UNITED STATES SECURITIESTable ANDof EXCHANGE COMMISSIONContents

~~Washington,~~UNITED ~~D.C. 20549~~STATES SECURITIES AND EXCHANGE COMMISSION

~~FORM~~Washington, ~~10-Q~~D.C. 20549

~~(Mark~~FORM ~~One)~~10-Q

ý	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the quarterly period ended September 28, 2003
or
o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the transition period from to

(Mark One)

~~Commission~~x ~~File~~QUARTERLY ~~Number:~~REPORT ~~0-28236~~PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 27, 2004

~~INVISION~~or ~~TECHNOLOGIES, INC.~~

~~(Exact~~o ~~name~~TRANSITION ~~of registrant~~REPORT asPURSUANT ~~specified~~TO inSECTION ~~its~~13 ~~charter~~OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to

~~Delaware~~Commission ~~(State~~File orNumber: ~~other jurisdiction of incorporation or organization) 94~~0-3123544 (I.R.S. Employer Identification No.) 7151 Gateway Boulevard, Newark, CA 94560 (Address of principal executive offices, including zip code) (510) 739-2400 (Registrant’s telephone number, including area code)28236

~~Indicate~~INVISION by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports)TECHNOLOGIES, ~~and (2) has been subject to such filing requirements for the past 90 days~~INC. ~~Yes ý No o~~

~~Indicate~~(Exact byname ~~check~~of ~~mark whether the~~ registrant ~~is an accelerated filer (~~as ~~defined~~specified in ~~Rule~~its ~~12b-2 of the Exchange Act~~charter).

~~Yes ý No o~~Delaware (State or other jurisdiction of incorporation or organization)

~~On October 31, 2003,~~94-3123544 ~~there~~(I.R.S. ~~were~~Employer ~~16,918,645~~Identification ~~shares of the registrant’s common stock outstanding~~No.)

~~InVision~~7151 ~~Technologies~~Gateway Boulevard, ~~Inc.~~Newark, CA 94560 (Address of principal executive offices, including zip code)

~~Form 10~~(510) 739-Q2400 (Registrant’s telephone number, including area code)

~~INDEX~~ Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act 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

PART I. FINANCIAL INFORMATION
Item
1.	Financial Statements
	a.	Condensed Consolidated Balance Sheets (Unaudited) - September 28, 2003 and December 31, 2002
	b.	Condensed Consolidated Statements of Operations (Unaudited) - Three and nine months ended September 28, 2003 and September 29, 2002
	c.	Condensed Consolidated Statements of Cash Flows (Unaudited) - Nine months ended September 28, 2003 and September 29, 2002
	d.	Notes to Condensed Consolidated Financial Statements (Unaudited)
2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations
3.	Quantitative and Qualitative Disclosures about Market Risk
4.	Controls and Procedures
PART II. OTHER INFORMATION
Item
1.	Legal Proceedings
2.	Changes in Securities
5.	Other Information
6.	Exhibits and Reports on Form 8-K
Signature Page

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).
Yes x No o

~~InVision,~~ On ~~Quantum Magnetics~~July 30, ~~Yxlon~~2004, ~~HAPEG,~~there ~~CTX,~~were ~~CTX 5500 DS~~17, ~~CTX 9000 DSi and QScan~~643,695 ~~among others,~~shares ~~are trademarks~~ of ~~InVision~~the ~~Technologies,~~registrant’s ~~Inc. or one of its~~common ~~subsidiaries~~stock ~~in the United States and other countries~~outstanding. ~~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.~~

~~PART I. FINANCIAL~~InVision ~~INFORMATION~~Technologies, Inc. Form 10-Q INDEX

Item 1. Financial Statements


PART I. FINANCIAL INFORMATION
Item
1.Financial Statements
		a. Condensed Consolidated Balance Sheets (Unaudited) - June 27, 2004 and December 31, 2003
		b. Condensed Consolidated Statements of Operations (Unaudited) - Three and six months ended June 27, 2004 and June 29, 2003
		c. Condensed Consolidated Statements of Cash Flows (Unaudited) - Six months ended June 27, 2004 and June 29, 2003
		d. Notes to Condensed Consolidated Financial Statements (Unaudited)
2.Management’s Discussion and Analysis of Financial Condition and Results of Operations
3.Quantitative and Qualitative Disclosures about Market Risk
4.Controls and Procedures
PART II. OTHER INFORMATION
Item
1. Legal Proceedings
4. Submission of Matters to a Vote of Security Holders
6. Exhibits and Reports on Form 8-K
Signature Page
EXHIBIT 10.1
EXHIBIT 31.1
EXHIBIT 31.2
EXHIBIT 32.1

InVision, Quantum Magnetics, Yxlon, HAPEG, CTX, CTX 5500 DS, CTX 9000 DSi and QScan, 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 of InVision Technologies, Inc. or one of its subsidiaries in the United States.

CondensedTable Consolidatedof Balance SheetsContents

~~(In~~PART ~~thousands,~~I. ~~except~~FINANCIAL ~~share data)~~INFORMATION

~~(Unaudited)~~Item 1. Financial Statements

	September 28, 2003			December 31, 2002
Assets
Current assets:
Cash and cash equivalents	$	282,383		$	159,736
Short-term investments	—			—
Accounts receivable, net	65,894			146,295
Inventories	76,383			64,764
Deferred income taxes	18,677			20,889
Other current assets	9,223			15,811
Total current assets	452,560			407,495
Property and equipment, net	11,678			7,225
Deferred income taxes	—			1,050
Goodwill	21,036			681
Intangible assets, net	14,805			922
Other assets	6,159			414
Total assets	$	506,238		$	417,787
Liabilities and stockholders’ equity
Current liabilities:
Accounts payable	$	17,383		$	28,477
Accrued liabilities	49,191			65,364
Deferred revenue	23,523			86,284
Short-term debt	7,365			184
Current maturities of long-term obligations	261			112
Total current liabilities	97,723			180,421
Long-term obligations	126,621			653
Deferred income taxes	1,221			—
Total liabilities	225,565			181,074
Commitments and contingencies (see Note 8)	—			—
Stockholders’ equity:
Preferred stock, $0.001 par value, 5,000,000 shares authorized; no shares issued and outstanding	—			—
Common stock, $0.001 par value, 60,000,000 shares authorized; 17,594,000 and 17,243,000 shares issued; 16,907,000 and 17,008,000 shares outstanding	17			17
Additional paid-in capital	171,257			166,243
Deferred stock compensation expense	(305		)	(406		)
Accumulated other comprehensive loss	(1,099		)	(1,783		)
Retained earnings	125,494			74,836
Treasury stock, at cost (687,000 and 235,000 shares)	(14,691		)	(2,194		)
Total stockholders’ equity	280,673			236,713
Total liabilities and stockholders’ equity	$	506,238		$	417,787

InVision Technologies, Inc.

