throughput than the XES 3000 system.

~~Selling~~ Products ~~Process. The~~Based ~~selling~~on ~~process~~QR ~~often~~Technology. ~~involves~~We aoffer ~~team~~entry ~~comprised~~point ofscreening ~~individuals~~systems based ~~from~~on ~~sales,~~QR ~~marketing~~technology, ~~engineering, customer~~developed ~~service~~by ~~and~~Quantum. ~~support~~QR detection is based on molecular structure, ~~and~~while ~~senior~~CT ~~management.~~detection ~~The~~is ~~team~~based ~~frequently~~on ~~engages~~density. inQR technology has a ~~multi-level~~high ~~sales~~detection ~~effort~~rate ~~directed~~for ~~toward~~specific explosives combined with a ~~variety~~low offalse ~~constituents~~alarm rate. In particular, ~~including~~QR ~~government~~technology ~~regulators,~~has significant detection capabilities to identify components typically found in the ~~local~~most difficult types of explosives ~~airport~~to ~~operator~~detect. orQR ~~authority,~~technology ~~systems~~is ~~and~~a orform ~~conveyor~~of ~~integrators~~magnetic resonance, ~~individual~~similar ~~airlines~~to ~~and~~medical magnetic ~~airline~~resonance ~~operating committees~~imaging. The ~~Company~~QR ~~provides~~detector ~~its~~sends ~~sales~~out ~~representatives~~specially ~~with~~tuned ~~training,~~low frequency ~~promotional~~radio waves into the material. The nuclei in the material align and ~~literature~~then as they relax to their previous state, they emit a ~~multi-media~~unique ~~presentation~~radio wave response, ~~videos~~which is analyzed and ~~competitive~~compared ~~analysis~~to a database of known threats. ~~The~~Our ~~sales~~QR systems ~~process~~can ~~includes~~be ~~assisting~~used ~~customers~~alone or to ~~design~~complement ~~baggage~~existing ~~handling~~CT or X-ray screening systems. The current system ~~configurations,~~available ~~including~~for sale is the ~~use~~QScan ofQR ~~computer modeling~~2000S, ~~educating~~a successor ~~customers~~to on the QScan QR 160 system, ~~and~~to ~~technology~~screen mail, parcels and ~~supporting~~personal items ~~the~~at ~~implementation~~secure facilities and ~~integration~~carry-on ~~process.~~baggage at airports.

~~Lengthy~~ With ~~Sales~~funding ~~Cycle. The~~from ~~combination~~the Department of ~~the~~State ~~high~~Technical ~~average~~Support ~~selling~~Working ~~prices~~Group, Quantum ~~the~~is ~~time~~developing ~~needed~~an ~~for~~explosives ~~various~~detection ~~agencies~~portal tousing ~~secure funding~~QR ~~for~~technology. ~~systems~~We anticipate that, ~~and~~once ~~the~~QR ~~negotiation~~is ~~and~~developed ~~execution~~as ~~of actual contracts leads to~~ a ~~typical~~personnel ~~sales~~screening ~~cycle lasting from six to twelve months~~technology, orit will ~~more,~~be ~~after~~combined ~~initial contact~~ with aother ~~customer.~~detection ~~Often, local~~technologies ~~government regulators become involved~~ in ~~the~~a ~~sales~~multi-sensor ~~decision~~portal ~~process or provide funds for the purchase. For repeat orders from existing customers, the Company can sometimes expedite the sales~~to ~~cycle~~screen bypeople ~~utilizing~~at ~~existing~~airport ~~contracts and contract extensions and thereby avoid lengthy procurement processes~~checkpoints.

~~Customer~~ As ~~Support. The~~of ~~Company~~December 31, ~~believes~~2002, ~~that~~we ~~customer~~commenced ~~service~~in-airport ~~and~~testing ~~support~~of ~~are~~a ~~critical to its success and has committed~~prototype ~~significant~~system ~~resources~~consisting toof ~~these functions. The Company provides~~ a ~~high~~QScan ~~level~~system ofcoupled ~~customer support~~ to ~~assist~~a inCTX ~~the site planning~~product, ~~installation~~known ~~and~~as ~~integration~~“QRCT.” This oftest ~~the~~system ~~Company's~~is ~~products~~planned ~~into~~for ~~its customer's~~certification ~~facilities~~testing infollowing ~~addition~~further development. toWe ~~field~~believe ~~service for maintaining~~ the ~~reliability~~advantages of ~~the~~such ~~Company's~~a ~~products~~system ~~once~~include ~~installed. The Company's service organization includes customer service engineers,~~automated ~~product~~resolution ~~application specialists and technical support engineers. As~~ of ~~December 31~~alarms, ~~2000,~~leading ~~the~~to ~~Company~~lower ~~had~~operational 58cost ~~individuals employed in customer service~~ and ~~support~~more ~~roles. The Company typically~~efficient ~~hires~~throughput ~~and trains its own support staff throughout the world rather than relying on third-party maintenance providers, although a number~~ of ~~third~~checked ~~party relationships exist outside the United States~~baggage.

Quantum ~~Customers~~ has developed a prototype explosives detection handheld wand based on QR technology, which can be utilized to detect explosives carried by or concealed on people, including those that may be hidden in shoes. We are also currently developing a shoe scanner based on metal detection and QR technology, which can be utilized to detect explosives concealed in shoes.

~~Through~~ Non-Destructive ~~December 31,~~Testing ~~2000, the Company has shipped 231 CTX Series systems. 146 of these systems were shipped to the FAA and U.S. airlines for~~Products ~~installation at the busiest U.S. airports and certain U.S. airlines' foreign locations. For reasons of security, the FAA will not divulge the deployment schedule or~~ ~~locations of these systems. The Company shipped 85 CTX Series systems to international customers for installation at major international airports in Belgium, England, France, Greece, Hong Kong,~~ ~~Israel, Malaysia, The Netherlands, South Korea, Spain and South Africa. In 2000, the Company shipped 32 systems to the FAA and U.S. airlines, and 12 systems to international customers.~~

~~Sales~~ We tooffer ~~FAA. To~~X-ray ~~date,~~based ~~all~~non-destructive ~~orders~~testing, ~~from~~or ~~United~~NDT, ~~States~~equipment. ~~customers~~Yxlon’s NDT ~~have~~technology ~~been~~has ~~entirely~~wide ~~funded~~industrial byapplications, ~~the~~including ~~FAA.~~testing ~~In response to~~ the internal ~~crash~~structural integrity of ~~TWA~~tires, ~~Flight~~structural ~~800~~castings ~~off~~and ~~Long~~mechanical ~~Island,~~and electrical ~~New~~components; ~~York~~verifying inmaintenance ~~July 1996~~work, ~~President~~welds ~~Clinton~~and ~~announced~~wall ~~the~~thickness; and ~~formation~~testing offor ~~the~~corrosion. ~~White~~Yxlon’s ~~House~~NDT ~~Commission~~equipment onis ~~Aviation~~used ~~Safety~~in ~~and~~more ~~Security,~~than ~~chaired by Vice~~sixty ~~President~~countries, ~~Gore~~including ~~(the~~Denmark, ~~"Gore Commission")~~Germany, toJapan ~~review airline~~ and ~~airport security and oversee aviation safety. In response to~~ the ~~Gore~~United ~~Commission's conclusions, the U~~States.~~S. appropriated~~

~~Dependence~~Products onApplications ~~Few~~Key ~~Customers. In~~Features ~~any~~Stationary ~~given~~X-ray ~~fiscal~~Systems ~~year,~~Non-destructive testing of materials for defects • Detailed resolution • System components are protected against the ~~Company's~~influence ~~EDS~~of ~~product~~dust and ~~service~~water ~~revenues~~Portable ~~have~~and ~~principally consisted~~Mobile Non-destructive testing of materials for • Compact, low weight and optimum access in confined spaces X-ray Systems defects; used in the ~~Company~~field ~~believes~~• ~~will~~System ~~continue~~components toare ~~consist,~~protected ofagainst ~~orders~~the influence of ~~multiple~~dust ~~units~~and ~~from~~water aStandard ~~limited~~Cabinets ~~number~~Non-destructive testing of ~~customers.~~materials ~~While~~for • Compact cabinet dimensions defects in the ~~number~~automotive, ofaircraft ~~individual~~and ~~customers~~aerospace ~~may~~industries ~~vary~~• ~~from~~High-resolution ~~period~~images to• ~~period, the~~Range ~~Company~~of ispre-defined ~~nevertheless~~solutions ~~dependent~~Tire ~~upon~~Systems ~~these~~Non-destructive ~~multiple~~testing ~~orders~~of tires for adefects ~~substantial~~• ~~portion~~Inspection of ~~its~~wide ~~revenues.~~variety ~~The~~of ~~Company~~tire ~~cannot~~types ~~assure~~and ~~that~~materials itWheel ~~will~~Systems ~~obtain~~Non-destructive ~~such~~testing ~~multiple~~of ~~orders~~cast onor aforged ~~consistent~~• ~~basis. During~~Automated ~~the~~image ~~year~~analysis ~~ended~~software ~~December 31,~~to ~~2000,~~avoid ~~approximately~~operator ~~$43.8 million,~~interference orwheels ~~80.0%~~for defects, ofprimarily for the ~~Company's~~automotive ~~EDS~~industry ~~product~~• ~~and~~Innovative ~~service~~wheel ~~revenues~~positioning ~~were~~concepts ~~generated~~Customized ~~from~~Solutions ~~sales~~Customized tonon-destructive ~~the~~testing ~~Company's~~systems ~~five~~Examples ~~largest customers~~include: for the automotive, aircraft and steel industries • Creation of ~~which~~system ~~$30.8 million,~~for orcomplete ~~56.1%,~~scanning of ~~the~~critical ~~Company's~~regions ~~EDS~~without ~~product~~dismantling of an airplane • Systems with retrieval and ~~service~~manipulation ~~revenues~~by ~~were~~robot, ~~generated~~including ~~from~~version ~~sales~~integrated todirectly ~~the~~into ~~FAA.~~a plant’s conveyor system • Pipe weld X-ray inspection system

~~Public~~ In ~~Agency~~August 2003, ~~Contract~~Yxlon ~~and~~acquired ~~Budget~~German-based ~~Risks. Substantially~~Hattinger ~~all~~Pruf- ~~of the Company's EDS customers to date have been public~~und ~~agencies or quasi~~Entwicklungs-~~public~~ ~~agencies.~~GmbH, Inor ~~contracting with public agencies~~Hapeg, ~~the~~a ~~Company~~private isengineering ~~subject to public agency contract requirements which vary from jurisdiction to jurisdiction~~ and ~~which~~systems ~~are~~company ~~subject~~that todesigns ~~budgetary processes~~ and ~~expenditure~~develops ~~constraints.~~CT-based ~~Budgetary~~NDT ~~allocations~~systems for ~~explosive~~the ~~detection~~automotive ~~systems~~and ~~are~~aerospace industries ~~dependent,~~for ~~in part~~clients, ~~upon~~including ~~governmental~~DaimlerChrysler ~~policies~~and ~~which~~Goodyear. ~~fluctuate~~The ~~from~~use ~~time~~of toCT imaging ~~time~~ in ~~response~~ toindustrial ~~political~~testing and ~~other~~evaluation ~~factors,~~permits ~~including~~ the ~~public's~~inspection ~~perception~~and calculation of ~~the~~distances, ~~threat~~surfaces ofand ~~commercial~~volumes ~~airline~~inside ~~bombings.~~volumetric Inobjects ~~addition,~~such as ~~public~~cast ~~agency~~parts, ~~bidding~~turbines ~~processes~~and ~~have~~tires. ~~been~~Its ~~and~~uses ~~may~~include ~~continue~~rapid toprototyping, becasting ~~protracted~~simulations, ~~and~~design-phase ~~typically~~testing ~~contain~~and ~~provisions~~virtual ~~that~~CAD ~~permit~~modeling ~~cancellation~~of inexisting ~~the event that funds are unavailable to the public agency~~objects.

Other ~~Competition~~ Products

~~Explosive~~ Landmine Detection ~~Technologies~~Systems. ~~The~~ ~~market~~With ~~for~~funding ~~explosive~~from ~~detection~~the ~~systems~~Department isof ~~intensely~~Defense, we ~~competitive~~have developed and ~~is characterized~~continue byto ~~continuously~~improve ~~developing~~QR-based landmine detection technology. ~~and~~Most ~~frequent~~current ~~introductions~~landmines ofpossess ~~new~~low ~~products~~metal ~~and~~content, ~~features.~~forcing ~~The~~current metal ~~Company~~detection ~~expects~~devices ~~competition~~to be very sensitive to ~~increase~~metal, aswhich ~~other~~creates ~~companies~~high ~~introduce~~false alarm ~~additional~~rates and slow clearing times. QR technology does not detect explosives ~~more~~based ~~competitive~~on ~~products~~metal content and astherefore ~~the~~exhibits ~~Company~~much ~~develops~~lower ~~additional~~false ~~capabilities~~alarm rates and faster ~~enhancements~~clearing ~~for~~times ~~the~~than ~~CTX~~metal ~~Series~~detectors. ~~Several~~We ~~advanced~~believe ~~explosive~~the ~~detection~~current ~~technologies~~QR ~~have~~prototype system ~~been~~is ~~developed~~able to ~~attempt~~detect ~~to address~~the vast majority of all landmines deployed throughout the ~~need~~world and that QR technology can operate in almost all soil conditions, including saturated soils, as well as through fresh water. Through December 31, 2003, Quantum has received $43.9 million in government funding for ~~effective~~the development ~~explosive~~of landmine detection systems. Due to current regulations, ~~including:~~our ability to export our landmine detection technology outside of the United States is limited.

6 Wood Products. Our subsidiary, Inovec, currently offers systems for forest product maximization, which use laser scanners to measure the dimensions of logs or sawn wood before further sawing. Our current Inovec products include the StereoScan 3-D log scanner optimizer, the YieldMaster headrig carriage optimizer, the LogMaster small log optimizer, the TrimMaster trimmer optimizer, the CantMaster cant optimizer and the WaneMaster edger optimizer. These systems use laser scanners to measure the dimensions of logs or sawn wood before further sawing. Using proprietary optimizing algorithms, the systems develop cutting solutions to maximize the volume of usable wood, and then control the relative positions of the saw and the wood.

~~thousands of~~ Advanced ~~two-dimensional~~Personnel ~~views~~Checkpoint toSystems. ~~reconstruct~~Current apassenger ~~full~~checkpoint security ~~three-dimensional,~~technology ~~cross-sectional~~is ~~image~~capable of anidentifying ~~object~~only metallic weapons. SafeView, Inc. is commercializing an advanced passenger checkpoint portal system

~~Certified Technologies. Only explosive detection systems based on CT technology have been certified by the FAA.~~5 Competitors have attempted to obtain FAA certification of systems based on non-CT technology in the past without success. Multi-view systems have undergone extensive FAA certification testing. The Company believes that CT based explosive detection technology is the only type of commercially deployed equipment capable of detecting all types of explosives designated by the FAA to be a threat to commercial aviation. The Company believes that even if other technologies can be improved, CT technology will maintain its advantage if the FAA supplements, as it is proposing to do, its current certification testing with additional requirements designed to detect lower quantities of explosives than currently required.

7that uses millimeter wave holographic technology to screen passengers for weapons, explosives and other contraband material, including ceramic, plastic and other non-metallic weapons. The SafeView portal system transmits ultrahigh frequency, extremely low powered waves as a person passes through the checkpoint portal. These millimeter waves penetrate clothing and reflect off a person’s skin and the items he or she may be carrying. An array of sensors captures the reflected waves, which are processed and analyzed in real time, to produce a high-resolution, three-dimensional image from the signals. An operator then uses software-based threat detection algorithms to screen the image for suspicious materials. We will be the exclusive distributor of portal systems utilizing SafeView’s technology in commercial aviation and airport markets in North America and Europe.

~~Dual~~Industry ~~Energy X-Ray and Multi-View Competitors. Competitors such as PerkinElmer, Inc.~~Segments ~~Detection Systems Group (formed by the merger of Vivid Technologies, Inc., and EG&G Astrophysics) ("PerkinElmer") and Heimann Systems GmbH, offer non-certified explosive detection~~ ~~systems using dual energy x-ray technology. PerkinElmer has also introduced a model using multi-view technology using fixed x-ray sources. The Company believes that~~ ~~the CTX Series is superior to the dual energy and multi-view x-ray systems for the following reasons:~~

~~Other~~ We ~~Non-CT~~determine ~~Competitors. Other~~our ~~principal~~segments ~~competitors~~based inon ~~the~~how ~~market~~our ~~for~~Chief ~~explosive~~Executive ~~detection~~Officer ~~systems are~~and ~~Thermedics~~Chief ~~Detection Inc.,~~Operating ~~Barringer~~Officer ~~Technologies Inc.,~~assess performance and ~~Ion~~allocate ~~Track~~resources. ~~Instruments~~Through the first quarter of 2003, ~~which~~we ~~use~~presented ~~trace~~segment ~~detection~~information ~~technology~~based ~~(sniffers)~~on three reportable segments: EDS, Quantum and Wood. ~~YXLON~~As ~~International~~a ~~X-Ray~~result ~~GmbH~~of ~~has~~the acquisition of ~~introduced~~Yxlon, anwe ~~explosive~~now ~~detection~~have ~~system~~two ~~using~~reportable ~~x-ray~~segments, ~~scatter~~EDS ~~(diffraction)~~and ~~technology~~NDT. ~~Heimann~~The ~~Systems~~“EDS” ~~GmbH~~segment ~~has~~is comprised ~~introduced~~of athe ~~system~~business unit that ~~combines~~is ~~x-ray~~engaged ~~scanning~~in ~~technology~~the ~~with~~development, ~~x-ray~~manufacturing, ~~diffraction~~marketing ~~technology.~~and ~~Diffraction~~support ~~technology~~of ~~offers~~explosives ~~the~~detection ~~promise~~systems ofbased ~~extremely~~on advanced ~~low~~computed ~~false~~tomography ~~alarm~~technology. ~~rates,~~The ~~but~~“NDT” ~~when~~segment ~~used~~is ~~alone~~comprised ~~appears~~of tothe Yxlon bebusiness ~~too~~unit ~~slow,~~that ~~large~~is ~~and~~engaged ~~expensive~~in ~~for~~the ~~airport~~development, manufacturing, ~~application.~~marketing Toand ~~date~~support ~~none~~ of ~~these~~non-destructive ~~competitors~~testing ~~offer~~systems for a ~~product~~wide ~~certified~~range byof industrial ~~the FAA~~applications. ~~The~~Other ~~Company~~segments ~~believes~~including ~~that~~Quantum, ~~these~~Wood and ~~other~~XRD ~~non-CT~~were aggregated ~~explosive~~to ~~detection~~form ~~technologies~~an ~~have~~“All ~~significant~~Other” category as they did not meet the threshold ~~weaknesses~~for ~~that~~a ~~have~~reportable ~~prevented~~segment. ~~them~~Financial ~~from~~information ~~being~~for ~~certified~~each segment, ~~and~~including revenues, ~~also~~net ~~prevented~~income ~~them~~(loss) and ~~from~~total ~~being~~assets, ~~sold~~is reported in ~~significant~~Note ~~quantities~~11 ~~for~~of ~~checked~~the consolidated ~~baggage~~financial ~~inspection.~~statements in this annual report.

~~Competitive~~ EDS. ~~Factors~~The ~~Other~~“EDS” ~~than~~segment ~~Detection. The~~develops, ~~Company~~manufactures, ~~believes~~markets ~~that~~and itsupports explosives ~~can~~detection ~~compete~~systems infor ~~the~~civil ~~EDS~~aviation ~~market~~security based on ~~many~~advanced CT ~~factors~~technology. ~~that~~Our ~~are~~products ~~important~~were inthe first automated explosives detection system to be certified by the ~~market~~FAA. From inception through December 31, ~~including~~2003 ~~explosive~~we ~~detection~~have shipped ~~capability~~1,074 systems to the FAA and ~~accuracy~~the TSA, ~~product~~to ~~quality~~foreign aviation security agencies and ~~features,~~to ~~customer~~domestic ~~support,~~and ~~documentation~~foreign airports and ~~training~~airlines. ~~However,~~Our ~~other~~EDS ~~factors are~~product ~~important,~~sales ~~such~~accounted asfor ~~price,~~72.7% ~~throughput~~of our total revenues in 2003, ~~the~~91.8% ~~ability~~of toour ~~handle~~total revenues ~~all~~in ~~sizes~~2002 and 49.1% of ~~baggage~~our total revenues in 2001, and ~~the~~our ~~ease~~EDS service revenues accounted for 9.9% of ~~integration~~our ~~into~~total ~~existing~~revenues ~~baggage~~in ~~handling~~2003, ~~systems~~3.1% ~~Certain~~of our total revenues in 2002 and 12.9% of ~~the~~our ~~Company's~~total ~~competitors~~revenues ~~may~~in ~~have~~2001. anAs a result, we are ~~advantage~~substantially ~~over~~dependent on the ~~Company~~TSA for the ~~following~~majority ~~reasons:~~of our EDS business.

8 NDT. The “NDT” segment is comprised of the Yxlon business unit that is engaged in the development, manufacturing, marketing and support of non-destructive testing systems for a wide range of industrial applications. Our NDT products are based on X ray and CT technologies that are used for inspection of finished products and materials in a wide range of industries. NDT accounted for 10.4% of our total revenues in 2003 and 17.2% of our total revenues in the nine-month period since completion of our acquisition of Yxlon.

~~Manual~~ Other ~~Methods. In~~segments, ~~addition~~including ~~to other explosive detection systems~~Quantum, ~~the~~Wood ~~Company's products compete against more manual methods of assuring the security of checked baggage. In "100% system-wide bag match" passengers~~ and ~~bags~~XRD, are ~~matched~~aggregated ~~not~~to ~~only~~form ~~at flight origination but also in connection with layovers and~~an ~~connecting~~“All ~~flights.~~Other” ~~Bag~~category ~~match~~as isthey andid ~~explosive~~not ~~deterrent~~meet ~~system based on~~ the ~~assumption~~threshold ~~that~~for a ~~bomber does not want to commit suicide. In "Procedural CAPPS and manual search" computer-assisted~~reportable ~~passenger prescreening is used to identify passenger bags to be hand searched~~segment. ~~In "directed trace and hand search," a conventional x-ray system is used to identify suspicious bags that are~~ ~~then hand searched with the assistance of trace detection. Directed trace and hand search relies on scanning technology that is not currently able to identify all types of explosives even at the~~ ~~"suspicious" level and often requires suitcases to be opened. These manual methods are extremely slow and labor intensive and impose inconveniences on the flying public which make them unpopular.~~ These manual methods can compete with the Company's products depending on the local cost of labor, and the willingness of the airlines' customers to put up with the longer pre-flight check-in requirements necessary to implement these methods on a large scale and to accept the increased invasion of privacy that more frequent hand searches of luggage would entail.

~~Risk of Certification of Competing Technologies. CT based systems are slower and more expensive than uncertified~~Customers ~~systems based on conventional and dual energy x-ray technology. If competitors develop systems based on dual energy, multi-energy or other non-CT technology to the point where~~ ~~such systems could be certified, the result will be the entry into the market of lower priced, higher throughput explosive detection systems. If so, the Company would lose a significant competitive~~ ~~advantage.~~

~~Backlog~~ EDS

~~The~~ From ~~Company~~inception ~~measures~~through ~~its~~December 31, ~~backlog~~2003, ofwe ~~product~~shipped ~~and~~1,074 ~~service~~EDS ~~revenues~~units ~~as orders~~ for installation. ~~systems~~Substantially ~~and~~all ~~upgrades~~purchases ~~for~~of ~~which~~EDS ~~contracts~~products orfor ~~purchase~~U.S. ~~orders~~airports ~~have been signed,~~are ~~but~~made ~~which~~by ~~have~~the ~~not~~TSA. ~~yet~~Prior ~~been shipped; and as orders for maintenance related~~ to ~~product~~the ~~support~~establishment ~~for~~of ~~which~~the ~~contracts have been signed~~TSA, ~~but~~substantially ~~maintenance service has not yet been performed. The Company~~all ~~typically~~purchases ~~ships~~of ~~its~~ EDS products ~~within~~for ~~three~~U.S. toairports ~~twelve~~were ~~months~~made ~~after~~by ~~receiving~~the ~~an order~~FAA. ~~However,~~Of ~~such~~the ~~shipments~~total EDS ~~may~~products beshipped, ~~affected~~872 bywere ~~delays~~shipped ~~which~~to ~~occur in~~ the ~~delivery~~FAA, ~~of components to~~ the ~~Company~~TSA ~~or customers'~~and ~~readiness~~U.S. ~~to accept delivery~~ airlines for ~~reasons~~installation ofat ~~site~~commercial ~~preparation~~U.S. ~~or otherwise~~airports. AtFor ~~December 31,~~security ~~2000~~reasons, the ~~Company's~~FAA ~~EDS product~~ and the ~~service~~TSA ~~revenue~~will ~~backlog~~not ~~was~~divulge ~~approximately $8.1 million,~~the ~~compared~~deployment toschedule ~~$19.8 million~~or atlocations ~~December 31,~~of ~~1999~~these systems. ~~The~~We ~~Company~~had ~~expects~~EDS sales to ~~fill~~ the ~~majority~~TSA ~~of these orders~~ and ~~complete~~ the ~~majority~~FAA of ~~these~~$268.1 million ~~services~~ in ~~2001. In the first quarter of 2001~~2003, ~~the Company received EDS orders valued at approximately~~ $10356.5 7 million ~~from~~in ~~the FAA and an international customer for CTX systems~~2002, ~~accessories~~ and ~~service~~$20.0 million in 2001.

9 We believe future sales of our EDS equipment will be driven primarily by demand for the installation of in-line automated EDS into the baggage handling systems of airports, which will achieve the highest level of security, vastly

6 Any failure of the Company to meet an agreed upon schedule could lead to the cancellation of the related order. Variations in the size, complexity and delivery requirements of the customer order may result in substantial fluctuations in backlog from period to period. The Company believes that it is important for competitive reasons and to better satisfy customer requirements to reduce order lead times and expects that the Company's backlog may decrease on a relative basis over time. In addition, all orders are subject to cancellation or delay by the customer and, accordingly, the Company cannot assure that such backlog will eventually result in revenues. For these reasons, the Company believes that backlog cannot be considered a meaningful indicator of the Company's performance on an annual or quarterly basis.

improve ~~Products~~passenger convenience and ~~Services~~ lower operating costs. However, the timing of revenues is highly dependent on the budget process and the ultimate level of funding commitment. We continue to remain in active discussions with the TSA regarding the U.S. government’s needs for additional systems. Additional orders for EDS equipment will depend on various factors, including future U.S. government funding appropriations.

~~Products. The~~ From ~~Company~~inception ~~develops~~to ~~for~~December 31, ~~commercialization patented and proprietary technology for inspection~~2003, ~~detection~~we ~~and analysis~~shipped of202 ~~explosives~~EDS ~~and other materials. The Company's Quantum~~ products ~~are~~to customers ~~based~~in onBelgium, ~~passive~~Canada, ~~magnetic~~Chile, ~~sensing~~China, ~~technology~~France, ~~and~~Greece, ~~quadrupole~~Hong ~~resonance ("QR") technology~~Kong, ~~a form of magnetic resonance.~~Israel, ~~The~~Italy, ~~Company's~~Japan, ~~Quantum products~~Malaysia, ~~primarily~~the inNetherlands, the ~~prototype stage~~Philippines, ~~include~~South ~~advanced detection systems for such markets as military and humanitarian landmine detection~~Africa, ~~carry-on luggage~~South ~~screening~~Korea, ~~concealed~~Spain, ~~weapon detection~~Sweden, ~~drug~~Taiwan ~~detection~~ and ~~postal inspection. The Company is also a leading supplier of research and development services in~~ the ~~area~~United ~~of QR technology and passive magnetic sensing to a number of government agencies~~Kingdom. ~~In 2000 the Company received grants for approximately $31.3 million in research funding for all products.~~

~~Baggage~~ We ~~and~~typically ~~Package~~bill ~~Screening. The~~our ~~Company~~customers offers fully automatic entry point screening systems based on QR technology, which has a high detection rate for specified explosives combined with one of the lowest false alarm rates for any type of technology. In particular, QR technology has significant detection capabilities to identify components typically found in ~~sheet~~three ~~explosive~~stages, ~~which has been the most difficult type of explosive to detect,~~ as ~~well~~generally asprovided ~~military plastic explosives. QR directly measures the presence of the specific target material, by identifying the explosive's characteristic~~in ~~signals.~~our ~~The~~contracts ~~Company's systems can be used alone or to complement existing x-ray screening systems. The Company is developing systems combining the current systems~~ with ~~complementary technologies.~~our ~~The current models available for sale are~~customers:

~~Landmine~~• ~~Detection. The~~amounts ~~Company's QR technology is considered~~ to becover the ~~most~~bill ~~promising~~of ~~landmine~~materials ~~detection~~when ~~technology. With~~materials ~~funding~~are received from ~~the Defense Advanced Research Projects Agency ("DARPA")~~suppliers, ~~the~~typically ~~Company~~30% ~~developed~~to a40% ~~cart-based prototype with a tethered, hand-held probe. The probe emits radio frequency magnetic field pulses at the characteristic QR frequency~~ of the ~~explosive.~~total ~~These~~system ~~pulses~~price; ~~stimulate~~• ~~coherent~~an ~~signals~~additional ~~from~~amount ~~the~~upon ~~mine~~factory ~~that~~acceptance ~~are~~or ~~picked up by a tuned antenna~~shipment, ~~amplified~~ranging infrom ~~a sensitive~~30% ~~receiver,~~to and analyzed digitally. Since the QR resonance frequency is highly specific for individual compounds, tests have demonstrated a very high level of detection and a very low incidence of false alarms. This prototype was tested in Bosnia in the summer of 1999. Later in 1999 the prototype successfully demonstrated 10060%; ~~detection of antipersonnel~~ and ~~antitank~~• ~~landmines during extensive field trials at~~ the ~~Army~~balance ~~Combat~~upon ~~Engineering~~installation School test facility at Fort Leonard Wood, Missouri. This was the first time that plastic, low metal content, TNT landmines had been detected with this level of performance by any system in actual field conditions. The current QR prototype system detects metal, RDX, TNT and ~~Composition~~site Bacceptance, ~~and~~ranging isfrom ~~thus~~5% ~~able~~ to ~~detect the vast majority of all landmines deployed~~ 30%.

10 NDT

Our NDT product and service revenues are primarily derived from sales of ~~throughout~~X-ray based NDT products primarily to the ~~world~~automotive and aerospace industries. There ~~The~~were ~~Company~~no ~~expects~~NDT ~~future~~customers ~~systems~~who toaccounted befor ~~able~~more tothan ~~detect~~10% ~~tetryl~~of astotal ~~well~~revenues since the acquisition of Yxlon on March 31, 2003. QRWe ~~has~~had ~~the~~NDT ~~ability~~equipment tosales of ~~operate~~$34.6 million insince ~~almost~~completion ~~all~~of ~~soil~~our ~~conditions~~acquisition ~~including~~of ~~saturated~~Yxlon ~~soils~~on March 31, 2003. asWe ~~well~~believe asfuture ~~through~~sales of our NDT equipment will be driven primarily by ~~water.~~overall economic and industrial activity in the countries in which we market our NDT equipment.

~~Weapons~~Sales ~~Detection. The Company's passive magnetic technology combines high weapons detection probability with a low rate of false alarms. It is capable of real time detection~~ and ~~tracking of concealed weapons. This makes it attractive for screening large numbers of people at entrances to both secure facilities and~~Marketing ~~public buildings. In addition, because it is completely passive and non-intrusive, it diminishes issues involving permission to search. The Company developed the technology with the~~ ~~support of the National Institute of Justice ("NIJ"), and developed four portal systems that were installed at a courthouse in Bannock County, Idaho. In 2000, the Company engineered its concealed~~ ~~weapons detection portal hardware into a manufacturable product, and shipped a number of units as an OEM supplier.~~

~~Market, Distribution and Customers~~ EDS

~~Baggage~~ We ~~and Package Screening. The~~ market ~~for~~our ~~baggage~~EDS products and ~~package~~services ~~screening~~both ~~systems~~directly ~~includes~~through ~~checked baggage inspection~~internal ~~for~~sales ~~civil~~personnel ~~aviation,~~ and ~~package~~indirectly ~~inspection~~through atauthorized ~~postal~~agents, ~~facilities~~distributors and ~~secure~~EDS systems ~~facilities~~integrators. ~~The~~For ~~market~~EDS ~~for~~sales ~~checked~~through ~~baggage~~our ~~explosive~~authorized ~~detection~~representatives ~~systems is discussed in "Item~~and ~~1—Business—Explosive~~distributors, ~~Detection~~we ~~Systems—Market"~~are ~~above.~~generally ~~Several~~directly ~~units~~involved ~~of the Company's QScan products were delivered to the FAA~~ in ~~1998,~~developing ~~the~~proposal documents ~~U.S. Navy in 1999~~ and ~~the FAA~~negotiating incontract ~~2000~~terms.

~~Landmine~~ The ~~Detection~~selling ~~Market. According~~process tooften ~~DARPA,~~involves ~~for~~a ~~the~~team ~~last~~comprised ~~60 years,~~of aindividuals ~~sharply~~from sales ~~increasing~~and ~~percentage~~marketing, ~~of American~~engineering, ~~soldiers~~customer ~~have~~service ~~been~~and ~~killed~~support, orlegal ~~wounded~~and senior ~~by landmines~~management. ~~From~~The ~~World~~team ~~War~~frequently IIengages toin ~~Somalia,~~a ~~the~~multi-level ~~percentage~~sales effort directed toward a variety of ~~American~~constituents, ~~casualties~~including ~~caused~~government byregulators, ~~landmines~~the local ~~has~~airport ~~grown~~operator ~~from~~or ~~2.5 percent~~authority, insystems ~~World~~and ~~War~~conveyor IIintegrators, toand ~~26 percent~~individual ~~in Somalia~~airlines. ~~Still~~We ~~today,~~provide ~~mine~~our ~~detection~~sales ~~methods~~representatives ~~continue~~with totraining, promotional ~~depend~~literature, ~~primarily~~a onmulti-media ~~soldiers~~presentation, ~~manually~~videos ~~probing~~and ~~the earth~~competitive analysis. ~~Jane's~~The ~~Mines~~sales ~~and~~process ~~Mine~~includes ~~Clearance,~~assisting ~~3rd~~customers ~~edition, 1998-99,~~to ~~estimates~~design ~~there~~baggage handling ~~are~~system upconfigurations, toincluding ~~60 million~~the ~~landmines~~use ~~buried~~of ~~across~~computer ~~four continents~~modeling, educating ~~making~~customers ~~landmine~~on ~~detection~~the asystem ~~humanitarian~~and ~~issue~~technology, asand ~~well~~supporting asthe implementation aand ~~military~~integration ~~issue~~process.

~~Landmine~~ The ~~Detection~~combination ~~Customers. From the commencement~~ of the ~~landmine~~high ~~detection~~average ~~program~~selling ~~in April 1997 through December 31~~prices, ~~2000,~~the ~~Quantum~~time ~~received~~needed ~~$36.0 million in research and development funding from~~ for various ~~U.S. government departments and~~ agencies, ~~including~~to ~~$27.0 million~~secure ~~in 2000. The initial~~ funding ~~was~~for ~~from~~systems, ~~DARPA~~ and the ~~Office~~negotiation ~~of Naval Research to demonstrate the detection~~ and execution ~~false alarm performance~~ of QRactual ~~technology.~~contracts ~~The~~historically ~~more~~has ~~recent~~led ~~funding~~to ~~is part of~~ a ~~three~~typical ~~year~~sales ~~program to~~cycle ~~develop~~lasting afrom ~~vehicle~~six ~~mounted~~to ~~system~~twelve ~~for~~months, ~~the~~or ~~U.S. Army~~more, ~~and~~after ainitial ~~two~~contact ~~year~~with ~~program~~a customer. ~~for~~For ~~the~~repeat ~~Office~~orders offrom ~~Naval~~existing ~~Research to develop a man-portable~~customers, ~~backpack~~we ~~system~~can ~~for~~sometimes expedite the ~~United~~sales ~~States~~cycle ~~Marine~~by ~~Corps. The~~utilizing ~~Company~~existing ~~currently~~contracts ~~has~~and nocontract ~~customers for landmine detection systems other than the U~~extensions.~~S. Government.~~

11 NDT

~~Export~~ We ~~Control. The~~market ~~Company~~our isNDT ~~subject~~products toand ~~risks~~services ~~associated~~directly ~~with~~through ~~regulations~~internal ~~relating to the export of defense articles.~~sales Inpersonnel ~~particular,~~and ~~the~~indirectly ~~Company's~~through ~~landmine~~authorized ~~detection~~agents ~~systems~~and ~~are deemed to be regulated defense articles subject to export control by the U~~distributors.S. ~~Department~~As of ~~State. Exports may be prohibited or limited to a~~ ~~small~~December 31, ~~number of countries~~2003, ~~even~~Yxlon ~~for~~employed ~~purposes~~approximately of33 ~~demonstration~~employees ~~and~~in ~~further data collection and development.~~ NDT

~~Weapons Detection. The market for weapons detection systems includes law enforcement and facilities security, including~~7 airports, schools, courthouses, prisons, government buildings, banks and corporate headquarters. Four of the Company's concealed weapons detection portals are installed and operating at a courthouse in Bannock County, Idaho.

~~Public~~sales ~~Agency Contract~~ and ~~Budget Risks~~marketing. ~~Substantially~~ ~~all~~For ofNDT ~~the~~sales ~~Company's~~through ~~Quantum~~our ~~customers~~authorized ~~to date have been public~~representatives ~~agencies~~and ~~or quasi-public agencies. In contracting with public agencies~~distributors, ~~the~~we ~~Company is subject to public agency contract requirements which vary from jurisdiction to jurisdiction and which~~ are ~~subject to~~generally ~~budgetary~~directly ~~processes~~involved ~~and expenditure constraints. Budgetary allocations for explosive detection systems are dependent,~~ in ~~part,~~developing ~~upon governmental policies which fluctuate from time to time in~~proposal ~~response~~documents ~~to political~~ and ~~other~~negotiating ~~factors.~~contract In addition, public agency bidding processes have been and may continue to be protracted, and typically contain provisions that permit cancellation in the event that funds are unavailable to the public agencyterms.

Research ~~Competition~~ and Development

~~Baggage~~ We continue to make substantial investments to enhance the performance, functionality and ~~Package~~reliability ~~Screening~~of our products. ~~The~~ ~~competition~~We ~~for~~believe ~~baggage~~that continued and timely ~~package~~development ~~screening~~of ~~systems~~new ~~includes~~products ~~conventional~~and enhancements to existing products is ~~x-ray~~necessary ~~scanners~~to ~~and~~maintain ~~trace~~our ~~detection~~competitive ~~systems~~position. ~~for~~Accordingly ~~carry-on~~we ~~baggage~~devote ~~inspection~~a significant ~~for~~portion ~~civil~~of ~~aviation,~~our personnel and ~~package~~financial ~~inspection~~resources atto ~~postal~~engineering ~~facilities~~and research and ~~secure~~development ~~facilities~~programs. ~~The~~As of December 31, 2003, we had 235 ~~competition~~employees ~~for~~engaged ~~checked~~in ~~baggage~~research ~~explosive~~and ~~detection~~development ~~systems~~and isproduct ~~discussed~~development activities. We are also using the services of 18 specialized contract employees and consultants in ~~"Item~~this ~~1—Business—EDS—Competition"~~area. ~~above~~For the year ended December 31, 2003, we spent $29.4 million ~~The~~on ~~Company's~~total research and development activities, of which $3.1 QRmillion ~~technology~~was isfunded ~~more~~by ~~accurate~~the ~~than~~FAA, ~~conventional~~the ~~x-ray~~TSA ~~bulk~~and ~~detection~~other ~~techniques~~agencies ~~which~~under ~~predict~~development contracts and grants. For the ~~explosives~~year ~~presence~~ended December 31, 2002, we spent $21.2 million on total research and development activities, of which $566,000 was funded by ~~measuring~~the ~~object~~FAA, ~~density~~the orTSA ~~atomic~~and ~~number~~other agencies under development contracts and grants. For the year ended December 31, 2001, we spent $13.7 million on total research and development activities, of which $5.7 million was funded by the FAA and other agencies under development contracts and grants.

~~Landmine Detection. The market for landmine detection is becoming increasingly competitive with the growing interest in~~Competition ~~military and humanitarian demining. The Company believes that this will continue to prompt the development of new technologies, which will be the basis of competition in the market because there are~~ ~~greater differences between technologies than between companies using the same technology. The current competing technologies include:~~

12 EDS

~~Weapons~~ We ~~Detection. Many~~believe ~~companies~~that ~~manufacture~~the ~~conventional~~market ~~weapons~~for explosives detection systems ~~that~~will ~~use active magnetic~~become ~~technology~~increasingly competitive. ~~These~~Several ~~systems~~advanced ~~emit~~explosives ~~electro-magnetic~~detection ~~radiation~~technologies have ~~and~~been ~~measure~~developed ~~variations~~to inattempt ~~the~~to ~~resulting~~address ~~magnetic~~the ~~field.~~need ~~The~~for ~~Company's~~effective ~~passive magnetic technology measures variations in the earth's natural~~explosives ~~magnetic~~detection ~~field~~for ~~without~~checked ~~emitting additional radiation~~baggage, soincluding itCT ~~does~~technology ~~not~~and ~~interfere with~~ other ~~equipment, and its operation cannot be detected. The Company's system is also innovative because it displays a~~technologies ~~video~~described ~~image of the area being scanned with potential weapons highlighted on the image.~~ below:

• ~~Backlog~~ Dual energy X-ray systems measure the X-ray absorption properties of a bag’s contents at two different X-ray energies using one or two views to determine if any of the contents have the physical characteristics of explosive materials. • Multi-view X-ray, which is like dual energy X-ray, except that it uses three or more views in an effort to approximate cross-sectional data. This method gathers more two-dimensional data than conventional single- or double-view dual energy X-ray systems. • X-ray diffraction systems use a single energy source to take hundreds of measurements of the angular scatter patterns of a bag’s contents to determine if any of the contents have the chemical characteristics of explosive materials.

~~The~~ Only ~~Company~~explosives ~~measures~~detection ~~its~~systems ~~backlog~~based ofon ~~government~~CT ~~contracts~~technology ashave ~~awards~~been certified ~~from~~by ~~government~~the ~~agencies~~FAA/TSA ~~which~~for ~~have~~bulk ~~been~~explosives ~~funded,~~detection. ~~but~~Competitors ~~for~~have attempted ~~which~~to ~~services~~obtain ~~have~~FAA/TSA ~~not~~certification ~~yet~~of ~~been performed.~~systems Atfor ~~December 31,~~bulk ~~2000,~~explosives detection ~~the~~based ~~Company's~~on ~~Quantum~~non-CT ~~government~~technology ~~contracts~~in ~~backlog~~the ~~was~~past ~~approximately~~without ~~$23~~success.~~6 million,~~ ~~compared~~To tomeet ~~approximately~~the increased ~~$3.2 million~~demand atfor ~~December 31~~EDS products, ~~1999.~~ ~~The~~the ~~Company~~TSA ~~expects~~may tochange ~~fill~~its ~~the~~certification standards ~~December 31,~~and ~~2000~~certify ~~backlog~~non-CT-based intechnology ~~2001~~or ~~and~~other ~~2002.~~CT-based products.

We ~~Wood~~ believe that the primary competitive factor, especially in the United States, is obtaining FAA/TSA certification. Additional factors are price, throughput rates, ease of integration into baggage handling systems and the size of baggage that can be screened. We believe that we compare favorably with both our CT-based and non-CT-based competitors on these factors. Our primary competitors in EDS are:

• ~~Products~~CT-Based Competition. Our only competitor that has developed a CT-based EDS is L-3 Communications Holdings, Inc., which has obtained FAA certification for two of its EDS products, including a product developed for the FAA ARGUS program. We and ~~Services~~ L-3 (which acquired the former PerkinElmer, Inc. Detection Systems Group during 2002) are participating in the ARGUS program for the development and certification of a smaller EDS.