~~The accompanying~~ ~~notes~~Condensed ~~are~~Consolidated anBalance ~~integral~~Sheets (In ~~part~~thousands, ofexcept ~~these~~share ~~condensed consolidated financial~~data) ~~statements.~~(Unaudited)


	June 27,			December 31,
	2004			2003
Assets
Current assets:
Cash and cash equivalents	$	114,270		$	182,382
Short-term investments		214,825			94,557
Restricted cash		5,633			—
Accounts receivable, net		59,115			56,951
Inventories		78,999			78,894
Deferred income taxes		13,881			14,283
Other current assets		8,316			5,666
Total current assets		495,039			432,733

Property and equipment, net		10,793			11,605
Goodwill		21,474			21,474
Intangible assets, net		13,100			13,978
Other assets		7,051			6,278

Total assets	$	547,457		$	486,068

Liabilities and stockholders’ equity
Current liabilities:
Accounts payable	$	18,533		$	13,761
Accrued liabilities		39,730			35,058
Deferred revenue		42,981			13,277
Short-term debt		5,319			5,581
Current maturities of long-term obligations		260			263

Total current liabilities		106,823			67,940
Long-term obligations		127,034			127,244
Deferred income taxes		—			203

Total liabilities		233,857			195,387
Commitments and contingencies Stockholders’ equity:
Preferred stock, $0.001 par value, 5,000,000 shares authorized; no shares issued and outstanding		—			—
Common stock, $0.001 par value, 60,000,000 shares authorized; 18,248,000 and 17,782,000 shares issued; 17,561,000 and 17,095,000 shares outstanding		18			18
Additional paid-in capital		186,120			173,968
Deferred stock compensation expense		(203	)		(271	)
Accumulated other comprehensive loss		(1,512	)		(125	)
Retained earnings		143,868			131,782
Treasury stock, at cost (687,000 shares)		(14,691	)		(14,691	)
Total stockholders’ equity		313,600			290,681
Total liabilities and stockholders’ equity	$	547,457		$	486,068

~~InVision~~ The ~~Technologies,~~accompanying ~~Inc~~notes are an integral part of these condensed consolidated financial statements.

~~Condensed~~3 ~~Consolidated Statements of Operations~~

(InTable thousands,of except per share data)Contents

~~(Unaudited)~~InVision Technologies, Inc.

	Three Months Ended						Nine Months Ended
	September 28, 2003			September 29, 2002			September 28, 2003			September 29, 2002
Revenues:
Product revenues	$	69,281		$	111,159		$	297,090		$	199,255
Service revenues	13,745			3,567			34,167			10,456
Contract research and development revenues	3,092			2,334			9,456			8,973
Total revenues	86,118			117,060			340,713			218,684
Cost of revenues:
Product costs	42,285			62,860			171,411			112,784
Service costs	8,330			2,598			20,497			7,906
Contract research and development revenues	1,806			1,559			5,875			6,091
Total cost of revenues	52,421			67,017			197,783			126,781
Gross profit	33,697			50,043			142,930			91,903
Operating expenses:
Research and development	5,268			5,762			20,269			14,219
Selling, general and administrative	12,280			8,897			31,778			20,931
In-process research and development (Yxlon)	—			—			4,300			—
Total operating expenses	17,548			14,659			56,347			35,150
Income from operations	16,149			35,384			86,583			56,753
Interest expense	(343		)	(107		)	(488		)	(316		)
Interest and other income, net	667			510			2,022			373
Income before provision for income taxes	16,473			35,787			88,117			56,810
Provision for income taxes	7,197			14,314			37,459			22,912
Net income	$	9,276		$	21,473		$	50,658		$	33,898
Net income per share:
Basic	$	0.54		$	1.28		$	2.95		$	2.16
Diluted	$	0.50		$	1.17		$	2.75		$	1.93
Weighted average shares outstanding:
Basic	17,269			16,740			17,182			15,671
Diluted	18,450			18,430			18,415			17,561

Condensed Consolidated Statements of Operations
(In thousands, except per share data)
(Unaudited)

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


	Three Months Ended						Six Months Ended
	June 27,			June 29,			June 27,			June 29,
	2004			2003			2004			2003
Revenues:
Product revenues	$	60,180		$	74,995		$	114,125		$	227,809
Service revenues		23,750			11,513			43,827			20,422
Contract research and development revenues		2,738			2,919			5,611			6,364

Total revenues		86,668			89,427			163,563			254,595

Cost of revenues:
Product costs		36,321			44,452			69,924			129,126
Service costs		14,866			7,167			27,039			12,167
Contract research and development costs		2,047			1,933			4,331			4,069

Total cost of revenues		53,234			53,552			101,294			145,362

Gross profit		33,434			35,875			62,269			109,233

Operating expenses:
Research and development		7,036			7,646			13,297			15,001
Selling, general and administrative		13,406			10,436			26,769			19,498
In-process research and development (Yxlon)		—			4,300			—			4,300

Total operating expenses		20,442			22,382			40,066			38,799

Income from operations		12,992			13,493			22,203			70,434
Interest expense		(1,297	)		(103	)		(2,590	)		(145	)
Interest and other income, net		418			670			1,254			1,355

Income before provision for income taxes		12,113			14,060			20,867			71,644
Provision for income taxes		5,206			7,085			8,781			30,262

Net income	$	6,907		$	6,975		$	12,086		$	41,382

Net income per share:
Basic	$	0.39		$	0.41		$	0.69		$	2.41

Diluted (Note 4)	$	0.32		$	0.38		$	0.58		$	2.25

Weighted average shares outstanding:
Basic		17,509			17,210			17,391			17,139
Diluted (Note 4)		23,039			18,415			22,813			18,397

4 The accompanying notes are an integral part of these condensed consolidated financial statements.

~~InVision Technologies, Inc.~~4

CondensedTable Consolidated Statements of Cash FlowContents

~~(In~~InVision ~~thousands)~~Technologies, Inc.

Condensed Consolidated Statements of Cash Flow (~~unaudited~~In thousands) (Unaudited)

	Nine Months Ended
	Six Months Ended
	September 28, 2003			September 29, 2002
	June 27,				June 29,
Cash flow from operating activities:
	2004				2003
Net income	$	50,658		$	33,898
Cash flow from operating activities:
Adjustments to reconcile net income to net cash provided by operating activities:
Net income	$	12,086			$	41,382
Depreciation and amortization	4,318			2,635
Adjustments to reconcile net income to net cash provided by operating activities:
Deferred income taxes	1,311			(4,365		)
Depreciation and amortization		5,604				2,363
Loss on disposal of fixed assets	456			460
Deferred income taxes		498				(487	)
Bad debt expense	156			53
Loss on disposal of fixed assets		98				536
Income tax benefit from employee stock transactions	1,662			5,802
Bad debt expense		159				284
Stock compensation expense	206			885
Income tax benefits from employee stock transactions		4,758				1,193
In-process research and development (Yxlon)	4,300			—
Stock compensation expense		366				109
Changes in operating assets and liabilities:
In-process research and development (Yxlon)		—				4,300
Accounts receivable	90,390			(62,485		)
Changes in operating assets and liabilities:
Inventories	7,593			(55,917		)
Accounts receivable		(4,580	)			92,698
Other current assets	7,835			(23,357		)
Inventories		(1,356	)			4,245
Other noncurrent assets	—			—
Other assets		(2,035	)			6,585
Accounts payable	~~(19,055~~	4,935	)	~~18,977~~		(21,456	)
Accrued liabilities	~~(24,046~~	7,190	)	~~27,994~~		(11,760	)
Deferred revenues	~~(69,161~~	29,801	)	~~72,376~~		(77,649	)
Other	39			(26		)
Other liabilities		(36	)			33
Net cash provided by operating activities	~~56,662~~	57,488		~~16,930~~		42,376
Cash flow from investing activities:
Purchases of property and equipment	(2,627		)	(3,387		)
Change in restricted cash		(5,633	)			—
Proceeds from short-term investments	—			1,992
Purchases of property and equipment		(1,725	)			(1,765	)
Purchase of Inovec subsidiary	—			(183		)
Proceeds from short-term investments, net		51,670				—
Purchase of Yxlon subsidiary, net of cash acquired	(41,830		)	—
Purchase of short-term investments, net		(175,960	)			—
Purchase of Hapeg subsidiary, net of cash acquired	(3,424		)	—
Purchase of Yxlon subsidiary, net of cash acquired		—				(41,830	)
Investment in SafeView	(1,500		)	—
Purchase of other long-term investments, net		(500	)			(1,500	)
Net cash used in investing activities	~~(49,381~~	(132,148	)	~~(1,578~~		)(45,095	)
Cash flow from financing activities:
Net proceeds from (repayments of) short-term debt	~~4,874~~	(96	)	~~(1,313~~		)3,769
Proceeds from issuance of long-term debt	125,000			—
Debt issuance costs		(51	)			—
Debt issuance costs	(4,406		)	—
Repayments of long-term debt		(321	)			(136	)
Repayments of long-term debt	(212		)	(137		)
Proceeds from issuance of common stock, net		7,096				2,181
Repurchase of common stock	(12,497		)	—
Net cash provided by financing activities		6,628				5,814
Proceeds from issuance of common stock, net	3,248			86,423
Effect of exchange rate changes on cash		(80	)			146
Net cash provided by financing activities	116,007			84,973
Net change in cash and cash equivalents for the period		(68,112	)			3,241
Effect of exchange rate changes on cash	(641		)	—
Cash and cash equivalents at beginning of period		182,382				159,736
Net change in cash and cash equivalents for the period	122,647			100,325
Cash and cash equivalents at end of period	$	114,270			$	162,977
Cash and cash equivalents at beginning of period	159,736			11,386
Supplemental disclosures of cash flow information:
Cash and cash equivalents at end of period	$	282,383		$	111,711
Interest paid	$	3,156			$	138
Supplemental disclosures of cash flow information:
Income taxes paid	$	860			$	37,153
Interest paid	$	374		$	304
Supplemental disclosures of noncash investing and financing activities:
Income taxes paid	$	47,054		$	7,831
Capital lease obligations incurred for the purchase of new equipment	$	—			$	668
Supplemental disclosures of noncash investing and financing activities:
Issuance of common stock in connection with acquisition of subsidiary	$	—		$	1,199
Financing obligations incurred for the purchase of new equipment	$	668		$	86
Warrant issued in connection with investment advisory services and financing related services
Issuance of common stock in connection with the exercise of warrants	$	—		$	995
Financing obligations incurred for insurance policy renewals	$	1,691		$	—

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

InVisionTable Technologies,of Inc. Notes to Condensed Consolidated Financial Statements (Unaudited)Contents

~~1. Summary~~InVision ofTechnologies, ~~Significant Accounting Policies~~Inc.

~~Interim~~ Notes ~~Unaudited~~to Condensed Consolidated Financial Statements ~~Information~~(Unaudited)

The accompanying interim unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“generally accepted accounting principles”) for interim financial information and in accordance with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X1. ~~Accordingly,~~ ~~they~~Summary ~~do not contain all~~ of ~~the~~Significant ~~information~~Accounting ~~and footnotes required by generally accepted accounting~~Policies ~~principles for complete financial statements. In the opinion of~~ ~~management, the accompanying unaudited condensed consolidated financial~~ ~~statements reflect all adjustments (consisting only of normal recurring~~ adjustments) considered necessary for a fair presentation. These financial statements should be read in conjunction with the audited consolidated financial statements of InVision Technologies, Inc. and its subsidiaries (the “Company”) as of December 31, 2002 and 2001 and for each of the three years in the period ended December 31, 2002, including the notes thereto, included in the Company’s Annual Report on Form 10-K filed on March 28, 2003.

~~Operating~~ Interim ~~results~~Unaudited ~~for~~Financial ~~the~~Information ~~three and nine-month periods ended September 28, 2003 may not necessarily~~ ~~be indicative of the results that may be expected for the year ended~~ ~~December 31, 2003 or any other future period.~~

~~Business~~ The ~~Combinations~~accompanying interim unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“generally accepted accounting principles”) for interim financial information and ~~Goodwill~~in accordance with the instructions to Form 10-Q and ~~Other~~Rule 10-01 ~~Intangible~~of ~~Assets~~Regulation S-X. Accordingly, they do not contain all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, the accompanying unaudited condensed consolidated financial statements reflect all adjustments (consisting only of normal recurring adjustments) considered necessary for a fair presentation. These financial statements should be read in conjunction with the audited consolidated financial statements of InVision Technologies, Inc. and its subsidiaries (the “Company”) as of December 31, 2003 and 2002 and for each of the three years in the period ended December 31, 2003, including the notes thereto, included in the Company’s Annual Report on Form 10-K filed on March 15, 2004.