~~WoodVision. The Company is developing a log scanning system based on CT technology to optimize the value and yield of~~8 harvested timber. Development versions were evaluated during ongoing field trials that started in 1999. Where suitable, the log scanner will share components with the Company's EDS products. The Company anticipates features of the log scanner will include the ability to locate hidden defects and undesirable wood properties, and thereby identify high quality logs for sale and indicate sawing solutions to increase the quantity of high value wood products from the log.

Market, Customers and Distribution

•		Dual Energy X-ray and Multi-View Competition. Competitors such as L-3 Communications Holdings, Inc. and Heimann Systems GmbH offer non-certified explosives detection systems using dual energy X-ray technology.

•		X-ray Diffraction Competition. Heimann Systems GmbH offers an X-ray diffraction system that can be used in combination with one of its dual-energy X-ray units.

~~WoodVision Market.~~ The ~~worldwide~~primary ~~lumber~~competition ~~industry~~for ~~generates~~our ~~revenues~~QR-based products in the area of ~~$75 billion~~checked and ~~per~~carry-on ~~year.~~baggage ~~Worldwide,~~currently ~~there~~includes the large installed base of ~~are~~conventional ~~over~~X-ray ~~6,000~~scanners ~~sawmills~~and trace detection systems for commercial aviation. ~~Sawmills~~In ~~will~~addition, ~~purchase~~other ~~capital~~companies ~~equipment~~are todeveloping ~~improve~~QR ~~yield~~technology in these markets, ~~efficiency~~including ~~and~~QR ~~value~~Sciences Limited (formerly Thorlock International Ltd.). We ~~Given~~believe ~~the~~that ~~significant~~government ~~payback~~requirements ~~for~~to ~~sawmills~~screen ~~when~~carry-on ~~the~~baggage ~~value~~for explosives ofare ~~the~~needed ~~lumber~~to isincrease ~~increased~~demand byfor ~~even~~our aQR technology products. If ~~small~~demand ~~percentage~~increases, we believe that the ~~Company~~competitive ~~believes~~factors ~~there~~in isthese amarkets ~~very~~will be ~~significant~~government ~~market~~certification, ~~opportunity~~if ~~for~~any, CTperformance, ~~based~~price ~~scanners.~~and ease of use.

~~WoodVision Customers. During the first phase of development the Company expects to sell principally to the planted wood~~ NDT ~~market. Sellers of planted wood will gain a significant competitive advantage by using a CT based system to locate hidden defects and undesirable wood properties such as twist, and thereby identify~~ ~~high quality logs for sale. The Company also expects to further develop systems for sawmills worldwide. Sawmills will gain a significant competitive advantage by using a CT~~

13 We believe that the market for NDT equipment is primarily divided into competitors offering both standard and customized solutions and competitors offering only standard products or offering products to local markets. Our primary global competitors include GE Inspection Technologies and Boselli. We believe that the competitive factors in these markets are performance, service and price. We believe that we compare favorably against our competitors on performance and service, although our products are generally priced higher than those of our competitors.

To some extent, our NDT products, which are based ~~system~~on toX-ray ~~locate~~and ~~hidden~~CT technologies, ~~defects~~compete with products based on other non-destructive techniques such as ~~knots~~ultrasound, ~~and~~eddy ~~cracks~~current, magnetic particle and ~~thereby~~dye ~~adjust~~penetration. However, ~~the~~for ~~cutting~~many ~~pattern~~applications those alternative techniques offer inferior performance. Often, our NDT products are complementary to ~~increase~~products ~~the~~based ~~quality~~on alternative techniques and ~~quantity~~customers ofwill ~~the~~use ~~sawn~~our ~~wood.~~NDT products as well as products based on these alternatives.

~~Inovec Customers. The Company believes that the market for optimization systems will remain competitive as the lumber~~Manufacturing ~~industry seeks to maximize the value obtained from the current and foreseeable supply of usable timber. Over 600 of the Company's Inovec laser scanners and other optimization systems have been~~ ~~installed in over 300 sawmills worldwide.~~

~~Distribution. The~~ Our ~~Company~~manufacturing ~~seeks~~operations ~~potential~~consist ~~customers~~primarily ~~for~~of ~~its~~materials ~~products~~management, assembly, ~~under~~test ~~development~~and ~~primarily~~quality ~~though~~control ~~development~~of complete systems and ~~test~~ ~~agreements~~final system testing. ~~The~~Using ~~agreements~~our ~~are~~designs ~~negotiated~~and byspecifications, asubcontractors ~~team~~assemble ofsome mechanical ~~senior~~and ~~research~~electrical sub-components, and ~~development~~in ~~employees~~times ~~and~~of ~~senior~~peak ~~management.~~production, ~~The~~we engage ~~Company~~subcontractors ~~markets~~to ~~its~~assemble ~~Inovec~~entire CTX products. ~~both~~We ~~directly~~perform ~~through~~all ~~internal~~final ~~sales~~assembly ~~personnel~~ and ~~indirectly~~testing ~~through~~of ~~authorized~~products ~~agents,~~prior ~~distributors~~to ~~and systems integrators~~shipment. AsBecause ofquality ~~December 31,~~and reliability ~~2000,~~over the ~~Company~~life ~~employed~~of aour ~~total~~products ofare ~~seven~~vital ~~employees~~to incustomer ~~sales~~ satisfaction and ~~marketing. For~~repeat ~~sales~~purchases, ~~through~~we ~~its~~believe ~~authorized~~our ~~representatives~~quality ~~and~~assurance ~~distributors,~~program ~~the Company generally~~ is ~~directly~~a ~~involved~~key component inof ~~developing~~our ~~proposal~~EDS ~~documents~~business ~~and negotiating contract terms~~strategy.

~~Wood Industry Purchasing. The Company's Wood revenues will be subject to the ability and willingness of customers in~~Suppliers ~~the wood industry to purchase capital equipment to improve productivity, yield and finished product value. The factors that affect the decision to purchase such capital equipment include the demand~~ ~~for wood products, market prices for logs and finished wood products, labor costs, interest rates and other general economic factors. In addition, the revenues related to the Company's CT scanners for~~ ~~the wood industry will be subject to the acceptance of new technology by customers in the wood industry. There are no assurances that market conditions in the wood industry will be favorable for the~~ ~~sale of capital equipment, or that the Company's new products will be accepted by the industry in any particular time, or at all.~~

EDS. ~~Competition~~ We outsource certain materials management processes, and certain manufacturing processes, including mechanical sub-assemblies, sheet metal fabrication, cables and assembled printed circuit boards. We generally purchase major contracted assemblies from single source suppliers. We review our single source procurements on a case by case basis, where feasible, and have qualified second sources for certain contracted assemblies. We have entered into an agreement with CoorsTek under which CoorsTek performs supply chain management services. We have experienced delays in obtaining a few of our single source assemblies. We cannot assure you that we will not face further shortages of one or more of these systems in the future.

~~WoodVision~~ NDT. ~~The~~ ~~Company's~~We ~~high~~outsource ~~throughput~~certain CTmanufacturing ~~technology creates a three dimensional image of the log~~processes, ~~producing~~including aelectronic ~~virtual log which is an exact representation of the log's internal structure~~boards, ~~including~~mechanical ~~all~~sub-assemblies ~~knots, cracks~~ and ~~grain patterns~~cabling. ~~Through~~We ~~advanced~~generally ~~and~~purchase ~~proprietary image processing, logs can be graded and~~major ~~optimized~~contracted ~~for~~assemblies ~~the~~from ~~ideal~~single ~~cutting~~source ~~pattern~~suppliers, ~~therefore~~although ~~allowing~~we ~~the~~are ~~customer~~in ~~to mitigate~~ the process ~~impact~~ of ~~previously~~qualifying ~~unseen~~second ~~defects~~sources ~~and~~for ~~maximize~~certain ~~the value of a log's yield~~components. ~~Competing technologies include:~~

~~Inovec. Inovec competes with a number of manufacturers of laser based optimization and scanning systems. The Company~~9 believes that it has an advantage because it is focused on scanning and optimization systems compared to many competitors who are focussed on general sawmill equipment and who also offer some scanning or optimization equipment.

~~The~~Intellectual ~~Company~~Property ~~measures its backlog of Inovec product~~ and ~~services~~Proprietary ~~revenues as orders for systems and upgrades for which contracts or purchase orders have been~~Rights ~~signed, but which have not yet been shipped, and as orders for maintenance related to product support for which contracts have been~~

14 We seek to protect our intellectual property through various methods such as patents and patent applications, trademarks, copyrights, non-disclosure agreements and trade secrets. We cannot assure you that the steps taken by us to protect our proprietary technology will be adequate or that our competitors will not be able to develop similar, functionally equivalent or superior technology.

EDS. We have relied primarily on copyrights and trade secrets for the ~~signed,~~protection ~~but~~of ~~maintenance~~our ~~service~~EDS ~~has~~technology. ~~not~~We ~~yet~~have ~~been~~two ~~performed~~U. ~~The~~S. ~~Company~~patents ~~typically~~for ~~ships~~automatic concealed ~~its~~object ~~Inovec~~detection ~~products~~systems ~~within~~using ~~three~~a topre-scan ~~twelve~~stage ~~months~~as ~~after~~used ~~receiving~~in anthe ~~order~~CTX Series. ~~However,~~These ~~such~~patents ~~shipments~~expire ~~may~~in ~~be affected~~2010 byand ~~delays~~2011. ~~which~~The ~~occur~~patents inhave ~~the~~not ~~delivery~~prevented competition offrom ~~components~~developing toCT-based ~~Inovec~~products orwhich ~~customers'~~do ~~readiness~~not touse ~~accept~~a ~~delivery~~pre-scan stage. ~~for~~The ~~reasons~~time ofperiod ~~site~~for ~~preparation~~filing orforeign ~~otherwise.~~counterparts Atof ~~December 31,~~our ~~2000,~~two ~~the~~U.S. EDS ~~Company's~~patents ~~Inovec~~has ~~product~~expired, and ~~service~~we ~~revenues~~did ~~backlog~~not ~~was~~seek ~~approximately~~or $1obtain patent protection.~~8 million.~~ The absence ~~Company~~of ~~expects~~foreign counterparts to ~~fill~~our ~~these~~patents ~~orders~~could ~~and~~adversely ~~perform~~affect ~~these~~our ability ~~services~~to prevent a competitor from using technology similar to technology used in ~~2001~~our CTX Series. ~~The~~We ~~Company~~also ~~acquired~~have ~~Inovec effective~~a ~~January 1,~~U.S. ~~2000~~patent ~~and~~for ~~thus~~a ~~had~~mechanical noradiation shield ~~Inovec~~for ~~backlog~~our atCTX ~~December 31~~9000 DSi model, ~~1999~~which expires in 2021. InWe ~~the~~rely ~~first~~on ~~quarter~~this technology ofto ~~2001,~~increase the ~~Company~~speed ~~received~~of ~~orders~~the ~~valued~~baggage atinspection ~~approximately $2~~process.~~2 million~~ ~~for~~We have ~~Inovec~~filed ~~laser~~other ~~based~~applications ~~optimization~~in ~~and~~the ~~scanning~~United ~~systems.~~States ~~The~~and ~~Company~~Europe ~~had~~for nopatents ~~WoodVision~~covering other ~~backlog~~features atcontained ~~December 31,~~in ~~2000~~our ~~and~~CTX ~~December 31,~~9000 ~~1999.~~DSi model.

In ~~Manufacturing~~ connection with our formation, in 1990, we entered into a licensing agreement with Imatron, Inc. Under the agreement, as amended and currently in effect, we have an exclusive, worldwide and fully-paid license to use Imatron’s CT technology in products for the scanning of mail, freight, parcels, baggage and wood, and in compact medical scanners for military field applications. In exchange, we granted to Imatron under this agreement an exclusive, worldwide and fully-paid license to use, in products for the medical industry, any CT scanning technology that we develop during the term of the agreement. The license agreement expires in 2009. We believe that by the time the license expires in 2009, we will not be using any of the original Imatron technology in our products.

In NDT. ~~all~~We ~~segments,~~have ~~the~~relied ~~Company's~~on ~~manufacturing~~copyrights ~~operations~~and ~~consist~~trade ~~primarily~~secrets for the protection of: our ~~(1) materials~~NDT ~~management;~~technology. ~~(2) assembly~~In addition, ~~test~~we ~~and~~have ~~quality~~three ~~control~~groups of ~~parts~~ NDT patents and patent ~~components~~applications. ~~subassemblies;~~The ~~and~~first ~~(3) final~~group ~~system~~of ~~testing~~U.S. ~~Using~~and foreign patents relates to the usage ~~Company's~~of ~~designs~~Compton ~~and~~Backscatter ~~specifications,~~X-ray ~~subcontractors~~technology ~~assemble~~applicable ~~mechanical~~for the inspection of aircraft fuselages and ~~electrical~~other ~~sub-components~~surface near areas of extended objects. A ~~The~~sub-patent ~~Company~~relates ~~performs~~to ~~final~~a ~~assembly~~device ~~and~~for ~~test~~a generation of ~~systems,~~a ~~including~~scanning ~~configuration~~X-ray beam with a small cross-section to ~~customers'~~be ~~orders~~used ~~and~~for ~~testing~~the ~~with~~area ~~current~~inspection ~~release~~of ~~software~~large, ~~prior~~extended objects. toThese ~~shipment~~patents expire between 2005 and 2010. The ~~Company's~~second ~~manufacturing~~group of ~~organization~~patents, which has ~~expertise~~been issued in ~~mechanical,~~Europe ~~electrical~~and is pending in the United States, relates ~~electronic~~to ~~and~~a ~~software~~method ~~assembly~~for high speed object manipulation to increase the through-put of automated in-line X-ray inspection systems for small and mid-size ~~testing~~parts. InThe ~~addition,~~patents ~~because~~expire ~~quality~~in ~~and~~2021. ~~reliability~~The ~~over~~third group of patents covers the ~~life~~design and construction of ~~the~~a ~~Company's~~three-dimensional ~~products~~test ~~are~~object ~~vital~~with toartificial ~~customer~~defects ~~satisfaction~~dedicated ~~and~~for ~~repeat~~the ~~purchases~~automated, ~~the~~regular ~~Company~~performance ~~believes~~check ~~its~~of ~~quality~~in-line inspection ~~assurance~~machines ~~program~~during isoperation. aPatents ~~key~~are ~~component~~pending ofin ~~its~~Europe ~~business~~and ~~strategy.~~the United States.

Government ~~Suppliers~~ rights to use our technology. In accordance with the terms of our development contracts with the FAA and the TSA, the U.S. government has rights to the use of our proprietary technology developed after the award of the contracts and funded by the contracts. The U.S. government may use these rights to produce or have produced competing products for it using such technology.

~~The Company outsources certain manufacturing processes, including standard and build-to-print fabricated parts such as mechanical~~Backlog ~~sub-assemblies, sheet metal fabrication, cables and assembled printed circuit boards. The Company generally purchases major contracted assemblies from single source suppliers to ensure~~ ~~high quality, prompt delivery and low cost. The Company reviews its single source procurements on a case by case basis, where feasible, and has qualified second sources for certain contracted~~ ~~assemblies. Although to date the Company has not experienced any significant delays in obtaining any of its single source assemblies, the Company cannot assure that it will not face shortages of one~~ ~~or more of these systems in the future.~~

We ~~Intellectual~~measure ~~Property~~our backlog of product revenues as orders for systems and upgrades ~~Proprietary~~for ~~Rights~~ which contracts or purchase orders have been signed, but which have not yet been shipped. We measure our backlog of service revenues as orders for maintenance related to product support for which contracts have been signed, but maintenance service has not yet been performed. We typically ship our products within three to twelve months after receiving an order. However, such shipments may be affected by delays which occur in the delivery of components to us or our readiness to accept delivery of components for reasons of site preparation or otherwise. In some instances, shipments may be made more quickly depending on our ability to build machines to order and our customers’ demand for immediate delivery.

~~Proprietary Technology. The Company's performance depends in part upon its proprietary technology. In the United~~10 States, the Company relies upon patents, copyrights and trade secrets for the protection of the proprietary elements of its products. The Company cannot assure, however, that the Company could enforce such patents, trade secrets or copyrights.

As of December 31, 2003, our EDS product and service revenue backlog was $65.6 million, compared to $246.6 million as of December 31, 2002. As of December 31, 2003, our NDT product and service revenues backlog was approximately $21.6 million. As of December 31, 2003, our product and service revenues backlog from other segments was approximately $15.6 million, compared to $13.1 million as of December 31, 2002. As of December 31, 2003, our contract research and development backlog from other segments was $13.1 million, $7.7 million of which is funded.

~~EDS~~ Any ~~Foreign~~failure ~~Patents. Outside~~by ~~the~~us ~~United~~to ~~States,~~meet ~~the~~an ~~Company~~agreed ~~does~~upon ~~not~~schedule ~~have~~for ~~patent~~the ~~protection~~delivery ~~(except~~of our EDS products could lead to the ~~extent~~cancellation of ~~licenses~~ ~~held~~the ~~under~~related ~~patents~~order. ~~owned~~Variations byin the ~~Imatron Inc.)~~size, complexity and ~~has~~delivery ~~relied~~requirements toof ~~date~~the ~~primarily~~customer onorder ~~software~~may ~~copyrights~~result in ~~and~~substantial ~~trade~~fluctuations ~~secrets~~in ~~for~~backlog ~~the~~from ~~protection~~period ofto ~~its proprietary technology~~period. ~~The~~In ~~absence~~addition, ofall ~~foreign~~orders ~~counterparts~~are subject to cancellation or delay by the ~~Patents~~customer ~~could~~and, ~~adversely~~accordingly, we ~~affect~~cannot ~~the~~assure ~~Company's~~investors ~~ability~~that toour ~~prevent~~backlog awill ~~competitor~~eventually ~~from~~result ~~using~~in ~~technology~~revenues. For ~~similar~~these toreasons, ~~technology~~we ~~used~~believe inthat ~~the~~backlog ~~CTX~~cannot ~~Series.~~be considered a meaningful indicator of our performance on an annual or quarterly basis.

~~Imatron License. In connection with the formation of the Company, the Company obtained an exclusive, worldwide, and~~Employees ~~fully-paid license, as amended, from Imatron, Inc. regarding its patents and know-how related to (a) scanners for the inspection of mail, freight, parcels,~~ ~~baggage and wood products, and (b) compact medical scanners for military field applications. The license allows the Company to develop, manufacture and sell systems based on a different type of~~ ~~CT technology than is currently incorporated in the Company's CTX Series. The Company, in exchange, granted to Imatron an exclusive, worldwide, perpetual and fully paid license under the Company's~~ then existing or future patents and know-how to permit Imatron to utilize such technology in medical scanners other than compact medical scanners for military field applications. The license expires in 2009.

~~Quantum~~ As ~~Patents. In~~of ~~the~~December 31, ~~United States~~2003, ~~the~~we ~~Company~~directly ~~relies~~employed ~~on licenses~~1,009 ~~patents~~people, ~~copyrights~~of ~~and~~whom ~~trade~~235 were ~~secrets~~primarily ~~held~~engaged ~~by the~~in ~~Company~~research ~~for~~and ~~the~~development ~~protection~~activities, of43 ~~the~~in ~~proprietary~~marketing and ~~elements~~sales, of344 ~~its~~in ~~Quantum~~customer ~~products.~~support ~~The~~and ~~Company~~field ~~also~~service, ~~relies~~247 onin ~~its~~manufacturing, ~~ability~~20 in toquality ~~obtain~~assurance ~~research~~ and ~~development~~120 ~~contracts~~ in ~~the~~administration ~~areas of electromagnetic sensing~~ and ~~detection~~finance. In ~~connection~~addition, ~~with~~we utilized ~~its~~the QRservices ~~technology,~~of ~~the~~50 ~~Company~~full-time ~~utilizes~~consultants ~~three~~and ~~key~~temporary QRemployees. ~~patents~~The number ~~from~~of ~~the~~our ~~Naval~~EDS ~~Research~~customer ~~Laboratory~~support and ~~has~~field ~~been~~service ~~granted~~personnel anwas significantly ~~exclusive~~increased ~~license~~in to2003 ~~commercialize~~in ~~the technology,~~response ~~including~~to ~~landmine~~a ~~detection.~~greater ~~The~~number ~~license~~of ~~expires~~our EDS in the ~~2009~~field. ~~Additionally~~ In addition, the ~~Company~~number ~~has~~of ~~been~~our ~~granted~~EDS ~~ten~~manufacturing ~~patents~~personnel increased ~~related~~in to2003 ~~Quantum~~as ~~technology,~~we ~~with~~relied ~~additional~~on ~~patents~~our ~~pending,~~internal ~~and~~manufacturing ~~has~~personnel ~~developed~~for final aassembly ~~significant~~instead ~~amount~~ of ~~know-how~~contract inmanufacturers. ~~the~~The ~~magnetic sensing~~aggregate ~~and~~number ~~detection~~of employees ~~areas.~~also ~~These~~increased ~~patents~~due ~~and~~to ~~know-how~~our ~~enable~~acquisition ~~field~~of ~~deployable~~Yxlon. ~~security~~We ~~systems~~believe tothat beour relationship ~~designed~~with ~~and~~our ~~cost-effectively~~employees ~~manufactured.~~is good.

~~Quantum Licenses. The Company has also been granted a non~~Long-~~exclusive~~Lived ~~license by International Business~~Assets ~~Machines Corporation (IBM). The license covers certain patented and non-patented proprietary software and know-how related to electro-magnetic sensing and detection. The~~ ~~license grant expires in 2009.~~

~~Wood. The~~ For ~~Company has a patent application pending covering a number of new features related to the design and use of the CT based log scanner. The Company has a patent~~2001, ~~issued~~2002 ~~in the US~~ and ~~Canada~~2003, ~~for~~substantially ~~certain~~all ~~technology~~of ~~used~~our inlong-lived ~~Inovec~~assets ~~log cutting optimization systems. The Company cannot assure that the patents~~were ~~would~~located ~~be effective~~ in ~~preventing~~the ~~competition~~United ~~from other CT and laser based scanning and optimizing systems~~States.

~~Protection. The~~Available ~~Company generally enters into confidentiality agreements with each of its employees, and on a~~Information ~~case-by-case basis enters into similar agreements with distributors, customers, and potential customers. In addition, the Company limits access to distribution of its software,~~ ~~documentation and other proprietary information. The Company cannot assure that these agreements will not be breached, that the Company will have adequate remedies for any breach, or that the~~ ~~Company's trade secrets will not otherwise become known to or independently developed by others. The Company cannot assure that the steps taken by the Company to protect its proprietary technology~~ will be adequate or that its competitors will not be able to develop similar, functionally equivalent or superior technology. Although the Company believes that its intellectual property rights are valuable, the Company also believes that product support, and customer relations are of greater competitive significance because of the rapid pace of technological change and evolving customer requirements.

~~Dependence~~ We file electronically with the Securities and Exchange Commission our annual reports on ~~Proprietary~~From ~~Technology. The~~10-K, ~~Company~~quarterly inreports ~~the~~on ~~past~~Form ~~has~~10-Q, ~~received~~current reports on From 8-K, and ~~from~~amendments ~~time~~to those reports pursuant to ~~time~~Section in13(a) ~~the~~or ~~future~~15(d) ~~may~~of ~~receive,~~the ~~communications~~Securities ~~from~~Exchange ~~third~~Act ~~parties~~of ~~alleging~~1934. ~~infringements~~We bymake ~~the~~available ~~Company~~on orour ~~one~~website at http://www.invision-tech.com, free of ~~its~~charge, ~~suppliers~~copies of ~~patents~~these reports as soon as reasonably practicable after filing or ~~other~~furnishing ~~intellectual~~the ~~proprietary~~information ~~rights~~to ~~owned~~the SEC. byYou can also request copies of such ~~third~~documents by contacting our Investor Relations Department at (510) 739-2200 or sending an email to investor_relations@invision.iip.com.

16Risk Factors

~~parties.~~ Many ~~The~~factors, ~~Company~~including ~~cannot~~those ~~assure~~described ~~that~~below, ~~any~~could ~~infringement~~cause ~~claims~~actual ~~(or~~results to ~~claims~~differ ~~for~~materially ~~indemnification resulting~~ from ~~infringement~~those ~~claims~~discussed ~~against third parties, such as customers) will not be asserted against the Company, resulting~~ in ~~expensive~~any ~~and~~forward-looking ~~protracted litigation~~statements.

Risks ~~Research~~Related ~~and~~to ~~Development~~ Our Business

~~Importance~~A number of ~~Research~~factors ~~and~~that ~~Development. The~~affect ~~Company~~our ~~considers~~revenues ~~research~~make ~~and~~our ~~development~~future toresults ~~be a vital part of its~~difficult ~~operating discipline and continues~~ to ~~dedicate substantial resources to research and development. At December 31~~predict, ~~2000 the Company had 132 full-time employees engaged in research~~ and ~~development~~therefore ~~and~~we ~~product~~may ~~development~~not ~~activities,~~meet 47expectations for ~~EDS,~~a 49particular ~~for Quantum and 36 for Wood~~period. ~~The Company was also using the services of sixteen specialized contract employees and consultants in~~ ~~this area. During the years ended December 31, 2000, 1999 and 1998, the Company spent $11.9 million, $11.2 million and $12.9 million, respectively, on research and~~ ~~development activities, of which $0.9 million, $0.7 million and $3.6 million, respectively, were funded by the FAA and other agencies under development contracts and grants. The~~ ~~Company has in backlog grants of $6.7 million for EDS research and development.~~

~~Enhance~~ We ~~EDS~~believe ~~Technology. The~~that ~~Company~~our ~~continues~~revenues have the potential to ~~make~~vary ~~substantial~~significantly ~~investments~~from time to ~~enhance~~time. ~~the~~For ~~performance~~example, ~~functionality~~our total revenues were $89.4 million for the second ~~and~~quarter ~~reliability~~of fiscal 2003, $165.2 million for the first quarter of fiscal 2003 and $220.4 million for the ~~CTX~~fourth ~~Series~~quarter ~~explosive~~of ~~detection~~fiscal ~~systems~~2002, ~~including~~and ~~developments~~were ~~to:~~$416.5 million for fiscal 2003, $439.1 million for fiscal 2002 and $74.3 million for fiscal 2001. We believe that these variations may result from many factors, including:

~~These and~~• ~~other~~the ~~modifications~~timing, orsize ~~updated~~and ~~versions~~mix of ~~the~~orders ~~CTX~~from ~~Series~~our ~~may~~major ~~require~~customers, ~~FAA~~including ~~approval~~in ~~to retain certification or may require re-certification testing. The Company cannot assure that any such modifications will be approved or~~particular, ifthe ~~required,~~TSA ~~certified~~and byagencies ~~the~~of ~~FAA.~~other governments;

~~Broaden EDS Product Offerings. The Company is continuing its commitment to its "family" approach to explosive detection~~11 by participating in the FAA's ARGUS program. This program is a four-phase competitive research and development program designed to develop a low-cost, automated explosive detection system to scan checked baggage in small airports. The project specifies an explosive detection system that would be smaller and less expensive than the Company's CTX 2500 model. During Phase I of the program, the Company developed an initial system design to meet the FAA's criteria for weight, size, and cost. In 2000, the Company was awarded funding of $7.7 million for Phase II development of a prototype system. Two competitors also received grant awards to develop prototypes. The Company believes that its participation in Phases I and II and its long experience and leading position in the field of certified EDS place it in good stead to receive additional grants under the further phases of the ARGUS program. However, there can be no assurance that the FAA will continue to award ARGUS or other development grants to the Company.

~~Broaden~~• ~~EDS~~legislative ~~Technology~~or ~~Offerings. The~~other ~~Company~~government ~~believes~~actions ~~that~~driven, ~~systems~~in ~~combining~~part, ~~two~~by orthe ~~more~~public’s ~~technologies~~perception ~~based~~of ~~on different~~the ~~physical~~threats ~~principles~~facing ~~will~~commercial beaviation, ~~more~~leading ~~robust,~~to ~~more~~fluctuations ~~cost~~in ~~effective~~demand for aviation security products and ~~more~~services; ~~difficult~~• todelays ~~defeat~~in ~~than~~product ~~single~~shipments ~~technology~~caused ~~systems.~~by ~~For~~the ~~example,~~inability ~~combining~~of QRairports ~~with~~to ~~dual-energy X-ray~~install ~~results~~or integrate our products in a ~~system~~timely ~~with~~fashion; • the ~~ability~~availability toand ~~detect~~cost aof ~~wider~~key ~~range~~components; • the timing of ~~explosives~~completion ~~than~~of anacceptance ~~X-ray~~testing ~~alone~~for some of our products; • the introduction and acceptance, ~~with~~including ~~greater~~certification ~~reliability~~by the TSA, ~~and~~of ~~with~~new ~~images~~products or enhancements to ~~assist~~existing ~~with~~products ~~threat~~offered ~~resolution following~~by aus ~~QR-generated~~or ~~alarm.~~our ~~The~~competitors; ~~Company~~• ischanges in ~~the~~pricing ~~early~~policies ~~development~~by ~~stage~~us, our competitors or our suppliers, including possible decreases in average selling prices of ~~these~~our ~~combined~~products ~~technologies~~caused by customer volume orders or in response to competitive pressures; • our sales mix to domestic and international customers; and • fluctuations in currency exchange rates, particularly exchange rate of the U.S. dollar against the euro.

~~Competition~~ Further, ~~for~~we ~~FAA~~depend ~~Grants. The~~on ~~U.S.~~a ~~Government~~small ~~currently~~number ~~plays~~of ancustomers ~~important~~for ~~role~~a insubstantial portion ~~funding the development~~ of ~~EDS technology~~our ~~and sponsoring its deployment in U~~revenues.S. ~~airports.~~In ~~Through~~the ~~December 31~~past, ~~2000,~~ the ~~Company~~number ~~had~~of ~~received~~orders ~~$27.8 million~~placed ~~from~~by ~~FAA grants and contracts. The Company is also aware that~~these ~~certain~~customers ~~other~~has ~~competitors~~changed insignificantly ~~the~~from ~~EDS~~period ~~market have received FAA development grants. These grants include approximately $14.5 million~~ to ~~the Company's only CT based competitor~~period, and ~~funding~~we ~~to another~~expect ~~competitor to develop a new CT system for the ARGUS program. The Company cannot assure~~ that this ~~additional~~may ~~research~~continue ~~and development funds from the FAA will become available~~ in the future ~~or that the Company will receive any such additional funds~~.

~~Broaden~~ A CTsignificant ~~based~~portion ~~Detection Applications. The Company believes that its CT detection technology can also be applied to the detection~~ of ~~drugs~~our ~~and~~quarterly ~~agricultural products at ports of entry,~~ and toannual ~~the~~operating ~~detection~~expenses ~~of contraband entering prisons. The U.S. has deployed approximately 500 conventional x-ray~~is, ~~systems at border crossings~~ and ~~other~~will ~~points~~continue ofto ~~entry.~~be, ~~There~~relatively ~~are~~fixed ~~additional~~in ~~deployments around the world for the purpose of drug interdiction~~nature. ~~The~~This ~~Company~~means ~~has determined~~ that ~~its CTX Series explosive~~revenue ~~detection~~fluctuations ~~systems~~will ~~are~~cause ~~able~~our toquarterly ~~detect illegal drugs~~ and ~~currency.~~annual Byoperating ~~expanding~~results ~~the software library~~ to ~~specifically include the characteristics of controlled substances, the Company developed a~~vary ~~prototype CT based system for drug detection~~substantially. InWe ~~late~~also ~~1999~~may ~~and~~choose ~~early~~to ~~2000~~increase ~~the~~spending ~~Company conducted trials for the United States Customs Service~~ to ~~evaluate~~pursue ~~the~~new ~~use of a truck-mounted CT based drug~~market ~~detection~~opportunities, ~~system.~~which ~~The~~may ~~Company~~negatively ~~believes~~affect ~~that~~our afinancial ~~truck mounted CTX Series system could be sold for aviation security applications~~results.

~~Weapons~~ Accordingly, ~~Detection. The~~we ~~Company~~believe isthat ~~continuing~~period-to-period ~~the~~comparisons ~~development~~ of ~~its~~our ~~passive~~results of ~~magnetic~~operations ~~concealed~~cannot ~~weapons~~be ~~detection technology,~~relied ~~currently~~upon ~~developed~~as ~~for~~indicators ~~portal~~of ~~systems~~future performance. Because ~~The~~of ~~Company~~all isof ~~exploring~~the ~~portable~~foregoing ~~variations~~factors, ofour ~~this~~operating ~~technology~~results have from time to ~~detect~~time ~~weapons~~in ~~entering~~the orpast ~~leaving~~been, aand ~~specific~~may ~~area.~~again ~~The~~in ~~Company~~the isfuture ~~also~~be, different from ~~developing~~expectations aof ~~wand~~public market analysts and investors. Failure to ~~screen~~meet ~~people~~market expectations ~~for~~has ~~both~~in ~~weapons~~the past resulted, and ~~explosives.~~may again in the future result, in fluctuations in the trading price of our common stock.

~~Process~~We ~~Control. In~~are ~~2000,~~anticipating ~~the~~decreased ~~Company~~EDS ~~received~~sales ~~a major contract from the U.S. Department of Energy to develop its magnetic resonance technology to improve energy efficiency~~ in ~~process~~2004 ~~control~~and ~~applications.~~increased ~~The~~difficulty ~~Company is developing systems to accurately determine the moisture content of processed materials,~~in ~~including~~predicting ~~lumber,~~future ~~wood~~gross ~~products~~margins, ~~paper~~which ~~pulp,~~may ~~food~~cause ~~products,~~our ~~and~~stock ~~fuels~~price ~~such~~to ~~as coal~~decline. ~~Accurate measurements of moisture content are very important, since industrial drying operations consume large~~ ~~quantities of energy, and small improvements in process efficiency result in significant cost and energy savings.~~

~~Uncertainty~~ We ofanticipate ~~Product~~a ~~Development. The~~decline ~~Company's~~in ~~success~~EDS ~~will~~revenues ~~depend~~for ~~upon~~2004 ~~its~~compared ~~ability~~ to ~~enhance~~2003 ~~its~~and, ~~existing~~as ~~products~~a result, ~~and~~we toare ~~develop~~planning ~~new products and new applications~~ to ~~meet~~reduce ~~regulatory~~costs. ~~and~~However, ~~customer~~our ~~requirements~~ability ~~and~~ to ~~achieve~~control costs ~~market~~during ~~acceptance.~~a ~~The~~period ~~enhancement~~of ~~and~~further ~~development~~declining ofsales ~~these~~is ~~products~~difficult ~~will~~to bepredict. This ~~subject~~difficulty tois ~~all~~a result of ~~the~~factors ~~risks~~such ~~associated~~as ~~with~~our ~~new~~ability ~~product~~to ~~development,~~increase ~~including~~our ~~unanticipated~~operating efficiency ~~delays,~~and ~~expenses,~~further ~~technical~~reduce ~~problems~~the orcosts ~~other~~of ~~difficulties~~components. ~~that~~We ~~could~~may ~~result~~be inunable ~~the abandonment or~~to ~~substantial~~reduce ~~change~~costs inas ~~the~~much ~~commercialization~~as ofwe ~~these~~anticipate. ~~enhancements~~As ora ~~new~~consequence, ~~products. Given~~ the ~~uncertainties~~gross ~~inherent~~margins ~~with~~for our ~~product~~products ~~development~~ and ~~introduction,~~services ~~the~~may ~~Company~~vary ~~cannot~~significantly ~~assure~~from ~~that~~our itanticipated ~~will be~~gross ~~successful~~margins inand ~~introducing~~the ~~products~~gross ormargins ~~product~~of ~~enhancements,~~our ~~including~~ products ~~that~~and ~~meet~~services ~~FAA~~in ~~certification~~recent ~~standards~~periods. If, onas a ~~timely~~result ~~basis,~~of ifthese ~~at all~~uncertainties, orour ~~that~~gross ~~the~~margins, ~~Company~~operating ~~will~~results ~~be able to market~~or ~~successfully~~earnings ~~these~~per ~~products~~share ~~and~~are ~~product~~below ~~enhancements~~the ~~once~~expectations ~~developed.~~of Inmarket ~~addition,~~analysts ~~if new products~~ and ~~new applications are successfully introduced~~investors, the ~~Company~~trading ~~cannot~~price ~~assure~~of ~~that~~our itcommon ~~will~~stock bemay decline.

18Governmental agencies, the primary customers for our EDS and other products, are subject to budget processes which could limit the demand for these products.

Substantially all of the customers for our EDS products and our other ~~able~~products under development to ~~expand~~date ~~quickly~~have ~~enough~~been public agencies or quasi-public agencies, such as the FAA, the TSA and airport authorities. Public agencies are subject to ~~meet~~budgetary ~~market~~processes ~~demand~~and orexpenditure constraints. In the past, many domestic and foreign government agencies have experienced budget deficits that have ~~new~~led ~~competitors~~to ~~will~~decreased ~~not~~capital ~~enter~~expenditures ~~the~~in ~~market.~~certain areas.

The ~~Employees~~ funding of government programs is subject to legislative appropriation. Budgetary allocations for EDS depend, in part, upon governmental policies, which fluctuate from time to time in response to political and other factors, including the public’s perception of the threat of commercial airline bombings. For example, the terrorist

~~As of December 31, 2000, the Company directly employed 335 people, of whom 132 were primarily engaged in research and development activities, 82 in~~12 marketing and sales, customer support and field service, 59 in manufacturing, ten in quality and 52 in administration and finance. In addition, The Company utilized the services of 37 full-time consultants and temporary employees in 2000. Management believes that the Company's relationship with its employees is good.

~~The~~attacks ~~following~~of ~~sets~~September 11, ~~forth~~2001 ~~certain~~resulted ~~information~~in ~~regarding~~the passage of the ~~Company's~~Aviation ~~executive~~and Transportation ~~officers:~~Security Act of 2001, or Transportation Security Act, mandating a small surcharge on each airline ticket purchase to fund airline security. This surcharge was suspended from June 1, 2003 to September 30, 2003. We cannot assure investors that the surcharge will not again be suspended or that the funds generated by these surcharges will be used to purchase our EDS products. We cannot assure investors that funds will continue to be appropriated by Congress or allocated by the TSA or other agencies for the purchase of EDS products.

Name	Age	Position
Dr. Sergio Magistri	48	President and Chief Executive Officer, Director
Donald E. Mattson	68	Senior Vice President and Chief Operating Officer
Alfred V. Larrenaga	53	Senior Vice President and Chief Financial Officer
David M. Pillor	46	Senior Vice President, Sales and Marketing, Director

Legislative actions could lead to fluctuations in demand for aviation security products and services.

~~Dr. Sergio~~ In ~~Magistri~~addition ~~has~~to ~~served~~the asCongressional ~~President~~budgetary process, ~~Chief~~other ~~Executive~~legislation could ~~Officer~~be ~~and~~introduced ~~Director~~that ofwould ~~InVision~~impact ~~since~~demand ~~December 1992.~~for ~~From June 1991~~aviation tosecurity ~~November 1992,~~products heand services. ~~was~~In aresponse ~~Project~~to ~~Manager~~fluctuation ~~with~~in ~~AGIE,~~concern ~~Switzerland,~~on athe ~~manufacturer~~part of ~~high~~voters ~~precision~~about aviation ~~tooling~~security ~~equipment,~~and ~~responsible~~competing ~~for~~homeland ~~all~~security ~~aspects~~demands, ofor afor ~~family~~other reasons, ofthe ~~new~~plans ~~products~~ for ~~high~~deployment ~~precision~~of ~~electro-erosion~~EDS ~~machining with sub-micron precision. From 1988~~ to ~~June 1991,~~screen ~~Dr. Magistri~~baggage ~~was~~could abe ~~consultant to high technology companies~~changed. Budgetary Asdebates aand ~~consultant, Dr. Magistri~~delays ~~was~~could ~~involved~~result in ~~the~~fewer ~~formation~~EDS ofbeing ~~InVision~~sold ~~and~~to the ~~development~~TSA and ofelected ~~its~~officials ~~business~~who ~~plan~~support ~~and~~the ofEDS ~~its~~program ~~technology.~~could ~~From~~fail ~~1983~~ to ~~1988,~~maintain ~~Dr. Magistri held various positions with~~their ~~Imatron Inc.~~offices, aany ~~CT medical scanner company, including as an Engineering Physicist and Manager~~ of ~~Advanced~~which ~~Reconstruction~~events ~~Systems,~~could ~~and Director~~cause ~~of Computer Engineering. Dr. Magistri holds~~ a ~~degree~~decrease in ~~Electrical Engineering and a doctorate in Biomedical Engineering from~~ the ~~Swiss~~demand ~~Institute~~for ofour ~~Technology, Zurich, Switzerland~~EDS products.

~~Donald~~Governmental E.agencies ~~Mattson~~have ~~has~~special ~~served~~contracting asrequirements, ~~Senior~~which ~~Vice President and Chief Operating Officer since November 2000. Mr. Mattson~~create ~~previously~~additional ~~served as Interim Vice President of Operations at InVision in 1998~~risks. ~~In addition to his position at InVision, from 1992 to 2000, Mr. Mattson has been a management consultant,~~ ~~including, among others, interim management assignments as chief executive officer of a computer distribution company, president of a disk drive sub-systems company and vice president of~~ ~~operations of a tape drive manufacturing company. Prior to 1992, Mr. Mattson held senior management positions at Microware Distributors, Inc., Optical Data, Inc., Media Technology~~ ~~Corporation, Verbatim Corporation, Memorex Corporation and Varian Associates. Mr. Mattson holds a bachelor's degree in Industrial Management and Technology and an MBA from the University of~~ ~~California, Berkeley.~~

~~Alfred~~ In V.contracting ~~Larrenaga~~with ~~has~~public ~~served~~agencies, aswe ~~Senior~~are ~~Vice~~subject ~~President and Chief Financial Officer since June 1999. Prior~~ to ~~joining~~public ~~InVision,~~agency ~~Mr. Larrenaga~~contract ~~served~~requirements asthat ~~Executive~~vary ~~Vice President and CFO of Integrated Packaging Assembly Corporation, an independent semiconductor packaging foundry~~ from ~~1997~~jurisdiction to ~~May 1999~~jurisdiction. ~~From~~Future ~~1988 to~~sales ~~1997,~~to ~~Mr. Larrenaga~~public ~~was~~agencies ~~Senior~~will ~~Vice President~~depend, ~~CFO~~in ~~and Secretary of Southwall Technologies Inc.~~part, aon ~~manufacturer~~our ofability ~~thin film materials. Prior~~ to ~~that,~~meet ~~Mr. Larrenaga~~public ~~served as Vice~~agency ~~President~~contract ~~and CFO of Asyst Technologies Inc.~~requirements, acertain ~~manufacturer~~ of ~~equipment~~which ~~for~~may ~~the~~be ~~semiconductor~~onerous ~~industry,~~or ~~and~~even ~~was~~impossible ~~Controller of the Farinon Division of Harris Corporation. He is a Certified~~for ~~Public~~us ~~Accountant~~to ~~and holds a bachelor's degree in accounting from Santa Clara University~~satisfy.

19 Government contracts typically contain termination provisions unfavorable to us and are subject to audit and modification by the government at its sole discretion, which subject us to additional risks. These risks include the ability of the U.S. government to unilaterally:

~~David~~• M.suspend ~~Pillor~~or ~~joined~~prevent ~~InVision~~us infor ~~July 1994~~a asset ~~Vice~~period ~~President,~~of ~~Sales~~time ~~and~~from ~~Marketing.~~receiving Henew ~~has~~contracts ~~served~~or asextending ~~Senior~~existing ~~Vice~~contracts ~~President, Sales~~based ~~and~~on ~~Marketing~~violations ~~since~~or ~~November 1995~~suspected ~~and~~violations asof alaws ~~director~~or ~~since~~regulations; ~~December 1999.~~• ~~From~~terminate ~~1988~~our toexisting ~~July 1994,~~contracts; ~~Mr. Pillor~~• ~~held~~reduce ~~various~~the ~~positions~~scope ~~including~~and ~~Area~~value ~~Sales~~of ~~Manager, National~~our ~~Sales~~existing ~~Manager~~contracts; • audit and ~~Vice~~object ~~President~~to ofour ~~Sales~~contract-related ofcosts ~~Technomed~~and ~~International~~fees, aincluding ~~medical~~allocated ~~products~~indirect ~~company.~~costs; ~~Mr. Pillor~~• ~~holds~~control aand ~~Bachelor~~potentially prohibit the export of ~~Science~~our ~~degree~~products; inand ~~Chemistry~~• ~~from~~change ~~the~~certain ~~University~~terms ~~of Maryland.~~and conditions in our contracts.