On Operating ~~January 1,~~results ~~2002,~~ for the ~~Company~~three ~~adopted~~and ~~Statement~~six-month ofperiods ~~Financial~~ended ~~Accounting Standards (“SFAS”) No.~~June ~~142~~27, ~~“Goodwill and Other Intangible Assets” (“SFAS 142”). SFAS~~2004 ~~142~~may ~~addresses~~not ~~the~~necessarily ~~initial~~be ~~recognition~~indicative ~~and measurement~~ of ~~intangible assets acquired outside of a business combination and~~ the ~~accounting~~results ~~for goodwill and other intangible assets subsequent to their acquisition. SFAS 142 provides~~ that ~~intangible~~may ~~assets with finite useful lives~~ be ~~amortized~~expected ~~and that goodwill and intangible assets with indefinite lives not be amortized, but will rather be tested at least annually~~ for ~~impairment. Since adopting SFAS 142 on January 1, 2002,~~ the ~~Company ceased amortization of the carrying~~ ~~value~~year ofended ~~goodwill of $2.5 million and acquired workforce of $331,000 at January~~December 131, ~~2002,~~2004 ~~resulting~~or inany aother ~~reduction~~future ~~in annual amortization expense of $426,000~~period. ~~The net carrying amount of acquired workforce was also reclassified~~ ~~to goodwill. In the fourth quarter of 2002, the Company performed the~~ ~~annual impairment test required by the standard and recorded a $2.1 million~~ ~~impairment of goodwill relating to the Inovec reporting unit. The Company will perform its 2003 annual impairment test in the fourth quarter of 2003.~~

~~Accounting~~ Cash ~~for~~and ~~Costs~~Cash ~~Associated with~~Equivalents ~~Exit or Disposal Activities~~

On The ~~January 1, 2003, the~~ Company ~~adopted~~considers ~~SFAS~~all ~~No.~~highly ~~146,~~liquid ~~“Accounting~~investments ~~for~~purchased ~~Costs Associated~~ with Exit or Disposal Activities” (“SFAS 146”), which addresses accounting for restructuring and similar costs. SFAS 146 supersedes previous accounting guidance, principally Emerging Issues Task Force (“EITF”) Issue No. 94-3 (“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~~original ~~EITF 94-3,~~maturity ~~a liability for exit costs was recognized at the date~~ of ~~the~~three ~~Company’s~~months ~~commitment~~or less to ~~an exit plan. SFAS 146 also establishes that the liability should initially~~ be ~~measured~~cash ~~and recorded at fair value~~equivalents. ~~Accordingly, SFAS 146 may affect the timing of recognizing~~ ~~future restructuring costs as well as the amounts recognized. There was~~ ~~no effect on the Company’s financial statements from the adoption of SFAS 146.~~

~~Accounting for Stock~~ Short-~~Based~~Term Investments ~~Compensation~~

In Short-term ~~December 2002, the~~investments ~~Financial~~consist ~~Accounting~~primarily ~~Standards~~of ~~Board (“FASB”) issued SFAS No~~U.S. ~~148~~government, international ~~“Accounting~~government, ~~for~~corporate ~~Stock-Based~~and ~~Compensation~~municipal –notes ~~Transition~~ and ~~Disclosure~~bonds –and ~~an Amendment~~are ofclassified ~~FASB Statement 123” (“SFAS 148”), which provides alternative~~as ~~methods of transition~~ available-for-sale. aSuch ~~voluntary~~short-term ~~change~~investments toare ~~the~~carried at fair value ~~based method of~~with ~~accounting~~unrealized ~~for~~gains ~~stock-based~~or ~~employee~~losses ~~compensation. In~~reported ~~addition,~~as ~~SFAS~~a ~~148 amends~~separate ~~the~~component ~~disclosure requirements~~ of ~~SFAS No. 123, “Accounting for~~accumulated ~~Stock-Based~~other ~~Compensation”~~comprehensive income (~~“SFAS 123”~~loss), tonet ~~require~~of ~~prominent~~tax.

6 The following table summarizes the Company’s short-term investments as of June 27, 2004 (in thousands):

disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. The amended disclosure requirements of SFAS 148 are effective for years ending after December 15, 2002.


			Gross		Gross
	Amortized		Unrealized		Unrealized			Fair
	Cost		Gains		Losses			Value
U.S. government notes and bonds	$	37,055	$	17	$	(505	)	$	36,567
International government notes and bonds		4,739		—		(62	)		4,677
Corporate notes and bonds		174,179		288		(1,785	)		172,682
Municipal notes and bonds		904		—		(5	)		899

Total	$	216,877	$	305	$	(2,357	)	$	214,825

~~The Company grants stock~~6 options for a fixed number of shares to employees with an exercise price equal to the fair value of the shares at the date of grant. The Company accounts for employee stock-based compensation in accordance with Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB 25”). The Company accounts for stock-based awards to non-employees in accordance with SFAS 123 and EITF Issue No. 96-18, “Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services.”

HadTable compensationof cost for options granted and shares issued in 2003 and 2002 under the Company’s stock option plans (the “Equity Plans”) and employee stock purchase plans (the “Purchase Plans”) been determined based on the fair value at the grant and issue dates, as prescribed in SFAS 123, the Company’s net income and pro forma net income per share would have been as follows (in thousands, except per share data):Contents

	Three months ended						Nine months ended
	Sept. 28, 2003			Sept. 29, 2002			Sept. 28, 2003			Sept. 29, 2002
Net income:	$	9,276		$	21,473		$	50,658		$	33,898
As reported
add: stock compensation as reported, net of tax effects	$	56		$	20		$	120		$	60
less: stock compensation determined using the fair value method, net of tax effects	$	(2,249	)	$	(1,725	)	$	(6,335	)	$	(4,307	)
Pro forma	$	7,083		$	19,768		$	44,443		$	29,651
Pro forma net income per share:
Basic:
As reported	$	0.54		$	1.28		$	2.95		$	2.16
Pro forma	$	0.41		$	1.18		$	2.59		$	1.89
Diluted:
As reported	$	0.50		$	1.17		$	2.75		$	1.93
Pro forma	$	0.38		$	1.09		$	2.41		$	1.71

The following table summarizes the maturities of the Company’s short-term investments at June 27, 2004 (in thousands):

Under the intrinsic value method, when the exercise price of the Company’s employee stock options equals or exceeds the market price of the underlying stock on the date of grant, no compensation expense is recognized. The pro forma information regarding the results of operations and net income per share above is determined as if the Company had accounted for its employee stock options using the fair value method. Under this method, the fair value of each option granted is estimated on the date of grant using the Black-Scholes option pricing model.


	Amortized		Fair
	Cost		Value
Due between 91 - 365 days	$	91,847	$	91,511
Due between 1 - 2 years		77,190		76,268
Due between 2 - 3 years		47,840		47,046

Total	$	216,877	$	214,825

~~Option~~ Business ~~valuation~~Combinations ~~models such~~and asGoodwill ~~Black-Scholes were developed for use in estimating the fair value of traded options that have no vesting restrictions~~ and ~~are~~Other ~~fully~~Intangible ~~transferable. In~~Assets ~~addition, option valuation models require the input of highly subjective~~ ~~assumptions, including the expected life of the option. In management’s~~ opinion, the existing models do not necessarily provide a reliable single measure of the fair value of the Company’s employee stock options because the Company’s employee stock options have characteristics significantly different from those of traded options and because changes in the subjective assumptions required by these models can materially affect the fair value estimates.

7 On January 1, 2002, the Company adopted Statement of Financial Accounting Standards (“SFAS”) No. 142, “Goodwill and Other Intangible Assets” (“SFAS 142”). SFAS 142 addresses the initial recognition and measurement of intangible assets acquired outside of a business combination and the accounting for goodwill and other intangible assets subsequent to their acquisition. SFAS 142 provides that intangible assets with finite useful lives be amortized and that goodwill and intangible assets with indefinite lives not be amortized, but will rather be tested at least annually for impairment. Since adopting SFAS 142 on January 1, 2002, the Company ceased amortization of the carrying value of goodwill of $2.5 million and acquired workforce of $331,000 at January 1, 2002, resulting in a reduction in annual amortization expense of $426,000. The net carrying amount of acquired workforce was also reclassified to goodwill. In the fourth quarter of 2002, the Company performed the annual impairment test required by SFAS 142 and recorded a $2.1 million impairment of goodwill relating to the Inovec reporting unit. The Company performed the 2003 annual impairment test as of the end of the fourth quarter of 2003 resulting in no impairment assessed on the goodwill related to the Inovec reporting unit.

The ~~fair~~Company ~~value~~performed ofthe ~~each option~~2004 ~~grant~~annual ~~and~~impairment ~~share~~test ~~granted~~for isthe ~~estimated~~goodwill related onto the ~~date~~Yxlon ofreporting ~~grant~~unit ~~using~~at the end of the second quarter of 2004, ~~following~~resulting ~~assumptions~~in ~~used~~no ~~for~~impairment ~~grants~~assessed ~~during~~on the ~~applicable~~goodwill ~~period:~~related to the Yxlon reporting unit.

	2003		2002
Option Grants:
Average risk free rate of return	2.31-3.00	%	3.50-4.39	%
Weighted average expected option life	4.1 years		4.0 years
Volatility rate	74	%	83	%
Dividend yield	0	%	0	%

Accounting for Costs Associated with Exit or Disposal Activities

	2003		2002
Shares Granted
Average risk free rate of return	1.15-1.19	%	1.25-1.65	%
Weighted average expected share life	3.0 months		3.0 months
Volatility rate	17-30	%	31-33	%
Dividend yield	0	%	0	%

On January 1, 2003, the Company adopted SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities” (“SFAS 146”), which addresses accounting for restructuring and similar costs. SFAS 146 supersedes previous accounting guidance, principally Emerging Issues Task Force (“EITF”) Issue No. 94-3 (“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 the 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 impact on the Company’s financial statements from the adoption of SFAS 146.

Accounting ~~and~~for ~~Disclosure~~Stock-Based ~~Requirements~~Compensation ~~for Guarantees~~

In December 2002, the ~~Company~~Financial ~~adopted~~Accounting Standards Board (“FASB”) ~~Interpretation~~issued SFAS No. 45 148, “~~Guarantor’s~~ Accounting ~~and Disclosure Requirement~~ for ~~Guarantees,~~Stock-Based ~~Including~~Compensation ~~Indirect~~– ~~Guarantees~~Transition ofand ~~Indebtedness~~Disclosure – an Amendment of ~~Others~~FASB Statement 123” (“~~FIN~~SFAS 45148”)~~. FIN 45 requires that~~, ~~upon~~which ~~issuance~~provides alternative methods of transition for a ~~guarantee,~~voluntary change to the ~~guarantor~~fair ~~must~~value based ~~recognize~~method aof ~~liability~~accounting for ~~the~~stock-based ~~fair~~employee ~~value~~compensation. ofIn addition, ~~the~~SFAS ~~obligation~~148 itamends ~~assumes~~the ~~under~~disclosure ~~that~~requirements ~~guarantee~~of SFAS No. ~~The~~ 123, ~~provisions~~“Accounting for ~~initial~~Stock-Based ~~recognition~~Compensation” (“SFAS 123”) to require prominent disclosures in both annual and ~~measurement~~interim ~~are~~financial ~~effective~~statements onabout athe ~~prospective~~method ~~basis~~of accounting for ~~guarantees~~stock-based ~~that~~employee ~~are~~compensation ~~issued~~and orthe ~~modified~~effect ~~after~~of ~~December 31,~~the ~~2002,~~method used on reported ~~irrespective~~results. The amended disclosure requirements of aSFAS ~~guarantor’s~~148 ~~year-end~~are effective for years ending after December 15, 2002.

~~Accrued~~ The ~~Warranty~~Company grants stock options for a fixed number of shares to employees with an exercise price equal to the fair value of the shares at the date of grant. The Company accounts for employee stock-based compensation in accordance with Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees”

~~Estimated warranty costs~~7 are recorded on product revenues and adjusted periodically based on historical and anticipated experience. The Company accrues the estimated cost of product warranties at the time revenues are recognized. Although the Company engages in extensive product quality programs and processes, including actively monitoring and evaluating the quality of component suppliers, the warranty obligation is affected by actual warranty costs, including usage of material and labor and service delivery costs incurred in correcting a product failure.