The ~~Business~~U.S. ~~Risks~~ government can terminate any of its contracts with us either for its convenience or if we default by failing to perform in accordance with the contract schedule and terms. Termination for convenience provisions generally enable us to recover only our costs incurred or committed, and settlement expenses and profit on the work completed prior to termination. Termination for default provisions do not permit these recoveries and make us liable for excess costs incurred by the U.S. government in procuring undelivered items from another source. Our contracts with foreign governments may contain similar provisions. Consequently, our backlog is not necessarily indicative of future revenues. The government’s termination of one or more of the contracts for our EDS products or our other products under development would harm our business.

In addition, toU.S. government contracts are conditioned upon the ~~risks~~continuing availability ~~discussed~~of ~~above~~Congressional appropriations. Congress usually appropriates funds annually for a given program on a September 30 fiscal year-end basis, even though contract performance may take years. Consequently, our contracts with the ~~Company~~TSA ismay ~~subject~~only be partially funded at the outset, and additional monies are normally committed to the ~~following~~contract ~~risks:~~by the TSA only as appropriations are made by Congress for future periods. The government’s failure to fully fund one or more of the contracts for our EDS products or our other products under development would harm our business.

~~History of Losses; No Assurance of Profitability. The Company commenced operations in September 1990, remained~~13 in the development stage through 1994 and received its first revenues from product sales in the first quarter of 1995. The Company experienced net losses for each year from inception through December 31, 1996. The year ended December 31, 1997 was the Company's first year of profitability. The Company was profitable on an annual basis from 1997 to 1999 but it experienced losses in each of the last two quarters of 1999 and the first two quarters of 2000, and reported a $1.8 million loss for the year ended December 31, 2000. As of December 31, 2000, the Company had an accumulated deficit of approximately $11.0 million. The Company cannot assure that it will return to and maintain profitability. See "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources."

~~The Company~~ Under ~~also~~our ~~may choose to reduce prices or to increase spending in response to competition or to pursue~~ new ~~market~~three-year ~~opportunities,~~agreement ~~all~~with ofthe ~~which~~TSA ~~may~~announced ~~have~~on ~~a material adverse effect~~August 12, on2003, the ~~Company's~~TSA ~~business,~~has ~~financial~~the ~~condition~~right orto ~~results~~purchase ofsystem ~~operations.~~options ~~InVision's~~and ~~systems~~accessories, engineering ~~revenues~~and ininstallation ~~any~~support ~~period~~and ~~are~~550 ~~derived~~CTX ~~from~~units, ~~sales~~principally ofour ~~multiple~~ CTX 9000 ~~Series~~DSi systems, toover athe ~~limited~~three-year ~~number of customers and are recognized upon shipment~~term. ~~The~~While ~~high sales price of units in~~ the ~~CTX~~TSA ~~Series~~placed delivery ~~means~~orders ~~that~~totaling ~~minor~~162.8 ~~variations~~million inunder the ~~number~~new ~~of orders~~agreement, ~~or in~~ the ~~timing~~TSA ofhas ~~shipments,~~no ~~substantially affects~~obligation ~~the~~to ~~Company's~~place ~~quarterly~~additional ~~revenues.~~delivery Aorders ~~significant~~or ~~portion~~purchase ofadditional ~~the~~engineering ~~Company's quarterly operating expenses are,~~ and installation ~~will~~support ~~continue~~under tothe ~~be,~~new ~~relatively~~agreement. ~~fixed~~We incannot ~~nature.~~assure ~~This~~you ~~means~~ that ~~revenue~~the ~~fluctuations~~TSA will ~~cause~~make ~~the~~any ~~Company's~~additional ~~quarterly~~delivery ~~and~~orders ~~annual~~under ~~operating results to vary substantially. Accordingly,~~ the ~~Company~~new ~~believes~~agreement ~~that~~or ~~period-to-period~~will ~~comparisons~~not cancel of its ~~results~~existing ~~of operations~~order. ~~are~~The ~~not~~new ~~meaningful~~agreement ~~and~~is ~~cannot~~subject beto ~~relied upon as indicators of future performance. Because of~~ all of the ~~foregoing factors, the Company's operating results have from time to time in the past~~ ~~been~~limitations and ~~may~~restrictions ~~again~~that inapply ~~the~~to ~~future be below the expectations of public market analysts and investors~~U.S. ~~This~~government ~~failure~~contracts, toincluding those ~~meet~~described ~~market expectation~~ above.

20 Because we contract with the U.S. government, we are subject to periodic audits and reviews. Based on the results of its audits, the U.S. government may adjust our contract-related costs and fees, including allocated indirect costs. In the future, government audits and reviews could result in adjustments to our revenues and cause other adverse effects, particularly to our relationship with the TSA. In addition, under U.S. government purchasing regulations, some of our costs, including most financing costs, amortization of intangible assets, portions of our research and development costs, and some marketing expenses may not be reimbursable or allowed in our negotiation of fixed-price contracts. Further, because we contract with the U.S. government, we are subject to an increased risk of investigations, criminal prosecution, civil fraud, whistleblower lawsuits and other legal actions and liabilities to which purely private sector companies are not.

In addition, public agency contracts are frequently awarded only after ~~has~~formal incompetitive ~~the~~bidding ~~past~~processes, which are often protracted and ~~may~~typically contain ~~again~~provisions that permit cancellation in the ~~future~~event ~~result~~that infunds aare unavailable ~~decline~~to in the ~~trading~~public ~~price~~agency. We may not be awarded any of the ~~Common~~contracts for ~~Stock~~which our products are bid. Even if we are awarded contracts, substantial delays or cancellations of purchases could result from protests initiated by losing bidders.

~~International~~Our ~~Business. The~~growth ~~Company~~depends ~~markets~~on ~~its~~our ~~products~~introduction ~~to customers outside~~ of ~~the~~new ~~United~~products ~~States~~ and, ~~accordingly~~services, ~~is exposed~~which ~~to the risks of international business operations, including unexpected changes in regulatory requirements, possible foreign currency controls, uncertain ability to protect and utilize its~~may ~~intellectual~~be ~~property~~costly in foreign jurisdictions, tariffs or other barriers, difficulties in staffing and managing foreign operations, difficulties in obtaining and managing vendors and distributors, and potentially negative tax consequences. International sales are subject to ~~certain~~develop ~~inherent risks including tariffs, embargoes~~ and ~~other~~may ~~trade~~not ~~barriers,~~achieve ~~staffing~~market ~~and operating foreign sales and service operations and collecting accounts receivable~~acceptance.

~~Fluctuation~~ As Inpart ~~Exchange~~of ~~Rates. Fluctuations~~our instrategy ~~currency~~for ~~exchange~~growth, ~~rates~~we ~~could~~intend ~~cause~~to ~~the~~develop ~~Company's~~ products to address ~~become~~additional aviation security opportunities, such as passenger, carry-on ~~relatively~~baggage ~~more~~and ~~expensive~~air cargo screening. We also intend to ~~customers~~address inhomeland asecurity requirements ~~particular~~beyond ~~country~~aviation, ~~leading~~such as screening at border checkpoints, government offices and transportation terminals and ports. We will be required to aspend ~~reduction~~significant infunds ~~sales~~to develop or ~~profitability~~acquire technologies and products for these initiatives, and these initiatives may divert our development and management resources away from our core EDS products. In addition, we have acquired, rather than developed internally, some of our technologies in connection ~~that~~with ~~country~~our acquisitions of companies and businesses, and these technologies may not perform as we expect. The development of new products may require greater time and financial resources than we currently anticipate and, despite significant investments in research and development, may not yield commercially successful products.

~~Product~~ The ~~Liability~~development ~~Risks; Risk~~ of ~~Failure~~our toproducts ~~Detect~~for ~~Explosives;~~explosives ~~Availability of Insurance. The Company's business exposes it to potential product liability risks, which are inherent in the manufacturing~~ and ~~sale~~weapons ~~of explosive~~ detection ~~systems. There are many factors beyond the control of the Company that could~~is ~~lead~~highly tocomplex. ~~liability~~Successful ~~claims,~~product ~~such~~development ~~as the reliability of the customer's operators, the training of the operators after the initial installation~~ and ~~training~~market ~~period,~~acceptance ~~and the maintenance~~ of ~~the~~any ~~units by the~~new ~~customers.~~products ~~For these~~ and ~~other~~services ~~reasons, including software and hardware limitations and malfunctions of the CTX Series, the Company cannot assure~~ that ~~the~~we ~~systems~~develop ~~will~~depend detect all explosives hidden in the luggage scanned. The Company does not believe that it would be liable for any such claims, but the cost of defending any such claims would be significant and any adverse determination may be in excess of the Company's insurance coverage. Moreover, the failure of the CTX Series to detect an explosive would also result in negative publicity which could have a material adverse effect on ~~sales and may cause customers to cancel orders already placed, either of which could have~~ a ~~material~~number ~~adverse effect on the Company's business, financial condition or results~~ of operations. Many of the Company's customers require the Company to maintain insurance at certain levels. The Company currently has product liability insurance in the amount of $150 million. The Company cannot assure that additional insurance coveragefactors, ~~if required by customers or otherwise, could be obtained on acceptable terms, if~~including: ~~at all.~~

~~Concentration~~• Ofour ~~Ownership;~~timely ~~Control~~completion Byand ~~Management. As~~introduction of ~~December 31,~~new ~~2000,~~products; ~~the~~• ~~Company's~~our ~~principal~~accurate ~~stockholder, HARAX~~prediction ~~Holding, S.A. ("HARAX"), held approximately 20%~~ of the ~~Company's~~demand ~~common~~for ~~stock,~~homeland ~~and~~security ~~the~~products ~~present directors~~ and ~~executive officers of~~ the ~~Company~~changing ~~and~~requirements ~~their affiliates, in the aggregate, beneficially owned approximately 14%~~ of the ~~outstanding~~homeland ~~common~~security ~~stock~~industry, ~~in each case~~ including ~~shares~~certification ~~issuable~~or ~~pursuant~~other torequired ~~stock~~performance ~~options~~standards; ~~exercisable~~• ~~within~~the ~~60 days~~availability of ~~December 31,~~key ~~2000. Consequently,~~components ~~HARAX~~of ~~together~~our ~~with~~products; • the ~~Company's~~quality, ~~directors~~price and ~~executive~~operating ~~officers,~~performance ~~acting in concert, have the ability to significantly affect the election~~ of ~~the~~our ~~Company's~~products ~~directors~~ and ~~have~~those ~~a significant effect on the outcome~~ of ~~corporate~~our ~~actions~~competitors; ~~requiring~~• ~~stockholder~~our ~~approval.~~customer Inservice ~~addition,~~capabilities ~~HARAX,~~and ~~acting~~responsiveness; ~~alone,~~and ~~will~~• ~~have~~ the ~~power~~success toof ~~significantly~~our ~~affect~~relationships ~~matters~~with ~~relating~~existing ~~to the Company's affairs~~ and ~~business.~~potential customers;

~~Anti-Takeover Provisions. The Company's Restated Certificate of Incorporation contains certain provisions~~14 ~~that may discourage bids for the Company. This could limit the price that certain investors might be willing to pay in the future for shares of the Common Stock.~~

~~Financial~~ Finally, ~~information~~new ~~about~~products ~~foreign~~for aviation security applications may require certification or approval by the TSA, and ~~domestic~~we ~~sales~~believe ~~are~~that ~~stated~~the inTSA does not currently have standards for the ~~attached~~certification ~~Consolidated~~of ~~Financial~~aviation ~~Statements~~security products other than bulk explosives detection systems and explosives trace detectors, ~~Note 2~~or ETD. Other products, ~~Summary~~such as metal detectors, are subject to TSA testing prior to approval. Market acceptance of ~~Significant~~new products may be limited if the TSA has ~~Accounting~~not ~~Policies~~developed standards for certification or approval of such products, and even if it does develop such standards, we may be unable to obtain any such certification or approval, which could materially limit market acceptance of such products. If we fail to timely introduce new products or if these products fail to gain market acceptance, our results of operations would be harmed.

21 In addition, even if successful in the United States, new products that we develop may not achieve market acceptance outside of the United States. Unlike the U.S. government, foreign governments may be unwilling to commit financial resources to purchase our new products, which would reduce our potential revenues and harm our business.

We depend upon a limited number of suppliers for components of our products, and if we are unable to obtain parts from these suppliers on a timely basis, ~~ITEM~~then 2.we ~~PROPERTIES~~ may not be able to deliver our products as required.

~~The~~ Key ~~Company's~~components ~~principal~~used ~~corporate~~in ~~office~~our products have been designed by us to our specifications and ~~EDS~~are ~~manufacturing~~currently ~~facility~~available isonly ~~located~~from inone ~~Newark,~~or ~~California,~~a ~~which~~limited ~~consists~~number of suppliers. ~~approximately~~We ~~95,000~~currently ~~square~~do ~~feet under~~not ahave ~~lease~~long-term ~~which~~agreements ~~expires~~with inany ~~May 2007~~of these suppliers. ~~The~~In ~~Company~~addition, ~~has~~some anof ~~option~~the tosuppliers ~~extend~~of the ~~lease~~key ~~for~~components ~~five~~used ~~years.~~in ~~Approximately~~our products 16are our competitors,~~000~~ ~~square~~and ~~feet~~they ismay ~~subleased~~be ~~under~~motivated annot ~~agreement~~to ~~which~~supply ~~expires~~us with ~~March 31,~~the ~~2001.~~components ~~Management~~we ~~intends~~need. toOur ~~continue~~inability to ~~sublease~~develop ~~this~~alternative ~~space~~sources for ~~the~~single or ~~foreseeable~~sole ~~future.~~source ~~The~~components, ~~Company's~~to ~~Quantum~~find ~~office~~alternative isthird ~~located~~party inmanufacturers ~~San Diego~~or sub-assemblers, ~~California,~~or ~~which~~to ~~consists~~obtain sufficient quantities of ~~approximately~~ 36these components,~~000~~ ~~square~~could result ~~feet~~in ~~under~~delays aor ~~lease~~interruptions ~~which~~in ~~expires~~product ~~May 23~~shipments, ~~2002. The~~which ~~Company's~~could ~~Inovec~~cause current ~~office~~or ~~and~~potential ~~manufacturing~~customers ~~facility~~to isseek ~~located~~other insuppliers ~~Eugene,~~of ~~Oregon,~~our ~~which~~products. ~~consists~~In view of ~~approximately~~the ~~7,500~~high ~~square~~cost ~~feet~~of ~~under~~many aof ~~month~~these tocomponents, ~~month~~we ~~lease~~strive ~~and~~to ~~approximately~~avoid ~~5,000 square feet~~excess insupplies. aIf ~~separate~~our ~~building~~suppliers ~~under~~experience afinancial, ~~lease~~operational, ~~which~~production ~~expires~~or quality atassurance ~~the~~difficulties, ~~end~~or ofour ~~March 2001.~~sole ~~The~~source ~~Company~~suppliers isare ~~currently~~acquired ~~negotiating~~or otherwise ainfluenced ~~renewal~~by ofour ~~this~~competitors, ~~lease.~~the ~~The~~supply ~~Company~~of ~~leases~~components anto ~~additional~~us ~~approximately 3,850~~would ~~square~~be ~~foot~~reduced ~~facility~~or ininterrupted. ~~Eugene,~~In ~~Oregon,~~the ~~for~~event ~~WoodVision~~that ~~and~~a ~~Inovec~~supplier ceases operations, discontinues ~~under~~ a ~~two~~product ~~year~~or ~~lease~~withholds ~~expiring~~or ~~August 31,~~interrupts ~~2002.~~supply ~~Management~~for ~~believes~~any ~~that~~reason, ~~these~~we ~~facilities will~~ may be ~~sufficient~~unable to ~~satisfy~~ ~~its~~acquire ~~administrative~~the ~~and~~product ~~manufacturing~~from ~~needs~~alternative ~~for~~sources ~~the~~within ~~foreseeable~~a ~~future.~~reasonable period of time.

Our future ~~ITEM~~EDS 3.products ~~LEGAL~~may ~~PROCEEDINGS~~ fail to obtain certification by the TSA.

In We ~~July 2000,~~plan ~~the~~to ~~Company~~continue ~~entered~~to ~~into~~develop anew ~~settlement~~models ~~agreement~~for ~~(the~~our ~~"Settlement~~family ~~Agreement")~~of ~~that~~EDS ~~settled an action brought on January 7~~products, ~~1999 by~~ ~~Vivid~~including ~~Technologies, Inc.~~systems ~~("Vivid")~~utilizing inX-ray ~~Superior~~based ~~Court of the State of California for the County of San Diego against InVision~~diffraction, ~~Quantum,~~or ~~ESI International~~XRD, ~~Inc.~~ ~~("ESI")~~technology, ~~Robert~~of ~~Price and~~our ~~Sandra Price (collectively~~subsidiary, ~~"Defendants").~~Yxlon ~~Vivid~~International ~~asserted~~Security ~~causes~~GmbH, ofand ~~action~~to ~~for~~continue ~~(1) misappropriation of trade secrets; (2) inducing breach of contract; (3) interference with~~our ~~contractual~~participation ~~relations;~~in (4) statutory unfair competition; (5) common law unfair competition; (6) interference with prospective economic advantage; (7) defamation; and (8) declaratory relief. The complaint was filed by Vivid following efforts by the ~~Company~~ARGUS ~~and ESI~~program, aan ~~private~~FAA/TSA-sponsored ~~investigator~~program ~~hired~~designed ~~by the Company,~~ to ~~investigate the alleged theft of intellectual~~ ~~property~~develop ~~from the Company by~~ a ~~former~~smaller, ~~key~~low-cost ~~employee~~EDS ~~hired~~product. byHowever, ~~Vivid~~we ~~and~~cannot tobe ~~bring~~ certain ~~evidence~~that ~~to the attention of the Federal Bureau of Investigation and the United States Attorney for the Southern~~any ~~District~~new ofEDS ~~California. As part of the Settlement Agreement~~product, ~~Vivid~~including ~~represented~~systems ~~that~~utilizing itYxlon’s isXRD ~~no longer pursuing QR~~ technology ~~and~~or ~~agreed~~our ~~not to pursue QR technology for two years from the date of the~~CTX ~~agreement.~~1000 ~~Vivid further agreed to file~~(ARGUS) asystem, ~~request~~will ~~for~~be ~~dismissal~~certified ofby the ~~complaint~~TSA. ~~without~~The ~~prejudice~~failure ~~which would automatically convert~~ to ~~a dismissal with prejudice on the second anniversary of~~gain ~~the~~certification ~~Settlement~~for ~~Agreement.~~an ~~Similarly,~~EDS ~~the~~product ~~Company agreed that their voluntary dismissal of a federal court action (which had been filed but not served) against Vivid based on the alleged theft~~ would ~~also~~ ~~automatically~~harm ~~convert~~our ability to asell ~~dismissal with prejudice in two years. Management believes that~~ the ~~terms of the Settlement Agreement will not have a material adverse effect on the Company's business~~product, ~~financial~~and ~~condition~~recognize orassociated ~~results of operations~~revenues.

~~In addition~~Our toexisting ~~the~~EDS ~~foregoing~~products ~~matter, the Company~~ may befail ~~involved, from time~~ to ~~time,~~obtain inre-certification ~~other~~by ~~litigation,~~the ~~including~~TSA ~~litigation relating to claims arising out of its operations in the~~for ~~normal~~changes ~~course of business. The Company is not currently a party to any legal proceedings, the adverse outcome of which,~~ in ~~management's opinion, individually or in aggregate would have a material adverse effect on~~ the ~~Company's~~EDS ~~business, financial condition or results of operations~~systems.

Our existing EDS products can be required to be re-certified by the TSA. This can happen when a critical component is changed, or we wish to make other ~~ITEM~~changes 4to the EDS products. ~~SUBMISSION~~When OFthis ~~MATTERS~~happens, TOthe Aaffected ~~VOTE~~EDS OFmodel ~~SECURITY~~requires re-certification ~~HOLDERS~~ by the TSA. The failure or delay in gaining re-certification for an existing EDS product could harm our ability to continue to sell the product and recognize associated revenues.

~~Not~~Our ~~applicable.~~major customer, the TSA, is a part of the Department of Homeland Security, a relatively new agency that has experienced, and may continue to experience, delays in its operations, which may cause delays in our receiving orders from the TSA.

22 The TSA is a relatively new agency that was created in November 2001 by the Transportation Security Act. As a result, it has experienced, and may continue to experience, delays in fulfilling its mandate as a result of delays in establishing the necessary infrastructure to operate in an efficient manner. This may result in delays in our receiving orders for our EDS products. Further, the TSA is now a part of the Department of Homeland Security, which was

15 ~~PART II.~~

created ~~Market~~subsequent ~~Information~~ to the creation of the TSA and is therefore in an earlier stage of formation, which may further create delays in our receiving orders as this agency is organized.

~~The~~Future ~~Company's~~sales ~~common~~of ~~stock~~our ~~trades~~EDS onproducts ~~the~~will ~~Nasdaq~~depend ~~National~~on ~~Market under~~ the ~~symbol~~ability ~~"INVN."~~of ~~The~~airports ~~following~~to secure ~~table~~funding ~~sets~~to ~~forth,~~build ~~for~~baggage ~~the~~handling ~~periods~~systems ~~indicated, the high~~ and ~~low~~to ~~bid~~integrate ~~quotations~~our ~~of the Company common stock as reported on the Nasdaq National Market. These over-the-counter quotations reflect inter-dealer prices, without retail~~EDS ~~markup,~~products ~~markdown~~into orsuch ~~commission~~systems, ~~and~~which they may not ~~necessarily~~be ~~represent~~able ~~the~~to ~~sales prices in actual transactions~~do.

Quarter ended 2000	April 2		July 2		October 1		December 31
High	$	93/8	$	73/16	$	41/2	$	325/32
Low	$	35/8	$	39/16	$	33/8	$	15/16
Quarter ended 1999	March 31		June 30		September 30		December 31
High	$	67/8	$	67/16	$	53/8	$	53/8
Low	$	43/4	$	43/8	$	33/8	$	35/16

Future sales will depend, in part, on installing our EDS products into airport lobbies or integrating them into existing baggage handling systems. If an airport is not configured for these systems, deployment of our EDS products may require changes in the airport infrastructure, such as reinforced airport lobby floors and baggage platforms. If our EDS products cannot easily be installed in airport lobbies or integrated into existing baggage handling systems, we may experience reduced sales of our EDS products or these sales may be delayed. In addition, installations and integrations are currently partially funded by the TSA in the United States. Legislation established a “letter of intent” program under which an airport can present a request to the TSA for reimbursement of up to 90% of costs incurred by the airport in improving baggage handling systems to increase security. There can be no assurance that the government will continue to fund installations, integrations and reimbursements at the current level or at all. If there is a reduction in funding, we may experience reduced sales of our EDS products or these sales may be delayed.

~~On March~~ We ~~26,~~believe ~~2001,~~that ~~the~~a ~~closing~~substantial ~~price~~opportunity ofexists ~~the~~for ~~Company's~~our ~~Common~~CTX ~~Stock~~9000 onDSi model ~~the~~to ~~Nasdaq~~be ~~National~~integrated ~~Market~~into ~~was~~baggage ~~$3.00~~handling ~~per share~~systems. OnIf ~~March~~airports 26determine, ~~2001~~in conjunction with governmental authorities, ~~there~~that ~~were~~they ~~approximately~~will ~~307~~be ~~stockholders~~unable ofor ~~record~~unwilling ofto ~~the~~modify ~~Company's~~or ~~Common~~finance ~~Stock.~~such in-line baggage handling systems, this opportunity may be limited.

~~In May 1998,~~As ~~the~~a ~~Board~~result of ~~Directors of~~ the ~~Company~~Transportation ~~adopted~~Security ~~a stock repurchase program~~Act, inour ~~which~~EDS ~~management~~products ofare ~~the Company is authorized to repurchase up to 500,000 shares of~~undergoing ~~the~~substantially ~~Company's~~increased ~~common~~usage ~~stock~~per ~~on the open market at prevailing market prices or in negotiated transactions off the market. As of December 31~~day, ~~1999,~~which ~~the~~could ~~Company~~cause ~~had~~unforeseen ~~repurchased approximately~~problems ~~200,500~~with ~~shares~~their ofability ~~its~~to ~~common~~sustain ~~stock.~~this ~~The~~increased ~~Company has not repurchased any shares since December 1999 and the Company cannot assure that all of such shares will ultimately be repurchased by the Company~~usage.

As ~~Dividends~~ required by the Transportation Security Act, as of December 31, 2002, 100% of checked baggage must undergo screening. As a result, our EDS products in operation are being used more hours per day than before, which places a burden on them not previously experienced. This has resulted in an increase in the amount of maintenance required to keep them operating, and may result in unforeseen problems. If this were to occur, our customers could perceive that there are reliability problems with our EDS products, which could reduce the demand for our products. In addition, our CTX 9000 DSi product is a relatively new model with which we have limited experience in sustaining extensive usage. As a result, our CTX 9000 DSi product may experience maintenance needs and increased down time beyond that experienced by our CTX 2500 and CTX 5500 DS products. Further, because the CTX 9000 DSi product is designed to be integrated into an airport’s baggage handling system, it has, in addition to the detection function and mechanisms, components that integrate it into the baggage handling system, which also require maintenance and may also contribute to increased maintenance needs and down time. If our CTX 9000 DSi product does experience additional maintenance needs beyond that of our CTX 2500 and CTX 5500 DS products, our customers may not purchase this product in favor of our CTX 2500 and CTX 5500 DS products or the products of our competitors.

~~The~~We ~~Company~~may ~~has~~seek ~~never~~to ~~declared~~grow orby ~~paid~~acquisition, ~~cash~~which ~~dividends~~subjects onus ~~its Common Stock and it is currently the intention of the Board of Directors not~~ to ~~pay~~substantial ~~cash dividends~~risks, inincluding the ~~foreseeable~~failure ~~future. The Company plans~~ to ~~retain~~successfully ~~earnings,~~integrate ifan ~~any,~~acquired ~~to finance its operations and product development~~business. ~~In addition, the Company's bank credit facility prohibits the payment of~~ ~~dividends without the lender's consent.~~

As ~~Recent~~part ~~Sales~~of Ofour ~~Unregistered~~growth ~~Securities~~ strategy, we may expand our business by pursuing selected acquisitions of technologies and companies that offer complementary products, services, technologies or market access. Our ability to grow by acquisition depends upon the availability of acquisition candidates at acceptable prices. We may incur costs in connection with our pursuit of acquisitions for which we are responsible regardless of whether the acquisitions are actually consummated. Future acquisitions by us could result in dilutive issuances of equity securities, the incurrence of debt and contingent liabilities and expenses related to acquired operations and assets, any of which could harm our business and our operating results. Acquisitions entail numerous risks and we may not realize the expected benefits of these transactions. These risks include:

~~From~~• ~~January 1,~~difficulties ~~2000~~in ~~through December 31, 2000,~~ the ~~Company~~assimilation ~~sold the following amounts~~ of ~~unregistered~~acquired ~~securities in connection with its acquisition of Inovec~~operations, ~~Inc.,~~technologies inand ~~reliance~~products; on• ~~Section 4(2)~~diversion of ~~the~~management’s ~~Securities~~attention ~~Act~~from ofother ~~1933:~~business concerns;

~~(1) On~~16 November 2, 2000, the Company issued 139,530 shares of common stock to Andrew Nowak for partial consideration for the acquisition of Inovec, Inc., of which 8,000 shares were directed by Mr. Nowak to be issued to seven individuals as gifts. (2) On November 2, 2000, the Company issued 54,049 shares of common stock to Alan Bazzaz for partial consideration for the acquisition of Inovec, Inc. (3) On November 2, 2000, the Company issued 28,091 shares of common stock to Kerry Wilson for partial consideration for the acquisition of Inovec, Inc. (4) On November 2, 2000, the Company issued 27,619 shares of common stock to Jeffrey Franklin for partial consideration for the acquisition of Inovec, Inc.

• lack ~~ITEM~~of 6.experience ~~SELECTED~~operating ~~FINANCIAL~~in ~~DATA~~ the geographic market or industry sector of acquired companies; • exposure to unanticipated contingent liabilities of acquired companies; and • potential loss of key employees of acquired companies.

The ~~following~~process ~~table~~of ~~sets~~integrating ~~forth~~supply ~~for~~and ~~the~~distribution ~~periods~~channels, computer and accounting ~~the~~systems ~~dates~~and ~~indicated~~other ~~certain~~aspects ~~consolidated~~of ~~financial data~~operations, ~~which~~while ~~should~~managing bea ~~read in conjunction with "Item 7.~~larger ~~Management's~~entity, ~~Discussion~~may ~~and~~present ~~Analysis~~a ofsignificant ~~Financial~~challenge ~~Condition~~to ~~and~~our ~~Results~~management. ofWe ~~Operations"~~may ~~and~~not ~~the~~be able ~~consolidated~~to ~~financial~~successfully ~~statements~~integrate ~~and~~any ~~notes~~businesses, ~~thereto~~products, ~~included~~technologies ~~elsewhere~~or personnel ~~herein.~~that ~~The~~might ~~Company~~be acquired ~~Inovec, Inc.~~ ~~("Inovec"),~~in ~~effective~~the ~~January 1, 2000~~future. ~~This~~In ~~acquisition~~such iscase, ~~being~~we ~~accounted~~would ~~for~~not fully asrealize ~~a purchase and, accordingly,~~ the ~~results~~anticipated ofbenefits ~~operations~~ of ~~Inovec~~a ~~are~~business ~~only~~combination, ~~included~~and in the ~~consolidated~~failure ~~financial statements as~~ of ~~and~~such ~~for~~efforts ~~the~~would ~~year~~harm ~~ended December 31,~~our ~~2000~~business. InMaintaining ~~September 1997,~~uniform ~~the Company acquired Quantum Magnetics~~standards, ~~Inc.~~ controls, ~~("Quantum")~~procedures inand apolicies ~~stock-for-stock~~may ~~transaction~~be ~~accounted~~harder ~~for~~than aswe aanticipate ~~pooling~~and ofinterfere ~~interests;~~with ~~accordingly,~~efficient ~~all~~administration ~~prior~~of ~~periods~~the ~~have~~company ~~been~~as ~~restated~~a ~~to include Quantum's results~~whole.

			Year Ended December 31,
			2000			1999			1998			1997			1996
			(In thousands, except per share data)
Operations
Revenues:
	Product revenues		$	58,713		$	43,160		$	60,854		$	55,216		$	15,684
	Service revenues			9,801			4,582			2,430			1,211			157
	Government contract revenues			10,632			10,694			7,210			5,533			3,444
		Total revenues		79,146			58,436			70,494			61,960			19,285
Cost of revenues:
	Product costs			39,333			24,886			32,701			27,576			9,731
	Service costs			6,512			3,678			2,245			451			5
	Government contract costs			7,849			7,739			5,223			4,273			2,836
		Total cost of revenues		53,694			36,303			40,169			32,300			12,572
	Gross profit			25,452			22,133			30,325			29,660			6,713
Operating expenses:
	Research and development(a)			11,039			10,443			8,498			8,635			3,409
	Selling, general and administrative			16,551			11,767			12,997			12,323			7,568
	Acquisition costs			—			—			—			685			—
		Total operating expenses		27,590			22,210			21,495			21,643			10,977
Income (loss) from operations(b)				(2,138	)		(77	)		8,830			8,017			(4,264	)
Interest expense(c)				(195	)		(227	)		(390	)		(428	)		(1,599	)
Interest and other income, net				527			754			697			242			187
Income (loss) before provision for income taxes				(1,806	)		450			9,137			7,831			(5,676	)
Provision for income taxes				—			67			1,096			1,192			—
Net income (loss)			$	(1,806	)	$	383		$	8,041		$	6,639		$	(5,676	)
Net income (loss) per share:
	Basic		$	(0.14	)	$	0.03		$	0.67		$	0.60		$	(0.90	)
	Diluted		$	(0.14	)	$	0.03		$	0.63		$	0.55		$	(0.90	)
Weighted average shares outstanding:
	Basic			12,510			12,133			12,046			11,141			6,338
	Diluted			12,510			12,751			12,827			12,166			6,338

For example, on March 31, 2003, we completed the acquisition of Yxlon International Holding GmbH. Yxlon is active in businesses that are new to us and present a challenge to our management. In order to successfully integrate Yxlon’s security technologies and products, we must, among other things, integrate these into our suite of products, both from an engineering and a sales and marketing perspective. As a result, we may take longer to develop and introduce new products than we anticipate. In addition, we do not have experience developing, marketing and selling products in the non-destructive testing business, and we may not be successful competing for customers in industries with which we are unfamiliar. The difficulties of integration of Yxlon may be further complicated by the geographic distance between our U.S. offices and Yxlon’s headquarters, which are located in Germany. If we are not successful in integrating Yxlon’s security technologies into our product line, or in managing Yxlon’s non-destructive testing business, we may incur additional expenses or lose revenue opportunities for Yxlon and us, and our business results may suffer.

24Our strategic investments may not provide any of the benefits we anticipate, and as a result, we may incur economic losses or be required to write-down these investments.

		December 31,
		2000		1999		1998		1997		1996
		(In thousands)
Financial Position
	Cash, cash equivalents and short-term investments	$	11,908	$	24,169	$	12,457	$	19,190	$	2,471
	Working capital	$	37,672	$	40,913	$	38,911	$	31,806	$	6,875
	Total assets	$	69,332	$	62,987	$	63,486	$	57,251	$	16,949
	Long-term obligations	$	1,861	$	1,181	$	1,565	$	1,336	$	144
	Total stockholders' equity	$	47,504	$	47,485	$	46,830	$	38,816	$	8,875

From time to time, we consider strategic investments in development-stage companies that we believe provide strategic opportunities for us, such as our recent investment in SafeView, Inc., which is developing portal systems for passenger screening. Although we intend that these investments will provide access to new technologies and emerging markets, we cannot assure you that these investments will create opportunities for us to increase our sales. If these companies are unsuccessful in their product development efforts or are unable to obtain additional private financing, we may be required to write-down these investments or we may lose some or all of these investments, which would harm our results.

If our EDS products fail to detect explosives, we could be exposed to product ~~ITEM~~liability 7.and ~~MANAGEMENT'S~~related ~~DISCUSSION~~claims ~~AND~~for ~~ANALYSIS~~which OFwe ~~FINANCIAL~~may ~~CONDITION~~not ~~AND~~have ~~RESULTS~~adequate OFinsurance coverage, ~~OPERATIONS~~ and we may lose current and potential customers.

~~The~~ Our ~~discussion~~business ~~below~~exposes ~~contains~~us ~~forward-looking~~to ~~statements~~potential ~~which~~product ~~involve~~liability risks, ~~and~~which ~~uncertainties.~~are inherent ~~When~~in ~~used~~the inmanufacturing, ~~this~~sale ~~Annual~~and ~~Report~~maintenance onof EDS products. Our ~~Form 10-K,~~machines ~~the~~are ~~words~~not ~~"anticipate,"~~designed ~~"believe,"~~to ~~"estimate~~detect," and ~~"expect"~~FAA/TSA ~~and~~certification ~~similar~~does ~~expressions~~not require, ~~identify~~100% ~~such~~detection ~~forward-looking~~of ~~statements.~~any ~~The~~and ~~Company's~~all ~~actual~~explosives ~~results,~~contained in scanned baggage. ~~performance~~For this reason, or ~~achievements~~if ~~could~~our ~~differ~~products ~~materially~~malfunction, ~~from~~it ~~the~~is ~~results~~possible ~~expressed~~that ~~in,~~explosive material orcould ~~implied~~pass byundetected through our products, ~~these~~which ~~forward-looking~~could ~~statements~~lead to product liability claims. ~~Factors~~There are also many other factors beyond our control that could ~~cause~~lead orto ~~contribute~~liability toclaims, such ~~differences~~as ~~include:~~the reliability and competence of the customer’s operators and the training of the operators.

25 InVision and our subsidiary, Quantum Magnetics, were named as defendants in a number of lawsuits relating to the terrorist acts of September 11, 2001. The cost of defending these and other product liability claims brought against us could be significant and any adverse determination may result in liabilities in excess of our insurance coverage. We currently have product liability insurance in the amount of $200.0 million. We also have war and terrorism insurance in the amount of $200.0 million, including up to $50.0 million under our product liability insurance. We cannot be certain that our current insurance can be maintained, or additional insurance coverage could be obtained, on acceptable terms, if at all.

~~OVERVIEW~~ In addition, the failure of any EDS product to detect explosives, even if due to operator error and not to the mechanical failure of an EDS product, could result in public and customer perception that our products do not work

~~InVision Technologies, Inc. (the "Company") brings to market advanced detection and inspection products by adapting various medical and laboratory~~17 technologies for government and commercial uses, such as security, defense and process control. The Company reports its financial information in three segments, Explosive Detection Systems ("EDS"), Qauntum and Wood, based on types of technology and applications.

~~Quantum. The Company~~effectively, ~~through~~which ~~its~~may ~~wholly-owned~~cause ~~subsidiary~~potential ~~Quantum~~customers ~~Magnetics, Inc.,~~to ~~("Quantum")~~not ~~develops~~place ~~for commercialization~~orders ~~patented~~ and current ~~proprietary~~customers ~~technology~~to ~~for~~cancel ~~inspection,~~orders ~~detection~~already ~~and~~placed ~~analysis~~or ofto ~~explosives~~not ~~and~~place ~~other materials. Quantum's products are based on passive magnetic sensing technology and~~additional ~~quadrupole resonance ("QR") technology~~orders, aany ~~form~~ of ~~magnetic~~which ~~resonance.~~would ~~Quantum~~harm ~~receives~~our ~~grants~~business ~~from a variety of US government agencies for research~~ and ~~development~~financial ~~of landmine detection, carry-on luggage screening, concealed weapon detection, drug detection, and in-process materials inspection~~results.

~~Wood. In~~We ~~February 2000,~~substantially ~~the~~depend ~~Company~~on ~~announced~~large ~~the~~orders ~~formation~~from ofa ~~its~~limited ~~WoodVision~~number ~~division ("WoodVision") to develop the Company's CT technology to optimize the value and yield~~ of ~~harvested timber~~customers. ~~Previous studies indicated that CT technology can be applied to see inside a log before it is sawn. The Company~~As ~~believes that~~ a ~~market~~result, ~~for~~order acancellations ~~product~~from ~~that~~any ~~does~~of ~~this~~our ~~exists.~~customers Inor ~~connection with~~ the ~~formation~~failure of ~~WoodVision, the Company acquired, as a wholly-owned subsidiary, Inovec, Inc. ("Inovec"),~~these ~~effective~~customers asto ofcontinue ~~January 1,~~to ~~2000.~~purchase ~~Inovec~~EDS ~~manufactures,~~products ~~markets~~could ~~and~~have ~~supports~~a ~~advanced~~material ~~optimization~~negative impact ~~equipment for sawmills based~~ on ~~laser~~our ~~scanning~~business and ~~other~~financial ~~optimization technologies~~results. ~~Since~~ ~~inception, Inovec has installed over 600 laser scanners and other optimization systems in over 300 sawmills worldwide. The transaction has been accounted for as a purchase and accordingly, the results~~ ~~of operations of Inovec are only included in the consolidated financial statements as of and for the year ended December 31, 2000.~~

~~Research~~ In ~~and~~any ~~development. The~~given ~~Company~~fiscal ~~considers~~quarter ~~research~~or ~~and~~year, ~~development~~our torevenues beare aderived ~~vital~~from ~~part~~ orders of ~~its~~multiple ~~operating~~units ~~discipline and~~of ~~continues~~our toEDS ~~dedicate~~products ~~substantial~~from ~~resources~~a tolimited ~~research~~number ~~and~~of ~~development~~customers. Through ~~At December~~September 3128, ~~2000~~2003, ~~the~~substantially ~~Company~~all ~~had~~of ~~132~~our ~~full-time~~orders ~~employees~~from ~~engaged~~U.S. ~~in research and development, and~~customers ~~product~~have ~~development~~been ~~activities,~~funded 47by ~~for~~the ~~EDS,~~FAA ~~49 for Quantum~~ and 36the ~~for~~TSA, ~~Wood.~~which ~~The~~allocate ~~Company~~our ~~was~~products ~~also~~to airports ~~using~~in the ~~services~~United ofStates. 16EDS ~~specialized~~product ~~contract employees~~ and ~~consultants~~service insales ~~this~~to ~~area. During~~ the ~~years ended December 31~~FAA, ~~2000,~~and following ~~1999~~the ~~and~~formation ~~1998,~~of the ~~Company~~TSA, ~~spent~~to ~~$11.9 million~~the TSA, ~~$11.2 million~~accounted ~~and~~for ~~$12~~64.~~9 million,~~4% ~~respectively,~~of onour total ~~research~~revenues ~~and~~in ~~development~~the ~~activities,~~year ofended ~~which $0.9~~December ~~million~~31, ~~$0.7 million~~2003 and $381.~~6 million,~~2% ~~respectively,~~of ~~were~~our ~~funded~~total revenues byin the ~~FAA~~year ~~and~~ended ~~other~~December 31, ~~agencies~~2002. ~~under~~In ~~development~~the ~~contracts~~year ~~and~~ended ~~grants.~~December 31, 2003, ~~The~~18 ~~Company~~customers ~~has~~accounted infor ~~backlog~~all ~~grants~~ of ~~$6.7 million~~ ~~for~~our EDS ~~research~~units ~~and~~sold ~~development,~~during ~~primarily for~~ the ~~development of ARGUS~~year, anand in ~~FAA-sponsored~~the ~~program~~year ~~designed~~ended toDecember 31, ~~develop a low-cost~~2002, ~~automated~~ten ~~explosive detection~~customers ~~system~~accounted tofor ~~scan~~all ~~checked~~of ~~baggage~~our inEDS products ~~small~~sold ~~airports~~during ~~and~~the ~~low-traffic stations within larger airports~~year. The ~~Company~~failure ~~has~~of ~~also~~these ~~expended~~customers, ~~significant~~particularly ~~efforts in~~ the ~~development of new wood scanning~~ ~~products~~U.S. ingovernment, ~~2000~~to ~~and~~continue ~~expects~~ to ~~continue~~purchase ~~investing~~our ~~heavily~~EDS inproducts or the ~~development~~ cancellation of ~~these~~existing ~~products~~orders inwould ~~the~~harm ~~future.~~our business.

~~Revenues.~~ The ~~Company'~~U.S. government’s ~~EDS~~right ~~product~~to ~~revenues~~use ~~have~~technology ~~principally~~developed ~~consisted~~by us, ~~and~~but ~~the~~funded ~~Company believes will continue to~~by ~~consist,~~the ~~of orders of multiple units from a limited number of customers~~U.S. ~~While the number of individual customers may vary from period to period~~government, ~~the~~limits ~~Company~~our isintellectual ~~nevertheless~~property ~~dependent upon these multiple orders for a substantial portion of its revenues~~rights. ~~The Company cannot~~

26 In accordance with Federal Acquisition Regulations included in our development contracts with the FAA, the U.S. government has rights to use our proprietary technologies developed after the award of the development contract and funded by the development contract. The U.S. government may use these rights to produce or have produced for the U.S. government competing products using CT technology found in our existing EDS products as well as our CTX 1000 model, which has not yet been certified by the TSA. With respect to Quantum, the U.S. government retains the same rights to the passive magnetic technology found in the quadrupole resonance, or QR, technology. In the event that the U.S. government were to exercise these rights, our competitive position in supplying the U.S. government with certified CT-based explosives detection systems and/or the Quantum products would be harmed.