InformationTable regardingof the changes in the Company’s warranty liabilities was as follows for the nine months ended September 28, 2003:Contents

Balance at Dec. 31, 2002			Accruals for warranties issued			Reduction for payments made			Increase resulting from Yxlon acquisition on March 31, 2003			Changes in accruals related to pre-existing warranties			Balance at Sept. 28, 2003
$	19,890		$	16,693		$	(20,001	)	$	925		$	334		$	17,841

(“APB 25”). The Company accounts for stock-based awards to non-employees in accordance with SFAS 123 and EITF Issue No. 96-18, “Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services.”

~~Revenue~~ Had ~~Arrangements~~compensation ~~with~~cost ~~Multiple~~for options granted and shares issued in 2004 and ~~Deliverables~~2003 under the Company’s stock option plans and employee stock purchase plan been determined based on the fair value at the grant and issue dates, as prescribed in SFAS 123, the Company’s net income and pro forma net income per share would have been as follows (in thousands, except per share data):

In November 2002, the EITF reached a consensus on Issue No. 00-21, “Revenue Arrangements with Multiple Deliverables” (“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 the Company’s results of operations or financial position.


	Three Months Ended						Six Months Ended
	June 27,			June 29,			June 27,			June 29,
	2004			2003			2004			2003
Net income:
As reported	$	6,907		$	6,975		$	12,086		$	41,382
add: stock compensation as reported, net of tax effects		62			44			214			64
less: stock compensation determined using the fair value method, net of tax effects		(4,235	)		(2,209	)		(8,254	)		(4,086	)
Pro forma	$	2,734		$	4,810		$	4,046		$	37,360

Pro forma net income per share:
Basic:
As reported	$	0.39		$	0.41		$	0.69		$	2.41
Pro forma	$	0.16		$	0.28		$	0.23		$	2.18
Diluted:
As reported	$	0.32		$	0.38		$	0.58		$	2.25
Pro forma	$	0.14		$	0.26		$	0.23		$	2.03

8 Under the intrinsic value method, when the exercise price of the Company’s employee stock options equals or exceeds the market price of the underlying stock on the date of grant, no compensation expense is recognized. The pro forma information regarding the results of operations and net income per share above is determined as if the Company had accounted for its employee stock options using the fair value method. Under this method, the fair value of each option granted is estimated on the date of grant using the Black-Scholes option valuation model.

~~Derivative~~ Option ~~Instruments~~valuation models such as Black-Scholes were developed for use in estimating the fair value of traded options that have no vesting restrictions and ~~Hedging~~are fully transferable. In addition, option valuation models require the ~~Activities~~input of highly subjective assumptions, including the expected life of the option. In management’s opinion, the existing models do not necessarily provide a reliable single measure of the fair value of the Company’s employee stock options because the Company’s employee stock options have characteristics significantly different from those of traded options and because changes in the subjective assumptions required by these models can materially affect the fair value estimates.

~~The Company is exposed to~~8 foreign currency exchange rate risk inherent in its sales commitments, anticipated sales, anticipated purchases and assets and liabilities denominated in currencies other than the U.S. dollar. The Company utilizes foreign exchange forward contracts to limit its exposure to foreign currency rate fluctuation. The maturity of foreign exchange forward contracts as of September 28, 2003 is consistent with the contractual or expected timing of the transactions being hedged, principally receipt of customer payments. These foreign exchange forward contracts all mature within twelve months. The Company does not enter into market risk sensitive instruments for trading purposes. During the nine months ended September 28, 2003, the Company’s derivatives consisted only of foreign exchange forward contracts. The Company had aggregate foreign exchange forward contracts with notional amounts of $23.7 million at September 28, 2003. The fair value of these instruments, included in the consolidated balance sheets, represented a net liability of $605,000 at September 28, 2003.

InTable May 2002, the Company began applying hedge accounting as defined by SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities” (“SFAS 133”) and designated certain foreign exchange forward contracts as cash flow hedges of foreign exchange risk for international sales contracts. As of September 28, 2003, the Company has recorded $1,677,000 of other comprehensive loss, net of income taxes of $1,240,000, representing the net change in the fair value of the foreign exchange forward contracts that were designated as and qualified for hedge accounting. The amounts deferred in other comprehensive loss are reclassified to earnings upon the collection of the hedged contract. As of September 28, 2003, the Company anticipates reclassifying the full amount included within other comprehensive loss to earnings within the next twelve months. During the nine months ended September 28, 2003, the Company also recorded $21,000 as foreign currency transaction loss related to ineffectiveness under hedge accounting. For the nine-month period ended September 28, 2003, primarily all of the changes in the fair value of forward contracts not designated for hedge accounting were offset by the measurement of associated accounts receivable.Contents

In The ~~April 2003,~~fair ~~the FASB~~value ~~issued~~of ~~SFAS~~each ~~No.~~option ~~149,~~grant ~~“Amendment~~is ofestimated ~~Statement 133~~ on ~~Derivative Instruments and Hedging Activities” (“SFAS 149”). SFAS No. 149 amends and clarifies~~ the ~~accounting~~date ~~for~~of ~~derivative instruments, including certain derivative instruments~~grant ~~embedded~~using inthe ~~other~~following ~~contracts~~assumptions ~~and~~used for ~~hedging~~grants ~~activities~~during under SFAS 133. SFAS No. 149 is generally effective for contracts entered into or modified after June 30, 2003 and for hedging relationships designated after June 30, 2003. There was no impact from the ~~adoption~~applicable ~~of SFAS No. 149 on~~period: ~~the Company’s operations and financial condition.~~

In May 2003, the FASB issued SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity” (“SFAS 150”). SFAS No. 150 requires that certain financial instruments, which under previous guidance were accounted for as equity, must now be accounted for as liabilities. The financial instruments affected include mandatorily redeemable stock, certain financial instruments that require or may require the issuer to buy back some of its shares in exchange for cash or other assets and certain obligations that can be settled with shares of stock. SFAS No. 150 is effective for interim periods beginning after June 15, 2003. The Company does not expect the adoption of SFAS No. 150 to have a material effect on its financial condition.


	2004			2003
Option Grants
Average risk free rate of return		2.55-3.55	%		2.26-3.00	%
Weighted average expected option life	4.0 years			4.2 years
Volatility rate		90-92	%		74-83	%
Dividend yield		0	%		0	%
Purchase Plan Shares Granted
Average risk free rate of return		0.9	%		1.19	%
Weighted average expected option life	3.0 months			3.0 months
Volatility rate		6	%		30	%
Dividend yield		0	%		0	%

~~2. Business~~ Accounting and Disclosure Requirements for Guarantees ~~Combinations~~

In ~~accordance with SFAS No. 141~~December 2002, ~~“Business Combinations,”~~ the Company ~~allocates~~adopted ~~the~~FASB ~~purchase~~Interpretation ~~price of~~No. 45, ~~its~~“Guarantor’s ~~acquisitions~~Accounting toand ~~the~~Disclosure ~~tangible~~Requirement ~~assets~~for Guarantees, ~~liabilities~~Including Indirect ~~and~~Guarantees ~~intangible~~of ~~assets acquired,~~Indebtedness asof ~~well~~Others” as(“FIN ~~in-process~~45”). ~~research~~FIN ~~and~~45 ~~development~~requires that, ~~based~~upon onissuance ~~their estimated~~of ~~fair~~a ~~values. The~~guarantee, ~~excess~~the ~~purchase~~guarantor ~~price~~must ~~over~~recognize ~~those~~a ~~fair values~~liability isfor ~~recorded~~the ~~as goodwill. The~~ fair value ~~assigned~~of tothe ~~intangible~~obligation ~~assets acquired~~it isassumes ~~based~~under onthat ~~valuations~~guarantee. ~~prepared by independent third party appraisal~~The ~~firms~~provisions ~~using~~for ~~estimates~~initial recognition and ~~assumptions~~measurement ~~provided~~are byeffective ~~management. In~~on a ~~accordance~~prospective ~~with~~basis ~~SFAS~~for ~~142,~~guarantees ~~goodwill~~that ~~and~~are ~~purchased~~issued ~~intangibles~~or ~~with~~modified ~~indefinite lives acquired~~ after ~~June~~December 3031, ~~2001 are not amortized but will be reviewed~~ ~~periodically~~2002, ~~for~~irrespective ~~impairment. Purchased~~of ~~intangibles with finite lives will be amortized on~~ a ~~straight-line~~guarantor’s ~~basis over their estimated useful lives~~year-end.

9 Accrued Warranty

~~Yxlon~~ Estimated ~~International~~warranty ~~Holding~~costs ~~GmbH~~are recorded on product revenues and adjusted periodically based on historical and anticipated experience. The Company accrues the estimated cost of product warranties at the time revenues are recognized. Although the Company engages in extensive product quality programs and processes, including actively monitoring and evaluating the quality of component suppliers, the warranty obligation is affected by actual warranty costs, including usage of material and labor and service delivery costs incurred in correcting a product failure.

On Information ~~March 31,~~regarding ~~2003,~~ the ~~Company~~changes ~~completed its acquisition of Yxlon International Holding GmbH (“Yxlon”), a company based~~ in ~~Hamburg,~~the Germany. Yxlon develops, manufactures, markets and supports X-ray based non-destructive testing (“NDT”) systems for a wide range of industrial applications, and systems that use X-ray based diffraction (“XRD”) technology for explosives detection. The Company acquired Yxlon for €38.6 million in cash, or $41.7 million, and incurred additional acquisition costs of $2.1 million for a total purchase price of $43.8 million. The Company would be required to make an additional payment of €7.5 million if Yxlon’s ~~XRD~~warranty ~~system is certified for~~liabilities ~~explosives~~was ~~detection~~as byfollows ~~the Transportation Security Administration (“TSA”) by December 31, 2003 or €5.0 million if Yxlon’s XRD system is thereafter certified~~ for ~~explosives detection by~~ the ~~TSA~~six bymonths ended June 3027, 2004~~. If~~: ~~the XRD system is certified for explosives detection by the TSA, the Company~~ ~~would record the additional consideration as intangible assets.~~

An independent valuation to determine the allocation of the fair value of the net assets acquired was completed in September 2003. The total purchase price of approximately $43.8 million has been allocated as follows (in thousands):


							Changes in
Balance at							Accruals Related			Balance at
Dec. 31,		Accruals for		Reduction for			to Pre-Existing			June 27,
2003		Warranties Issued		Payments Made			Warranties			2004
$	14,259	$	6,631	$	(5,212	)	$	(1,249	)	$	14,429

Cash and cash equivalents	$	1,946
Current assets	29,101
Other non-current assets	1,726
Amortizable intangible assets:
Developed and core technology	8,700
Other	1,480
Intangible assets with indefinite lives:
Goodwill	18,253
Trademark	2,780
Current liabilities	(22,866		)
Other non-current liabilities	(1,644		)
In-process research and development	4,300
Total purchase price	$	43,776

Information regarding the changes in the Company’s warranty liabilities was as follows for the six months ended June 29, 2003:

Amortizable Intangible Assets


									Changes in
Balance at							Increase Resulting		Accruals Related		Balance at
Dec. 31,		Accruals for		Reduction for			from Yxlon Acquisition		to Pre-Existing		June 29,
2002		Warranties Issued		Payments Made			at March 31, 2003		Warranties		2003
$	19,890	$	13,204	$	(13,023	)	$	925	$	726	$	21,722

~~Of the total purchase~~9 price, approximately $10.2 million has been allocated to amortizable intangible assets, including maintenance contracts and renewals, contract backlog, direct customer relationships, supplier agreements and developed and core technology. The maintenance contracts and renewals represent a value assigned to the revenue stream estimated from existing maintenance contracts as of the acquisition date with an assumed renewal rate. Contract backlog represents the gross contract backlog to be recognized over the twelve-month period following the close of the acquisition. Direct customer relationships represent the sale of products and services by Yxlon’s internal sales and marketing force. Supplier agreements represent the value in material supplier agreements where Yxlon receives below market rates on inventory component purchases. The Company expects to amortize the fair value of these assets on a straight-line basis over estimated useful lives ranging from twelve months to six years. Expected future amortization expenses for the intangible assets are as follows:

(in thousands)		2003			2004			2005			2006			2007			Thereafter
Expected intangibles amortization expenses		$	1,479		$	1,612		$	1,477		$	1,387		$	1,359		$	2,867

~~Developed~~ Revenue ~~and~~Arrangements ~~core technology,~~with ~~which~~Multiple ~~consists of products that have reached technological~~Deliverables ~~feasibility, includes Yxlon’s XRD system and NDT system products. The~~ ~~Company expects to amortize the fair value of the developed and core technology~~ ~~on a straight-line basis over an estimated useful life of seven years.~~

10 In November 2002, the EITF reached a consensus on Issue No. 00-21, “Revenue Arrangements with Multiple Deliverables” (“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 the Company’s financial statements.