~~assure~~The ~~that~~sales itcycle ~~will~~for ~~obtain~~our ~~such multiple orders on a consistent basis. For the years ended December 31, 2000, 1999 and 1998, $30.8 million, $37.1 million and $37.9 million, respectively, were generated from~~ EDS ~~sales~~products tois ~~the Company's largest customer~~lengthy, ~~the FAA, representing 38.9%, 63.5%~~ and ~~53.8%,~~we ~~respectively,~~may ofexpend ~~the Company's total revenues. There were no other~~a significant ~~customers~~amount ~~who accounted for more than 10%~~ of ~~the~~effort ~~Company's~~in ~~total~~obtaining ~~revenues~~sales inorders ~~2000,~~and ~~1999~~not ~~and~~receive ~~1998~~them.

The ~~Company~~ ~~markets~~sales ~~its~~cycle ~~products~~of ~~and~~our ~~services~~EDS ~~both~~products ~~directly~~is ~~through~~often ~~internal~~lengthy ~~sales~~due ~~personnel~~to ~~and~~the ~~indirectly~~protracted approval ~~through~~process ~~authorized~~that ~~agents,~~typically ~~distributors~~accompanies ~~and~~large ~~systems~~capital ~~integrators.~~expenditures Inand the ~~United~~time ~~States,~~required ~~the~~to ~~Company~~manufacture ~~markets~~and ~~its~~install ~~products~~our ~~and~~EDS ~~services~~products. ~~primarily~~Typically, ~~through~~six ~~direct~~to twelve ~~sales~~months ~~personnel.~~may ~~Internationally,~~elapse ~~the~~between ~~Company~~a ~~utilizes~~new ~~both~~customer’s ainitial ~~direct~~evaluation ~~sales~~of ~~force~~our systems and ~~authorized~~the ~~agents~~execution of a contract. Another three months to ~~sell~~a ~~its~~year may ~~products.~~elapse ~~For~~prior ~~the~~to ~~years~~shipment ~~ended~~of ~~December 31,~~our ~~2000,~~EDS ~~1999~~products as the customer site is prepared and ~~1998,~~our ~~international~~EDS ~~sales~~products ~~represented~~are 26manufactured.2% In addition, ~~14.7%~~in ~~and~~the ~~30.2%~~United States, budgetary ~~respectively~~debates in Congress, ofmay result in additional delays in the ~~Company's~~purchase of ~~total~~additional ~~revenues~~EDS products. During the sales cycle we expend substantial funds and management resources but recognize no associated revenue.

~~The sales~~Our ~~cycle~~backlog ~~of the Company's CTX product line~~ is ~~often~~not ~~lengthy~~necessarily ~~due~~indicative to the protracted approval process that typically accompanies large capital expenditures and the time required to manufacture, install and integrate the product. Typically, nine to twelve months may elapse between a new customer's initial evaluation of ~~the~~future ~~Company's product line and the execution of a contract~~revenues. ~~Another three months to a year may elapse prior to shipment of the product as the customer site is prepared and the system is manufactured. During this period the Company expends substantial~~ ~~funds and management resources but recognizes no associated revenue.~~

~~The Company~~ We ~~recognizes~~measure ~~EDS~~our backlog of product ~~revenue~~revenues ~~upon~~as ~~shipment~~orders ~~unless~~for ~~extended~~systems ~~acceptance~~and upgrades ~~criteria~~for ~~exist~~which contracts or purchase orders have been signed, inbut which have ~~case~~not ~~revenue~~yet isbeen ~~recognized~~shipped. ~~upon~~We ~~achievement~~measure our backlog of ~~such~~service ~~acceptance~~revenues ~~criteria.~~as orders ~~The~~for ~~Company~~maintenance ~~typically~~related ~~requires~~to ~~customer~~product ~~deposits~~support infor ~~advance~~which ofcontracts ~~shipment~~have onbeen signed, ~~customer~~but ~~purchase~~maintenance ~~orders~~service has not yet been performed. ~~Provision~~We ~~for~~typically ~~estimated~~ship our ~~installation,~~products ~~training~~within ~~and~~three ~~warranty~~to ~~costs~~twelve ismonths ~~recorded~~after atreceiving ~~the~~an ~~time~~order. ~~revenue~~However, issuch ~~recognized~~shipments ~~and~~may ~~adjusted~~be ~~periodically~~affected ~~based~~by ondelays ~~historical~~which ~~and~~occur ~~anticipated~~in ~~experience.~~the ~~Products~~delivery ~~typically~~of components ~~carry~~to aus ~~one-year~~or ~~warranty.~~our ~~The~~readiness ~~Company~~to ~~recognizes~~accept ~~EDS~~delivery ~~service~~of ~~revenue~~components for ~~service~~reasons ~~maintenance~~of ~~contracts~~site ~~ratably~~preparation ~~over~~or ~~the~~otherwise. ~~term~~In ofsome ~~the~~instances, ~~agreements~~shipments ~~and~~may ~~for~~be ~~integration~~made ~~and~~more quickly ~~other~~depending ~~services~~on asour ~~the~~ability ~~services~~to ~~are~~build ~~performed.~~machines to order and our customers’ demand for immediate delivery.

~~The Company'~~ Quantum’s ~~government~~ contract ~~revenue~~research isand ~~substantially~~development ~~derived~~backlog ~~from~~includes ~~Quantum~~funded ~~activities~~and unfunded ~~performed~~awards ~~under~~from ~~U.S.~~ government ~~contracts.~~agencies ~~These~~for ~~contracts~~which ~~are~~services ~~typically~~have innot ~~the~~yet ~~form of~~been ~~cost-plus-fixed-fee or firm-fixed-price awards~~performed. ~~The~~At ~~Company~~December 31, ~~recognizes~~2003, ~~revenue~~our onQuantum ~~these~~contract ~~contracts~~research ~~using~~and ~~the~~development ~~percentage-of-completion~~backlog ~~method~~was ~~based~~$13.0 million, on$7.7 million ~~costs incurred to date as a percentage~~ of ~~total~~which ~~estimated~~was ~~costs at completion~~funded.

~~The~~18 Company recognizes Wood product revenues from the sale of its control and automation systems of its Inovec subsidiary using the percentage-of-completion method, based on costs incurred to date as a percentage of total estimated costs at completion.

Any ~~Results~~failure by us to meet an agreed upon schedule could lead to the cancellation of ~~Operations~~ the related order. Variations in the size, complexity and delivery requirements of the customer order may result in substantial fluctuations in backlog from period to period. In addition, all orders are subject to cancellation or delay by the customer and, accordingly, we cannot assure investors that our backlog will eventually result in revenues. For these reasons, we believe that backlog cannot be considered a meaningful indicator of our performance on an annual or quarterly basis.

~~The~~Our ~~following~~international ~~table~~sales ~~sets~~subject ~~forth~~us ~~certain~~to ~~income~~risks ~~and~~that ~~expenditure~~could ~~items~~materially ~~from~~harm ~~the Company's consolidated statements of operations expressed as a percentage of total~~our ~~revenues for the periods indicated~~business.

			Year Ended December 31,
			2000		1999		1998
Revenues:
	Product revenues		74.2	%	73.9	%	86.4	%
	Service revenues		12.4		7.8		3.4
	Government contract revenues		13.4		18.3		10.2
		Total revenues	100.0		100.0		100.0
Cost of revenues:
	Product costs		49.7		42.6		46.4
	Service costs		8.2		6.3		3.2
	Government contract costs		9.9		13.2		7.4
		Total cost of revenues	67.8		62.1		57.0
	Gross profit		32.2		37.9		43.0
Operating expenses:
	Research and development		13.9		17.9		12.1
	Selling, general and administrative		20.9		20.1		18.4
		Total operating expenses	34.8		38.0		30.5
Income (loss) from operations			(2.6	)	(0.1	)	12.5
Interest expense			(0.2	)	(0.4	)	(0.6	)
Interest and other income, net			0.7		1.3		1.0
Income (loss) before provision for income taxes			(2.1	)	0.8		12.9
Provision for income taxes			—		0.1		1.6
Net income (loss)			(2.1	)%	0.7	%	11.3	%

Sales to countries other than the United States accounted for 29.0% of our revenues in the year ended December 31, 2003. It is part of our growth strategy to increase our international operations. A number of factors related to our international sales and operations could adversely affect our business, including:

• ~~Comparison~~changes ofin ~~Fiscal~~domestic ~~Years~~and ~~2000~~foreign regulatory requirements; • political instability in the countries where we sell products; • possible foreign currency controls; • fluctuations in currency exchange rates; • our ability to protect and ~~1999~~ utilize our intellectual property in foreign jurisdictions; • tariffs, embargoes or other barriers; • difficulties in staffing and managing foreign operations; • difficulties in obtaining and managing distributors; and • potentially negative tax consequences.

~~Revenues. The~~ Further, ~~Company's~~the ~~revenues~~sale ~~are~~of ~~primarily~~some ~~comprised~~ of: ~~(i) EDS~~our ~~product~~products ~~revenues,~~outside ~~which~~the ~~include~~United ~~revenues~~States is ~~from~~subject ~~sales~~to ofcompliance ~~CTX~~with ~~systems~~the ~~and~~U.S. ~~related~~International ~~accessories,~~Traffic ~~and~~in ~~installation~~Arms Regulations and ~~configuration,~~Export ~~and~~Administration ~~EDS~~Regulations. ~~service~~Our ~~revenues,~~failure ~~which~~to ~~include~~obtain ~~revenues~~the ~~from~~requisite licenses, ~~maintenance~~meet ~~contracts~~registration ~~related~~standards toor ~~product~~comply ~~support,~~with other government export ~~integration~~regulations, ~~and~~may ~~other~~affect ~~services;~~our ~~(ii) Quantum~~ability ~~government~~to ~~contract~~generate revenues from the sale of our products outside the United States, which ~~include~~could ~~revenues~~harm ~~primarily~~our ~~from~~business. ~~research~~In particular, ~~and~~some ~~development~~of ~~contracts~~our ~~utilizing~~EDS QRproducts and ~~passive~~our ~~magnetic technologies~~landmine ~~with~~detection ~~government~~equipment ~~agencies~~are deemed ~~and~~regulated ~~private~~military ~~entities~~devices ~~and;~~subject ~~(iii) Wood~~to ~~product~~export ~~revenues~~restrictions ~~from~~under the ~~sales~~U.S. Department of ~~control~~State ~~and~~regulations. ~~automation~~Consequently, ~~systems~~these ~~for~~regulations ~~material~~may ~~processing~~make ~~equipment,~~these products ~~primarily~~more indifficult ~~the~~to sell to a number of countries. Compliance with ~~wood~~government ~~products~~regulations ~~industry~~may ~~and~~also ~~related~~subject ~~accessories,~~us ~~installation~~to ~~and~~additional ~~configuration,~~fees and ~~Wood~~costs. ~~service~~The absence ~~revenues~~of ~~from~~comparable ~~maintenance~~restrictions ~~contracts~~on ~~related~~competitors toin ~~product~~other ~~support,~~countries ~~integration~~may adversely ~~and~~affect ~~other~~our ~~services.~~competitive position.

~~EDS product~~Exchange ~~revenues~~rate ~~were~~fluctuations ~~$46.5 million~~could incause ~~2000,~~a andecline ~~increase of 8.1% from the $43.0 million~~ in ~~1999.~~our ~~This~~financial ~~increase~~condition ~~was primarily attributable to more system shipments~~ and results ~~more sales~~ of ~~the Company's higher priced CTX 9000DSi system in 2000~~operations. ~~EDS service revenues were $8.3 million, an increase of 80.7% from the $4.6 million in 1999. The increase in~~ ~~service revenues is primarily due to increased service contract revenue for new support and maintenance agreements for CTX systems for~~

28 In 2003, the cost of certain international currencies has increased due to fluctuations in the exchange rate of the U.S. dollar against the euro. As a result of our international operations and Yxlon operations, we generate a significant portion of our net sales and incur a significant portion of our expenses in currencies other than the U.S. dollar, primarily the euro. Future fluctuations in this exchange rate could adversely affect our results because we pay our non-U.S. employees and certain suppliers in local currencies, and, in some cases, our sales contracts are denominated in local currencies. From time to time, as and when we determine it is appropriate and advisable to do so, we will seek to mitigate the effect of exchange rate fluctuations through the use of derivative financial instruments. We cannot assure you, however, that we will continue this practice or be successful in these efforts.

~~which~~ Yxlon ~~warranty~~generally ~~periods~~transacts ~~expired~~business ~~during~~in ~~the year~~euros. ~~The~~Consequently, ~~Company~~its ~~typically~~financial condition ~~ships~~and ~~against~~results aof ~~backlog~~operations ofare ~~orders~~reported ~~for~~in ~~its~~euros ~~products.~~and Asthen oftranslated into ~~December 31,~~U.S. ~~2000,~~dollars at the ~~Company~~applicable ~~had~~exchange inrate ~~backlog~~for ~~EDS~~inclusion ~~equipment~~in our ~~orders~~consolidated ~~and~~financial ~~service~~statements. ~~agreements~~As ofa ~~$8.1 million~~result, ~~primarily~~appreciation ~~consisting~~ of ~~service~~the ~~agreements~~U.S. ~~Additionally,~~dollar against in the ~~first~~euro ~~quarter~~will ofhave ~~2001,~~a ~~the~~negative ~~Company~~impact ~~received~~on ~~orders~~our ~~valued~~reported atrevenues ~~approximately~~and ~~$10.5 million~~operating ~~from~~profit ~~the~~while ~~FAA~~depreciation ~~and~~of anthe ~~international~~U.S. ~~customer~~dollar ~~for~~against ~~multiple~~the ~~explosive~~euro ~~detection systems, accessories and service.~~ will have

~~Quantum's~~19 government contract revenues were $10.6 million and $10.7 million in 2000 and 1999, respectively. Revenues were relatively flat in 2000 compared to 1999, reflecting an increase in efforts in the development of landmine detection technologies in 2000, offset by a decrease in other types of development efforts as government contracts and grants are completed. As of December 31, 2000, the Company had Quantum government contract backlog of approximately $23.6 million, primarily for development of landmine detection technologies.

~~Gross~~a ~~Profit. Cost~~positive ofeffect ~~EDS~~on ~~product~~reported revenues ~~primarily consists of purchased materials procured for use in the assembly of the Company's products, as well as manufacturing labor~~ and ~~overhead,~~operating ~~and warranty~~profit. ~~Cost~~However, ofYxlon’s customer ~~EDS~~contracts ~~service~~that ~~revenues~~are ~~primarily~~denominated ~~consists~~n ~~of direct labor and materials and customer support overhead~~U.S. ~~In any~~dollars ~~given~~will ~~period the Company's gross profit for products and services may~~ be adversely affected by ~~several~~the ~~factors,~~depreciation ~~including revenue mix, volume~~ of ~~systems manufactured in a given period, product configuration, location of~~ the ~~installation and complexity of integration into various environments~~U.S. dollar.

~~Gross profit~~We ~~for~~may ~~EDS~~have ~~products~~warranty ~~was~~claims ~~$15.8 million~~that inexceed ~~2000,~~our ~~a decrease of 13~~reserves.~~3% from the $18.2 million in 1999. Gross margins for EDS products in 2000 and 1999 were 33.9%~~ ~~and 42.3%, respectively. The~~ ~~decrease in gross profit is primarily due to lower margins on the sale of CTX 9000 systems in 2000, primarily due to competitive pricing factors with international customers and higher manufacturing~~ ~~costs related to the initial production process of the CTX 9000 systems. Gross profit for EDS services increased to $2.6 million in 2000 from $0.9 million in 1999. Gross margins for EDS~~ services were 30.9% and 19.7%, respectively. The increase in gross profit is primarily due to increased service contract revenue for new support and maintenance agreements for CTX systems for which warranty periods expired during the year.

~~Cost of~~ Our ~~Quantum~~EDS ~~government~~products ~~contract~~are ~~revenues~~typically ~~primarily~~sold ~~consists~~with ofone-year ~~direct~~warranties. ~~labor,~~We ~~purchased~~have established ~~materials,~~reserves ~~subcontract~~for ~~labor and~~ the ~~applicable~~liability ~~overhead~~associated ~~required~~with toproduct ~~support~~warranties ~~government~~based ~~funded~~on ~~activities.~~historical ~~Gross~~experience ~~profit~~with ~~for~~warranty ~~government contracts was $2~~claims.~~8 million~~ ~~in 2000~~However, aour ~~5.8%~~actual ~~decrease~~warranty costs, ~~from~~including ~~the~~actual ~~$3.0 million~~material inusage ~~1999.~~or ~~Gross~~service ~~margins~~delivery ~~were 26.2% and 27.6%~~costs, ~~respectively.~~may ~~The~~exceed ~~decrease~~our ~~in gross profit is primarily due to the change in mix of types of services and materials~~reserves, which ~~carry~~could ~~different~~have ~~margins,~~an inadverse ~~2000~~effect ~~compared~~on toour ~~1999.~~operating results.

~~Gross profit~~We ~~for~~may ~~Wood~~not ~~product~~be ~~revenues~~selected ~~and~~to ~~service~~provide ~~revenues~~post-warranty ~~were~~service ~~$3.6 million~~on ~~and~~our ~~$0.7 million~~CTX ~~in 2000, respectively. Gross margins for Wood~~ products , and ~~services~~if ~~in 2000~~we ~~and~~are ~~1999~~selected ~~were~~to ~~30.0%~~provide ~~and~~post-warranty ~~48.2%~~services, ~~respectively.~~these ~~The~~services ~~gross~~may not ~~profit~~be isprofitable ~~primarily~~for ~~generated from Inovec product and service revenues during the year~~us.

~~Research~~ We offer to our customers the opportunity to buy a service contract from us, which provides for scheduled maintenance, repairs and ~~Development~~parts once a warranty period on a CTX product has expired (which is typically a one-year period). ~~Research~~ ~~and~~If we ~~development~~are ~~expenses~~not ~~consist~~selected ~~primarily~~to provide post-warranty service, this would harm our business. Some of ~~compensation~~our ~~paid~~post-warranty toservice ~~personnel~~contracts ~~engaged~~contain fixed pricing interms. ~~research~~If ~~and~~our ~~development~~actual ~~activities~~costs, ~~amounts~~including ~~paid~~actual ~~for~~material ~~outside~~usage ~~services,~~or ~~and~~service delivery costs, ofexceed ~~materials~~our ~~utilized~~revenues under these service agreements, our operating results could be adversely affected. We are currently in ~~the~~negotiations ~~development~~for the renewal of ~~hardware~~our agreement to provide service to our CTX products owned by the TSA. We cannot assure investors that the agreement will be renewed, ~~including~~or ~~prototype~~will ~~units~~be renewed on financial advantageous terms. In addition, historically, we have sold service contracts on most eligible CTX products deployed internationally. We may not achieve this level of service contract sales in the future.

29Our inability to adapt to rapid technological change could impair our ability to remain competitive.

~~Research~~ The ~~and~~EDS ~~development~~industry ~~expenditures~~may byundergo ~~the~~significant ~~Company~~technological ~~are~~development ~~partially~~in response ~~offset~~to byincreased ~~amounts~~demand ~~reimbursed~~for byaviation ~~the~~security ~~FAA~~products. ~~and~~A ~~other~~fundamental shift ~~government~~in ~~agencies~~technology ~~and~~in ~~private~~our ~~entities~~product ~~under~~markets ~~research~~could ~~and~~harm ~~development~~us, ~~contracts~~because we derive ~~and~~substantially ~~grants.~~all ~~These~~of ~~services~~our ~~are~~revenues ~~provided~~from onsales aof ~~cost~~EDS ~~basis.~~products and services.

~~Gross research~~ We ~~development~~anticipate ~~expenses~~that ~~were~~we ~~$11.9 million~~will inincur ~~2000,~~significant anexpenses ~~increase~~in ~~of 6.8% from~~ the ~~$11.2 million~~design ~~in 1999. Of these amounts in 2000~~ and ~~1999,~~ ~~$0.9 million~~initial ~~and~~manufacturing ~~$0.7 million, respectively, were funded by research~~ and ~~development~~marketing ~~contracts~~of ~~and~~new ~~grants~~products ~~from the FAA~~ and ~~other government agencies and private entities~~services. ~~Net research~~Our ~~and~~competitors ~~development~~may ~~expenses~~implement ~~were~~new ~~$11.0 million~~technologies inbefore ~~2000,~~we anare ~~increase~~able ~~of 5.7% compared~~ to ~~the $10.4 million in 1999. As a percentage of revenues~~, ~~net~~allowing ~~research and development expenses were~~them ~~13.9% and 17.9% in 2000 and 1999, respectively. The increase in gross research and development expenses is primarily due~~ to ~~engineering~~provide ~~services,~~more ~~materials~~effective ~~and labor costs incurred for the development of WoodVision~~ products ~~and~~at ~~also~~more ~~due~~competitive ~~to expenses incurred by the Company's newly acquired subsidiary, Inovec~~prices. ~~These increases are partially offset by reduced expenses incurred by Quantum as more~~Future ~~resources~~technological ~~were~~developments ~~expended on research and development efforts that were~~could: ~~funded under government contracts and grants and less incurred on internal research and development activities. The decrease as a percentage of revenues is primarily due to higher revenues in 2000~~ ~~compared to the prior year. As of December 31, 2000, the Company had in backlog research and development contracts and grants of $6.7 million.~~

~~Selling,~~• ~~general~~adversely ~~and~~impact ~~administrative. Selling,~~our ~~general~~competitive ~~and~~position; ~~administrative~~• ~~expenses~~require ~~consist~~write-downs ~~primarily~~ of ~~compensation paid~~obsolete totechnology; ~~direct~~• ~~and~~require ~~indirect~~us ~~sales~~to ~~and~~discontinue ~~marketing~~production ~~personnel,~~of ~~administrative~~obsolete ~~personnel,~~products ~~including~~before ~~directors,~~we ~~consultant~~can ~~fees,~~recover ~~professional~~any ~~service~~or ~~fees,~~all ~~insurance,~~of ~~travel~~our related research, ~~selling~~development and ~~distribution~~commercialization ~~costs, and~~expenses; ~~other~~or ~~general~~• ~~expenses.~~require significant capital expenditures beyond those currently contemplated.

~~Selling, general~~ We ~~and~~cannot ~~administrative~~assure ~~expenses~~investors ~~were~~that ~~$16.6 million~~we inwill ~~2000,~~be anable ~~increase~~to ofachieve ~~40.7% from~~ the technological ~~$11.8 million~~advances into ~~1999.~~remain Ascompetitive aand ~~percentage~~profitable, ofthat ~~total~~new ~~revenues, selling,~~products ~~general~~ and ~~administrative~~services ~~expenses~~will ~~were~~be ~~20.9%~~developed and ~~20.1%~~manufactured inon ~~2000~~schedule ~~and~~or ~~1999,~~on ~~respectively.~~a cost-effective ~~The increase in selling~~basis, ~~general~~that ~~and~~anticipated ~~administrative~~markets ~~expenses~~will ~~was~~exist ~~primarily~~or ~~the~~develop ~~result~~for ~~of start-up~~new ~~operating~~products ~~costs~~or ~~of WoodVision~~services, ~~the~~or ~~amortization~~that ~~expense~~our ofexisting ~~$0.7 million~~products ~~for goodwill~~ and ~~other~~services ~~intangibles~~will ~~acquired~~not become ~~with~~technologically ~~the purchase of Inovec, and also expenses incurred by Inovec in 2000~~obsolete.

~~Interest~~The ~~Expense. Interest~~EDS ~~expense~~industry ~~decreased~~is tohighly ~~$195,000 in 2000 from $227,000 in 1999~~competitive. ~~Interest~~Given ~~expense~~the inanticipated ~~2000~~continuing ~~and~~demand ~~1999~~for ~~resulted~~airport ~~primarily~~security ~~from debt financing associated with the Company's working capital lines of credit~~products, ~~equipment~~competition ~~term~~may ~~loans and capital leases~~increase. ~~The decrease is primarily due to lower average debt~~ ~~balances in 2000 compared to 1999.~~

~~Interest~~ The ~~and~~EDS ~~Other~~industry ~~Income~~is ~~(Expense),~~intensely ~~Net. Interest~~competitive and ~~other~~we ~~income~~may ~~(expense),~~not ~~net, decreased to $527,000 in 2000 from~~compete ~~$754,000 in 1999~~successfully. ~~The~~As ~~2000~~a ~~amount~~result ~~consists primarily~~ of ~~interest~~increased ~~income~~demand onfor ~~cash~~security ~~equivalents~~systems, ~~and~~additional companies ~~short-term~~may ~~investments~~enter ofthe ~~$917,000,~~EDS ~~partially~~industry. ~~offset~~Some byof ~~other~~our ~~expense~~competitors, ~~(net)~~including ofL-3 Communications ~~$390~~Holdings,~~000~~ Inc. ~~The 1999~~and ~~amount~~many ~~consists primarily~~ of ~~interest~~the ~~income~~potential onnew ~~cash~~entrants ~~equivalents~~into ~~and~~the EDS ~~short-term~~industry, ~~investments~~have offinancial, ~~$813~~technical,~~000,~~ ~~partially~~production ~~offset~~and by other ~~expense~~resources substantially ~~(net)~~greater ofthan ~~$59,000~~ours. ~~The~~We ~~decrease~~believe inthat ~~interest income~~some isof ~~primarily~~our ~~due to lower average cash balances in 2000 compared to the prior year.~~ competitors

~~Provision for Income Taxes. No tax provision or benefit was recorded for 2000. The Company recorded a provision for~~20 income taxes of $67,000 in 1999. At December 31, 2000, the Company had federal net operating loss carryforwards of approximately $4.6 million available to reduce future federal taxable income. The Company's net operating loss carryforwards expire from 2010 to 2012 and tax credit carryforwards expire from 2005 to 2018.

~~Revenues.~~ have EDS ~~product~~products ~~revenues~~undergoing ~~were~~TSA ~~$43~~certification.~~0 million~~ inOur ~~1999,~~failure ato ~~decrease of 29.3% from the $60.9 million in~~compete ~~1998.~~successfully ~~This~~could ~~decrease~~result ~~was primarily attributable to fewer systems shipped~~ in ~~1999~~lost ~~compared~~sales ~~to the prior year. EDS service revenues were $4.6 million~~ and ~~$2.4 million~~could inhamper ~~1999~~our ~~and~~financial ~~1998,~~ results.

30We depend on key management and personnel and may not be able to retain those employees or recruit additional qualified personnel.

~~respectively.~~ We ~~The~~believe ~~increase~~that inour ~~service~~future ~~revenues~~success ~~were~~will ~~primarily~~be due, in part, to ~~increased~~the ~~service~~continued services ~~contract~~of ~~revenues~~our ~~primarily~~senior ~~due~~management toteam. We do not have long-term employment agreements with any of our executive officers. Losing the ~~commencement~~services of ~~support~~one or more members of our management team could negatively affect our business and our ~~maintenance~~expansion ~~agreements~~efforts. ~~for~~We ~~systems~~do ~~for~~not ~~which~~maintain key person life insurance policies ~~warranty~~for ~~periods~~members ~~expired~~of ~~during~~our management. We could be seriously harmed by the ~~year~~loss of any of our executive officers. The implementation of our growth strategy will require that we recruit additional members of our senior management team. In addition, in order to manage our growth, we will need to recruit and retain additional skilled personnel, such as advanced engineering professionals. Our failure to recruit qualified employees in a timely manner and retain them could harm our business and our ability to continue to grow.

~~Government contract~~Natural ~~revenues~~disasters, ~~were~~including ~~$10.7 million in 1999~~earthquakes, anmay ~~increase~~damage ofour 48facilities.~~3% from the $7.2 million in 1998. This increase was primarily attributable to accelerated~~ ~~activities related to landmine detection technologies in 1999.~~

~~Gross~~ Our ~~Profit. Gross~~corporate ~~profit~~and ~~for~~manufacturing ~~EDS~~facilities ~~product was $18.2 million~~ in ~~1999~~California ~~compared~~are tolocated ~~$28.2 million in 1998.~~near ~~Gross~~major ~~margins~~earthquake infaults, ~~1999~~which ~~and~~have ~~1998~~experienced ~~were~~earthquakes ~~42.3%~~in ~~and~~the 46past.~~3%,~~ ~~respectively.~~In ~~The decrease in gross margins was primarily~~ the event ~~result~~ of ~~lower~~a ~~margins~~major onearthquake ~~the~~or ~~sale~~other ofnatural ~~the CTX 9000 systems~~disaster, ~~which~~our ~~were~~facilities ~~made up of~~may ~~higher~~sustain ~~per~~significant ~~unit~~damage ~~costs~~and ~~related~~our tooperations ~~the~~could ~~start-up~~be ~~of the initial production process in the latter part of the year~~harmed.

~~Gross profit~~Our ~~for~~business ~~government~~could ~~contracts~~be ~~was~~harmed ~~$3.0 million~~if inwe ~~1999~~fail ~~compared~~ to ~~$2.0 million~~properly inprotect ~~1998.~~our ~~Gross margins were 27.6% in 1999 and 1998. The increase in gross profit~~intellectual ~~was primarily due to the increased level of work on funded landmine detection technologies~~property.

~~Research~~ Our ~~and~~success ~~Development. Net~~depends ~~research~~in ~~and~~part ~~development~~on ~~expenses~~our ~~were~~ability ~~$10.4 million~~to inprotect ~~the~~our ~~year ended~~intellectual ~~December 31, 1999~~property. ~~Net~~Although ~~research~~we ~~and~~attempt ~~development~~to ~~expenses~~protect ~~would~~our ~~have~~intellectual ~~been~~property ~~$9.3 million~~ in ~~1998 without~~ the ~~capitalization of software development costs of $0.8 million. Software~~ ~~development~~United ~~costs~~States qualifying for capitalization were insignificant in 1999. In the third quarter of 1999, the Company began amortizing the capitalized software development costs using the straight-line method over the forecasted units of production. Gross research and ~~development~~other ~~expenses~~countries ~~were~~through ~~$11.2 million~~various inmethods ~~1999,~~such aas ~~decrease~~patents ~~of 13.4% from the $12.9 million~~and inpatent ~~1998~~applications, ~~before considering the impact of software capitalization. Of these amounts in 1999 and 1998~~trademarks, ~~$0.7 million~~copyrights and ~~$3.6 million,~~non-disclosure ~~respectively~~agreements, ~~were funded by research and development~~ ~~contracts~~there ~~and~~can ~~grants~~be ~~from~~no ~~the~~assurance ~~FAA~~that ~~and~~we ~~other~~will ~~government~~successfully ~~agencies.~~protect Asour atechnology ~~percentage of total revenues, net research and development expenditures were 17.9% in 1999 compared to 12.1% in~~or ~~1998.~~that ~~The~~competitors ~~increase~~will ofnot ~~net~~be ~~research~~able ~~and development costs as a percentage of revenues was primarily the result of lower revenues in 1999 compared~~ to ~~the~~develop ~~prior~~similar ~~year.~~technology ~~The decrease in gross research and~~independently. ~~development expenditures in absolute dollars was primarily due to the completion of two significant development products in early 1999, specifically the development of the CTX 9000 and QScan 160, of~~ ~~which the Company made its first sale of these products in 1999.~~

~~Selling,~~ We ~~general~~have ~~and~~two ~~administrative~~U. ~~Selling,~~S. ~~general~~patents ~~and~~for ~~administrative~~automatic ~~expenses~~concealed ~~were~~object ~~$11~~detection systems using a pre-scan stage as used in our CTX products.~~8 million~~ These patents expire in 2010 ~~1999,~~and 2011. The patents have not prevented competitors from developing CT-based products which do not use a pre-scan stage. The time period for filing ~~decrease~~foreign counterparts of 9our two U.5%S. ~~from~~EDS ~~the~~patents ~~$13.0 million~~has inexpired, ~~1998~~and we did not seek or obtain patent protection. AsThe absence of foreign counterparts to our patents could adversely affect our ability to prevent a ~~percentage~~competitor offrom ~~total~~using technology ~~revenues,~~similar ~~selling,~~to ~~general~~technology ~~and~~used ~~administrative~~in ~~expenses~~our ~~were~~CTX 20products.1% ~~and~~We 18also have a U.4%S. patent infor ~~1999~~a ~~and~~mechanical ~~1998~~radiation shield for our CTX 9000 DSi model, ~~respectively~~which expires in 2021. ~~The~~ We rely on this technology to increase the speed of the baggage inspection process. We have filed other applications in ~~selling,~~the ~~general~~United States and ~~administrative~~Europe ~~expenses~~for aspatents acovering ~~percentage~~other offeatures ~~revenues~~contained ~~was~~in ~~primarily~~our CTX 9000 DSi model. We cannot assure investors that the ~~result~~claims ofallowed ~~lower~~under ~~revenues~~any inpatents held ~~1999~~by ~~compared~~us will be sufficiently broad to ~~the~~protect ~~prior~~our ~~year~~technology against competition from third parties with similar technologies or products. ~~The~~In addition, ~~decrease~~we incannot ~~selling~~assure investors that any patents issued to us will not be challenged, ~~general~~invalidated ~~and~~or circumvented or that the rights granted under these ~~administrative~~patents ~~expenses~~will inprovide ~~absolute~~a ~~dollars~~competitive ~~was~~advantage ~~primarily~~to us. Moreover, the ~~result~~laws of asome foreign ~~decrease~~countries indo ~~commission~~not ~~expense~~protect ~~due~~intellectual property rights to ~~changes~~the insame extent as the ~~structure~~laws of ~~sales~~the ~~incentive~~United ~~compensation~~States, ~~plans~~and we could experience various obstacles and ~~lower~~high ~~revenues~~costs in protecting our intellectual property rights in ~~1999~~foreign ~~and~~countries. ~~continued~~If ~~efforts~~we are unable to ~~reduce~~obtain ~~selling~~or ~~and~~maintain ~~administrative~~these ~~expenses~~protections, ~~during~~we may ~~the~~not ~~year.~~be able to prevent third parties from using our intellectual property.

~~Interest~~ We ~~Expense. Interest~~also ~~expense~~rely ~~decreased~~on totrade ~~$227~~secrets,~~000~~ inproprietary ~~1999~~know-how ~~from~~and ~~$390,000~~continuing technological ininnovation ~~1998~~to remain competitive. ~~Interest~~We ~~expense~~have intaken ~~1999~~measures ~~and~~to ~~1998~~protect ~~resulted~~our ~~primarily~~trade ~~from~~secrets ~~debt~~and ~~financing~~know-how, ~~associated~~including ~~with~~ the ~~Company's~~use ~~working capital lines~~ of ~~credit,~~confidentiality agreements ~~equipment~~with ~~term~~our ~~loans~~employees. ~~and~~It ~~capital~~is ~~leases.~~possible ~~The~~that ~~decrease~~these ~~was~~agreements ~~primarily~~may ~~due~~be breached toand ~~payments~~that ~~made~~the ~~on term~~available ~~loans~~remedies ~~and~~for ~~capital~~any ~~lease~~breach ~~obligations~~will ~~and~~not nobe ~~new~~sufficient to ~~significant~~compensate ~~financing~~us infor ~~1999.~~damages incurred.

~~Interest~~Litigation ~~and~~may ~~Other~~be ~~Income,~~necessary ~~Net. Interest and other income, net, increased~~ to ~~$754,000~~enforce inor ~~1999~~defend ~~from~~against ~~$697,000~~claims inof ~~1998.~~intellectual ~~The~~property ~~1999~~infringement, ~~amount~~which ~~consists~~could ~~primarily~~be ofexpensive ~~interest income on short-term investments~~ and ~~interest bearing cash accounts of $813~~,~~000,~~ ~~partially~~if ~~offset~~we ~~by other expense of $59~~lose,~~000.~~ ~~The~~could ~~1998~~prevent ~~amount~~us ~~consists~~from ~~primarily~~selling ofour ~~interest income on short-term investments and interest bearing cash accounts of $754,000, partially offset by other expense of $57,000~~products.

31 Litigation may be necessary in the future to enforce our patents and other intellectual property rights, to protect our trade secrets or to determine the validity and scope of the proprietary rights of others. Any litigation, regardless

~~Income Taxes. The Company's effective tax rate for 1999 and 1998 was 15% and 12%, respectively. The Company's effective~~21 ~~tax rate for 1999 and 1998 was lower than statutory tax rates primarily due to the utilization of net operating loss carryforwards.~~

~~The Company recorded noncash charges related to grants~~ of ~~stock~~the ~~options~~outcome, ~~having~~could ~~exercise~~be ~~prices~~costly ~~below~~and ~~the~~require ~~fair~~significant ~~market~~time ~~value~~and onattention ~~the date~~ of ~~grant to employees~~ ~~and~~key ~~directors~~members ~~in the amounts~~ of ~~$63,000,~~our ~~$68,000~~management and ~~$68,000~~technical ~~in 2000, 1999 and 1998, respectively~~personnel.

Our ~~Liquidity~~domestic and ~~Capital~~international ~~Resources~~ competitors, many of whom have substantially greater resources and have made substantial investments in competing technologies, may have patents that will prevent, limit or interfere with our ability to manufacture and sell our products. We have not conducted an independent review of patents issued to third parties. Because of the perceived market opportunity we face, companies possessing technology rights that they believe we might be infringing will now be much more motivated to assert infringement of their rights. These third parties may assert infringement or invalidity claims against us and litigation may be necessary to defend against these claims. An adverse outcome in the defense of a patent suit could subject us to significant liabilities to third parties, require disputed rights to be licensed from third parties or require us to cease selling our products. Even successful defenses of patent suits can be costly and time-consuming.

~~Since~~We ~~inception,~~have ~~the~~received ~~Company~~significant ~~has~~amounts ~~financed its operations primarily through private sales~~ of ~~$16.5 million~~funding offrom ~~preferred~~government ~~and~~grants common stock (of which $5.6 million represents indebtedness converted to equity), the sale of $9.5 million of common stock in the Company's initial public offering in April 1996, the sale of $21.2 million in the Company's follow-on offering in May 1997, and ~~short-term borrowings under working capital lines of credit. At December 31, 2000, the~~ ~~Company had $11~~contracts.~~9 million~~ inWe ~~cash,~~cannot ~~cash~~assure ~~equivalents~~investors ~~and~~that ~~short-term~~we ~~investments,~~will ~~compared~~continue to ~~$24.2 million~~receive ~~at December 31, 1999. Working capital was~~this ~~$37.7 million~~level atof ~~December 31,~~funding ~~2000~~for ~~compared~~future toproduct ~~$40~~development.~~9 million at December 31, 1999.~~

~~Net cash~~ The ~~used~~U.S. ingovernment ~~operating~~currently ~~activities~~plays ~~was~~an ~~$9.2 million~~important role in ~~2000,~~funding ~~compared~~the development toof ~~$17.0 million~~EDS ~~provided~~technology byand ~~operating~~sponsoring ~~activities~~its deployment in ~~1999~~U.S. ~~Cash~~airports. We ~~used~~performed inreimbursable ~~operating~~research ~~activities~~and ~~in 2000~~development ~~primarily~~for ~~resulted~~EDS ~~from~~products apursuant ~~net~~to FAA ~~loss~~and ofTSA grants and contracts totaling $13.81million for the year ended December ~~million~~31, a2003, and $~~10.5 million~~886,000 ~~increase~~for inthe ~~accounts~~year ~~receivable~~ended December 31, 2002. This is a significant reduction from the $28.23 million ~~increase~~for inreimbursable ~~inventories~~research and development afor ~~$3.0 million~~EDS ~~decrease~~ products from FAA grants and contracts in ~~deferred~~the ~~revenues~~year ended December 31, ~~partially~~2001. ~~offset~~We byare also aware that other competitors and potential competitors in the $3EDS market have received FAA and TSA development grants.~~8 million~~ ~~non-cash~~The U.S. ~~effect~~government also currently funds almost all of ~~depreciation~~the ~~and~~development ~~amortization~~of Quantum products, aincluding QR and passive magnetic sensing. We had contract research and development revenues from the U.S. government for the development of Quantum products of $413.01 million ~~increase~~for inthe ~~accrued~~year ~~liabilities~~ended December 31, 2003 and aof $012.61 million ~~decrease~~for inthe ~~other~~year ~~current~~ended ~~assets~~December 31, 2002. ~~Cash~~We ~~provided~~cannot byassure ~~operating~~investors that ~~activities~~additional inresearch ~~1999~~and ~~primarily~~development ~~resulted~~funds from ~~net~~the ~~income~~government ofwill ~~$0.4 million,~~become available in the $3future or that we will receive any of these additional funds.~~0 million~~ ~~non-cash~~If ~~effect~~the ~~from~~government ~~depreciation~~fails ~~and~~to ~~amortization~~continue to sponsor our technology, awe ~~$16.2 million~~would ~~decrease~~have into expend ~~accounts~~more ~~receivable~~resources on product development, awhich $1could adversely affect our business.~~7 million~~ ~~increase~~In inaddition, ~~accounts~~any ~~payable~~future ~~and~~grants ato ~~$1.6 million increase~~our incompetitors ~~deferred~~may ~~revenues,~~improve ~~partially~~their ability ~~offset~~to bydevelop aand ~~$5.6 million~~market ~~increase~~advanced indetection ~~inventories~~products and acause ~~$0.8 million~~our customers ~~decrease~~to indelay ~~accrued~~any ~~liabilities.~~purchase decisions, which could harm our ability to market our products.

~~Net cash~~Substantial ~~provided~~leverage byand ~~investing~~debt ~~activities~~service ~~was~~obligations ~~$1.7 million~~may inadversely ~~2000,~~affect ~~compared~~our ~~to $5.5 million used in investing activities in 1999. Net~~ cash ~~provided by investing~~ ~~activities in 2000 primarily resulted from $5~~flow.~~9 million on sales of short-term investments partially offset by the cash payment of $1.5 million for the purchase of Inovec,~~ ~~net of cash acquired, and $2.7 million in acquisitions of capital equipment. Net cash used in investing activities in 1999 primarily resulted from $3.9 million in purchases of~~ ~~short-term investments (net of sales) and $1.7 million in acquisitions of capital equipment~~

~~Net cash~~ As ~~provided~~a byresult ~~financing~~of ~~activities~~the ~~was~~convertible ~~$1.1 million~~debt inoffering ~~2000,~~that ~~compared~~we tocompleted ~~$3.7~~in September ~~million~~2003, ~~used~~our indebt ~~financing~~service ~~activities~~obligations inincreased ~~1999~~substantially. ~~Net~~There ~~cash provided by financing~~is ~~activities~~the inpossibility ~~2000~~that ~~was~~we ~~primarily~~may ~~due~~be unable to ~~$0.9 million~~generate incash ~~net~~sufficient ~~proceeds~~to ~~from~~pay ~~borrowings~~the principal of, ~~short-term~~interest ~~debt~~on and ~~$0.7 million~~other inamounts ~~proceeds~~due ~~from sales under the employee stock purchase plan and exercises of incentive stock options, partially offset by $0.4 million~~ in ~~repayments~~respect of ~~long-term~~our ~~debt~~indebtedness when ~~financing~~due. ~~Net~~We ~~cash~~may ~~used~~also ~~in financing~~add ~~activities~~equipment inloans ~~1999~~and ~~was~~lease ~~primarily~~lines ~~due~~ to ~~$3.9 million~~finance incapital expenditures ~~repayments~~and ofmay ~~debt~~obtain ~~financing~~additional ~~(principally, short~~long-term ~~borrowings~~debt, ~~under~~working ~~the~~capital lines of credit), and ~~$0.3 million~~ inlease ~~the repurchase of 85,600 shares of the Company's Common Stock at prevailing market prices, partially offset by $0~~lines.~~5 million in proceeds from sales under the employee~~ ~~stock purchase plan and exercises of incentive stock options.~~

~~In November 2000,~~ Our ~~the~~substantial ~~Company~~leverage ~~renewed~~could ~~its~~have ~~two~~significant ~~line~~negative ~~of credit agreements with a bank. The first agreement provides for maximum borrowings in an amount up to the lower of 80% of~~consequences, eligible domestic EDS receivables or $5.0 million. The second agreement is partially guaranteed by the Export-Import Bank of the United States and provides for maximum borrowings in an amount up to the lower ofincluding: ~~(a) the sum of 80% of eligible EDS export accounts receivable plus the lower of: (i) 70% of eligible~~

32• increasing our vulnerability to general adverse economic and industry conditions; • limiting our ability to obtain additional financing; • requiring the dedication of a portion of our expected cash flow from operations to service our indebtedness, thereby reducing the amount of our expected cash flow available for other purposes, including capital expenditures; • limiting our flexibility in planning for, or reacting to, changes in our business and the industry in which we compete; and • placing us at a possible competitive disadvantage relative to less leveraged competitors and competitors that have better access to capital resources.

22 raw materials and work-in-process inventory designated for export customers; (ii) 60% of outstanding loans under this agreement, or; (iii) $2.0 million, or; (b) $5.0 million. Borrowings under both agreements bear interest at the bank's prime rate plus 1.5% (11.0% at December 31, 2000) and are secured by EDS assets. The agreements expire in November 2001 and require that the EDS segment maintain certain levels of tangible net worth and intercompany balances from its wholly-owned subsidiaries, and also prohibit the Company from paying cash dividends. Proceeds of loans under both lines of credit may be used for general corporate purposes. At December 31, 2000, the Company had borrowings outstanding of $0.9 million under the domestic EDS agreement. Additionally, the Company had outstanding guarantees to customers through issuance of letters of credit secured by the lines of credit totaling $1.1 million and foreign exchange contracts for which a 10% reserve of $141,000 is secured by the lines of credit. The remaining available borrowing capacity under the lines of credit was $5.3 million at December 31, 2000 based on eligible EDS accounts receivable and inventories as of that date.

~~As of~~Risks ~~December 31,~~Related ~~2000, the Company had non-cancelable annual lease commitments in the amount of $1.6 million for 2001 and decreasing~~ to ~~$1.3 million in~~Ownership ~~2005. See Note 8~~ of ~~the~~Our ~~Notes~~Common ~~to the Consolidated Financial Statements in item 8 of this Annual Report on Form 10-K.~~ Stock

The ~~Company~~ ~~believes~~price ~~that existing cash, cash equivalents and short-term investments together with available borrowings under its lines~~ of ~~credits~~our ~~and~~common ~~funds~~stock ~~expected~~may tofluctuate besignificantly. ~~generated from operations will~~ ~~be sufficient to finance its working capital and capital expenditure requirements for at least the next 12 months.~~

The trading price of our common stock has been and may continue to be ~~ITEM~~subject 7Ato large fluctuations, which may result in losses to investors. ~~QUANTITATIVE~~Our stock ~~AND~~price ~~QUALITATIVE~~may ~~DISCLOSURES~~increase ~~ABOUT~~or ~~MARKET~~decrease ~~RISK~~ in response to a number of events and factors, including:

• ~~Foreign~~the ~~Exchange~~level ~~Risk~~and changing nature of terrorist activity; • legislative and ~~Impact~~regulatory developments related to anti-terrorism efforts or aviation security; • our quarterly operating results or those of ~~Inflation~~ other explosives detection companies; • the public’s reaction to our press releases, announcements and our filings with the Securities and Exchange Commission; • our announcement of an acquisition or strategic investment; • changes in earnings estimates or recommendations by research analysts; • changes in our relationships with customers; and • developments affecting our competitors.

The ~~Company's~~market ~~international~~price ~~system~~of ~~sales~~our ~~and~~common ~~maintenance~~stock ~~contracts~~has ~~are~~fluctuated ~~generally~~dramatically ~~denominated~~since ~~in U.S. dollars. In instances where there are significant~~the ~~international~~terrorist ~~system~~attacks ~~sales~~of ~~contracts~~September 11, ~~denominated~~2001. inFor ~~a foreign currency~~example, ~~the~~immediately ~~Company~~prior ~~enters~~to September 11, ~~into~~2001, ~~forward~~our ~~exchange~~common ~~contracts~~stock toclosed ~~mitigate~~at ~~foreign~~$3.11 ~~exchange~~per ~~risk~~share. InSince ~~2000~~that date, ~~the~~our ~~Company~~closing ~~entered~~stock ~~into~~price ~~forward exchange~~has ~~contracts~~risen ofto ~~approximately~~a high of $648.~~3 million~~29 toper ~~hedge~~share ~~against~~on ~~foreign~~March 12, ~~exchange~~2002. ~~risk~~During ~~for~~2003, ~~contracts~~our ~~with~~closing ~~international~~stock ~~customers,~~price ~~and~~has atfluctuated ~~December 31,~~from ~~2000,~~a ~~had~~low ~~outstanding contracts~~of ~~totaling~~ $120.~~4 million.~~33 ~~The~~per ~~Company~~share ~~did~~to ~~not~~a ~~hedge~~high ~~any~~of ~~foreign~~$34.41 ~~exchange~~per ~~risk in 1999~~share. ~~Purchases~~In ofaddition, ~~raw~~the ~~materials~~stock ~~and~~market has ~~other~~periodically ~~inventory~~experienced ~~components~~significant ~~are~~price ~~primarily~~and ~~denominated~~volume influctuations ~~U.S dollars and when~~that ~~purchased~~have inparticularly ~~foreign~~affected ~~currencies,~~the ~~are~~market ~~generally~~prices ~~made~~of oncommon anstock asof ~~needed basis~~technology companies. ~~The~~These ~~Company~~changes ~~has~~have ~~some~~often ~~advance~~been ~~purchase~~unrelated ~~commitments~~to inthe ~~foreign~~operating ~~currencies~~performance of ~~with~~particular ~~a few European suppliers~~companies. ~~The~~These ~~Company~~broad ~~currently does~~market ~~not hedge against these purchase commitments, as the foreign exchange rate~~ fluctuations ~~have~~may ~~not~~also ~~had~~negatively affect ~~a material adverse impact on these purchases; however,~~ the ~~Company~~market ~~will~~price ~~continue~~of toour ~~monitor the~~common ~~foreign~~stock ~~exchange rates~~ and ~~enter~~the ~~into forward exchange contracts to mitigate foreign exchange risk as appropriate~~notes.

~~In June~~Delaware ~~1998,~~law ~~the Financial Accounting Standards Board issued SFAS No. 133 ("SFAS 133"), "Accounting for Derivative Instruments~~ and ~~Hedging~~our ~~Activities."~~charter ~~SFAS 133, as~~documents ~~amended,~~may ~~establishes~~impede ~~accounting~~or ~~and~~discourage ~~reporting~~a ~~standards for derivative instruments and hedging activities and is effective for fiscal years beginning after June 15~~takeover, ~~2000. The Company adopted~~ ~~SFAS 133~~which ~~effective~~could ~~January 1,~~cause ~~2001. SFAS 133 requires companies to recognize all derivatives as either assets or liabilities on~~ the ~~balance~~market ~~sheet~~price ~~and~~of ~~measure~~our ~~them~~shares atto ~~fair value~~decline. ~~Gains and losses resulting from changes in fair value would be accounted for depending on the use of the derivative and whether it is designated and qualifies for~~

33 We are a Delaware corporation and the anti-takeover provisions of Delaware law impose various impediments on the ability of a third party to acquire control of us, even if a change in control would be beneficial to our existing stockholders. Our certificate of incorporation provides for 5,000,000 shares of preferred stock which our board of directors may issue with terms determined by them without stockholder approval, a classified board of directors serving staggered three-year terms, restrictions on who may call a special meeting of stockholders and a prohibition on stockholder action by written consent. These provisions of Delaware law and in our charter documents could impede a merger, takeover or other business combination involving us or discourage a potential acquirer from making a tender offer for our common stock, which, under certain circumstances, could reduce the market value of our common stock and the notes.

~~hedge~~We ~~accounting.~~may ~~The adoption of SFAS 133 did~~ not ~~have~~pay acash ~~material effect on the Company's consolidated results of operations at January 1, 2001~~dividends.

~~Certain costs~~ We ofhave ~~providing~~not ~~warranty~~declared ~~and~~or ~~maintenance~~paid ~~services~~any ~~for~~cash ~~systems~~dividends ~~sold~~on toour ~~foreign~~capital ~~countries~~stock previously, ~~are~~and ~~denominated~~we inhave ~~local~~agreed ~~currencies.~~not Toto ~~the~~pay ~~extent~~cash ~~exchange~~dividends ~~rates~~under ~~fluctuate,~~our itcurrent bank ~~could~~line ~~become~~of ~~more expensive~~credit. toHistorically, ~~provide~~we ~~these~~have ~~services.~~retained Toearnings, ~~date~~if any, ~~these~~to ~~costs~~support ~~have~~the development ~~not~~of ~~been~~our ~~significant~~business. Payment of future dividends, ~~however~~if any, will be at the ~~Company~~discretion ~~expects~~of ~~they~~our ~~will~~board ~~increase~~of asdirectors ~~the~~after ~~Company's~~taking ~~installed~~into ~~base~~account ~~increases.~~various factors, including our financial condition, operating results and current and anticipated cash needs.

~~The~~23 ~~impact of inflation has not been material on the Company's operations or liquidity to date.~~

~~The~~We ~~Company's~~may ~~Consolidated~~become ~~Financial~~subject ~~Statements~~to costly and ~~Notes thereto appear on pages F~~time-1consuming toclass ~~F-24~~action ~~of this Annual Report on~~litigation ~~Form 10-K~~following ~~and~~significant ~~are~~changes ~~incorporated by reference here. Supplementary financial information with respect to each of the quarters~~ in ~~the~~our ~~years~~stock ~~ended December 31, 2000 and 1999 are set forth in Note 15 to the Notes to the Consolidated Financial Statements~~price.

In the past, following periods of volatility in the market price of a company’s securities, securities class action litigation has often been ~~ITEM~~instituted 9against such a company. ~~CHANGES~~Were INsuch ~~AND~~litigation ~~DISAGREEMENTS~~to ~~WITH~~be ~~ACCOUNTANTS~~commenced ONagainst us, ~~ACCOUNTING~~we ~~AND~~would ~~FINANCIAL~~incur ~~DISCLOSURE~~ substantial costs and there would be diversion of our management’s attention and resources, which could materially harm our business, results of operations and financial condition.

OnITEM April 24, 2000, the Company's Board of Directors approved a change in the Company's independent accountants for the current fiscal year, from PricewaterhouseCoopers LLP ("PwC") to Deloitte & Touche LLP ("Deloitte & Touche") due to an independence issue2. The brother of the Company's Chief Financial Officer is a partner with PwC and was transferred in April 2000 to an office within 500 miles of the Company's headquarters, rendering PwC unable to act as the Company's independent accountants pursuant to longstanding interpretive guidance regarding independence issued by the Securities and Exchange Commission ("SEC"). The decision to change accountants was approved by the audit committee of the Board of Directors, and by the Board of Directors, effective April 24, 2000. The reports of PwC for the fiscal years ended December 31, 1998 and December 31, 1999, contained no adverse opinion, disclaimer of opinion or qualification or modification as to uncertainty, audit scope or accounting principles. During the fiscal years ended December 31, 1998 and December 31, 1999, and the interim period from January 1, 2000 through April 24, 2000, there were no disagreements between the Company and PwC on any accounting principles or practices, financial statement disclosures or auditing scope or procedures, which, if not resolved to the satisfaction of PwC would have caused it to make reference to the subject matter of the disagreement in connection with its reports. The Company has provided PwC with a copy of the disclosures contained herein and has filed as an exhibit hereto the response of PwC to the disclosures set forth in the section. The Company did not consult with Deloitte & Touche during the fiscal years ended December 31, 1998 and December 31, 1999, and the interim period from January 1, 2000 through April 24, 2000, on any matter which was the subject of any disagreement or any reportable event or on the application of accounting principles to a specified transaction, either completed or proposed. PROPERTIES

34 Our principal corporate office and EDS manufacturing facility are located in Newark, California, and consist of approximately 112,000 square feet under a lease that expires in August 2007. We have an option to extend the lease for five years. We also entered into an amendment to the original Newark agreement to lease a second facility consisting of 18,700 square feet. The lease for the second facility expires in September 2004.

Yxlon’s principal office and primary NDT manufacturing facility are located in Hamburg, Germany, and consist of approximately 64,000 square feet ~~PART~~under ~~III~~a lease that expires in March 2009. Yxlon also leases a 16,000 square foot facility in Hamburg for its XRD business on a month-to-month basis with a three-month termination clause. Yxlon leases a manufacturing facility in Copenhagen, Denmark, consisting of approximately 37,000 square feet under a month-to-month lease that may be terminated with six months’ notice. Yxlon International Inc., the NDT sales company in the United States, leases a facility in Akron, Ohio consisting of approximately 61,000 square feet under a lease that expires in October 2005. Yxlon leases sales offices in Japan consisting of 3,000 square feet under leases that expire in January 2005.

Quantum’s principal office and manufacturing facility are located in San ~~ITEM~~Diego, ~~10.~~California, ~~DIRECTORS~~and ~~AND~~consist ~~EXECUTIVE~~of ~~OFFICERS~~approximately OF58,400 ~~THE~~square ~~REGISTRANT~~ feet under a lease that expires in December 2012, with a one-time option to extend the lease another ten years.

~~The~~ Inovec’s ~~information~~principal ~~required~~office byand ~~this~~manufacturing ~~Item~~facilities 10are islocated ~~incorporated~~in Eugene, byOregon ~~reference~~in toseveral ~~the~~buildings ~~information~~consisting ~~contained~~of inone ~~the~~building ~~Proxy~~of ~~Statement~~approximately 5,000 tosquare befeet ~~filed~~under noa ~~later~~lease ~~than~~ that expires in April 302005, ~~2001~~and inthree ~~connection~~buildings of ~~with~~approximately ~~the~~10,000 ~~solicitation~~square offeet, ~~proxies~~4,500 ~~for~~square ~~the~~feet, ~~Company's~~and ~~Annual~~4,000 ~~Meeting~~square offeet, all ~~Stockholders~~on a month-to-month bebasis. ~~held~~In ~~June~~February 212004, ~~2001~~Inovec ~~(the~~signed ~~"Proxy~~a ~~Statement")~~new ~~under~~lease ~~the captions~~for ~~"Proposal~~a ~~No. 1—Election~~facility of ~~Directors"~~approximately ~~and~~33,000 ~~"Section 16(a)~~square ~~Beneficial Ownership Reporting Compliance~~feet." ~~For~~The ~~the~~lease ~~information~~commences ~~required~~in asMay 2004 toand ~~Executive~~expires ~~Officers,~~in ~~see "Part~~April I2009. ~~Item~~Inovec 1.expects ~~Business—Executive~~to ~~Officers~~completely move out of ~~the~~its current ~~Registrant,"~~facilities ~~which~~by ~~information~~the isend ~~incorporated~~of bythe ~~reference~~second ~~here.~~quarter of 2004.

We believe our facilities are adequate for our current and near-term ~~ITEM~~needs, 11and that we will be able to locate additional facilities as needed. See ~~EXECUTIVE~~Note ~~COMPENSATION~~ 8 of the notes to the consolidated financial statements for more information about our lease commitments.

~~The~~ITEM information required by this Item 11 is incorporated by reference to the information contained in the Proxy Statement under the captions "Executive Compensation" and "Compensation Committee Interlocks and Insider Participation3." LEGAL PROCEEDINGS

InVision and our subsidiary, Quantum Magnetics, together with many other entities, were named as defendants in a number of lawsuits in approximately 110 ~~ITEM~~products 12liability lawsuits by individual plaintiffs seeking damages for wrongful death relating to the terrorist acts of September 11, 2001. ~~SECURITY~~The litigation ~~OWNERSHIP~~in OFconnection ~~CERTAIN~~with ~~BENEFICIAL~~the ~~OWNERS~~terrorist ~~AND~~acts ~~MANAGEMENT~~ of September 11, 2001 have been consolidated in In re: September 11 Litigation, 21 MC 97 (AKH); Lopez, et al v. United Airlines, et al., 1:02-cv-458, United States District Court for the Southern District of New York. InVision and Quantum Magnetics have been served with 39 complaints that remain active. Each of the active complaints with which we have been served alleges that the defendants breached a duty to airplane passengers and others by failing to properly screen passengers and carry-on baggage for dangerous weapons. We believe that the plaintiffs’ claims lack merit, especially in light of the fact that we did not, as of September 11, 2001, have any passenger or carry-on baggage screening equipment at security checkpoints in any of the airports from which the hijacked airplanes departed. We have recently been advised by the Plaintiffs' Executive Committee that InVision and Quantum Magnetics will be dismissed as defendants from all active complaints on or before March 31, 2004, plaintiffs' deadline to file and serve amended Master Complaints. If InVision and Quantum Magnetics are not dismissed, we must answer or otherwise respond to any amended Master Complaints in which we are listed as defendants by April 30, 2004 and must answer or otherwise respond to plaintiffs' individual complaints by May 15, 2004. We intend to vigorously defend any of these lawsuits in which InVision or Quantum Magnetics continue to be named as defendants.

~~The information required by this Item 12 is incorporated by reference to the information contained in the Proxy Statement under the caption "Security Ownership~~24 ~~of Certain Beneficial Owners and Management."~~

~~The~~ We ~~information~~also ~~required~~are byinvolved ~~this~~in ~~Item~~legal 13proceedings, isclaims ~~incorporated~~and bylitigation ~~reference~~arising in to the ~~information~~ordinary ~~contained~~course inof business. While the ~~Proxy~~outcome ~~Statement~~of ~~under~~these matters is currently not determinable, management does not believe that the ~~caption~~ultimate ~~"Certain~~cost ~~Transactions."~~to resolve these matters will have a material adverse effect on our consolidated financial condition, results of operations or cash flows.

35ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

Not applicable. ~~PART IV.~~

PART ~~ITEM 14~~II. ~~EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K~~

~~The~~Market ~~consolidated financial statements required by this item are submitted in a separate section beginning on page F-1 immediately following the~~Information ~~signature page of this report and are incorporated by reference here.~~

Deloitte & Touche LLP, Independent Auditors' Report		F-1
Report of PricewaterhouseCoopers LLP, Independent Accountants		F-2
Consolidated Balance Sheets as of December 31, 2000 and 1999		F-3
Consolidated Statements of Operations for the Years Ended December 31, 2000, 1999 and 1998		F-4
Consolidated Statements of Cash Flows for the Years Ended December 31, 2000, 1999 and 1998		F-5
Consolidated Statements of Stockholders' Equity for the Years Ended December 31, 2000, 1999 and 1998		F-6
Notes to Consolidated Financial Statements		F-7

Our common stock has been traded on the Nasdaq National Market under the symbol “INVN” since May 15, 1997. Prior to that date, our common stock had been traded on the Nasdaq SmallCap Market under the symbol “INVN” since April 23, 1996. The following table sets forth for the periods indicated the high and low sale prices for our common stock, as reported by the Nasdaq National Market. On March 1, 2004, the last reported sale price of our common stock on the Nasdaq National Market was $36.19.

(a)(2) Financial Statement Schedule


	High		Low
Year ended December 31, 2003
First Quarter	$	29.70	$	19.82
Second Quarter	$	25.10	$	20.65
Third Quarter	$	27.97	$	22.02
Fourth Quarter	$	34.72	$	24.08
Year ended December 31, 2002
First Quarter	$	49.76	$	24.70
Second Quarter	$	43.40	$	17.42
Third Quarter	$	37.25	$	21.60
Fourth Quarter	$	37.50	$	22.78

~~II—Valuation~~Stockholders ~~and Qualifying Accounts~~

~~Schedules not~~ As ~~listed~~of ~~above~~March 1, ~~have~~2004, ~~been~~we ~~omitted~~had ~~because~~approximately ~~they~~160 ~~are~~record ~~not~~holders ~~applicable~~of orour ~~the required information is shown in the Consolidated Financial Statements or in the notes thereto~~common stock.

~~(a)(3) Exhibits~~ Dividends

Exhibit Number		Description
2.1		Agreement and Plan of Merger and Reorganization dated as of February 23, 2000, among InVision Technologies, Inc., a Delaware corporation, InVision Acquisition Corporation, a Delaware corporation, and Inovec, Inc., an Oregon Corporation (7)
2.2		Form of Escrow Agreement between InVision, Merger Sub, the Shareholders and Greater Bay Trust Company, dated February 23, 2000 (7)
3.1		Amended and Restated Certificate of Incorporation of the Registrant. (1)
3.2		Bylaws of Registrant, as amended. (2)
4.1		Reference is made to Exhibits 3.1 and 3.2.
10.1		Technology License Agreement, dated September 11, 1990, by and between the Registrant and Imatron, Inc. (1)
10.2		Registrant's Equity Incentive Plan, as amended (3)(5)
10.3		Registrant's 1996 Employee Stock Purchase Plan, as amended (3) (5)
10.4		Registrant's 2000 Equity Incentive Plan (3)(5)
10.12		Lease, dated as of February 11, 1997, between the Registrant and WHLNF Real Estate L.P. (4)
10.13		Purchase Agreement, dated as of December 24, 1996, between the Registrant and the U.S. Federal Aviation Administration. (4)
10.22		Key Employee Agreement, dated April 22, 1994, between the registrant and Sergio Magistri, and amendment thereto, dated October 16, 1995. (4) (5)
10.23		Key Employee Agreement, dated March 1, 1996, between the Registrant and David M. Pillor. (4) (5)

We have not declared or paid any cash dividends on our capital stock previously, and we have agreed not to pay cash dividends under our current bank line of credit. Historically, we have retained earnings, if any, to support the development of our business. Payment of future dividends, if any, will be at the discretion of our board of directors after taking into account various factors, including our financial condition, operating results and current and anticipated cash needs.

36ITEM 6. SELECTED FINANCIAL DATA

10.34		Amendment No. 1 to Technology License Agreement between the Registrant and Imatron Inc. dated September 11, 1990 (6)
10.35		Key Employee Agreement dated May 27, 1999, between the Registrant and Alfred V. Larrenaga. (5)(6)
10.36		Form of Indemnity Agreement between the Registrant and each of Sergio Magistri, Tim Black, Alfred V. Larrenaga, David Pillor, Giovanni Lanzara, Bruno Trezza, Douglas Boyd and Morris Busby dated November 1, 1999 (5)(6)
10.38		Registrant's 2000 Non-Officer Equity Incentive Plan, adopted February 14, 2000 (8)
10.39		Loan and Security Agreement, dated November 8, 2000, between the Registrant and Silicon Valley Bank (9)
10.40		Loan and Security Agreement (Exim Program), dated November 8, 2000, between the Registrant and Silicon Valley Bank (9)
10.41		Key Employment Agreement dated November 28, 2000, between the Registrant and Donald E. Mattson. (5)
16.1		Letter from PricewaterhouseCoopers LLP, the Registrant's Prior Independent Accountants
23.1		Consent of Deloitte & Touche LLP, Independent Auditors
23.2		Consent of PricewaterhouseCoopers LLP, Independent Accountants

The following selected consolidated financial data is qualified by reference to, and should be read in conjunction with, Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, and the consolidated financial statements and notes thereto and the other information contained in this annual report.

~~Notes to Exhibits~~ 25

The selected consolidated balance sheet data as of December 31, 2003 and 2002 and the selected consolidated statement of operations data for each year ~~SIGNATURES~~ in the three years ended December 31, 2003, have been derived from our audited consolidated financial statements appearing elsewhere in this annual report. The selected consolidated balance sheet data as of December 31, 2001, 2000 and 1999 and the consolidated statement of operations data for the years ended December 2000 and 1999 have been derived from our audited consolidated financial statements not included in this annual report. Historical results are not necessarily indicative of future results. Product cost of revenues is net of reimbursable ramp up costs from the TSA of $11.0 million in 2002. Cost of revenues and operating expenses are net of amounts reimbursed under contracts and grants with governmental agencies of $3.1 million in 2003, $866,000 in 2002, $8.3 million in 2001, $1.7 million in 2000, and $865,000 in 1999. We acquired Yxlon at the beginning of the second quarter of 2003. Yxlon’s results are only accounted for in the consolidated results starting in the second quarter of 2003. Yxlon acquired Hapeg during the third quarter of 2003. Hapeg results are consolidated with Yxlon’s results from the date of acquisition. We acquired Inovec, which was accounted for as a purchase effective January 1, 2000 and, accordingly, Inovec’s results of operations are only included in the consolidated statement of operations data for the years ended December 31, 2003, 2002, 2001 and 2000.

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Annual Report on Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized, on the 28th day of March 2001.


	Year Ended December 31,
	2003			2002			2001			2000			1999
	(In thousands, except per share data)
Consolidated Statement of Operations Data
Revenues:
Product revenues	$	351,573		$	411,426		$	46,536		$	58,713		$	43,160
Service revenues		51,793			15,622			11,239			9,801			4,582
Contract research and development revenues		13,131			12,083			16,556			10,632			10,694

Total revenues		416,497			439,131			74,331			79,146			58,436

Cost of revenues:
Product costs		204,419			234,767			28,782			39,333			24,886
Service costs		31,166			10,761			7,162			6,512			3,678
Contract research and development costs		8,396			8,708			13,010			7,849			7,739

Total cost of revenues		243,981			254,236			48,954			53,694			36,303

Gross profit		172,516			184,895			25,377			25,452			22,133

Operating expenses:
Research and development		26,323			20,622			7,979			11,039			10,443
Selling, general and administrative		45,232			31,744			14,727			16,551			11,767
In process research and development (Yxlon)		4,300			—			—			—			—

Total operating expenses		75,855			52,366			22,706			27,590			22,210

Income (loss) from operations		96,661			132,529			2,671			(2,138	)		(77	)
Interest expense		(1,693	)		(399	)		(289	)		(195	)		(227	)
Interest and other income, net		3,903			38			570			527			754

Income (loss) before income taxes		98,871			132,168			2,952			(1,806	)		450
Provision (benefit) for income taxes		41,925			53,874			(4,571	)		—			67

Net income (loss)	$	56,946		$	78,294		$	7,523			($1,806	)	$	383

Net income (loss) per share:
Basic	$	3.32		$	4.90		$	0.58			($0.14	)	$	0.03

Diluted	$	3.10		$	4.40		$	0.52			($0.14	)	$	0.03

Weighted average shares outstanding:
Basic		17,132			15,987			12,998			12,510			12,133
Diluted		18,368			17,803			14,343			12,510			12,751

~~INVISION TECHNOLOGIES, INC. By: /s/ SERGIO MAGISTRI Sergio Magistri President and Chief Executive Officer~~26

Signature	Title		Date
	December 31,
/s/ SERGIO MAGISTRI Sergio Magistri	President, Chief Executive Officer and Director (Principal Executive Officer)		March 28, 2001
	2003			2002		2001		2000		1999
/s/ ALFRED V. LARRENAGA Alfred V. Larrenaga	Senior Vice President and Chief Financial Officer (Principal Financial and Accounting Officer)		March 28, 2001
	(In thousands)
/s/ GIOVANNI LANZARA Giovanni Lanzara	Chairman of the Board of Directors		March 28, 2001
Consolidated Balance Sheet Data
/s/ DOUGLAS P. BOYD Douglas P. Boyd	Director		March 28, 2001
Cash, cash equivalents and short-term investments	$	276,939		$	159,736	$	13,378	$	11,908	$	24,169
/s/ BRUNO TREZZA Bruno Trezza	Director		March 28, 2001
Working capital	$	364,793		$	227,074	$	49,634	$	37,672	$	40,913
/s/ MORRIS BUSBY Morris Busby	Director		March 28, 2001
Total assets	$	486,068		$	417,787	$	89,733	$	69,332	$	62,987
/s/ DAVID M. PILLOR David M. Pillor	Senior Vice President, Sales and Marketing, and Director		March 28, 2001
Long-term liabilities	$	127,244		$	653	$	680	$	1,861	$	1,181
Total stockholders’ equity	$	290,681		$	236,713	$	61,420	$	47,504	$	47,485

38ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

~~INDEPENDENT~~ For ~~AUDITORS'~~a ~~REPORT~~ more complete understanding of our financial condition and results of operations, and some of the risks that could affect future results, see “Business—Risk Factors” in Item 1. This section should also be read in conjunction with the consolidated financial statements and related notes in Item 8.

ToOverview ~~the Board of Directors and Stockholders of~~ ~~InVision Technologies, Inc.~~ ~~Newark, California~~

We ~~have~~ ~~audited~~are the ~~accompanying~~leading ~~consolidated~~provider ~~balance sheet~~ of ~~InVision~~Transportation ~~Technologies~~Security Administration, ~~Inc.~~ ~~and~~or TSA ~~subsidiaries~~ (~~the~~formerly ~~"Company")~~Federal asAviation ~~of December 31~~Administration, ~~2000,~~or ~~and~~FAA) ~~the~~certified ~~related~~explosives ~~consolidated~~detection ~~statements of operations~~systems, ~~stockholders'~~or ~~equity~~EDS, ~~and~~used ~~cash~~at ~~flows~~airports for ~~the~~screening ~~year~~checked ~~then ended. Our audit also included the financial statement schedule for the year ended December 31,~~passenger ~~2000 listed in the Index at Item 14(a)(2)~~baggage. ~~These financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an~~ ~~opinion on these financial statements and financial statement schedule based on our audit.~~

We In September 2003, we completed a private offering of $125.0 million ~~conducted~~aggregate principal amount of our ~~audit~~3% inconvertible ~~accordance~~senior ~~with~~notes ~~auditing~~due ~~standards~~2023. ~~generally~~The notes ~~accepted~~are inconvertible ~~the~~into ~~United~~our ~~States~~common stock, under certain circumstances, at an initial conversion rate of ~~America~~31.25 ~~Those~~shares ~~standards~~per ~~require~~$1,000 ~~that~~principal weamount ~~plan~~of ~~and~~notes, subject ~~perform~~to adjustment. At the ~~audit~~initial toconversion ~~obtain reasonable~~rate, ~~assurance~~the ~~about~~notes ~~whether~~will ~~the~~be convertible ~~financial~~into ~~statements~~common ~~are~~stock ~~free~~at a conversion price of ~~material~~$32.00 ~~misstatement~~per share. AnThe notes ~~audit~~will ~~includes~~be ~~examining,~~redeemable onfor acash ~~test~~at ~~basis~~our option beginning on October 1, ~~evidence~~2008. Holders ~~supporting~~of the ~~amounts~~notes ~~and~~have ~~disclosures~~the inoption to require us to purchase the notes in ~~financial~~cash, ~~statements~~in whole or in part, on October 1 in each of 2008, 2013 and 2018. AnThe holders ~~audit~~of the notes will also ~~includes~~have ~~assessing~~the ability to require us to purchase the notes ~~accounting~~in ~~principles~~the ~~used~~event ~~and~~that ~~significant~~we ~~estimates~~undergo ~~made~~a bychange ~~management~~in control. In each such case, asthe redemption ~~well~~or aspurchase ~~evaluating~~price would be at 100% of the ~~overall~~principal ~~financial~~amount ~~statement~~of ~~presentation.~~the Wenotes, ~~believe~~plus ~~that~~accrued ~~our~~and ~~audit~~unpaid ~~provides~~interest ato, ~~reasonable~~but ~~basis~~excluding, ~~for~~the ~~our~~redemption ~~opinion.~~or purchase date, as the case may be.

~~In our~~ On ~~opinion~~March 31, ~~such~~2003, ~~consolidated~~we ~~financial~~completed ~~statements~~the ~~present~~acquisition ~~fairly,~~of inYxlon ~~all~~International Holding ~~material~~GmbH ~~respects~~for $41.7 million in cash, calculated at the ~~financial~~then ~~position~~effective conversion ofrate ~~InVision~~for ~~Technologies~~the euro, ~~Inc~~ incurred additional acquisition costs of $2.1 million, and ~~subsidiaries~~paid ata subsequent purchase price adjustment of $483,000 in December 312003, ~~2000,~~for ~~and~~a ~~the~~total ~~results~~purchase price of ~~their~~$44.3 million. ~~operations~~Yxlon develops, manufactures, markets and ~~their~~supports ~~cash~~X-ray ~~flows~~based non-destructive testing, or NDT, systems for ~~the~~a ~~year~~wide ~~then~~range ~~ended~~of inindustrial ~~conformity~~applications, ~~with~~and ~~accounting~~systems ~~principles~~that ~~generally~~use ~~accepted~~X-ray based indiffraction, ~~the~~or ~~United~~XRD, ~~States~~technology offor ~~America~~explosives detection. We would make ~~Also,~~an inadditional ~~our~~payment ~~opinion,~~of ~~such~~¬5.0 million ~~financial~~if ~~statement~~Yxlon’s ~~schedule~~XRD system is certified for explosives detection by the ~~year~~TSA ~~ended~~by ~~December~~June 3130, ~~2000,~~2004. ~~when~~On ~~considered~~August 1, in2003, ~~relation~~we completed to the ~~basic~~acquisition ~~consolidated~~of ~~financial~~Hattinger ~~statements~~Pruf- ~~taken~~und asEntwicklungs- aGmbH, ~~whole~~or Hapeg, ~~presents~~an ~~fairly~~engineering and systems company that provides industrial testing and evaluation solutions utilizing computed tomography for ¬2.9 million or $3.4 million in ~~all~~cash, ~~material~~calculated ~~respects~~at the ~~information~~then ~~set~~effective ~~forth~~conversion ~~therein.~~rate for the euro.

~~/s/~~ Our goodwill and intangible assets increased by $33.9 ~~DELOITTE~~million &from ~~TOUCHE~~$1.6 million ~~LLP~~ at December 31, 2002 to $35.5 million at December 31, 2003, primarily as a result of $31.7 million of goodwill and intangible assets acquired pursuant to our acquisition of Yxlon, partially offset by the amortization of our intangible assets. Based on an independent valuation, the intangible assets we acquired included $8.7 million of developed and core technology, $2.8 million of trademarks, $18.7 million of goodwill and $1.5 million of other intangible assets.

~~DELOITTE &~~ We determine our segments based on how our Chief Executive Officer and ~~TOUCHE~~Chief ~~LLP~~Operating Officer assess performance and allocate resources. Through the ~~San~~first ~~Jose~~quarter of 2003, ~~California~~we presented segment information based on three ~~February 9~~reportable segments: EDS, ~~2001~~Quantum and Wood. As a result of the acquisition of Yxlon, we now have two reportable segments, EDS and NDT. The “EDS” segment is comprised of the business unit that is engaged in the development, manufacturing, marketing and support of explosives detection systems based on advanced computed

~~F-1~~27

Totomography technology. The “NDT” segment is comprised of the Yxlon business unit that is engaged in the ~~Board~~development, ofmanufacturing, ~~Directors~~marketing and support ~~Stockholders~~of non-destructive testing systems for a wide range of industrial ~~InVision~~applications. ~~Technologies~~Other segments including Quantum, ~~Inc~~ Wood and XRD were aggregated to form an “All Other” category as they did not meet the threshold for a reportable segment. See Note 11 of the consolidated financial statements for additional information about our reportable segments.

~~In our~~ As ~~opinion, the consolidated financial statements listed in Item 14(~~a) ~~present~~result ~~fairly,~~of inthe ~~all~~completion ~~material~~of ~~respects,~~ the ~~financial~~initial ~~position~~deployment offollowing ~~InVision~~the ~~Technologies,~~September ~~Inc.~~11, ~~and~~2001 ~~its~~terrorist ~~subsidiaries~~attacks ~~at December 31, 1999,~~ and the ~~results~~time ofit ~~their~~takes ~~operations~~to ~~and~~construct modifications ~~their~~to ~~cash~~retrofit ~~flows~~airports ~~for~~to ~~each~~accommodate ~~of the two years~~ in-line ~~the~~EDS ~~period ended December 31~~equipment, ~~1999~~ ~~in conformity with accounting principles generally accepted in~~ the market ~~United~~for ~~States~~many of ~~America. In addition, in~~ our ~~opinion,~~products ~~the~~is ~~financial statement schedule listed~~ in ~~Item 14(~~a) ~~presents fairly,~~period inof ~~all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements~~transition. ~~These~~The ~~financial~~demand ~~statements~~for ~~and financial statement~~a ~~schedule~~significant ~~are~~portion ~~the responsibility~~ of ~~the Company's management;~~ our ~~responsibility~~products is toalso ~~express~~subject anto ~~opinion on these financial statements and financial statement schedule based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in~~ the ~~United~~budgetary ~~States~~process of ~~America, which require that we plan and perform the audit to obtain reasonable~~ ~~assurance about whether~~ the ~~financial~~federal ~~statements are free of material misstatement~~government. AnWe ~~audit~~anticipate ~~includes examining, on~~ a ~~test~~decline ~~basis,~~in ~~evidence~~EDS ~~supporting~~revenues ~~the~~for ~~amounts~~2004. ~~and~~As ~~disclosures in the financial~~a ~~statements~~result, ~~assessing~~we ~~the~~are ~~accounting~~planning ~~principles~~to ~~used~~reduce ~~and significant estimates made by management, and evaluating the overall financial statement presentation~~costs. ~~We believe that our audits provide a~~ ~~reasonable basis for our opinion.~~

~~/s/ PRICEWATERHOUSECOOPERS~~ Our ~~LLP~~ ability to reduce costs will be critical to maintaining our gross margins and desired level of earnings. Due to a number of factors including the timing, size and mix of orders from our relatively small number of customers, particularly the TSA, our revenues have varied significantly from time to time. We expect that trend to continue. In addition, substantial components of our quarterly and annual operating expenses are, and will continue to be, relatively fixed in nature. This means that revenue fluctuations will cause our quarterly and annual operating results to vary substantially. Our ability to increase our operating efficiency, further reduce the costs of components and otherwise control costs during a period of further declining sales in a business already characterized by significant fluctuations in volume is difficult to predict.

~~PricewaterhouseCoopers LLP San~~ Our ~~Jose,~~revenues ~~California February 9,~~are ~~2000~~primarily comprised of:

F• EDS product revenues, which include revenues from sales of CTX products, accessories and related installation and configuration, and EDS service revenues, which include revenues from maintenance contracts related to product support, integration and other services, including those complex integrations and configurations that are separate from product revenues; and • NDT product revenues, which include revenues from the design, assembly and installation of X-2ray systems and associated components for industrial NDT, and NDT service revenues, which include revenues from maintenance contracts related to product support.

~~InVision~~ We ~~Technologies~~market our products and services directly through internal sales personnel and indirectly through authorized agents, ~~Inc~~distributors and system integrators. In the United States, we market our products and services primarily through direct sales personnel. Internationally, we use a direct sales force and authorized representatives to sell our products. International sales represented 29.0% of total revenues for the year ended December 31, 2003, 11.7 % of total revenues for the year ended December 31, 2002, and 32.5 % of total revenues for the year ended December 31, 2001.

EDS. ~~Consolidated~~In ~~Balance~~any ~~Sheets~~ given fiscal quarter or year, our EDS product revenues are derived from orders of multiple units of our products from a limited number of customers. For example, in 2003 eighteen customers accounted for all of our EDS products sold. The number of our customers does not vary widely from period to period. Therefore, a cancellation or delay of an order from a customer could have a significant negative impact on our operations in a given period. EDS product and service sales to the FAA and, following the formation of the TSA, to the TSA, accounted for 77.9% of our EDS revenues for the year ended December 31, 2003, 85.6% of our EDS revenues in the year ended December 31, 2002, and 43.4% of our EDS revenues in the year ended December 31, 2001. There were no other EDS customers who accounted for more than 10% of total revenues in the years ended December 31, 2003, 2002 and 2001.

We ~~(In~~typically ~~thousands~~bill our customers in three stages, ~~except~~as ~~share~~generally ~~data)~~ provided in our contracts with our customers:

				December 31,
•		amounts to cover the bill of materials when materials are received from suppliers, typically 30% to 40% of the total system price;
				2000			1999
•		an additional amount upon factory acceptance or shipment ranging from 30% to 60%; and
Assets
Current assets:
	Cash and cash equivalents			$	11,908		$	18,282
	Short-term investments				—			5,887
	Accounts receivable, net				22,547			10,633
	Inventories				20,207			17,460
	Other current assets				2,977			2,972
		Total current assets			57,639			55,234
Property and equipment, net					6,741			6,796
Intangible assets, net					4,412			301
Other assets					540			656
		Total assets		$	69,332		$	62,987
Liabilities and stockholders' equity
Current liabilities:
	Accounts payable			$	5,353		$	5,128
	Accrued liabilities				11,213			5,566
	Deferred revenue				2,107			3,194
	Short-term debt				890			—
	Current maturities of long-term obligations				404			433
		Total current liabilities			19,967			14,321
Long-term obligations					1,861			1,181
Commitments and contingencies (Note 8)
Stockholders' equity:
	Preferred stock, no par value, 5,000,000 shares authorized; no shares issued and outstanding				—			—
	Common stock, $0.001 par value, 20,000,000 shares authorized; 12,613,000 and 12,190,000 shares issued and outstanding				13			12
	Additional paid-in capital				59,671			57,910
	Deferred stock compensation expense				—			(63	)
	Accumulated deficit				(10,981	)		(9,175	)
	Treasury stock, at cost (201,000 shares)				(1,199	)		(1,199	)
		Total stockholders' equity			47,504			47,485
			Total liabilities and stockholders' equity	$	69,332		$	62,987

~~The~~28 ~~accompanying notes are an integral part of these consolidated financial statements.~~

~~InVision~~• ~~Technologies~~the balance upon installation and site acceptance, ~~Inc~~ranging from 5% to 30%.

These ~~Consolidated~~payment ~~Statements~~terms generally provide the necessary working capital for acquisition of ~~Operations~~ materials and funding inventory during the manufacturing cycle. We anticipate that potential future orders from the TSA will continue to provide payment terms which provide the necessary working capital for us and our suppliers, even if production volumes were to rapidly increase. If future orders from the TSA contain different payment terms, a major increase in production rates may require substantial additional working capital.

Payment ~~(In~~terms ~~thousands~~for TSA invoices are net 30 days, ~~except~~while ~~per~~terms ~~share~~for international ~~data)~~ invoices vary from amounts due upon receipt of invoice to 160 days.

			Year Ended December 31,
			2000			1999			1998
Revenues:
	Product revenues		$	58,713		$	43,160		$	60,854
	Service revenues			9,801			4,582			2,430
	Government contract revenues			10,632			10,694			7,210
		Total revenues		79,146			58,436			70,494
Cost of revenues:
	Product costs			39,333			24,886			32,701
	Service costs			6,512			3,678			2,245
	Government contract costs			7,849			7,739			5,223
		Total cost of revenues		53,694			36,303			40,169
	Gross profit			25,452			22,133			30,325
Operating expenses:
	Research and development			11,039			10,443			8,498
	Selling, general and administrative			16,551			11,767			12,997
		Total operating expenses		27,590			22,210			21,495
Income (loss) from operations				(2,138	)		(77	)		8,830
Interest expense				(195	)		(227	)		(390	)
Interest and other income, net				527			754			697
Income (loss) before provision for income taxes				(1,806	)		450			9,137
Provision for income taxes				—			67			1,096
Net income (loss)			$	(1,806	)	$	383		$	8,041
Net income (loss) per share:
	Basic		$	(0.14	)	$	0.03		$	0.67
	Diluted		$	(0.14	)	$	0.03		$	0.63
Weighted average shares outstanding:
	Basic			12,510			12,133			12,046
	Diluted			12,510			12,751			12,827

NDT. Our NDT product and service revenues are primarily derived from sales of X-ray based NDT products primarily to the automotive and aerospace industries. There were no NDT customers who accounted for more than 10% of total revenues since the acquisition of Yxlon on March 31, 2003.

~~The accompanying~~Results ~~notes are an integral part~~ of ~~these consolidated financial statements.~~ Operations

~~F-4~~ The following table sets forth certain income and expenditure items from our consolidated statements of operations expressed as a percentage of total revenues for the periods indicated.

InVision Technologies, Inc.


	Year Ended December 31,
	2003			2002			2001
Revenues:
Product revenues		84.4	%		93.7	%		62.6	%
Service revenues		12.4			3.6			15.1
Contract research and development revenues		3.2			2.7			22.3

Total revenues		100.0			100.0			100.0

Cost of revenues:
Product costs		49.1			53.5			38.8
Service costs		7.5			2.5			9.6
Contract research and development costs		2.0			2.0			17.5

Total cost of revenues		58.6			58.0			65.9

Gross margin		41.4			42.0			34.1

Operating expenses:
Research and development		6.3			4.7			10.7
Selling, general and administrative		10.9			7.2			19.8
In process research and development (Yxlon)		1.0			—			—

Total operating expenses		18.2			11.9			30.5

Income from operations		23.2			30.1			3.6
Interest expense		(0.4	)		(0.1	)		(0.4	)
Interest and other income, net		1.0			—			0.8

Income before income taxes		23.8			30.0			4.0
Provision for (benefit from) income taxes		10.1			12.2			(6.1	)

Net income		13.7	%		17.8	%		10.1	%

On ~~Consolidated~~March 31, ~~Statements~~2003, the first day of ~~Cash~~our ~~Flows~~ second quarter, we acquired Yxlon. Yxlon’s results have been included in our results since the acquisition date, and the operating results for the NDT segment also have been included only for the last three quarters of 2003.

Comparison ~~(In~~of ~~thousands)~~ Fiscal Years 2003 and 2002

			Year Ended December 31,
			2000			1999			1998
Cash flow from operating activities:
	Net income (loss)		$	(1,806	)	$	383		$	8,041
	Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
		Depreciation and amortization		2,901			2,878			1,989
		Amortization of capitalized software development costs		171			50			—
		Amortization of intangible assets		682			24			30
		Loss on disposal of fixed assets		107			12			50
		Bad debt expense		29			131			15
		Stock compensation expense		63			68			68
	Changes in assets and liabilities:
		Accounts receivable		(10,463	)		16,169			(10,101	)
		Inventories		(2,193	)		(5,635	)		(1,044	)
		Other current assets		595			(185	)		(700	)
		Other noncurrent assets		(18	)		418			490
		Accounts payable		(378	)		1,726			(1,695	)
		Accrued liabilities		4,010			(765	)		2,299
		Deferred revenues		(3,005	)		1,621			(1,696	)
		Other long-term obligations		90			131			211
	Net cash provided by (used in) operating activities			(9,215	)		17,026			(2,043	)
Cash flow from investing activities:
		Purchases of property and equipment		(2,652	)		(1,651	)		(2,894	)
		Proceeds from (purchases of) short-term investments, net		5,887			(3,892	)		3,084
		Purchase of subsidiary, net of cash acquired		(1,518	)		—			—
		Capitalized software development costs		—			—			(803	)
	Net cash provided by (used in) investing activities			1,717			(5,543	)		(613	)
Cash flow from financing activities:
		Net proceeds from (repayments of) short-term debt		890			(2,967	)		(1,201	)
		Proceeds from long-term debt		—			—			652
		Repayments of long-term debt		(435	)		(900	)		(349	)
		Proceeds from issuance of common stock		669			538			770
		Repurchase of common stock		—			(334	)		(865	)
	Net cash provided by (used in) financing activities			1,124			(3,663	)		(993	)
Net change in cash and cash equivalents for the year				(6,374	)		7,820			(3,649	)
Cash and cash equivalents at beginning of year				18,282			10,462			14,111
Cash and cash equivalents at end of year			$	11,908		$	18,282		$	10,462
Supplemental disclosures of cash flow information:
	Interest paid		$	242		$	256		$	343
	Taxes paid		$	187		$	283		$	842
Supplemental disclosures of noncash financing activities:
	Capital lease obligations incurred for the purchase of new equipment		$	57		$	—		$	—
	Liabilities assumed in acquisition of subsidiary		$	2,881		$	—		$	—
	Issuance of common stock in connection with acquisition of subsidiary		$	1,093		$	—		$	—
	Stock payable in connection with acquisition of subsidiary		$	1,684		$	—		$	—

Revenues. EDS product revenues were $303.0 million in 2003, a decrease of 24.8% from $403.1 million in 2002. The revenue decrease was mainly due to the fulfillment by the end of the second quarter of 2003 of several

~~The accompanying notes are an integral part of these consolidated financial statements.~~ 29

~~InVision~~large ~~Technologies,~~orders ~~Inc~~received from the TSA during 2002. We anticipate that EDS ~~Consolidated~~product ~~Statements~~revenues will continue to decline in 2004. The decline in revenues is primarily being driven greater demand for our in-line EDS compared to our stand-alone EDS as a result of ~~Stockholders'~~the ~~Equity~~completion of the initial deployment ~~(In~~following ~~thousands)~~ the September 11, 2001 terrorist attacks and the time it takes to construct modifications to retrofit airports to accommodate in-line EDS equipment.

	Common Stock											Treasury Stock
				Additional Paid-In Capital		Deferred Stock Compensation Expense			Accumulated Deficit								Total Stockholders' Equity
	Shares	Amount										Shares		Amount
Balance at December 31, 1997	11,932	$	12	$	56,602	$	(199	)	$	(17,599	)	—		$	—		$	38,816
Issuance of common stock	18		—		—		—			—		—			—			—
Amortization of deferred stock compensation	—		—		—		68			—		—			—			68
Exercise of common stock options	145		—		192		—			—		—			—			192
Shares issued under the employee stock purchase plan	87		—		578		—			—		—			—			578
Repurchase of common stock	—		—		—		—			—		(115	)		(865	)		(865	)
Net income	—		—		—		—			8,041		—			—			8,041
Balance at December 31, 1998	12,182		12		57,372		(131	)		(9,558	)	(115	)		(865	)		46,830
Amortization of deferred stock compensation	—		—		—		68			—		—			—			68
Exercise of common stock options	105		—		98		—			—		—			—			98
Shares issued under the employee stock purchase plan	104		—		440		—			—		—			—			440
Repurchase of common stock	—		—		—		—			—		(86	)		(334	)		(334	)
Net income	—		—		—		—			383		—			—			383
Balance at December 31, 1999	12,391		12		57,910		(63	)		(9,175	)	(201	)		(1,199	)		47,485
Amortization of deferred stock compensation	—		—		—		63			—		—			—			63
Exercise of common stock options	63		—		336		—			—		—			—			336
Shares issued under the employee stock purchase plan	111		—		333		—			—		—			—			333
Issuance of common stock related to an acquisition	249		1		1,092		—			—		—			—			1,093
Net loss	—		—		—		—			(1,806	)	—			—			(1,806	)
Balance at December 31, 2000	12,814	$	13	$	59,671	$	—		$	(10,981	)	(201	)	$	(1,199	)	$	47,504

EDS service revenues were $41.2 million in 2003, an increase of 199.5% from $13.7 million in 2002. The revenue increase results primarily from a larger number of units installed in the United States, and from services provided for our EDS products owned by the TSA in the United States and its territories, including extended-hour service. We anticipate that service revenues will increase in 2004 compared to 2003 primarily due to a larger installed based of EDS coming off of warranty. As of December 31, 2003, we had in backlog EDS equipment orders and service agreements of $65.6 million, primarily consisting of orders for EDS systems and services from international customers. We are in negotiations to renew our contract to service our EDS products owned by the TSA in the United States and its territories, and we do not anticipate disruption of service as a result of these discussions.

~~The~~ NDT product revenues were $34.6 million in the nine-month period since the ~~accompanying~~acquisition ~~notes~~of ~~are~~Yxlon, anand ~~integral~~NDT ~~part~~service revenues were $8.7 million for the same period. As of ~~these~~December 31, ~~consolidated~~2003, ~~financial~~we ~~statements~~had in backlog NDT equipment orders and service agreements of $21.6 million, primarily consisting of orders for standard industrial and custom NDT systems.

~~F-6~~ Gross Profit. Cost of EDS product revenues primarily consists of purchased materials procured for use in the assembly of our products, as well as manufacturing labor and overhead, contract manufacturing services, installation, training and warranty. Cost of EDS service revenues primarily consists of direct labor and materials and customer support overhead. In any given period, our gross profit for products and services may be affected by several factors, including product mix, volume of systems manufactured in the period, product configuration, location of the installation and complexity of integration into various environments.

~~INVISION~~ Gross ~~TECHNOLOGIES~~profit for EDS products was $135.1 million in 2003, ~~INC~~a decrease of 22. 4% from $174.3 million in 2002. Gross margin percentages for EDS products were 44.6% in 2003 and 43.2% in 2002. The decrease in gross profit was due to decreased sales of our CTX products. Product gross margin percentages for the year remained approximately the same primarily as a result of improved manufacturing overhead per unit, offset by decreases in sales price as a result of volume orders from the TSA.

Gross ~~NOTES~~profit TOfor ~~CONSOLIDATED~~EDS ~~FINANCIAL~~services ~~STATEMENTS~~ were $16.9 million in 2003, an increase of 334.6% from $3.9 million in 2002. Gross margin percentages for EDS services were 41.0% in 2003 and 28.2% in 2002. The increase in gross profit for EDS services was primarily due to increased EDS service revenues from the growing installed base of domestic systems covered by our agreement to service our EDS products owned by the TSA in the United States and its territories, which calls for extended 24-hour coverage beyond the standard warranty coverage, and service agreements from international customers. Gross margin percentages improved primarily as the result of service overhead costs being spread over a larger base of installed units. In addition, during 2002, we incurred costs associated with the expansion of our customer support staff in anticipation of an increase in EDS services as more units were sold.

~~NOTE~~ Cost 1of NDT product revenues primarily consists of purchased materials procured for use in the assembly of our products, as well as manufacturing labor and overhead, installation, training and warranty. ~~THE~~Cost ~~COMPANY~~ of NDT services revenues primarily consists of direct labor and materials and customer support overhead. Gross profit for NDT products was $7.9 million in the nine-month period since the acquisition of Yxlon. Gross margin percentage for NDT products was 22.8% for the same period. We are in the process of developing parts cost reduction programs for NDT. We believe these programs will improve gross margins for NDT products commencing in the third quarter of 2004, although such anticipated improvements may be reduced due to exchange rate fluctuations.

~~InVision~~ Gross ~~Technologies, Inc.~~profit ~~(the "Company") brings to market advanced detection and inspection products by adapting various medical and laboratory technologies~~ for ~~government~~NDT ~~and~~service ~~commercial~~was ~~uses, such as security, defense and process control~~$3.2 million ~~The~~in ~~Company~~the ~~develops,~~nine-month ~~manufactures, markets and supports systems based on advanced computed tomography~~period ~~("CT")~~since ~~technology for explosive detection systems for civil aviation security, for log scanning for~~ the ~~wood~~acquisition ~~products~~of ~~industry and for drug detection applications~~Yxlon. ~~The~~Gross ~~Company's~~margin ~~wholly-owned subsidiary,~~percentage ~~Quantum Magnetics, Inc. ("Quantum") develops~~ for ~~commercialization~~NDT ~~patented~~services ~~technologies, such as magnetic resonance and passive magnetic sensing, for landmine and weapons detection~~was ~~and other applications~~37.0% ~~The~~for ~~Company's Wood segment, including~~ the ~~Company's~~same ~~wholly-owned subsidiary, Inovec, Inc~~period. ~~("Inovec"),~~We ~~develops,~~do ~~manufactures,~~not ~~markets~~anticipate ~~and~~meaningful ~~supports~~changes ~~technologies~~in ~~for~~gross ~~scanning,~~margin ~~optimization and control systems~~ for ~~the~~NDT ~~forest~~services ~~products~~in ~~industry~~2004.

~~The~~30 Company was incorporated in Delaware in 1990. Its headquarters and principal manufacturing facilities are located in Newark, California. The Company acquired Quantum as a wholly-owned subsidiary in 1997. Quantum is a California corporation located in San Diego, California. The Company acquired Inovec as a wholly owned subsidiary effective January 1, 2000. Inovec is a Delaware corporation, with its headquarters and manufacturing facilities located in Eugene, Oregon.

~~Quantum~~ Research and Development. ~~The~~ ~~Company,~~Research ~~through~~and ~~its~~development ~~wholly-owned~~expenses ~~subsidiary~~consist primarily ~~Quantum~~of ~~Magnetics,~~compensation ~~develops~~paid ~~for~~to ~~commercialization~~personnel ~~patented and~~engaged ~~proprietary~~in ~~technology~~research ~~for~~and ~~inspection~~development activities, ~~detection~~amounts ~~and~~paid ~~analysis~~for ofoutside ~~explosives~~services and ~~other~~costs of materials. ~~Quantum's~~utilized in ~~products~~the ~~are~~development ~~based~~of onhardware ~~passive~~products, ~~magnetic~~including ~~sensing~~prototype ~~technology~~units. Research and ~~quadrupole~~development ~~resonance~~expenditures ~~("QR") technology,~~are apartially ~~form~~offset ofby ~~magnetic~~amounts ~~resonance.~~reimbursed ~~Quantum~~by ~~receives~~the TSA ~~grants~~and ~~from~~other agovernment ~~variety~~agencies ofand USprivate ~~government~~entities ~~agencies~~under ~~for~~ research and development ofcontracts ~~military~~ and ~~humanitarian~~grants. ~~landmine~~These ~~detection, carry-on~~services ~~luggage~~are ~~screening,~~provided ~~concealed weapon detection, drug detection,~~ and ~~in-process~~reimbursed on ~~materials~~a ~~inspection.~~cost basis.

~~Wood. In~~ Net ~~February 2000,~~research ~~the~~and ~~Company~~development ~~announced~~expenses ~~the~~for ~~formation~~EDS were $20.4 million in 2003, an increase of ~~its~~15.8% ~~WoodVision~~from ~~division~~$17.7 million ~~("WoodVision")~~in to2002. ~~develop the~~The ~~Company's~~net CTnumbers ~~technology~~reflect amounts toreimbursed ~~optimize~~by the ~~value~~TSA and ~~yield~~other ofgovernment ~~harvested~~agencies ~~timber~~of $3.1 million ~~Previous~~in 2003 ~~studies~~and ~~indicated~~$566,000 ~~that~~in CT2002. ~~technology~~Net ~~can~~research beand ~~applied~~development toexpenses ~~see~~for ~~inside~~EDS as a percentage ~~log~~of ~~before~~EDS itrevenues iswere ~~sawn~~5.9% in 2003 and 4.2% in 2002. The ~~Company~~increase in ~~believes~~research ~~that~~and adevelopment ~~market~~expenses for aEDS ~~product~~in ~~that~~2003 ~~does~~was ~~this~~primarily ~~exists.~~due Into increased ~~connection~~spending ~~with~~on ~~the~~several ~~formation~~initiatives ofto ~~WoodVision~~support our growth, partially offset by the ~~Company~~receipt ~~acquired,~~of as$3.1 million aof ~~wholly-owned~~government ~~subsidiary,~~funding ~~Inovec, Inc~~for research projects. ~~effective~~With asthe goal of ~~January 1~~ 100% checked baggage screening in U.S. airports, ~~2000~~we expect ~~(see~~that ~~Note 3)~~our EDS machines will be operated at or near capacity for extended periods. ~~Inovec~~We ~~manufactures,~~are ~~markets~~continuing to invest in sustaining engineering efforts to ensure that our products achieve high levels of serviceability and ~~supports~~reliability when ~~advanced~~operating ~~optimization~~at ~~equipment~~capacity, ~~for~~although ~~sawmills~~we ~~based~~anticipate that amounts spent on sustaining ~~laser~~engineering ~~scanning~~efforts ~~and~~will ~~other~~decrease ~~optimization~~in ~~technologies~~2004. ~~Since~~We are also continuing ~~inception~~to develop product enhancements for our existing line of EDS machines. In addition, ~~Inovec~~we ~~has~~are ~~installed~~continuing ~~over~~our ~~600~~development ~~laser~~of ~~scanners~~our ~~and~~CTX ~~other~~1000 ~~optimization~~system ~~systems~~under the ARGUS program, an FAA-sponsored program designed to develop a smaller, low-cost EDS product to scan checked baggage in ~~over~~small ~~300~~airports ~~sawmills~~and ~~worldwide.~~low-traffic stations within larger airports.

~~NOTE~~ Research and development expenses for NDT were $2.4 million ~~SUMMARY~~in OFthe nine-month ~~SIGNIFICANT~~period ~~ACCOUNTING~~since ~~POLICIES~~ the acquisition of Yxlon. Research and development expenses for NDT as a percentage of NDT revenues were 5.6% for the period. In order to strengthen our role as world leading supplier of X-ray solutions for NDT applications, we plan to increase the research and development expenses for NDT in 2004.

Selling, ~~Basis~~General and Administrative. Selling, general and administrative expenses consist primarily of ~~Presentation~~ compensation paid to direct and indirect sales and marketing personnel, administrative personnel, including directors, consultant fees, professional service fees, insurance costs, travel, selling and distribution costs, and other general expenses.

~~The~~ Selling, ~~consolidated~~general ~~financial~~and ~~statements~~administrative ~~include~~expenses ~~the~~for ~~financial~~EDS ~~statements~~were $26.8 million in 2003, an increase of ~~the~~9.2% ~~Company~~from ~~and~~$24.6 million ~~its~~in ~~wholly-owned~~2002. ~~subsidiaries~~Selling, ~~after~~general ~~the~~and administrative ~~elimination~~expenses for EDS as a percentage of ~~intercompany~~EDS revenues were 7.8% in ~~accounts~~2003 and ~~transactions~~5.9% in 2002. The increase in selling, general and administrative expenses for EDS in absolute dollars in 2003 was primarily due to an increase in headcount and employee-related expenses in 2003 as compared to the prior year.

F Selling, general and administrative expenses for NDT were $11.9 million in the nine-7month period since the acquisition of Yxlon. Selling, general and administrative expenses for NDT as a percentage of NDT revenues were 27.4% for the period. We anticipate that the selling, general and administrative expenses as a percentage of NDT revenues will decline in 2004 due to an expected increase in NDT sales volume compared to 2003.

~~Company's~~ Interest ~~preparation~~Expense. ofInterest ~~these~~expense ~~consolidated~~was ~~financial~~$1.7 million ~~statements~~ in ~~conformity~~2003 ~~with~~and ~~accounting principles generally accepted~~ $399,000 in ~~the~~2002. ~~United~~Interest ~~States~~expense ofresulted ~~America~~primarily ~~requires~~from ~~management~~the toissuance ~~make~~of ~~estimates and~~$125.0 ~~assumptions~~million ~~that~~of ~~affect~~convertible ~~the~~senior ~~reported~~notes ~~amounts~~in ~~of assets and liabilities~~September 2003, ~~disclosure~~along ofwith ~~contingent~~fees associated ~~assets~~with ~~and~~our ~~liabilities~~working atcapital ~~the~~lines ~~date~~ of ~~the~~credit, ~~financial~~equipment ~~statements~~term ~~and~~loans, capital ~~the~~leases ~~reported amounts of revenues~~ and ~~expenses~~ ~~during~~financing ~~the~~for ~~reporting~~insurance ~~period.~~premiums ~~Actual~~and ~~results~~interest ~~could~~expense associated ~~differ~~with ~~from~~long ~~those~~term ~~estimates~~debt.

~~Certain~~ Interest and Other Income, Net. Interest and other income, net, was $3.9 ~~prior~~million ~~year~~in ~~amounts~~2003 ~~have~~and ~~been~~$38,000 ~~reclassified~~in 2002. The amount for 2003 consisted of interest income on cash, cash equivalents and short-term investments of $2.1 million, and other income of $1.8 million, including a net $1.5 million in foreign exchange gain. The amount for 2002 consisted primarily of interest income on cash and cash equivalents of $1.9 million, offset by other expenses of $1.9 million, primarily consisting of $1.2 million of net foreign exchange losses primarily related to ~~conform~~foreign exchange contracts entered into in advance of adopting hedge accounting in May 2002 and a contingent settlement amount of $700,000. The increase in interest income on cash, cash equivalents and short-term investments was in part due to interest on the ~~current~~proceeds ~~year~~received ~~presentation.~~in September 2003 from the offering of our 3% convertible senior notes due 2023, which we also anticipate will lead to an increase in such interest income in 2004.

~~Stock Split~~ 31

Provision ~~Cash~~for Income Taxes. The provision for income taxes was $41.9 million in 2003 and ~~Cash~~$53.9 million ~~Equivalents~~ in 2002. Our effective tax rate was 42.4% in 2003 and 40.8% in 2002. The increase in the effective tax rates in 2003 compared to 2002 was mainly due to a $4.3 million expense for in-process research and development associated with the acquisition of Yxlon’s X-ray diffraction business, which was not tax deductible. Our effective tax rate was different than statutory tax rates primarily due to the in-process research and development expense described above, along with certain other permanent differences between book and taxable income. We expect that our effective tax rate will be reduced to a limited extent in future years. At December 31, 2003, we had federal, state and foreign net operating loss carryforwards of approximately $1.2 million, $321,000 and $15.8 million available to reduce future federal, state and foreign taxable income, respectively. Our federal net operating loss carryforwards begin to expire in 2010 and our state net operating loss carryforwards expire in 2011. The foreign net operating loss carryforwards may be carried over indefinitely and will not expire. The tax benefit of the net operating loss carryforwards may be limited due to the impact of the Tax Reform Act of 1986. Events which may cause the tax benefit to be limited include, but are not limited to, a cumulative stock ownership change of more than 50% over a three-year period and the timing of utilization of various tax benefits carried forward.

~~The~~ Comparison ~~Company considers all liquid investments purchased with an original maturity~~ of ~~three~~Fiscal ~~months~~Years or2002 ~~less~~and ~~to be cash equivalents.~~ 2001

Revenues. ~~Short-term~~EDS ~~Investments~~ product revenues were $403.1 million in 2002, an increase of 1,004% from $36.5 million in 2001. This increase in system sales and related accessories reflects the orders received from the FAA and the TSA during 2002, as well as international customers in late 2001 and 2002, resulting from the increased focus on aviation security following the terrorist attacks of September 11, 2001. The increase in EDS product revenues was slightly offset by volume discounts. EDS service revenues were $13.7 million in 2002, an increase of 43.4% from $9.6 million in 2001. The increase in service revenues was a result of signing an agreement with Siemens, which was retroactive to November 2002, to service our EDS units owned by the FAA and the TSA in the United States and its territories and service contract revenues from international customers for new support and maintenance agreements for CTX products for which warranty periods expired during the year.

~~Short-term~~ Gross ~~investments~~Profit. ~~consist~~Gross ~~primarily~~profit for EDS products was $174.3 million in 2002, an increase of ~~commercial~~1,125% ~~paper~~from ~~with~~$14.2 million ~~original~~in ~~maturities~~2001. atGross ~~date~~margins for EDS products were 43.2% in 2002 and 39.0% in 2001. In addition to significant TSA shipments in 2002, the improvement in EDS product gross profit was partially due to amounts reimbursable from the TSA for ramp up costs, which consist of consulting ~~purchase~~expenses, ~~beyond~~vendor ~~three~~expedite ~~months~~charges and ~~less~~subcontractor ~~than~~manufacturing 12set-up costs, totaling $11.0 ~~months~~million. ~~Such~~If ~~short-term~~this ~~investments~~amount ~~are~~were ~~carried~~not atreimbursable, these ~~cost~~elements of ramp up costs would have been expensed. The overall improvement in product gross profit was partially offset by $5.3 million in inventory write downs and accrued vendor cancellation fees. During 2002, ~~which~~in anticipation ~~approximates~~of ~~fair~~receiving ~~market~~additional ~~value~~TSA orders for our CTX 5500 DS model, ~~due~~we purchased and made commitments to ~~the~~purchase ~~short~~large ~~period~~quantities of ~~time~~critical components to ~~maturity~~build CTX 5500 DS machines. These anticipated TSA orders were largely replaced by orders for our CTX 9000 DSi model and, at year-end, our CTX 5500 DS raw material inventory levels were in excess of our anticipated requirements. Accordingly, we wrote down a portion of our CTX 5500 DS inventory and accrued cancellation fees which taken together totaled $5.3 million during 2002. The improvement in EDS product gross margin percentages was primarily due to lower manufacturing overhead per unit, resulting from a larger increase in units produced relative to the increase in fixed costs during 2002.

Gross ~~Revenue~~profit ~~Recognition~~ for EDS services was $3.9 million in 2002, an increase of 20.2% from $3.2 million in 2001. Gross margins for EDS services were 28.2% in 2002 and 33.7% in 2001. The decrease in gross margin percentages was primarily due to the need to increase EDS customer support overhead costs necessary to support an increasing installed base of EDS units. Because product sales are initially covered for support services under warranty, there is approximately a 15 to 18 month time lag from shipment to recognizing significant service contract revenue tied to the increased sales of EDS products. However, the EDS product customer is not obligated to purchase support services from us after the warranty period, so additional service contract revenues are not assured by product sales. The increased support costs with no immediate service revenue for recent product sales was the primary reason for lower gross margin for 2002 compared to that in 2001.

~~Revenue~~ Research ~~from~~and ~~EDS~~Development. ~~product~~Gross ~~sales~~research isand ~~recognized~~development ~~upon~~expenses ~~shipment~~for EDS ~~unless~~were ~~extended~~$18.2 million ~~acceptance~~in ~~criteria exist~~2002, inan ~~which~~increase ~~case~~of ~~revenue~~70.9% isfrom ~~recognized~~$10.7 million ~~upon completion of~~in ~~such acceptance criteria~~2001. ~~Provision~~Gross ~~for~~research ~~estimated~~and ~~installation,~~development ~~training~~expenses ~~and~~for ~~warranty~~EDS ~~costs~~as isa ~~recorded~~percentage atof ~~the~~EDS revenues ~~time~~were ~~revenue~~4.4% isin ~~recognized~~2002 and ~~adjusted~~23.1% ~~periodically~~in ~~based~~2001. onNet ~~historical~~research and ~~anticipated~~development ~~experience.~~expenses ~~Revenue~~for ~~from~~ EDS ~~service~~were ~~maintenance~~$17.7 million ~~contracts~~in is2002, ~~recognized~~an ~~ratably~~increase ~~over the term~~ of ~~the agreements, and for integration and other services, as the services are performed~~254.8% ~~Deferred revenue~~compared ~~arises from advance payments received~~to ~~from~~$5.0 million ~~customers~~in ~~for~~2001. ~~systems~~Net toresearch ~~be delivered within the next year~~ and ~~for maintenance service not yet performed.~~ development

~~Revenue~~32 from Quantum government contracts and from Inovec product sales of the automation and control systems is recognized using the percentage-of-completion method based on costs incurred to date as a percentage of total estimated costs at completion. Deferred revenue is recorded as advance payments are received for work not yet performed.

F-expenses for EDS as a percentage of EDS revenues were 4.2% in 2002 and 10.8% in 2001. The increase in gross research and development expenses for EDS was primarily due to an increased focus on several initiatives to support our growth. The increase in net research and development expenses for EDS was primarily due to Quantum’s development of an upgrade to the CTX family of explosives detection systems utilizing QR and less funding received from the ARGUS grant in the current year compared to the prior year. The decrease of gross and net research and development expenses for EDS as a percentage of revenues was primarily due to a significant increase in revenues.

Selling, ~~Inventories~~ General and Administrative. Selling, general and administrative expenses for EDS were $24.6 million in 2002, an increase of 186.0% from $8.6 million in 2001. Selling, general and administrative expenses for EDS as a percentage of EDS revenues were 5.9% in 2002 and 18.6% in 2001. Part of the increase in expenses for EDS was the result of an increase in expenditures to consultants and professional fees of $4.5 million, such as investigations relating to potential acquisitions and investor and public relations, employee headcount of $3.3 million, insurance costs of $2.2 million and sales commissions of $2.1 million, all related to the growth of our business compared to the prior year. The decrease in selling, general and administrative expenses for EDS as a percentage of revenues was primarily due to the increase in EDS revenues.

~~Inventories~~ Interest ~~are~~Expense. ~~stated~~Interest atexpense ~~the~~increased ~~lower~~to of$399,000 ~~cost~~in or2002 ~~market;~~from $289,000 ~~cost~~in is2001. ~~determined~~The onincrease ~~a first-~~in, ~~first-out~~interest ~~basis~~expense was primarily due to increased activities within our financing for insurance premiums, and ~~includes~~increased activities ~~materials~~within our lines of credit, ~~labor~~such as more standby letters of credit ~~and~~issued ~~overhead.~~to secure guarantees to customers, in 2002 compared to that in 2001.

Interest ~~Property~~and Other Income, Net. Interest and ~~Equipment~~ other income, net was $38,000 in 2002 compared to $570,000 in 2001. The 2002 amount consists of interest income on cash, cash equivalents and short-term investments of $1.9 million, offset by other expenses of $1.9 million, primarily consisting of $1.2 million of net foreign exchange losses primarily related to foreign exchange contracts entered into in advance of adopting hedge accounting in May 2002 and a contingent settlement amount of $700,000. The 2001 amount consists primarily of interest income on cash equivalents and short-term investments of $297,000 and other income (net) of $273,000, primarily the reversal of a reserve due to a favorable outcome of an international claim, partially offset by foreign exchange losses.

~~Property~~ Provision ~~and~~for ~~equipment~~(Benefit ~~are~~from) Income Taxes. We recorded atan ~~cost~~income tax provision of $53.9 million ~~Depreciation~~in is2002 ~~computed~~compared ~~using~~with ~~the~~an ~~straight-line~~income ~~method~~tax ~~based~~benefit ~~upon~~of $4.6 million in 2001. At December 31, 2002, we had federal and state net operating loss carryforwards of approximately $1.8 million and $321,000, respectively, available to reduce future federal and state taxable income. Our federal net operating loss carryforwards begin to expire in 2010 and our state net operating loss carryforwards expire in 2011. The tax benefit of the ~~estimated~~net operating ~~useful~~loss ~~lives~~carryforwards may be limited due to the impact of the Tax Reform ~~assets,~~Act of 1986. Events which ~~range~~may ~~from~~cause ~~two~~the tax benefit to ~~seven~~be ~~years~~limited include, orbut are ~~the~~not ~~lease~~limited ~~term~~to, a cumulative stock ownership change of more than 50% over a three-year period and the ~~respective~~timing ~~assets,~~of ifutilization ~~applicable.~~of various tax benefits carried forward.

Liquidity ~~Intangible~~and ~~Assets~~ Capital Resources

~~The~~ At ~~Company has patents, licenses, developed technologies, acquired workforce, goodwill and other intangible assets totaling $4.4 million and $0.3 million at~~ December 31, ~~2000 and 1999~~2003, ~~respectively,~~we ~~net~~had ~~of accumulated amortization of~~ $0276.89 million ~~and~~in ~~$86~~cash,~~000,~~ ~~respectively.~~cash ~~The~~equivalents ~~Company's excess of purchase cost over the fair value of net assets acquired was $2.3 million at December 31, 2000, net of accumulated amortization of $0.2 million. Identifiable intangible assets~~ and ~~goodwill are being~~ ~~amortized over their estimated useful lives on a straight~~short-~~line~~term ~~basis~~investments, ~~over~~compared ~~three~~ to ~~ten years. Amortization expense was~~ $0159.7 million, ~~$24,000~~in cash and ~~$30,000~~cash ~~for the years ended~~equivalents at December 31, ~~2000, 1999 and 1998, respectively~~2002. ~~The Company periodically re-evaluates goodwill and other intangibles based on undiscounted operating cash flows whenever significant~~ ~~events or changes occur which might impair recovery of recorded asset costs.~~

Net ~~Income~~cash ~~Taxes~~ provided by operating activities was $51.4 million in 2003, compared to $65.4 million provided by operating activities in 2002. Cash provided by operating activities in 2003 primarily resulted from significant accounts receivable collections from the TSA resulting in a $100.6 million decrease in accounts receivable. Other significant items include net income of $56.9 million, enhanced by the non-cash effects of the $5.9 million of depreciation and amortization, and the $4.3 million in-process research and development expense related to the Yxlon acquisition. Partially offsetting these increases to net cash provided by operating activities was a $79.8 million decrease in deferred revenue, primarily due to the shipment of units to the TSA for which deposits had been received in prior periods for long-lead shipments. A $62.4 million decrease in accounts payable and accrued liabilities also contributed to decreasing the net cash provided by operating activities.

~~The Company accounts for income taxes in accordance with Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes," which~~33 prescribes the use of the asset and liability method whereby deferred tax asset or liability account balances are calculated at the balance sheet date using current tax laws and rates in effect. Valuation allowances are established when necessary to reduce deferred tax assets to the amounts expected to be realized.

~~Research~~ Cash ~~and~~provided ~~development~~by ~~costs~~operating ~~are charged to operations as incurred. Contractually reimbursable costs for certain research and development~~ activities ~~are reflected as a reduction to research and development expense~~ in ~~the~~2002 ~~period~~primarily ~~the~~resulted ~~related~~from ~~costs are incurred.~~ a

$81.9 million ~~Software~~increase ~~Development~~in ~~Costs~~ deferred revenues, consisting primarily of long-lead deposits on delivery orders from the TSA, a $70.3 million increase in accounts payable and accrued liabilities, net income of $78.3 million enhanced by the $9.2 million effect of income tax benefits from employee stock transactions, and the $3.6 million non-cash effect of depreciation and amortization, partially offset by a $118.4 million increase in accounts receivable, a $37.7 million increase in inventories, and a $11.0 million increase in other current assets, primarily consisting of $8.3 million in prepaid inventory purchases, $1.6 million of ramp up costs to be recovered from the TSA and $1.0 million in recoverable value-added tax.

~~The~~ Net ~~Company~~cash ~~capitalizes~~used ~~internally~~in ~~generated~~investing ~~software~~activities ~~development~~was ~~costs~~$145.2 million in ~~accordance~~2003, ~~with~~compared to ~~Statement~~$2.9 million ofin ~~Financial Accounting Standards No~~2002. 86 ~~("SFAS 86"),~~Net ~~"Accounting~~cash ~~for~~used ~~the~~in ~~Costs~~investing ofactivities ~~Computer~~in ~~Software~~2003 resulted toprimarily befrom ~~Sold,~~purchase ~~Leased~~of orshort-term ~~Otherwise~~investments ~~Marketed~~of $94."7 million ~~SFAS~~and from 86payments ~~requires~~of ~~capitalization~~$42.3 million, net of ~~certain~~cash ~~software~~acquired, ~~development~~in ~~costs~~connection ~~after~~with ~~technological feasibility~~the ~~has~~Yxlon ~~been established~~acquisition. ~~Software~~In ~~development~~addition, ~~costs~~other ~~qualifying~~net ~~for~~cash ~~capitalization~~uses were ~~not~~$3.3 million ~~material~~ in acquisition ~~2000~~of ~~and~~capital ~~1999~~equipment, a $1.5 million Inpayment ~~1998,~~for ~~the~~an ~~Company~~equity investment ~~capitalized~~and ~~software~~product ~~development~~distribution ~~costs~~rights ofin ~~$803~~SafeView,~~000~~ Inc., ~~which~~a ~~are~~company ~~included~~developing inan ~~other~~advanced ~~current~~personnel ~~assets~~screening ~~and~~portal ~~other~~system, ~~noncurrent~~and ~~assets at December~~$3.4 ~~31,~~million ~~2000~~for the ~~and~~Hapeg ~~1999~~acquisition. ~~The~~Net ~~Company~~cash ~~began~~used ~~amortizing~~in ~~the~~investing ~~capitalized~~activities ~~software~~in ~~development~~2002 ~~based~~resulted primarily onfrom ~~the~~$4.7 million ~~ratio~~in purchases of ~~units~~capital ~~sold~~equipment, offset by ~~during~~proceeds from the ~~years~~sale toof ~~the~~short-term ~~total~~investments of $1.9 million.

F Net cash provided by financing activities was $115.8 million in 2003, compared to $85.9 million in 2002. Net cash provided by financing activities in 2003 primarily resulted from the issuance of $125.0 million of convertible senior debt, offset by related debt issuance costs of $4.5 million and a stock repurchase of $12.5 million. In addition, there was $3.5 million in net proceeds from short-term borrowings and $4.6 million in net proceeds from the sale of common stock under our employee stock purchase plan and exercises of stock options. Net cash provided by financing activities in 2002 primarily resulted from $87.8 million in net proceeds from the sale of common stock to the public and under our employee stock purchase plan and exercises of stock options, partially offset by $1.9 million in repayments of long-term and short-term debt, net of proceeds.

~~forecasted~~ Effective ~~units~~December 2003, we had a line of ~~sales~~credit agreement for our U.S. operations ~~Amortization~~that ~~expense~~provides ~~was~~for ~~$171,000~~maximum ~~and~~borrowings in an amount up to $5030.0 million. Borrowings under this agreement bear interest at the bank’s prime rate minus 0.5% (3.5% at December 31,~~000~~ 2003). The agreement expires in ~~2000~~December 2005 and ~~1999~~require that the EDS segment maintain certain levels of tangible net worth. We may use proceeds of loans under this line of credit for general corporate purposes. At December 31, ~~respectively~~2003, we had no borrowings outstanding under these agreements. NoHowever, ~~amortization~~at ~~expense~~December 31, ~~was~~2003, ~~recorded~~we inhad ~~1998~~outstanding guarantees ~~because~~to customers through the ~~product~~issuance ~~was~~of ~~not~~letters ~~yet~~of ~~available~~credit for which a ~~general~~partial ~~release~~reserve toof ~~customers~~$17.0 million is secured by the lines of credit, and foreign exchange contracts for which a 10% reserve of $1.7 million is secured by the lines of credit. We had remaining available borrowing capacity under the line of credit of $11.3 million at December 31, 2003.

As ~~Stock~~of ~~Compensation~~ December 31, 2003, we had letters of credit totaling $17.0 million as guarantees primarily to customers for performance and delivery commitments, and to foreign creditors to our subsidiary entities. In addition, we have one guarantee to an insurance carrier for premium payment commitments. The guarantees range from two months to nine years from December 31, 2003 until expiration.

~~The~~ As ~~Company~~of ~~grants~~December 31, ~~stock~~2003, ~~options~~we had two primary sources of financing from German banks for aYxlon. ~~fixed~~The ~~number~~first agreement is a line of ~~shares~~credit tothat ~~employees~~provides for ~~with~~maximum anborrowings ~~exercise~~in ~~price~~an ~~equal~~amount up to ~~the~~€6.6 million ~~fair~~or ~~value~~$8.3 million ofat December 31, ~~the~~2003. ~~shares~~The atsecond ~~the~~agreement ~~date~~is also a line of ~~grant~~credit that provides for maximum borrowings in an amount up to €5.2 million, or $6.6 million, at December 31, 2003. The ~~Company~~expiration ~~accounts~~date for ~~employee~~each ~~stock-~~of these agreements is March ~~based~~2004. ~~compensation~~Borrowings inunder ~~accordance~~these ~~with~~agreements ~~Accounting~~bear ~~Principles~~interest ~~Board~~at ~~Opinion~~a Norate of 5.75%. At December 2531, ~~("APB~~2003, ~~25")~~we had debt balances of $5.3 million outstanding under these agreements. In addition, ~~"Accounting~~at ~~for~~December 31, ~~Stock~~2003, ~~Issued~~we had outstanding guarantees to ~~Employees~~customers through the issuance of letters of credit for which a reserve of $3."9 million is secured by the lines of credit. Therefore, we had remaining available borrowing capacity under the lines of credit of approximately €4.5 million, or $5.7 million, at December 31, 2003.

~~Dependence on Suppliers~~ 34

Contractual ~~Comprehensive~~Obligations ~~Income~~ and Commitments

In The ~~1998,~~following ~~the~~table ~~Company~~depicts ~~adopted~~our ~~Statement~~contractual ofobligations ~~Financial~~as ~~Accounting~~of ~~Standards No.~~December ~~130 ("SFAS 130")~~31, ~~"Reporting Comprehensive Income." This Statement~~ ~~establishes~~2003 ~~standards for reporting and displaying comprehensive income and its components~~ (~~revenues, expenses, gains and losses)~~ in ~~a full set of general-purpose financial statements. Such items may~~thousands): ~~include foreign currency translation adjustments, unrealized gains/losses from investing and hedging activities, and other transactions. The Company has no comprehensive income other than net income~~ ~~(loss) for the periods presented in these consolidated financial statements.~~

Segment Information


	Payment Due by Period
			Less than		1-3		More than
Contractual Obligations	Total		1 year		years		3 years
Long-term debt	$	125,000	$	—	$	—	$	125,000
Operating leases		22,286		4,815		7,465		10,006
Short-term debt		5,581		5,581		—		—
Other long-term liabilities		1,390		—		—		1,390
Capital lease obligations		619		287		332		—

Total contractual cash obligations	$	154,876	$	10,683	$	7,797	$	136,396

~~Statement~~ At ~~of Financial Accounting Standards No.~~December ~~131~~31, ~~("SFAS 131")~~2003, ~~"Disclosures~~we ~~about~~had ~~Segments~~commitments of an$17.3 million ~~Enterprise~~for ~~and~~foreign exchange ~~Related~~forward ~~Information~~contracts," ~~requires disclosures~~which ofare ~~segment~~used ~~information~~to ~~under~~hedge aagainst ~~"management"~~existing receivables ~~approach~~and orders. ~~The~~These ~~management~~contracts ~~approach~~expire ~~designates~~within ~~the~~one ~~internal~~year, ~~organization~~when ~~that~~we ~~is used~~will byneed ~~management~~to ~~for~~provide ~~making operating decisions and assessing performance as~~ the ~~source~~euro ofcurrency ~~the~~from ~~Company's~~forecasted ~~reportable~~customer ~~segments.~~receipts ~~SFAS 131~~to ~~also requires disclosures about products and services,~~receive ~~geographic areas, and major customers~~$17. ~~The adoption of SFAS~~3 ~~131~~million. ~~did~~We ~~not~~have ~~affect~~no ~~results~~material ofobligations ~~operations~~ or ~~financial~~commitments ~~position~~other ofthan the obligations ~~Company.~~specified ~~Prior~~in ~~year's~~the ~~segment~~table ~~information~~above ~~has~~and ~~been presented to reflect~~ the ~~Company's~~commitments ~~organizational~~specified ~~structure~~ in ~~2000~~this paragraph.

We ~~Derivative~~believe ~~Instruments~~that existing cash, cash equivalents and ~~Hedging~~short-term investments, ~~Activities~~ available borrowings under our lines of credits and funds expected to be generated from operations will be sufficient to finance our working capital and capital expenditure requirements for at least the next twelve months. However, if we fail to meet required financial covenants in our credit agreements, or our receivables do not support the upper limits of these credit agreements, then we may not be able to have access to further funds under these agreements. In addition, if we are unable to deliver EDS units in a timely manner under our recent orders from the TSA or if we fail to adhere to the terms of the licensing agreement with the TSA, the TSA may cancel its orders or not place additional orders. If any of these events occur, our capital resources would be significantly impaired.

~~In June 1998, the Financial Accounting Standards Board issued SFAS No. 133 ("SFAS 133"), "Accounting for Derivative Instruments and~~Inflation ~~Hedging Activities." SFAS 133, as amended, establishes accounting and reporting standards for derivative instruments and hedging activities and is effective for fiscal years beginning after~~ ~~June 15, 2000. The Company adopted SFAS 133 effective January 1, 2001. SFAS 133 requires companies to recognize all derivatives as either assets or liabilities on the~~ ~~balance~~

~~F-10~~ The impact of inflation has not been material on our operations, cash flow or liquidity to date.

~~sheet~~Critical ~~and~~Accounting ~~measure~~Policies ~~them at fair value. Gains~~ and ~~losses resulting from changes in fair value would be accounted for depending on the use of the derivative and whether it is designated and qualifies for~~Estimates ~~hedge accounting. The adoption of SFAS 133 did not have a material effect on the Company's consolidated results of operations at January 1, 2001.~~

As Our discussion and analysis of ~~December 31,~~our ~~2000~~financial condition and results of operations are based on our consolidated financial statements, which have been prepared in conformity with accounting principles generally accepted in the United ~~Company~~States ~~had~~of $1America.~~4 million~~ Our preparation of ~~aggregate~~these ~~foreign~~consolidated ~~currency~~financial statements ~~forward~~requires ~~exchange~~us ~~contracts.~~to ~~The~~make ~~fair~~judgments ~~value~~and estimates that affect the reported amounts of ~~these~~assets ~~financial~~and ~~instruments~~liabilities, ~~was~~disclosure ~~not~~of contingent assets and ~~material~~liabilities at ~~December 31,~~the ~~2000~~date of the financial statements and the reported amounts of revenues and expenses during the reporting period. ~~There~~We ~~were~~base noour ~~forward~~estimates ~~exchange~~on historical ~~contracts~~experience ~~outstanding~~and aton ~~December 31,~~various ~~1999~~other assumptions that we believe to be reasonable under the circumstances. Actual results may differ from such estimates under different assumptions or conditions. The following summarizes our critical accounting policies and significant estimates used in preparing our consolidated financial statements:

Revenue ~~Concentration~~Recognition. We recognize revenues when persuasive evidence of ~~Credit~~an arrangement ~~Risk~~exists, delivery has occurred or services have been rendered, the price is fixed and ~~Fair~~determinable ~~Value~~and collectibility is reasonably assured. For sales of ~~Financial~~EDS ~~Instruments~~ products to the TSA that have been demonstrated to meet product specifications prior to shipment, we recognize product revenues at shipment and defer the portion of revenues relating to installation and training until these services are performed and accepted by the customer. The deferred installation and training revenues are based on the fair value of these services and generally represent less than 5% of these arrangements. Installation is generally completed within a relatively short period of time, typically less than one week. We have a consistent history of completing routine installations and obtaining customer acceptance for domestic and international sales. Some airport installations require more involved integration with baggage handling systems and take longer than

~~Financial instruments that potentially subject the Company to significant concentrations of credit risk consist primarily of cash and accounts receivable. The~~35 Company limits the amount of credit exposure of cash balances by maintaining its accounts in high credit quality financial institutions. At December 31, 2000, the Company has accounts receivable from customers (including research and development reimbursements from the FAA and other government agencies) located in the United States, Europe, Middle East, Pacific Rim and other areas of $17.3 million, $3.1 million, $1.4 million, $0.5 million and $0.2 million, respectively. The Company performs various evaluations of its customers' financial condition and credit worthiness. At December 31, 2000 and 1999, the allowance for bad debts was $302,000 and $171,000, respectively. At December 31, 2000, one customer accounted for 54.7% of total accounts receivable. No other individual customer accounted for more than 10% of accounts receivable at December 31, 2000.

~~The Company's~~most ~~total~~routine ~~revenues~~installations. ~~are~~Integration ~~denominated~~services inare ~~U.S.~~separately ~~dollars.~~priced ~~Significant~~from products ~~customers~~in ~~which~~sales ~~represented~~agreements ~~10%~~and orwe ~~more~~recognize ofservice ~~total~~ revenues ~~for~~under ~~the~~these agreements ~~respective periods were~~ as ~~follows:~~services are performed.

	Year Ended December 31,
	2000		1999		1998
FAA	42	%	67	%	57	%
DARPA	2	%	11	%	3	%

Sales of EDS and NDT products and services to customers in foreign countries have varying contractual terms and are governed, in part, by regulations in foreign jurisdictions. Accordingly, we recognize revenue based on the specific facts and circumstances surrounding each transaction. Revenue recognition on foreign sales is affected by our determination of when legal title and risk of loss pass to foreign customers as well as by our evaluation of our enforceable rights to unbilled amounts at the balance sheet date for transactions that have been recognized as revenues. For foreign sales of EDS and NDT products that have been demonstrated to meet product specifications prior to shipment, where title and risk of loss pass to the customer at shipment, and where we either have an enforceable claim at the balance sheet date for remaining unbilled amounts or have the ability to invoice the customer for any unbilled amounts after a fixed period of time regardless of whether installation is completed, we recognize product revenue at shipment and defer and recognize the fair value of installation and training revenue, if any, as services are performed. For sales of EDS and NDT products to foreign customers where title and risk of loss for such products pass upon completion of installation, we recognize product revenues at the completion of installation and acceptance by the customer. In other sales of EDS and NDT products to foreign customers where a portion of the contract price is withheld until installation is completed and where we do not believe we have an enforceable claim at the balance sheet date through which we can realize some or all of the withheld amount, we defer and recognize as revenue the greater of that portion of the contract price or the fair value of the installation and training at the completion of installation and acceptance by the customer.

~~The~~ Inventory. Our inventory purchases and commitments are made in order to ~~Company~~build ~~markets~~inventory ~~its~~to ~~products~~meet ~~both~~future ~~internationally~~shipment schedules based on actual and forecasted ~~domestically~~demand for our products. ~~Total~~The ~~revenues~~business byenvironment ~~geographic~~in ~~region~~which ~~are~~we operate asis ~~follows~~subject (to rapid changes in ~~thousands):~~customer demand. We perform a detailed assessment of inventory by segment each period, which includes a review of, among other factors, demand requirements, product life cycle and development plans, component cost trends, product pricing and quality issues. Based on this analysis, we may record a write down to inventory for excess, obsolescence or impairment, when appropriate, to reflect inventory at net realizable value.

		Year Ended December 31,
		2000		1999		1998
United States		$	58,441	$	49,830	$	49,171
Europe			11,939		3,084		12,907
Pacific Rim			5,239		2,979		2,792
Middle East			1,773		450		5,624
Other			1,754		2,093		—
	Total Worldwide Sales	$	79,146	$	58,436	$	70,494

Accrued Warranty Reserves. We accrue the estimated cost of product warranties at the time revenues are recognized. While we engage in extensive product quality programs and processes, including actively monitoring and evaluating the quality of our component suppliers, our warranty obligation is affected by actual warranty costs, including usage of material and labor and service delivery costs incurred in correcting a product failure. If actual material usage or service delivery costs differ from our estimates, revisions to the estimated warranty liability would be required.

F Deferred Tax Asset Valuation Allowance. We record a valuation allowance to reduce our deferred tax assets when it is more likely than not, based upon currently available evidence and other factors, that we will not realize some portion or all of our deferred tax assets. We base our determination of the need for a valuation allowance on an on-11going evaluation of current evidence including, among other things, estimates of future earnings, the backlog of customer orders and the expected timing of deferred tax asset reversals. We charge or credit adjustments to the valuation allowance to income tax expense in the period in which these determinations are made. If we determine that we would be able to realize our deferred tax assets in the future in excess of its net recorded amount, an adjustment to the deferred tax asset would increase income in the period this determination was made. Likewise, if we determine that we would not be able to realize all or part of our net deferred tax assets in the future, we would charge to operations an adjustment to the deferred tax asset in the period this determination was made.

Valuation ~~Net~~of ~~Income~~Long-Lived ~~(Loss)~~Assets, ~~Per~~Including ~~Share~~ Goodwill and Purchased Intangible Assets. We review property, plant and equipment, goodwill and purchased intangible assets for impairment whenever events or changes in circumstances indicate the carrying value of an asset may not be recoverable. Our asset impairment review assesses the fair value of the assets based on the future cash flows the assets are expected to generate. An impairment loss is recognized when estimated discounted future cash flows expected to result from the use of the asset plus net proceeds expected from disposition of the asset, if any, are less than the carrying value of the asset. This approach uses our estimates of future market growth, forecasted revenue and costs, expected periods the assets will be utilized and appropriate discount rates. Such evaluations of impairment of long-lived assets, including goodwill and purchased intangible assets are an integral part of, but not limited to, our strategic reviews of our business and

~~Basic earnings per share is computed by dividing income available to common stockholders by the weighted-average common shares outstanding for the period.~~36 Diluted earnings per share reflect the weighted-average common shares outstanding plus the potential effect of dilutive securities or contracts which are convertible to common shares such as options, warrants, convertible debt and preferred stock (using the treasury stock method).

		Year Ended December 31,
		2000							1999					1998
		Income (loss)			Shares	Per Share Amount			Income (loss)		Shares	Per Share Amount		Income (loss)		Shares	Per Share Amount
Basic net income (loss) per share:
	Income (loss) available to common stockholders	$	(1,806	)	12,510	$	(0.14	)	$	383	12,133	$	0.03	$	8,041	12,046	$	0.67
Effect of dilutive securities: Options			—		—		—			—	618		—		—	781		(0.04	)
Diluted net income (loss) per share:
	Income (loss) available to common stockholders plus assumed conversions	$	(1,806	)	12,510	$	(0.14	)	$	383	12,751	$	0.03	$	8,041	12,827	$	0.63

operations. When an impairment is identified, the carrying amount of the asset is reduced to its estimated fair value. Deterioration of our business in a geographic region or within a business segment in the future could also lead to impairment adjustments as such issues are identified.

~~The computation~~Recently ofIssued ~~diluted~~Accounting ~~net loss per share for the year ended December 31, 2000 does not include shares issuable upon exercise of options of 1,046,222 and issuance of common~~Standards ~~stock related to the acquisition of Inovec payable April 2001 and 2002 based on average share prices prior to scheduled payment dates, because their effect would have been anti-dilutive.~~

~~NOTE~~ Revenue 3Arrangements with Multiple Deliverables. ~~ACQUISITION~~In OFNovember 2002, ~~INOVEC~~the Emerging Issues Task Force, or EITF, reached a consensus on Issue No. ~~INC~~00-21, “Revenue Arrangements with Multiple Deliverables,” or EITF 00-21. EITF 00-21 addresses certain aspects of the accounting by a vendor for arrangements under which the vendor will perform multiple revenue generating activities. EITF 00-21 is effective for fiscal periods beginning after June 15, 2003. There was no impact from the adoption of EITF 00-21 on our consolidated financial statements.

~~Effective~~ Accounting ~~January 1,~~and ~~2000,~~Disclosure ~~the~~Requirements ~~Company~~for ~~acquired~~Guarantees. ~~Inovec,~~In December ~~Inc.~~2002, we aadopted ~~manufacturer~~Financial ofAccounting ~~advanced~~Standards ~~optimization~~Board, ~~equipment~~or ~~for~~FASB, ~~increasing~~Interpretation ~~the~~No. 45, ~~yield~~“Guarantor’s ofAccounting ~~the forest~~and ~~products~~Disclosure ~~industry~~Requirement for ~~$5.2 million in cash and stock~~Guarantees, Including ~~payable~~Indirect ~~over~~Guarantees ~~the~~of ~~next~~Indebtedness ~~two~~of ~~years.~~Others,” ~~The~~or ~~Company~~FIN ~~paid $2~~45.~~4 million~~ inFIN ~~cash~~45 requires ~~and issued 249~~that,~~000~~ ~~shares~~upon issuance of ~~common~~a ~~stock~~guarantee, to the ~~former~~ ~~shareholders~~guarantor ofmust ~~Inovec~~recognize asa liability for the ~~first~~fair ~~two~~value ~~installments~~ of the ~~purchase~~obligation ~~price.~~it ~~The~~assumes ~~remaining~~under ~~obligation~~that ~~payable of $1~~guarantee.~~7 million~~ The isprovisions ~~payable~~for ininitial ~~stock~~recognition ~~to the former shareholders in April 2001~~ and ~~2002~~measurement ~~and~~are iseffective ~~based~~ on ~~average~~a prospective ~~share~~basis ~~prices~~for ~~prior~~guarantees ~~to the scheduled payment dates. In addition, the Company is contingently liable under the purchase agreement in the event~~ that ~~Inovec~~ ~~achieves~~are ~~certain~~issued ~~operating~~or ~~milestones~~modified ~~during~~after ~~the years ended~~ December 31, ~~2000 and 2001. At December 31~~ 2002, ~~2000,~~irrespective ~~Inovec had achieved certain~~ of ~~these~~a ~~milestones~~guarantor’s ~~and an additional $0~~year-end.~~5 million~~ ~~was~~We ~~recorded~~adopted asthe ~~additional~~disclosure requirements ~~purchase~~of ~~price~~FIN ~~and~~45 ~~will be paid~~ in ~~cash~~the ~~and~~fourth ~~stock~~quarter inof ~~April 2001~~2002. AnThe ~~additional~~adoption ~~$0.7 million~~of ~~would~~FIN ~~be payable upon the achievement of~~45 ~~certain~~did ~~milestones~~not atmaterially ~~the~~impact ~~end~~our ofconsolidated ~~2001.~~financial statements.

F Accounting for Costs Associated with Exit or Disposal Activities. On January 1, 2003, we adopted SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities,” or SFAS 146, which addresses accounting for restructuring and similar costs. SFAS 146 supersedes previous accounting guidance, principally EITF Issue No. 94-123, or EITF 94-3. SFAS 146 requires that the liability for costs associated with an exit or disposal activity be recognized when the liability is incurred. Under EITF 94-3, a liability for exit costs was recognized at the date of a company’s commitment to an exit plan. SFAS 146 also establishes that the liability should initially be measured and recorded at fair value. Accordingly, SFAS 146 may affect the timing of recognizing future restructuring costs as well as the amounts recognized. There was no effect on our consolidated financial statements from the adoption of SFAS 146.

Consolidation of Variable Interest Entities. The ~~transaction~~FASB ~~has~~issued Interpretation ~~been~~No. 46, ~~accounted~~“Consolidation ~~for~~of asVariable aInterest ~~purchase~~Entities,” ~~and~~or ~~accordingly~~FIN 46, ~~the~~in ~~results~~January 2003, ofand ~~operations~~a revised interpretation of ~~Inovec~~FIN ~~are~~46, ~~only~~or ~~included~~FIN 46-R, in December 2003. ~~the~~FIN ~~consolidated~~46 ~~financial~~requires ~~statements~~certain ~~for~~variable ~~the~~interest ~~year ended~~entities, ~~December 31~~or VIEs, ~~2000.~~to be ~~The~~consolidated ~~Company~~by ~~allocated~~the primary beneficiary of the ~~purchase~~entity ~~price~~if ~~based~~the onequity investors in the ~~fair~~entity ~~value~~do not have the characteristics of ~~assets~~a ~~acquired~~controlling financial ~~and~~interest ~~liabilities~~or ~~assumed.~~do ~~Portions~~not ofhave ~~the~~sufficient ~~purchase~~equity ~~price,~~at ~~including~~risk ~~intangible assets,~~for ~~were~~the ~~identified~~entity byto finance ~~independent~~its ~~appraisers~~activities ~~utilizing~~without ~~accepted~~additional ~~valuation~~subordinated ~~procedures~~financial ~~and~~support ~~techniques~~from other parties. ~~These~~The ~~intangible~~provisions ~~assets~~of ~~include~~FIN ~~approximately~~46 ~~$1.5 million~~are effective immediately for ~~developed~~all arrangements ~~technologies~~entered into after January 31, $0 2003.7 Since January ~~million~~31, 2003, we have not invested in any entities it believes are variable interest entities for which we are the ~~acquired~~primary ~~workforce~~beneficiary. For all arrangements entered into after January 31, ~~$50~~2003,~~000~~ ~~for~~we ~~covenants~~are ~~not~~required to ~~compete~~continue ~~and~~to apply FIN 46 through the end ~~remaining~~of $2the first quarter of fiscal 2004.~~5 million~~ We are required to adopt the provisions of FIN 46-R for ~~goodwill~~those arrangements in the second quarter of fiscal 2004. ~~These~~For ~~intangibles~~arrangements entered into prior to February 1, 2003, we are ~~being~~required to ~~amortized~~adopt ~~over~~the ~~their~~provisions ~~estimated~~of FIN 46-R in the second quarter of fiscal 2004. We do ~~useful~~not ~~lives~~expect ~~ranging~~the ~~from~~adoption ~~three~~of FIN 46-R to ~~ten~~have ~~years.~~an impact on our consolidated financial statements.

~~The following~~ Accounting ~~unaudited~~for ~~pro~~Derivative ~~forma~~Instruments ~~data~~and ~~summarize~~Hedging ~~the~~Activities. ~~results~~In ofApril 2003, ~~operations for~~ the ~~year~~FASB ~~ended~~issued ~~December~~SFAS No. 31149, ~~1999~~“Amendment ~~as if the acquisition~~ of ~~Inovec~~Statement ~~occurred~~133 on ~~January 1,~~Derivative ~~1999.~~Instruments ~~The~~and ~~pro~~Hedging ~~forma~~Activities,” ~~data~~or ~~give~~SFAS ~~effect~~149. toSFAS ~~actual~~No. 149 ~~operating~~amends ~~results~~and clarifies ~~prior to~~ the ~~acquisition,~~accounting ~~adjusted~~for toderivative ~~include~~instruments, ~~the~~including ~~pro~~certain derivative ~~forma~~instruments ~~effect~~embedded ofin ~~amortization~~other ofcontracts ~~intangibles~~ and ~~income~~for ~~taxes.~~hedging ~~These pro forma~~activities ~~amounts~~under doSFAS ~~not~~133. ~~purport~~SFAS toNo. 149 beis ~~indicative~~generally ofeffective ~~the~~for ~~results~~contracts ~~that~~entered ~~would~~into or ~~have~~modified ~~actually~~after ~~been~~June 30, ~~obtained~~2003 ifand ~~the~~for ~~acquisition~~hedging ~~occurred~~relationships ondesignated ~~January~~after June 130, ~~1999,~~2003. orThere ~~that~~was ~~may~~no beimpact ~~obtained~~from in the ~~future~~adoption of SFAS No. 149 on our consolidated financial statements.

	Year ended Dec. 31, 1999 (unaudited)
	(in thousands, except per share data)
Total revenues	$	66,235
Net loss	$	(188	)
Basic net loss per share	$	(0.02	)
Diluted net loss per share	$	(0.02	)

Accounting for Financial Instruments with Characteristics of both Liabilities and Equity. In May 2003, the FASB issued SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity,” or SFAS 150, which requires that certain financial instruments be presented as liabilities that were previously presented as equity or as temporary equity. Such instruments include mandatory redeemable preferred and common stock, and certain options and warrants. SFAS 150 is effective for financial instruments entered into or

~~NOTE 4. RESEARCH AND DEVELOPMENT CONTRACTS AND GRANTS~~ 37

~~NOTE~~modified 5after May 31, 2003 and was effective at the beginning of the first interim period beginning after June 15, 2003. ~~DEBT~~ In November 2003, the FASB issued FASB Staff Position No. 150-3, “Effective Date, Disclosures, and Transition for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Noncontrolling Interests under SFAS No. 150,” or FSP 150-3, which defers the effective date for various provisions of SFAS No. 150. The adoption of SFAS 150, as modified by FSP 150-3, did not have a material impact on our consolidated financial statements.

Revenue ~~Lines~~Recognition. In December 2003, the SEC staff issued Staff Accounting Bulletin No. 104, “Revenue Recognition, Corrected Copy,” or SAB 104, which revises or rescinds portions of ~~Credit~~ the revenue recognition interpretive guidance included in the Staff Accounting Bulletin codification to make it consistent with current authoritative accounting and auditing guidance and SEC rules and regulations. The principal revisions relate to revenue recognition guidance no longer necessary due to developments in U.S. GAAP. SAB 104 also rescinds the Frequently Asked Questions and Answers document issued in conjunction with the release of Staff Accounting Bulletin No. 101. The adoption of SAB 104 did not materially impact our consolidated financial statements.

InITEM ~~November 2000, the Company renewed its two line of credit agreements with a bank~~7A. ~~The~~QUANTITATIVE ~~first~~AND ~~agreement~~QUALITATIVE ~~provides~~DISCLOSURES ~~for~~ABOUT ~~maximum~~MARKET borrowings in an amount up to the lower of 80% of eligible domestic EDS receivables or $5.0 million. The second agreement is partially guaranteed by the Export-Import Bank of the United States and provides for maximum borrowings in an amount up to the lower of: (a) the sum of 80% of eligible EDS export accounts receivable plus the lower of: (i) 70% of eligible raw materials and work-in-process inventory designated for export customers; (ii) 60% of outstanding loans under this agreement, or; (iii) $2.0 million, or; (b) $5.0 million. Borrowings under both agreements bear interest at the bank's prime rate plus 1.5% (11.0% at December 31, 2000) and are secured by EDS assets. The agreements expire in November 2001 and require that the EDS segment maintain certain levels of tangible net worth and intercompany balances from its wholly-owned RISK

F We consider investments purchased with an original or remaining maturity of less than three months at the date of purchase to be cash equivalents. We maintain an investment portfolio of various holdings, types, and maturities. (See Note 16 to the consolidated financial statements). These securities are classified as available for sale and consequently are recorded on the consolidated balance sheets at fair value with unrealized gains or losses reported as a separate component of accumulated other comprehensive income (loss), net of tax. The following table summarizes our cash, cash equivalents and short-13term investments for the periods indicated (in thousands):

subsidiaries, and also prohibit the Company from paying cash dividends. Proceeds of loans under both lines of credit may be used for general corporate purposes. At December 31, 2000, the Company had borrowings outstanding of $0.9 million under the domestic EDS agreement. Additionally, the Company had outstanding guarantees to customers through issuance of letters of credit secured by the lines of credit totaling $1.1 million and foreign exchange contracts for which a 10% reserve of $141,000 is secured by the lines of credit. The remaining available borrowing capacity under the lines of credit was $5.3 million at December 31, 2000 based on eligible EDS accounts receivable and inventories as of that date.


	December 31,
	2003		2002
Cash and cash equivalents	$	182,382	$	159,736
Short-term investments		94,557		—

Total	$	276,939	$	159,736

At ~~Long-Term~~any ~~Debt~~ time, a sharp rise in interest rates could have a material adverse impact on the fair value of our investment portfolio. Conversely, declines in interest rates could have a material impact on interest earnings for our investment portfolio. We do not currently hedge these interest rate exposures. The following table presents the changes in fair value in investment securities held at December 31, 2003 that are sensitive to changes in interest rates (in thousands) based on hypothetical adjustments in the applicable interest rates:

The Company previously borrowed against a committed equipment line of credit agreement with a bank, which converted into a term loan after draw down. Borrowings are secured by the assets purchased or financed. At December 31, 2000, the Company had an outstanding $331,000 term loan due June 2003 and a $196,000 term loan due November 2001. The term loans bear interest at the bank's prime rate plus 1.5% (11.0% at December 31, 2000).


	Valuation of securities								Valuation of securities
	given an interest rate						Fair Value as of		given an interest rate
	increase of basis points						December 31,		decrease of basis points
	150 BPS*		100 BPS		50 BPS		2003		(50 BPS)		(100 BPS)		(150 BPS)*
Total	$	275,836	$	276,367	$	276,905	$	276,939	$	277,902	$	278,559		N/A	*

~~NOTE~~* 6.A ~~STOCKHOLDERS'~~shift ~~EQUITY~~ of minus 150 basis points is highly unlikely due to the low interest rates in effect as of December 31, 2003.

~~Common~~ These ~~Stock~~ instruments are not leveraged and are held for purposes other than trading. The modeling technique used measures the change in fair value arising from selected potential changes in interest rates, using a three-month investment horizon and hypothetical parallel shifts in the yield curve of plus or minus 50 basis points (“BPS”), 100 BPS and 150 BPS.

In Our ~~2000,~~international ~~under~~system ~~the~~sales ~~terms~~and ofmaintenance ~~the~~contracts ~~acquisition~~are ~~of Inovec, the Company issued 249,000 shares of common stock to the former shareholders of Inovec as the first two~~generally ~~installments~~denominated ofin ~~the~~U.S. ~~purchase price~~dollars. ~~The~~In ~~remaining~~instances ~~obligation~~where ~~under~~there ~~the~~are ~~purchase~~significant international ~~agreement~~system ofsales ~~$1.7 million~~contracts isdenominated ~~payable~~ in ~~stock~~a toforeign ~~the~~currency, ~~former shareholders in April 2001 and 2002 and is~~we ~~based~~often onenter ~~average~~into ~~share~~forward ~~prices~~contracts ~~prior~~ to ~~the~~mitigate ~~scheduled~~foreign ~~payment~~exchange ~~dates~~risk. AtWe ~~December 31,~~do ~~2000, Inovec achieved certain milestones within the purchase agreement and an additional $0.3 million~~not isenter ~~payable~~into inmarket ~~stock~~risk ~~in April 2001, based on average share prices ten trading days prior to and ten trading days after March 31, 2001.~~ sensitive

In38 1999, the Company repurchased 85,600 shares of its common stock at prevailing market prices for a total of $334,000. In 1998, the Company repurchased 114,900 shares of its common stock at prevailing market prices for a total of $865,000.

~~In 1997,~~instruments for trading purposes. During the ~~Company~~year ~~sold~~ended 1December 31,~~875~~ 2003,~~000~~ we ~~shares~~entered into foreign exchange forward contracts with a total notional value of ~~common~~approximately ~~stock~~$6.3 million into anhedge ~~underwritten~~against ~~public~~foreign ~~offering~~exchange risk for contracts with international customers denominated in euros and, at December 31, 2003, December 31, 2002 and December 31, 2001, we had outstanding contracts to convert euros to dollars with notional values totaling $1217.003 million, ~~per share~~$34.7 million ~~The~~and ~~offering~~$16.9 million, ~~generated~~respectively, ~~net~~with ~~proceeds~~a tonegative ~~the~~fair ~~Company~~value of ~~approximately~~ approximately $211.24 million, ~~including~~$4.9 million ~~proceeds~~and ~~from~~a ~~the~~positive ~~underwriters~~fair ~~over-allotment~~value ~~option~~of $47,000, respectively. The following table depicts the maturities of the outstanding contract amounts (in thousands):

In connection with the Company's initial public offering, Donald & Co. Securities Inc., the underwriter, received, under the terms of the underwriting agreement, a four-year warrant to purchase 180,000 shares of the Company's common stock at a price of $6.60 per share commencing April 23, 1997. As of December 31, 2000, no shares of the Company's common stock had been purchased under the warrant.


	Within 3
Contract Maturity	months		4-6 months		7-9 months		10-12 months		13 months
Amount at 12/31/03	$	16,738	$	588	$	—	$	—	$	—
Amount at 12/31/02		13,884		18,020		2,653		99		—
Amount at 12/31/01		5,623		110		2,194		2,179		6,841

~~F-14~~ Purchases of raw materials and other inventory components are primarily denominated in U.S dollars and, when purchased in foreign currencies, are generally made on an as needed basis. We have some advance purchase commitments in foreign currencies with a few European suppliers. We currently do not hedge against these purchase commitments, as the foreign exchange rate fluctuations have not had a material adverse impact on these purchases; however, we will continue to monitor the foreign exchange rates and may enter into forward contracts to mitigate foreign exchange risk as appropriate.

~~NOTE~~ Certain 7costs of providing warranty and maintenance services for systems sold to foreign countries are denominated in local currencies. ~~EMPLOYEE~~To ~~STOCK~~the ~~AND~~extent exchange ~~BENEFIT~~rates ~~PLANS~~ fluctuate, it could become more expensive to provide these services. To date, these costs have not been significant; however, we expect they will increase as our installed base increases.

~~Equity~~ We ~~Incentive~~are ~~Plans~~ exposed to foreign currency exchange rate risk inherent in our sales commitments, anticipated sales, anticipated purchases and assets and liabilities denominated in currencies other than the U.S. dollar. We transact business primarily in four currencies worldwide, of which the most significant to our operations is the euro. In some situations, we are a net receiver of foreign currencies and therefore benefit from a weaker U.S. dollar and are adversely affected by a stronger U.S. dollar relative to those foreign currencies in which we transact significant amounts of business. We performed a sensitivity analysis as of December 31, 2003, December 31, 2002 and December 31, 2001, using a modeling technique that measures the change in the fair values arising from a hypothetical 10% and 15% adverse movement in the levels of foreign currency exchange rates relative to the U.S. dollar (that is, strengthening of the U.S. dollar) with all other variables held constant. The analysis covers all of our foreign exchange forward contracts offset by the underlying exposures. The analysis excludes balances and transactions pertaining to Yxlon. Foreign exchange rate risk is relatively low for Yxlon given that it primarily transacts business in euros.

The ~~Company~~cash ~~has~~flow ~~several~~impacts ~~stock option plans (the "Equity Plans") for its officers, employees, consultants and directors~~ of ~~the~~our ~~Company.~~sensitivity ~~The~~analysis ~~Equity~~as ~~Plans provides for the granting~~ of ~~incentive and non-qualified stock options~~December 31, ~~stock bonus awards, rights to purchase restricted stock and stock appreciation rights (together "Stock Awards") for~~2003 ~~the~~are ~~purchase~~summarized ofin ~~up to an aggregate of 4,489,355 shares of~~ the ~~Company's~~following ~~common~~table ~~stock by officers, employees, consultants and directors of~~ (the ~~Company.~~foreign ~~The~~currency ~~Board~~exchange ofrates ~~Directors is responsible for~~used ~~administration~~were ofbased the Equity Plans and also determines the terms of each Stock Award. Options granted under the Equity Plans generally vest over a four year period. In the event of a change in control transaction, Stock Awards then outstanding shall be continued or assumed by the surviving entity or similar awards shall be substituted therefor. If the surviving entity refuses to do so, then the vesting of or rate of lapse of repurchase rights on ~~such~~ ~~Stock~~market ~~Awards~~rates ~~shall accelerate~~ in ~~full~~effect toat ~~the date immediately prior to the effective date of such change in control transaction. With respect to officers and directors only~~December 31, ~~even if the surviving~~2003): ~~entity continues, assumes or substitutes Stock Awards, the vesting or rate of lapse of repurchase rights on such Stock Awards shall accelerate in full upon an involuntary termination without "cause"~~ ~~or a "constructive termination" as those terms are defined in the officers' and directors' respective option agreements within a year following the effective date of the change in control transaction.~~

Incentive and non-qualified stock options may be granted at an exercise price per share of not less than 85% of the fair value per common share on the date of the grant (not less than 110% of the fair value in the case of holders of more than 10% of the Company's voting stock and not less than 100% for incentive stock options under certain plans). Options granted under the Equity Plans generally expire ten years from the date of the grant (five years for incentive stock options granted to holders of more than 10% of the Company's voting stock). Options granted generally vest 25% one year after issuance and 1/16th each quarter thereafter for three years.


	Contract		Fair Value as of Dec. 31,			Cash flow impact of change in exchange rates
(in thousands)	Amount		2003			10% Change			15% Change
Foreign exchange forward contracts	$	17,326	$	(1,410	)	$	1,877		$	2,816
Accounts receivable		17,703		20,174			(2,017	)		(3,026	)
Firm orders*		10,749		14,358			(1,436	)		(2,154	)
Other working capital balances, net		1,366		1,325			(133	)		(199	)

Total						$	(1,709	)	$	(2,563	)

~~In October 1998,~~* ~~the~~Firm ~~Company~~orders ~~offered~~represent ~~employees~~orders and consultants the opportunity to participate in an option repricing program. Under the program, each employee and consultant could elect on or before November 9th that his or her existing option issued under the 1991 Equity Incentive Plan be converted into a repriced option. The per share exercise price of each repriced option would be equal to the greater of the fair market value of the Company's common stock on the conversion date (November 9, 1998) or $6.93. In return for ~~the~~which ~~lower~~we ~~exercise~~have ~~price, the~~received ~~repriced options issued would be subject to~~ a ~~blackout~~signed ~~period whereby no options could be exercised between November 9, 1998 and May 8, 1999. The number of shares vested under the~~purchase ~~converted option would vest immediately under the repriced option~~order. ~~All remaining shares subject to the repriced option will vest over a period that is equivalent to the vesting period remaining under~~ ~~the converted option. On November 9, 1998, the fair market value of the Company's common stock was $6.50 and options for a total of 313,986 shares were repriced at $6.93 per share. No officers~~ ~~of the Company repriced options under the program. The weighted average per share exercise price of the outstanding shares subject to the options prior to conversion was $10.55 and the range of~~ ~~exercise prices was $7.69-$14.56.~~

In39 connection with grants of stock options to employees and directors, the Company recorded $240,000 of deferred compensation representing the difference between the deemed fair value of the Company's common stock and the exercise price at the date of grant in 1997. No such deferred stock compensation was recorded in 2000, 1999 or 1998. Amortization of deferred stock compensation was $63,000, $68,000 and $68,000 in 2000, 1999, and 1998, respectively.

The ~~activity~~cash ~~under~~flow impact of changes in exchange rates at December 31, 2003 is not significantly different from the ~~Equity~~cash ~~Plans~~flow ~~was~~impact asof ~~follows~~changes (in ~~thousands~~exchange rates at December 31, ~~except~~2002. ~~per~~We ~~share~~do ~~data):~~not expect the impact of changes in interest rates to have a material impact on our operations, cash flow or liquidity.

		Year Ended December 31,
		2000				1999				1998
		Shares		Weighted Average Exercise Price		Shares		Weighted Average Exercise Price		Shares		Weighted Average Exercise Price
Outstanding at beginning of period		1,977		$	4.25	1,759		$	4.09	1,737		$	4.44
	Granted	1,143		$	4.09	504		$	4.98	635		$	6.89
	Exercised	(63	)	$	5.37	(105	)	$	0.93	(145	)	$	1.34
	Canceled (un-vested)	(158	)	$	5.13	(97	)	$	6.33	(357	)	$	9.82
	Expired (vested)	(68	)	$	6.05	(84	)	$	6.89	(111	)	$	10.85
Outstanding at end of period		2,831		$	4.07	1,977		$	4.25	1,759		$	4.09
Options exercisable at period end		1,396		$	3.79	1,260		$	3.65	1,094		$	2.70
Weighted average grant date fair value of options granted during the year				$	2.22			$	2.74			$	3.68
Weighted average grant date fair value of options granted during the year at exercise prices above market prices				$	—			$	—			$	6.93
Weighted average grant date fair value of options granted during the year at exercise prices below market prices				$	—			$	—			$	—

The cash flow impact of changes in exchange rates at December 31, 2002 is not significantly different from the cash flow impact of changes in exchange rates at December 31, 2001.

~~Information relating~~ITEM to8. ~~stock~~FINANCIAL ~~options~~STATEMENTS ~~outstanding~~AND ~~under~~SUPPLEMENTARY ~~the Equity Plans at December 31, 2000 is as follows (in thousands, except per share data):~~ DATA

		Options Outstanding
						Options Exercisable
			Weighted Average Remaining Contractual Life
Range of Exercise Price		Number Outstanding		Weighted Average Exercise Price		Number Exercisable	Weighted Average Exercise Price
$	0.55- 0.55	330	4.0	$	0.55	330	$	0.55
$	0.97- 1.10	301	4.8	$	1.10	301	$	1.10
$	1.81- 1.81	102	9.9	$	1.81	—	$	—
$	2.75- 4.13	257	9.0	$	3.84	35	$	3.71
$	4.25- 6.38	1,246	8.8	$	4.59	205	$	4.90
$	6.50- 9.63	594	7.0	$	6.90	524	$	6.92
$	11.25-14.56	1	6.2	$	12.58	1	$	12.47
		2,831	7.5	$	4.07	1,396	$	3.79

Our consolidated financial statements and notes thereto and supplementary financial data appear on pages F-1 to F-31 of this annual report and are incorporated by reference herein.

~~1996~~ Consistent ~~Employee~~with ~~Stock~~Section 10A(i)(2) ~~Purchase~~of ~~Plan~~ the Securities Exchange Act of 1934, as added by Section 202 of the Sarbanes-Oxley Act of 2002, we are responsible for listing the non-audit services approved by our Audit Committee to be performed by Deloitte & Touche LLP, our external auditor. Non-audit services are defined as services other than those provided in connection with an audit or a review of our financial statements. Since the filing of our Quarterly Report on Form 10-Q for the quarter ended September 28, 2003, the Audit Committee approved engagements of Deloitte & Touche LLP for the following non-audit services: tax services, which includes services related to the review of tax returns of Yxlon International Holding GmbH.

~~The~~ITEM ~~Company's 1996 Employee Stock Purchase Plan (the "Purchase Plan") was adopted in March 1996~~9. ACHANGES ~~total~~IN ofAND ~~450,000~~DISAGREEMENTS ~~shares~~WITH ofACCOUNTANTS ~~common~~ON ~~stock~~ACCOUNTING ~~has~~AND ~~been reserved~~FINANCIAL ~~for issuance under the Purchase Plan. As of December 31, 2000, 318,000 shares have been issued under the Purchase Plan.~~ DISCLOSURE

~~Fair~~ Not ~~Value Disclosures~~ applicable.

~~Had~~ITEM ~~compensation~~9A. ~~cost~~CONTROLS ~~for~~AND ~~options granted in 2000, 1999 and 1998 under the Company's Equity Plans been determined based on the fair value at the grant dates, as prescribed in Statement of~~ PROCEDURES

~~F-16~~Evaluation of Disclosure Controls and Procedures

~~Financial~~ Based ~~Accounting~~on ~~Standards~~our ~~No. 123~~management’s evaluation (~~"SFAS 123"~~with the participation of our principal executive officer and principal financial officer), ~~"Accounting~~of ~~for~~our ~~Stock-Based~~disclosure controls ~~Compensation,"~~and ~~the~~procedures ~~Company's~~(as ~~net~~defined ~~income~~in Rules 13a-15(~~loss~~e) and ~~pro~~15d-15(e) ~~forma~~under ~~net~~the Securities ~~income~~Exchange Act of 1934, as amended (~~loss~~the “Exchange Act”)), ~~per~~as ~~share~~of ~~would~~the end of the period covered by this annual report, our principal executive officer and principal financial officer have ~~been~~concluded that such disclosure ascontrols ~~follows~~and (procedures are effective to ensure that information required to be disclosed by us in ~~thousands~~reports that we file or submit under the Exchange Act is recorded, ~~except~~processed, ~~per~~summarized ~~share~~and ~~data):~~reported within the time periods specified in Securities and Exchange Commission rules and forms.

		Year Ended December 31,
		2000			1999			1998
Net income (loss):
	As reported	$	(1,806	)	$	383		$	8,041
	Pro forma	$	(3,056	)	$	(1,223	)	$	6,481
Pro forma net income (loss) per share:
Basic:
	As reported	$	(0.14	)	$	0.03		$	0.67
	Pro forma	$	(0.24	)	$	(0.10	)	$	0.54
Diluted:
	As reported	$	(0.14	)	$	0.03		$	0.63
	Pro forma	$	(0.24	)	$	(0.10	)	$	0.51

Changes in Internal Control Over Financial Reporting

~~The fair~~ There ~~value~~was ofno ~~each~~change ~~option~~in ~~grant~~our isinternal ~~estimated~~control onover ~~the~~financial ~~date~~reporting during ofour ~~grant~~fourth ~~using~~fiscal ~~the~~quarter ~~Black-Scholes~~that ~~pricing~~has ~~model~~materially ~~with~~affected, ~~the~~or ~~following~~is ~~assumptions~~reasonably likely ~~used~~to ~~for~~materially ~~grants~~affect, ~~during~~our ~~the~~internal ~~applicable period:~~control over financial reporting.

	2000	1999	1998
Risk free rate of return	6.32-6.68%	5.10-5.31%	4.43-4.79%
Weighted average expected option term	3.8 years	4.3 years	3.8 years
Volatility rate	66%	65%	72%
Dividend yield	0%	0%	0%

PART III.

~~1997~~ITEM ~~Employee~~10. ~~401(k)~~DIRECTORS ~~Plan~~ AND EXECUTIVE OFFICERS OF THE REGISTRANT

~~The~~Directors ~~InVision Technologies, Inc. 401(k) Plan (the "401(k) Plan") was established in 1992 to provide retirement~~ and ~~incidental benefits for its employees.~~Officers ~~As allowed under Section 401(k) of the Internal Revenue Code, the 401(k) Plan provides tax-deferred salary deductions for eligible employees. Employees may contribute up to 20% of~~ ~~their annual compensation to the 401(k) Plan, limited to a maximum amount as set periodically by the Internal Revenue Service. Beginning in July 1997, the Company began matching employee~~ ~~contributions at the rate of $0.50 on the dollar up to a maximum of 6% of the employee's gross compensation. All matching contributions vest immediately. Company matching contributions to the 401(k)~~ ~~Plan totaled $395,000, $351,000 and $294,000 in 2000, 1999 and 1998, respectively.~~

~~NOTE~~ The 8.following ~~COMMITMENTS~~ table shows our executive officers, key employees and directors as of March 1, 2004.

The Company leases facilities and equipment under non-cancelable leases expiring at various times through 2007. The existing facilities lease includes an option to renew for an additional five years

~~F-17~~40

Year Ending December 31,			Operating Leases		Capital Leases
Name		Age			Position
2001			$	1,606	$	91
Andrew D. Siegel			38		Senior Vice President, Corporate Development
2002				1,418		53
Roelof van Ark			52		President, Aviation Security
2003				1,268		19
Giovanni Lanzara			64		Chairman of the Board of Directors
2004				1,227		16
Stephen Blum			62		Director
2005				1,252		—
Douglas P. Boyd			62		Director
Years thereafter				2,071		—
Morris D. Busby			65		Director
			$	8,842		179
Bruno Trezza			67		Director
Less: amount representing interest						(27	)
Louis A. Turpen			60		Director
Present value of net minimum lease payments						152
Less: current portion of capital lease obligations						(76	)
	Long-term capital lease obligations				$	76

~~Rent expense~~ Sergio ~~for~~Magistri ~~facilities~~has ~~located~~served inas ~~Newark~~our President, ~~California~~Chief Executive Officer and a director since December 1992. From June 1991 to November 1992, ~~San~~he ~~Diego~~was a Project Manager with AGIE, ~~California~~Switzerland, ~~Eugene~~a manufacturer of high precision tooling equipment, ~~Oregon~~responsible for all aspects of a family of new products for high precision electro-erosion machining with sub-micron precision. From 1988 to June 1991, ~~and~~Dr. Magistri was a consultant to high technology companies. As a consultant, Dr. Magistri was involved in the ~~United~~formation ~~Kingdom~~of ~~was~~InVision, $1including the development of our business plan and our technology. From 1983 to 1988,~~529,000,~~ $1Dr. Magistri held various positions with Imatron,~~445,000~~ including Engineering Physicist and $1Manager of Advanced Reconstruction Systems,~~357,000,~~ ~~for~~and ~~the~~Director ~~years~~of Computer ~~ended~~Engineering. ~~December~~Dr. ~~31,~~Magistri ~~2000,~~holds ~~1999~~a degree in Electrical Engineering and ~~1998~~a doctorate in Biomedical Engineering from the Swiss Institute of Technology, Zurich, ~~respectively~~Switzerland.

~~The lease~~ Donald onE. ~~the~~Mattson ~~corporate~~has ~~office~~served ~~and~~as ~~manufacturing~~our ~~facility~~Senior inVice ~~Newark,~~President ~~California~~and ~~includes~~Chief Operating ~~scheduled~~Officer ~~base~~since ~~rent~~November 2000. ~~increases~~Mr. Mattson ~~over~~previously ~~the~~served ~~term~~as our Interim Vice President of ~~the~~Operations ~~lease~~in 1998. ~~The~~In ~~total~~addition ~~amount~~to ofhis ~~base~~position ~~rent~~with ~~payments~~us, isfrom ~~being~~1992 ~~charged~~ to ~~expense~~2000, onMr. Mattson ~~the~~was ~~straight-line~~a ~~method~~management ~~over~~consultant ~~the~~and ~~term~~held a number of ~~the~~different ~~lease.~~positions, Inincluding, ~~addition~~among toothers, ~~the~~interim ~~base~~management assignments ~~rent~~as ~~payment,~~Executive ~~the~~Officer ~~Company~~of ~~pays~~Microware Distributors, Inc., a ~~monthly~~computer distribution ~~allocation~~company, President of ~~the~~SyDos, ~~building's operating~~a ~~expenses.~~disk Atdrive ~~December 31~~sub-systems company, ~~2000~~ and Vice ~~1999~~President of operations of Quantum, ~~the~~a ~~Company~~tape ~~has~~drive ~~recorded~~manufacturing ~~long-term~~company. Prior ~~deferred~~to ~~rent~~1992, ofMr. Mattson ~~$539~~held senior management positions at Microware Distributors,~~000~~ ~~and~~Inc., ~~$449~~Optical Data,~~000~~ Inc., ~~respectively~~Media Technology Corporation, toVerbatim Corporation, ~~reflect~~Memorex ~~the~~Corporation ~~excess~~and ofVarian ~~rent~~Associates. ~~expense~~Mr. Mattson holds a ~~over~~bachelor’s ~~cash~~degree ~~payments~~in ~~since~~Industrial ~~inception~~Management ofand Technology and an MBA from the University ~~lease.~~of California at Berkeley.

~~NOTE~~ Ross 9Mulholland has served as our Senior Vice President and Chief Financial Officer since March 2001. ~~INCOME~~From ~~TAXES~~ January 2000 to October 2000, Mr. Mulholland was Chief Financial Officer and Vice President of Operations of TechPlanet, a Silicon Valley private company providing information technology services. In 2001, TechPlanet filed for bankruptcy protection under Chapter 7. Before that, he was Vice President and Chief Financial Officer at Silicon Entertainment, a technology-based specialty retailer, from 1998 to 2000, and Senior Vice President and Chief Financial Officer for The Nature Company/Discovery Channel Stores, a specialty retailer and direct marketing company, from 1995 to 1997. He has also held senior management positions with several leading national retailers, including Dayton-Hudson Corporation. Mr. Mulholland holds a bachelor’s degree in Liberal Arts and an MBA from Wayne State University.

~~For~~ David ~~2000~~M. Pillor joined InVision in July 1994 as Vice President, ~~1999~~Sales and Marketing, ~~1998~~and has served as our Senior Vice President, ~~the~~Sales ~~provision~~and ~~for~~Marketing since ~~income~~November 1995 ~~taxes~~and ~~consists~~as a director since 1999. From 1988 to July 1994, Mr. Pillor held various positions including Area Sales Manager, National Sales Manager and Vice President of ~~the~~Sales ~~following~~of (Technomed International, a medical products company. Mr. Pillor holds a bachelor’s degree in ~~thousands):~~Chemistry from the University of Maryland.

		Year Ended December 31,
		2000			1999			1998
Current:
	Federal	$	333		$	188		$	756
	State		30			4			200
	Foreign		—			9			140
			363			201			1,096
Deferred:
	Federal benefit		(363	)		(134	)		—
Total provision		$	—		$	67		$	1,096

Andrew D. Siegel has served as our Senior Vice President, Corporate Development since April 2003. Mr. Siegel joined us in 2002 and was our Vice President, Business Development from May 2002 to December 2002 and Vice President, Corporate Development from January 2003 to March 2003. From April 2000 to February 2002, Mr. Siegel was a Vice President in the corporate and institutional client group of Merrill Lynch & Co., an investment bank. From December 1998 to January 2000, he was Vice President of Granite Associates, a private investment firm in Liberty, New York. Prior to then, Mr. Siegel was an attorney at Skadden Arps Slate Meagher and Flom LLP, specializing in mergers and acquisitions. Mr. Siegel received a Juris Doctor from New York University School of Law and a bachelor’s degree in political science and communications from Syracuse University.

~~F-18~~41

U.S. federal statutory rate	(35.0	)%	35.0	%	35.0	%
State taxes, net of federal tax benefit	1.7		0.3		0.9
Non-deductible intangible assets	15.4		—		—
Utilization of operating loss carryforwards and valuation allowance	17.6		(35.1	)	(23.5	)
Other	0.3		14.8		(0.4	)
Effective tax rate	—	%	15.0	%	12.0	%

Roelof van Ark joined InVision in August 2003 as President, Aviation Security. From May 1999 to November 2002 , Mr. van Ark was President and Chief Executive Officer of Siemens Transportation Systems, a subsidiary of Siemens, a company that supplies capital equipment to transit and rail authorities in North America and some regions of South America. From October 1995 to April 1999, he served as President of the Turnkey Transportation Systems Group, Siemens AG, a supplier of turnkey rail-transportation projects world wide. Mr. van Ark holds a bachelor’s degree in Electrical Engineering and an MBA from the University of the Witwatersrand, Johannesburg.

~~Deferred~~ Giovanni Lanzara has served as a director since September 1990 and as ~~tax~~Chairman ~~assets~~of ~~(liabilities)~~the ~~consist~~board of directors since March 1994. Since 1978, he has served as a professor and President of the ~~following~~Transportation ~~(in~~Engineering ~~thousands):~~Department at the University of Aquila, Rome, Italy. Dr. Lanzara has been President of the International Center for Transportation Studies since 1987. Dr. Lanzara served as a director of Imatron from August 1993 to June 1996.

		December 31,
		2000			1999
Assets:
	Net operating loss carryforwards	$	1,669		$	1,654
	Tax credits		950			1,384
	Reserves and accruals		3,311			2,242
	Other		597			690
			6,527			5,970
Liabilities:
	Other		(299	)		(422	)
Valuation allowance			(5,731	)		(5,414	)
Net deferred tax assets		$	497		$	134

Stephen Blum has served as a director since June 2001. Since April 2003, Mr. Blum has served as Managing Director of Chai Tech LLC, which provides consulting services in technology transfers and licensing and strategic relationships. From 2001 to April 2003, Mr. Blum became Vice President of Tejas Securities Group. From 1990 to 2002, he served as President of Donald & Co. Securities, Inc., an investment banking and brokerage firm that ceased operations in September 2002. In connection with Donald & Co. Securities, Inc. ceasing operations as a brokerage firm, the National Association of Securities Dealers, Inc. fined Mr. Blum and suspended him from running a brokerage firm for three months because of the failure of Donald & Co. Securities, Inc. to meet net capital requirements. From August 2001 to January 2003, Mr. Blum served as a director and officer of THCG, Inc., which provided investment banking and other financing advisory services. Mr. Blum holds a bachelor’s degree from New York University’s School of Commerce.

~~The~~ Douglas P. Boyd has served as a director since June 1993 and previously ~~Company~~served ~~provides~~as a ~~valuation~~director ~~allowance~~from ~~for~~September 1990 ~~deferred~~to ~~tax~~December 1992. ~~assets~~Dr. Boyd ~~when~~was ita founder isof ~~more~~Imatron ~~likely~~in ~~than~~1981 ~~not,~~and ~~based~~has ~~upon~~held ~~currently~~various ~~available~~positions ~~evidence~~at Imatron, including as ~~its~~the ~~prior~~Chairman ~~history~~of its board of ~~losses~~directors, ~~that~~through its acquisition by General ~~some~~Electric ~~portion~~Medical orSystems ~~all~~in ofDecember 2001. Since the ~~deferred~~acquisition, ~~tax~~Dr. Boyd ~~assets~~has been ~~will~~employed ~~not~~by beGE ~~realized.~~Imatron, a GE Medical Systems Company, as Chief Scientist.

~~At December 31,~~ Morris ~~2000,~~D. ~~the~~Busby ~~Company~~has ~~had~~served ~~federal~~as ~~net~~a ~~operating~~director ~~loss~~since ~~carryforwards~~March 1998. ofSince ~~approximately~~1995, Ambassador ~~$4.6 million~~Busby ~~available~~has toserved ~~reduce~~as ~~future~~President ~~federal~~of ~~taxable~~BGI, ~~income~~Inc., ~~The~~an international ~~Company's~~consulting ~~net~~firm. ~~operating~~From ~~loss~~1991 ~~carryforwards~~to ~~expire~~1994 ~~from~~he ~~2010~~was ambassador to ~~2012~~the ~~and~~Republic ~~tax~~of Colombia ~~credit~~and ~~carryforwards expire~~ from ~~2005~~1989 to ~~2018.~~1991 ~~The~~he ~~tax~~was ~~benefit~~the ofU.S. ~~the~~government’s ~~net~~U.S. ~~operating~~coordinator for ~~loss~~counter-terrorism and ~~credit~~directed ~~carryforwards~~the ~~may~~international ~~be limited~~efforts ~~due~~against toterrorism during the ~~impact~~Persian ofGulf ~~the~~War. ~~Tax~~Prior ~~Reform~~to ~~Act~~that oftime, ~~1986.~~he ~~Events~~was ~~which~~Principal ~~may~~Deputy Assistant ~~cause~~Secretary ~~the~~of ~~tax~~State ~~benefit~~for toInter-American beAffairs. ~~limited~~From ~~include,~~1984 ~~but~~to ~~are~~1987 ~~not~~he was ~~limited~~Deputy ~~to,~~Chief aof ~~cumulative~~Mission ~~stock~~in ~~ownership~~Mexico ~~change~~City. ofAmbassador ~~more~~Busby ~~than~~holds ~~50%,~~a asbachelor’s ~~defined,~~degree ~~over~~from aMarshall ~~three~~University ~~year period~~ and ~~the~~a ~~timing~~master’s ofdegree ~~utilization~~from ofGeorge ~~various tax benefits carried forward~~Washington University.

~~NOTE~~ Bruno 10Trezza has served as a director since November 1993. ~~INDUSTRY~~Since ~~SEGMENTS~~ 1974, he has served as a professor of economics at the University “La Sapienza” in Rome, Italy. From 1980 to 1981, Dr. Trezza served as an economic advisor to the Italian Prime Minister. From 1974 to 1983, he served as a member of the Committee for Economic Planning of the Italian Ministry of Planning. He has served as a director of several private companies and public institutions in Italy. Dr. Trezza holds a degree in law from the University of Napoli, a master’s degree in economics from Cambridge University and a doctorate degree in economics from the Italian Ministry of Public Education.

~~Under~~ Louis ~~the~~A. ~~provisions~~Turpen ofhas ~~SFAS 131,~~served ~~the~~as ~~Company~~a isdirector ~~reporting~~since ~~segment~~August 2001 ~~information~~and inpreviously served ~~the~~as ~~same~~a ~~format~~director ~~regularly~~from ~~reviewed~~1992 ~~by the Company's management in deciding how~~ to ~~allocate resources and assess performance in 2000~~1995. ~~The~~He ~~Company~~ has ~~three~~served ~~reportable~~as ~~segments~~the ~~based~~President ~~on types of technology~~ and Chief ~~applications.~~Executive ~~The~~Officer ~~"EDS" segment is comprised~~ of the ~~business~~ ~~unit~~Greater ~~that~~Toronto ~~deals~~Airports ~~with~~Authority ~~the~~since November 1995. ~~development,~~Prior ~~manufacturing~~to that, ~~marketing~~he ~~and~~served ~~support~~as ofChief ~~explosive~~Executive ~~detection~~Officer ~~systems based on advanced CT technology. The "Quantum" segment is comprised~~ of ~~the business~~San ~~unit~~Francisco ~~that~~International ~~deals~~Airport ~~with the development of technology~~ for ~~inspection,~~fourteen ~~detection~~years. ~~and~~Mr. Turpen ~~analysis~~holds ofa bachelor’s ~~explosives,~~degree ~~primarily~~in ~~landmine~~Civil ~~detection,~~Engineering ~~and~~from ~~other~~the ~~materials~~United ~~based~~States onAir ~~quadrupole~~Force ~~resonance technology and~~Academy ~~passive~~and ~~magnetic~~an ~~sensing.~~MBA ~~The~~from ~~"Wood"~~Roosevelt ~~segment is comprised of those business units that deal with the development of~~ University.

~~F-19~~Audit Committee

~~technology~~ The toAudit ~~optimize~~Committee ~~the~~currently ~~value~~consists ~~and yield~~ of ~~harvested~~Dr. Douglas ~~timber~~Boyd, ~~based~~Dr. Bruno Trezza onand ~~different~~Stephen ~~types~~Blum, each of ~~scanning~~whom ~~technologies,~~is ~~including~~independent CTunder ~~technology.~~current ~~Prior~~listing standards ~~years'~~of ~~segment~~The ~~information~~Nasdaq ~~has~~Stock ~~been~~Market. ~~presented~~In ~~to reflect~~addition, the ~~above~~board ~~structure~~ of ~~the Company's organization.~~ directors

~~Financial~~42 ~~information by business segment is as follows (in thousands):~~

		EDS		Quantum			Wood			Total
Year 2000
Revenues:
	Product revenues	$	46,499	$	307		$	11,907		$	58,713
	Service revenues		8,278		—			1,523			9,801
	Government contract revenues		—		10,632			—			10,632
Total revenues		$	54,777	$	10,939		$	13,430		$	79,146
Net income (loss)		$	318	$	7		$	(2,131	)	$	(1,806	)
Total assets		$	57,261	$	4,056		$	8,015		$	69,332
Year 1999
Revenues:
	Product revenues	$	43,001	$	159		$	—		$	43,160
	Service revenues		4,582		—			—			4,582
	Government contract revenues		—		10,694			—			10,694
Total revenues		$	47,583	$	10,853		$	—		$	58,436
Net income (loss)		$	1,457	$	17		$	(1,091	)	$	383
Total assets		$	58,534	$	4,453		$	—		$	62,987
Year 1998
Revenues:
	Product revenues	$	60,854	$	—		$	—		$	60,854
	Service revenues		2,430		—			—			2,430
	Government contract revenues		—		7,210			—			7,210
Total revenues		$	63,284	$	7,210		$	—		$	70,494
Net income (loss)		$	10,047	$	(1,703	)	$	(303	)	$	8,041

~~Substantially~~has reviewed the qualifications and experience of Dr. Boyd, including his ~~all~~experience in supervising and evaluating the preparation of audited financial statements, and has determined that Dr. Boyd qualifies as an “audit committee financial expert” within the ~~Company's~~meaning ~~long-lived~~of ~~assets~~the ~~are~~current ~~located~~rules inof the ~~United~~Securities ~~States~~and Exchange Commission. Each of the current Audit Committee members served throughout fiscal 2003. The Audit Committee:

~~NOTE~~• ~~11.~~meets ~~RELATED~~with ~~PARTY~~our ~~TRANSACTIONS~~ independent auditors at least annually to review the results of the annual audit and to discuss the financial statements; • hires and has the power to terminate the independent auditors; • oversees the independence of the independent auditors; • evaluates the independent auditors’ performance; and • receives and considers the independent auditors’ comments as to internal controls, accounting and operational matters, management performance, and procedures in connection with audits and reviews.

InSection 16(a) ~~2000,~~Beneficial ~~1999~~Ownership ~~and~~Reporting ~~1998, the Company recorded professional and consulting fees of $188,000, $199,000 and $205,000, respectively, as compensation to the~~Compliance ~~Company's directors for services provided as members of the Board of Directors as well as consulting services rendered to the Company not in connection with their services as directors.~~

~~In August~~ Section ~~1996~~16(a) ~~and~~of asthe ~~amended~~Securities inExchange ~~September 1999~~Act of 1934, or the ~~Company~~1934 ~~entered~~Act, requires ~~into~~our adirectors ~~consulting~~and ~~agreement~~executive ~~with BGI~~officers, ~~Inc.~~ ~~("BGI"),~~and apersons ~~Virginia-based~~who ~~international~~own ~~consulting~~more than ~~firm~~10% ~~engaged~~of toour ~~assist~~common ~~the~~stock, ~~Company~~to file with ~~enhancing~~the ~~its~~Securities ~~methods,~~and ~~strategies~~Exchange ~~and~~Commission initial ~~contacts~~reports toof ~~support~~ownership ~~the~~and ~~marketing~~reports of ~~the~~changes ~~CTX~~in ~~5000~~ownership ~~Series~~of toour ~~the~~common stock ~~U.S.~~and ~~Government.~~other Inequity ~~March 1998,~~securities. ~~Ambassador Busby~~Officers, ~~a controlling~~directors ~~shareholder~~and ofgreater ~~BGI,~~than ~~was~~10% stockholders ~~elected~~are torequired ~~the~~by ~~Company's~~regulation ~~Board~~ of ~~Directors.~~the ~~The~~Securities ~~Company~~and ~~paid~~Exchange Commission ~~consulting~~to ~~fees~~furnish ~~for~~us ~~BGI~~with ~~consulting~~copies ~~services~~ of ~~$120,000,~~all ~~$120,000~~Section ~~and~~16(a) ~~$240,000~~forms inthey ~~2000, 1999 and 1998,~~file. ~~respectively, and has~~

~~F-20~~ To our knowledge, based solely on a review of the copies of such reports furnished to us and written representations that no other reports were required, during the fiscal year ended December 31, 2003, all Section 16(a) filing requirements applicable to our officers, directors and greater than 10% beneficial owners were complied with.

~~recorded~~Code ~~consulting expenses~~ of ~~$108,000 through issuance of 20,468 shares of common stock, effective February 2001, under this agreement.~~ Ethics

~~NOTE~~ We 12have adopted a code of ethics that applies to all members of our board of directors and all of our employees, including our principal executive officer, principal financial officer and controller. ~~LICENSE~~A ~~AGREEMENTS~~ copy of this code is available on the “Company” section of our website at www.invision-tech.com and is filed as an exhibit to this annual report. We intend to disclose any changes in or waivers from our code of ethics required to be publicly disclosed by posting such information on our website or by filing a Form 8-K.

InITEM ~~connection with the formation of the Company, the Company obtained an exclusive, worldwide, and fully-paid license, as amended, from Imatron, Inc~~11. ~~regarding~~EXECUTIVE its patents and know-how related to (a) scanners for inspection of mail, freight, parcels, baggage and wood products, and (b) compact medical scanners for military field applications. The license allows the Company to develop, manufacture and sell systems based on a different type of CT technology than is currently incorporated in the Company's CTX Series. The license applies to (a) scanners for the inspection of mail, freight, parcels, baggage and wood products, and (b) compact medical scanners for military field applications. The Company, in exchange, granted to Imatron an exclusive, worldwide, perpetual and fully paid license under the Company's then existing or future patents and know-how to permit Imatron to utilize such technology in medical scanners other than compact medical scanners for military field applications. The license expires in 2009. COMPENSATION

~~In April 1999,~~Compensation ~~Quantum~~of ~~entered into a Technology License Agreement with International Business Machines (IBM). This agreement is a 10-year,~~Directors ~~non-exclusive, non-transferable, worldwide license for certain detection technology. A one-time license fee was paid to IBM. Quantum is required to make royalty~~ ~~payments based upon the net sales price of certain products sold or otherwise transferred by Quantum. There were no minimum royalty payments and no sales that would have resulted in a royalty payment~~ ~~to IBM in 2000 or 1999.~~

In ~~October 1994~~ 2003, ~~Quantum~~non-employee ~~entered~~directors ~~into~~received a ~~twelve-year~~$60,000 ~~license~~annual ~~agreement~~retainer ~~with~~as compensation afor ~~third~~their ~~party.~~services Asas ~~amended~~members inof ~~May 1997~~the board of directors, and the Chairman ~~agreement~~of ~~provides~~the ~~Quantum~~board ~~with~~of ~~a non-exclusive~~directors received an additional $10,000 ~~irrevocable~~annual retainer ~~license~~as tocompensation ~~certain~~for ~~in-process~~his ~~detection~~services ~~technology~~as (the ~~"Superconductor~~Chairman ~~Technology")~~of the Board. Each non-employee director also received $16,000 asannually ~~well~~for services as ~~equipment~~members ~~with~~of committees aof ~~fair~~the ~~value~~board of ~~$100~~directors. In addition, each non-employee director was issued stock options to purchase 25,000 shares of our common stock in connection ~~exchange~~with their services as directors. These directors were also reimbursed for aexpenses incurred in connection with the performance of services as directors. In addition, directors were entitled to an allowance of $~~330~~5,000 ~~note~~for ~~payable~~tax ~~due~~planning and preparation services in ~~unequal~~2003. ~~quarterly~~Such allowance ~~payments~~has ~~plus~~been ~~11%~~increased ~~interest.~~to $15,000 for 2004.

~~In June 1997,~~Compensation ~~Quantum~~Committee ~~entered~~Interlocks ~~into a joint venture to perform research~~ and ~~development~~Insider ~~related to certain detection technologies. In exchange for a 38% ownership interest in~~Participation ~~the joint venture, Quantum granted a non-exclusive, royalty free, perpetual, transferable sub-license on the Superconductor Technology, agreed that the joint venture will be~~ ~~the sole source of fabrication and testing of products developed by the joint venture, and agreed to guarantee one-half of a $200,000 working capital loan to the joint venture. In~~ ~~connection with the formation of the joint venture, Quantum sold equipment to the joint venture in exchange for an eleven-year note receivable of $100,000, bearing interest at 6.7% per~~ annum. In January 1999, Quantum sold sufficient shares to reduce its ownership in the joint venture to 10%, was released from its obligation to guarantee one-half of the working capital loan to the joint venture and agreed to extend the payment holiday under its note receivable from the joint venture to July 10, 2001.

~~In March 1995,~~ During ~~Quantum~~fiscal ~~executed~~2003, aDr. Lanzara ~~ten-year~~and ~~exclusive license agreement with a third party~~Mr. Blum ~~Quantum~~served isas ~~subject~~members ~~to royalty payments based on a percentage~~ of the ~~net~~ ~~sales~~compensation ~~price~~committee of ~~certain~~our ~~products~~board ~~made,~~of ~~used~~directors. orThe ~~sold.~~Compensation ~~Minimum~~Committee did ~~annual~~not ~~royalties~~meet ofduring ~~$20~~2003,~~000~~ ~~are~~and ~~due~~all ~~beginning~~compensation inmatters ~~calendar~~were ~~year~~handled ~~1997~~by ~~through~~ the board ~~remaining term~~ of ~~the agreement~~directors. ~~Quantum~~No ~~did~~member ~~not~~of ~~incur royalty~~the ~~expense~~board ~~under~~of ~~this~~directors ~~agreement in 1995~~ or ~~1996,~~compensation committee ~~and~~serves ~~paid~~as ~~the~~an ~~minimum~~executive ~~royalty~~officer of ~~$20,000~~any ~~for~~other ~~1997~~entity ~~and~~that ~~1998.~~has Inone ~~January 1999,~~or more ~~Quantum~~of ~~and~~our ~~the~~executive ~~licensor~~officers ~~agreed~~serving toas ~~modify~~a ~~the~~member ~~license~~of ~~by expanding~~ the ~~field~~board of ~~use,~~directors ~~increasing~~or compensation ~~the~~committee ~~minimum~~of ~~annual royalty to $70,000 and extending~~ the ~~term~~other ~~until January 2009~~entity. ~~Quantum~~Only ~~paid~~Dr. Magistri aand ~~one-time fee of $50,000 to obtain such~~Mr. Pillor ~~modification~~are ~~and~~directors ~~extension~~who ~~and~~are ~~paid~~or ~~the~~have ~~minimum~~been ~~annual~~executive ~~royalty~~officers of ~~$70,000 for each of the years 2000 and 1999~~InVision.

~~F-21~~43

Position

Sergio Magistri

President, Chief Executive Officer and Director

Donald E. Mattson

Senior Vice President and Chief Operating Officer

Ross Mulholland

Senior Vice President and Chief Financial Officer

David M. Pillor

Senior Vice President, Sales and Marketing and Director

~~NOTE~~Named ~~13.~~Executive ~~LITIGATION~~ Officer Compensation

In July 2000, the Company entered into a settlement agreement (the "Settlement Agreement") that settled an action brought on January 7, 1999 by Vivid Technologies, Inc. ("Vivid") in Superior Court of the State of California for the County of San Diego against the Company, ESI International, Inc. ("ESI"), Robert Price and Sandra Price (collectively, "Defendants"). Vivid asserted causes of action for (1) misappropriation of trade secrets; (2) inducing breach of contract; (3) interference with contractual relations; (4) statutory unfair competition; (5) common law unfair competition; (6) interference with prospective economic advantage; (7) defamation; and (8) declaratory relief. The ~~complaint was filed by Vivid~~ following ~~efforts~~table bysets ~~the~~forth ~~Company~~certain ~~and~~compensation ~~ESI,~~earned aduring ~~private investigator hired by the Company~~2003, ~~to investigate the alleged theft of intellectual~~ ~~property~~2002 ~~from~~and ~~the~~2001 ~~Company~~ by aour ~~former~~Chief ~~key~~Executive ~~employee~~Officer ~~hired by Vivid~~ and toour ~~bring~~four ~~certain~~other ~~evidence to the attention of the Federal Bureau of Investigation and the United States Attorney for the Southern~~executive ~~District~~officers ofwhose ~~California.~~salary ~~As part of the Settlement Agreement, Vivid represented that it is no longer pursuing QR technology~~ and ~~agreed~~bonus ~~not to pursue QR technology~~ for ~~two years from~~ the ~~date~~year ofended ~~the agreement. Vivid further agreed to file~~December a31, ~~request~~2003 ~~for dismissal of the complaint without prejudice which would automatically convert to a dismissal with prejudice on the second anniversary of~~exceeded ~~the Settlement Agreement. Similarly~~$100,000, ~~the~~referred ~~Company agreed that their voluntary dismissal of a federal court action (which had been filed but not served) against Vivid based on the alleged theft would also automatically convert~~ to aas ~~dismissal with prejudice in two years. Management believes that~~ the ~~terms~~“Named ofExecutive ~~the Settlement Agreement will not have a material adverse effect on the Company's business,~~Officers”: ~~financial condition or results of operations.~~

In addition to the foregoing matter, the Company may be involved, from time to time, in other litigation, including litigation relating to claims arising out of its operations in the normal course of business. The Company is not currently a party to any legal proceedings, the adverse outcome of which, in management's opinion, individually or in aggregate would have a material adverse effect on the Company's business, financial condition or results of operations.


								Long-Term
								Compensation
								Awards
Name and			Annual Compensation					Securities Underlying		All Other
Principal Position	Year		Salary ($)		Bonus ($)			Option (#)		Compensation ($)*
Sergio Magistri		2003		445,385		225,000			80,000		7,525	(1)
President and		2002		321,146		450,000			80,000		8,747	(1)
Chief Executive Officer		2001		240,192		182,000			100,000		4,391	(1)
Donald Mattson		2003		327,000		220,350			64,000		10,677	(2)
Senior Vice President and		2002		255,804		380,000			64,000		10,548	(2)
Chief Operating Officer		2001		212,403		169,000			6,300		8,075	(2)
Ross Mulholland		2003		254,077		161,500			35,000		8,505	(3)
Senior Vice President and		2002		220,769		185,000			54,000		9,557	(3)
Chief Financial Officer		2001		155,653		89,900			80,000		4,919	(3)
David Pillor		2003		247,692		352,668	(4)		45,000		19,743	(5)
Senior Vice President,		2002		198,077		819,861	(4)		54,400		19,399	(5)
Sales and Marketing		2001		143,592		364,272	(4)		68,500		3,705	(5)
Andrew Siegel (6)		2003		213,231		269,500			40,000		6,205	(7)
Senior Vice President, Corporate Development

F-22

(1)		For 2003, represents matching contributions by us to employees’ accounts under our 401(k) plan of $7,000 and premiums for employees’ group term life insurance of $525. For 2002, represents matching contributions by us to employees’ accounts under our 401(k) plan of $4,777, fees for professional tax services of $3,265, premiums for employees’ group term life insurance of $355 and airline membership fees of $350. For 2001, represents matching contributions by us to employees’ accounts under our 401(k) plan of $4,035 and premiums for employees’ group term life insurance of $356.

(2)		For 2003, represents matching contributions by us to employees’ accounts under our 401(k) plan of $5,980 and premiums for employees’ group term life insurance of $4,697. For 2002, represents matching contributions by us to employees’ accounts under our 401(k) plan of $5,520, premiums for employees’ group term life insurance of $4,878 and fees for professional tax services of $150. For 2001, represents matching contributions by us to employees’ accounts under our 401(k) plan of $5,290 and premiums for employees’ group term life insurance of $2,785.

(3)		For 2003, represents matching contributions by us to employees’ accounts under our 401(k) plan of $7,000 and premiums for employees’ group term life insurance of $1,505. For 2002, represents matching contributions by us to employees’ accounts under our 401(k) plan of $5,539, fees for professional tax services of $3,000 and premiums for employees’ group term life insurance of $1,018. For 2001, represents matching contributions by us to employees’ accounts under our 401(k) plan of $4,165 and premiums for employees’ group term life insurance of $754.

(4)		For 2003, represents commissions of $83,918 and a bonus of $268,750. For 2002 and 2001, represents commissions earned. For 2000, represents commissions of $100,362 and a bonus of $23,000.

~~NOTE 14. BALANCE SHEET COMPONENTS~~ 44

				December 31,
				2000			1999
				(in thousands)
Accounts receivable, net:
	Billed			$	12,544		$	6,845
	Unbilled				10,056			3,877
	Other receivables				249			82
		Subtotal			22,849			10,804
Less: allowance for doubtful accounts					(302	)		(171	)
			Total	$	22,547		$	10,633
Inventories:
	Raw material and purchased components			$	15,169		$	10,325
	Work-in-process				4,503			6,819
	Finished goods				535			316
		Total		$	20,207		$	17,460
Property and equipment, net:
	Machinery and equipment			$	6,077		$	5,144
	Self constructed assets				5,266			4,316
	Furniture and fixtures				1,121			1,113
	Leasehold improvements				3,013			2,965
		Subtotal			15,477			13,538
	Less: accumulated depreciation and amortization				(8,736	)		(6,742	)
			Total	$	6,741		$	6,796
Accrued liabilities:
	Warranty and other reserves			$	4,352		$	2,478
	Accrued employee compensation				3,172			1,492
	Income taxes				1,302			906
	Other				2,387			690
		Total		$	11,213		$	5,566

~~Unbilled receivables~~(5) ~~are~~For ~~comprised~~2003, represents annual rent for an apartment of ~~those~~$15,600, ~~amounts~~matching ~~billable~~contributions by us to ~~customers~~employees’ ~~upon~~accounts ~~satisfaction~~under our 401(k) plan of ~~certain~~$3,788 ~~perfunctory~~and ~~activities~~premiums for employees’ group term life insurance of $355. For 2002, ~~such~~represents asannual ~~installation~~rent for an apartment of $15,600, matching contributions by us to employees’ accounts under our 401(k) plan of $3,404 and ~~final~~premiums ~~acceptance~~for employees’ group term life insurance of $395. For 2001, represents matching contributions by us to employees’ accounts under our 401(k) plan of $3,231 and premiums for employees’ group term life insurance of $474. For 2000, represents matching contributions by us to employees’ accounts under our 401(k) plan of $3,202 and premiums for employees’ group term life insurance of $485.

~~Self-constructed assets~~(6) ~~are~~In ~~manufactured~~April ~~by the Company for use in system testing and support~~2003, ~~and~~Mr. ~~include~~Siegel ~~the~~became ~~cost~~our ofSenior ~~parts~~Vice ~~and materials~~President, ~~and~~Corporate ~~an overhead allocation~~Development. ~~The Company depreciates self-constructed assets over their respective estimated useful lives which range from three to five years.~~

~~At December 31~~(7) For 2003, ~~2000~~represents ~~and~~matching ~~1999,~~contributions ~~the~~by ~~Company~~us ~~had~~to ~~$382,000~~employees’ ~~and~~accounts under our 401(k) plan of $~~343~~6,000, ~~respectively,~~and ofpremiums ~~capitalized~~for ~~lease~~employees’ ~~equipment~~group ~~and~~term ~~related~~life ~~accumulated~~insurance ~~amortization~~ of $~~195,000 and $134,000, respectively~~205.

~~F-23~~* In addition to the amounts presented in the table, each of the named executive officers was entitled to an allowance of $5,000 for tax planning and preparation services in 2003. Such allowance has been increased to $15,000 for 2004.

~~NOTE~~Stock ~~15.~~Option ~~QUARTERLY FINANCIAL DATA (UNAUDITED)~~ Grants

(in thousands, except per share data) Quarter ended 2000	Apr. 2			Jul. 2			Oct. 1			Dec. 31
Total revenues	$	18,679		$	16,982		$	22,141		$	21,344
Gross profit		5,759			5,222			7,091			7,380
Net income (loss)		(660	)		(1,665	)		197			322
Basic income (loss) per share		(0.05	)		(0.13	)		0.02			0.03
Diluted income (loss) per share		(0.05	)		(0.13	)		0.01			0.02
Quarter ended 1999	Mar. 31			June 30			Sept. 30			Dec. 31
Total revenues	$	17,839		$	14,562		$	13,034		$	13,001
Gross profit		7,670			5,623			4,514			4,326
Net income (loss)		1,814			108			(659	)		(880	)
Basic income (loss) per share		0.15			0.01			(0.05	)		(0.07	)
Diluted income (loss) per share		0.14			0.01			(0.05	)		(0.07	)

We grant options to our executive officers under the 2000 Equity Incentive Plan. No options were granted under our previous incentive plan, the 1991 Equity Incentive Plan, in the year ended December 31, 2003. As of December 31, 2003, options to purchase a total of 856,017 shares were outstanding under the 1991 Equity Incentive Plan and options to purchase a total of 2,459,761 shares were outstanding under our 2000 Equity Incentive Plan. As of December 31, 2003, 1,224,704 shares remained available for grant under the 2000 Equity Incentive Plan.

F The following table shows for the fiscal year ended December 31, 2003, certain information regarding options granted to, and held at year-24end by, the Named Executive Officers.

The exercise price of each option was equal to the fair market value of our common stock as valued by the board of directors on the date of grant. The ~~InVision~~exercise ~~Technologies~~price may be paid in cash, ~~Inc. Schedule~~promissory ~~II—Valuation~~notes, ~~and~~in ~~Qualifying~~shares ~~Accounts Years~~of ~~Ended~~our ~~December~~common stock 31valued at fair market value on the exercise date or, ~~2000~~if permissible, through ~~1999~~a cashless exercise procedure involving a same-day sale of the purchased shares. The options granted vest as to 25% of the shares one year from the date of grant and ~~1998 (in~~1/48th ~~thousands)~~ of the shares each month thereafter. Each of the options has a ten-year term, subject to earlier termination if the optionee’s service with us ceases.

			Additions
	Balance at beginning of period		Charged to costs and expenses		Charged to other accounts		Deductions		Balance at end of period
Allowance for doubtful accounts
2000	$	171	$	188	$	101	$	158	$	302
1999	$	40	$	170	$	—	$	39	$	171
1998	$	25	$	15	$	—	$	—	$	40
Reserves for inventory
2000	$	1,179	$	357	$	49	$	88	$	1,497
1999	$	630	$	549	$	—	$	—	$	1,179
1998	$	438	$	240	$	—	$	48	$	630

The potential realizable value is calculated based on the ten-year term of the option at the time of grant. Stock price appreciation of 5% and 10% is assumed pursuant to rules promulgated by the Securities and Exchange Commission and does not represent our prediction of stock price performance. The potential realizable values at 5% and 10% appreciation are calculated by assuming that the stock price on the date of grant appreciates at the indicated annual rate, compounded annually for the entire term of the option and that the option is exercised and sold on the last day of the term for the appreciated stock price.

S- Percentages shown under “Percentage of Total Options Granted to Employees in 2003” are based on an aggregate of 1,126,500 options granted to our employees, consultants and directors under the 2000 Equity Incentive Plan during 2003.

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								Potential Realizable
								Value at Assumed
	Individual Grants							Annual Rates of
								Stock Price
	Number of		Percentage of Total					Appreciation for
	Securities		Options Granted to					Option Term
	Underlying Options		Employees in		Exercise		Expiration
Name	Granted		2003 (%)		Price per Share		Date (1)	5%($)		10% ($)
Sergio Magistri		80,000		7.1	$	24.94	Feb. 5, 2013	$	1,254,771	$	3,179,830
Donald Mattson		64,000		5.7	$	24.94	Feb. 5, 2013	$	1,003,816	$	2,543,864
Ross Mulholland		35,000		3.1	$	24.94	Feb. 5, 2013	$	548,962	$	1,391,176
David Pillor		45,000		4.0	$	24.94	Feb. 5, 2013	$	705,808	$	1,788,654
Andrew Siegel		40,000		3.6	$	24.94	Feb. 5, 2013	$	627,385	$	1,589,915

(1) See the discussion of our Change in Control Equity Acceleration Plan under “–Employment Agreements and Change of Control Agreements.”

Aggregated Option Exercises in Fiscal 2003 and December 31, 2003 Option Values

The following table sets forth information with respect to options exercised by the Named Executive Officers during 2003, the number of securities underlying unexercised options held by the Named Executive Officers as of December 31, 2003, and the value of unexercised in-the-money options as of December 31, 2003.

Amounts shown under the column “Value Realized” are based on the price at which the shares were sold less the exercise price. Amounts shown under the column “Value of Unexercised In-the-Money Options at December 31, 2003” are based on the closing price of our common stock on December 31, 2003, which was $33.57, less the exercise price, without taking into account any taxes that may be payable in connection with the transaction, multiplied by the number of shares underlying the option.


						Number of Securities				Value of Unexercised
						Underlying Unexercised				In-the-Money Options
	Shares Acquired on			Value		Options at December 31, 2003				at December 31, 2003
Name	Exercise			Realized ($)		Exercisable		Unexercisable		Exercisable ($)		Unexercisable ($)
Sergio Magistri		14,000	(1)		469,980		386,158		160,122		10,359,620		1,780,466
Donald Mattson		22,000			527,274		45,331		126,969		548,215		1,407,790
Ross Mulholland		10,000					38,625		90,375		467,925		1,081,925
David M. Pillor		20,000			655,539		247,988		98,829		6,879,409		1,202,576
Andrew Siegel		—			—		30,000		90,000		428,400		1,059,200

(1)

The “Value Realized” is based on the closing sale price of $34.12 on December 30, 2003, the date on which Dr. Magistri exercised his option. Dr. Magistri has not sold the shares underlying such option.

Employment Agreements and Change of Control Agreements

We have entered into employment agreements with Dr. Magistri and Messrs. Mattson, Mulholland, Pillor and Siegel that provide for salaries and other employment terms. These agreements each provide that, if we terminate the employee’s employment without cause, the employee is entitled to a severance payment equal to his annual base salary for six, nine or twelve months, depending on whether such employee’s tenure with us has been less than four years, between four and eight years or over eight years, respectively. All of the employment agreements are terminable at the will of either the employee or us, with or without cause. In each case, termination by the employee requires ninety days notice to us.

In addition, under our Change in Control Equity Acceleration Plan, the vesting of stock option awards granted to the Named Executive Officers under our equity incentive plans shall accelerate in full following the effective date of a change in control of InVision, subject to reduction if appropriate to receive better tax treatment. A change of control will occur, generally, in the event of a merger, sale of our assets or a stock acquisition in which following the transaction the stockholders of our company will hold less than 50% of the stock of the acquiring company following the transaction.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

The following table sets forth certain information regarding the ownership of our common stock as of March 1, 2004 by: (1) each director and nominee for director; (2) the Chief Executive Officer and four other most highly compensated executive officers whose total cash compensation exceeded $100,000 during our last completed fiscal year; (3) all of our executive officers and directors as a group; and (4) all those known by us to be beneficial owners of more than 5% of our common stock.


	Beneficial Ownership (1)
Beneficial Owner	Number of Shares		Percent of Total
HARAX Holdings S.A. (2) 22, Rue Marie Adelaide, L-2128 Luxembourg		1,401,582		8.1	%
Wellington Management Company LLP 75 State Street Boston, MA 02109		1,179,580		6.8	%
Neuberger Berman, LLC (3) 605 Third Avenue New York, NY, 10158-3698		1,179,000		6.8	%
Sergio Magistri (4)		444,626		2.5	%
Giovanni Lanzara (5)		256,409		1.5	%
Bruno Trezza (6)		254,715		1.5	%
David M. Pillor (7)		253,488		1.4	%
Morris D. Busby (8)		72,013		*
Donald Mattson (9)		66,523		*
Stephen Blum (10)		66,250		*
Douglas P. Boyd (11)		58,085		*
Andrew Siegel (12)		49,566		*
Louis A. Turpen (13)		46,250		*
Ross Mulholland (14)		42,718		*
All executive officers and directors as a group (11 persons) (15)		1,610,643		8.6	%

* Less than 1%.

(1)

This table is based upon information supplied by officers, directors and principal stockholders and Schedules 13D and 13G filed with the Securities and Exchange Commission. Unless otherwise indicated in the footnotes to this table and subject to community property laws where applicable, we believe that each of the stockholders named in this table has sole voting and investment power with respect to the shares indicated as beneficially owned. Beneficial ownership is determined in accordance with the rules of the Securities and Exchange Commission and generally includes voting or investment power with respect to securities. Beneficial ownership also includes shares of stock subject to options and warrants currently exercisable or exercisable within 60 days of the date of this table. Applicable percentages are based on 17,297,789 shares of our common stock outstanding on March 1, 2004.

(2)

All of the shares are held directly by HARAX Holdings S.A. The directors of HARAX vote and invest the shares held by HARAX, and two of three directors must concur to take these actions. The current three directors of HARAX are Luisella Moreschi, Sandrine Klusa and Angela Cinarelli. Arsene Kronshagen is the sole stockholder of HARAX, and as such may also be deemed to have voting and investment power over the shares. The directors disclaim beneficial ownership of the shares held by HARAX.

(3)

Neuberger Berman, LLC is deemed to be a beneficial owner for purpose of Rule 13(d) since it has shared power to make decisions whether to retain or dispose of, and in some cases the sole power to vote, the securities of many unrelated clients. Neuberger Berman, LLC does not, however, have any economic interest in the securities of those clients. In addition, Neuberger Berman, LLC and Neuberger Berman Management Inc. are deemed to be beneficial owners for purposes of Rule 13(d) of 764,100 shares since they both have shared power to make decisions whether to retain or dispose and vote the securities. Neuberger Berman, LLC and Neuberger Berman Management Inc. serve as sub-adviser and investment manager, respectively, of Neuberger Berman’s various mutual funds which hold such shares in the ordinary course of their business.

(4)

Includes 393,315 shares issuable pursuant to options exercisable within 60 days of March 1, 2004.

(5)

Includes 41,886 shares held by PASTEC Holdings, S.A. Giovanni Lanzara is the controlling stockholder of PASTEC. Also includes 156,080 shares issuable pursuant to options exercisable within 60 days of March 1, 2004.

(6)

Includes 85,474 shares held by HAKON Holdings, S.A. Bruno Trezza is the controlling stockholder of HAKON. Also includes 169,241; shares issuable pursuant to options exercisable within 60 days of March 1, 2004.

(7)

Includes 251,243 shares issuable pursuant to options exercisable within 60 days of March 1, 2004.

(8)

Includes 327 shares held by BGI, Inc. Ambassador Busby is President and a controlling stockholder of BGI. Also includes 71,686 shares issuable pursuant to options exercisable within 60 days of March 1, 2004.

(9)

Includes of 65,975 shares issuable pursuant to options exercisable within 60 days of March 1, 2004.

(10)

Consists of shares issuable pursuant to options exercisable within 60 days of March 1, 2004.

(11)

Consists of shares issuable pursuant to options exercisable within 60 days of March 1, 2004.

(12)

Includes 46,666 shares issuable pursuant to options exercisable within 60 days of March 1, 2004.

(13)

Consists of shares issuable pursuant to options exercisable within 60 days of March 1, 2004.

(14)

Includes 42,214 shares issuable pursuant to options exercisable within 60 days of March 1, 2004.

(15)

Includes 1,367,005 shares issuable pursuant to options exercisable within 60 days of March 1, 2004. See Notes 3-14 above.

Change in Control Arrangement

On March 15, 2004, we entered into an Agreement and Plan of Merger with General Electric Company, or GE, under which, GE would acquire us through the merger of a wholly owned subsidiary of GE with and into InVision, and each outstanding share of our common stock would be converted into the right to receive $50.00 in cash. The merger is subject to customary closing conditions, including the approval of our stockholders and the expiration or termination of waiting periods under U.S. and applicable foreign antitrust laws. The Agreement and Plan of Merger is attached as Exhibit 2.2 to this annual report. The foregoing description is qualified in its entirety by reference to the full text of the agreement.

In connection with the proposed merger, we intend to file a proxy statement and other relevant materials with the Securities and Exchange Commission, or SEC. BEFORE MAKING ANY VOTING DECISION WITH RESPECT TO THE PROPOSED MERGER, WE URGE OUR STOCKHOLDERS TO READ THE PROXY STATEMENT AND OTHER RELEVANT MATERIALS BECAUSE THEY WILL CONTAIN IMPORTANT INFORMATION ABOUT THE PROPOSED MERGER. The proxy statement and other relevant materials, and any other documents filed by us with the SEC, may be obtained free of charge at the SEC’s website at www.sec.gov. In addition, our stockholders may obtain free copies of the documents filed with the SEC by contacting our Investor Relations at (510) 739-2511 or InVision Technologies, Inc., 7151 Gateway Boulevard, Newark, CA 94560. Any reports, statements and other information filed by us with the SEC may be copied or read at the SEC public reference room at 450 Fifth Street, N.W. Room 1200, Washington, D.C. 20549. Please call the SEC at 1-800-SEC-0330 or visit the SEC’s website for further information on its public reference room.

We and our executive officers and directors may be deemed to be participants in the solicitation of proxies from our stockholders in favor of the proposed merger. Some of our executive officers and directors have interests in the merger that may differ from the interests of our stockholders generally, including acceleration of vesting of stock options and continuation of director and officer insurance and indemnification. See, for example, the discussion of our Change in Control Equity Acceleration Plan under “ - Employment Agreements and Change of Control Agreements.” These interests will be described in the proxy statement when it becomes available.

Securities Authorized for Issuance Under Equity Compensation Plans

As of December 31, 2003, we maintained the 1991 Equity Incentive Plan, the 2000 Equity Incentive Plan and the 2002 Employee Stock Purchase Plan, all of which were approved by our stockholders, and the 2000 Non-Officer Equity Incentive Plan, which is not subject to stockholder approval.

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