~~Intangible~~ Derivative ~~Assets With~~Instruments ~~Indefinite~~and ~~Lives~~Hedging Activities

The ~~estimated~~Company ~~fair~~is ~~value~~exposed to foreign currency exchange rate risk inherent in ofits ~~intangible~~sales commitments, anticipated sales, anticipated purchases and assets ~~with~~and liabilities ~~indefinite~~denominated ~~lives~~in ~~was~~currencies ~~$18~~other than the U.3S. ~~million~~dollar. ~~for~~The ~~goodwill~~Company utilizes foreign exchange forward options and ~~$2.8~~ ~~million~~contracts ~~for~~to ~~the~~limit ~~Yxlon~~its ~~trade~~exposure to ~~name~~foreign currency rate fluctuation. ~~These~~ ~~intangible~~The ~~assets~~maturity ~~will~~of ~~not~~foreign exchange forward becontracts ~~amortized~~as ~~because~~of June 27, 2004 is consistent with the ~~assets~~contractual ~~have~~or ~~indefinite~~expected timing ~~useful~~of ~~lives~~the ~~based~~transactions onbeing ~~many~~hedged, principally receipt of customer ~~factors~~payments. These foreign exchange forward options and ~~considerations,~~contracts ~~including~~all ~~the~~mature within ~~length~~twelve ofmonths. ~~time~~The ~~that~~Company ~~the~~does ~~Yxlon~~not ~~name~~enter into market risk sensitive ~~has~~instruments ~~been~~for intrading ~~use~~purposes. During the six months ended June 27, 2004, the ~~Yxlon~~Company’s ~~brand~~derivatives ~~awareness~~consisted ~~and~~of ~~market~~foreign ~~position~~exchange forward options and contracts. ~~the~~The ~~plans~~Company ~~for~~had aggregate foreign exchange forward options and ~~continued~~contracts ~~use~~with notional amounts of ~~the~~$35.2 million ~~Yxlon~~at ~~brand~~June 27, ~~within~~2004. aThe ~~portion~~net fair value of these instruments, included as an asset in the ~~Company’s~~consolidated ~~overall~~balance ~~product~~sheets ~~portfolio~~was $259,000 at June 27, 2004.

In~~-Process~~ ~~Research~~May 2002, the Company began applying hedge accounting as defined by SFAS No. 133, “Accounting for Derivative Instruments and ~~Development~~Hedging Activities” (“SFAS 133”) and designated certain foreign exchange forward options and contracts as cash flow hedges of foreign exchange risk for international sales contracts. As of June 27, 2004, the Company has recorded $1.4 million of other comprehensive loss, net of income taxes of $1.0 million, representing the fair value of the foreign exchange forward contracts that were designated as and qualified for hedge accounting. The amounts deferred in other comprehensive loss are reclassified to earnings upon the recognition of the hedged contract as revenue. As of June 27, 2004, the Company anticipates reclassifying the full amount included within other comprehensive loss to earnings within the next twelve months. During the six months ended June 27, 2004, the Company also recorded $638,000 as foreign exchange transaction loss related to ineffectiveness under hedge accounting. For the six-month period ended June 27, 2004, primarily all of the changes in the fair value of foreign exchange forward contracts not designated for hedge accounting were offset by the measurement of associated accounts receivable.

Of In April 2003, the ~~total~~FASB ~~purchase price,~~issued $4SFAS No.3 149, ~~million~~“Amendment ~~has~~of ~~been~~Statement ~~allocated~~133 on toDerivative ~~in-process~~Instruments ~~research~~ and ~~development~~ Hedging Activities” (“~~IPR&D~~SFAS 149”). ~~and~~SFAS ~~was~~149 amends ~~expensed~~and inclarifies the ~~second~~accounting ~~quarter~~for ofderivative ~~fiscal~~instruments, ~~2003.~~ including ~~Projects~~certain ~~that~~derivative ~~qualify~~instruments asembedded ~~IPR&D~~in ~~represent~~other ~~those~~contracts ~~that~~and ~~have~~for ~~not~~hedging activities ~~yet~~under ~~reached technological~~SFAS ~~viability~~133. ~~Technological~~ ~~viability~~SFAS 149 is ~~defined~~generally aseffective ~~being~~for contracts ~~equivalent~~entered tointo aor ~~beta-phase~~modified ~~working~~after ~~prototype~~June 30, in2003 ~~which~~and ~~there~~for ishedging ~~lower remaining~~relationships ~~risk~~designated ~~relating~~after toJune 30, 2003. There was no impact from the ~~development~~adoption of SFAS 149 on the Company’s financial statements.

~~The~~ Financial ~~value~~Instruments ~~assigned~~with ~~to IPR&D~~Characteristics ~~was determined by considering the importance~~ of ~~each~~Both ~~project~~Liabilities ~~to the overall development plan, estimating costs to develop the purchased IPR&D into commercially viable products, estimating the resulting net cash flows from the projects when completed~~ and ~~discounting the net cash flows to their present~~Equity ~~value. The revenue estimates used to value the purchased IPR&D were~~ ~~based on estimates of the relevant market sizes and growth factors, expected~~ ~~trends in technology and the nature and expected timing of new product introductions by Yxlon.~~

~~The~~ In ~~rates~~May 2003, ~~utilized~~the toFASB issued SFAS No. 150, “Accounting for Certain ~~discount~~Financial ~~the~~Instruments ~~net~~with ~~cash~~Characteristics ~~flows~~of toboth ~~their~~Liabilities ~~present~~and ~~values~~Equity” (“SFAS ~~are~~150”). ~~based~~SFAS on150 ~~Yxlon’s~~requires that certain financial instruments, which ~~weighted~~under ~~average~~previous ~~cost~~guidance ofwere ~~capital~~accounted for as equity, must now be accounted for as liabilities. The ~~weighted~~financial ~~average~~instruments ~~cost~~affected ofinclude ~~capital~~mandatorily ~~was~~redeemable ~~adjusted~~stock, tocertain ~~reflect~~financial instruments that require or may require the issuer ~~difficulties~~to ~~and~~buy ~~uncertainties~~back some of its shares in ~~completing~~exchange ~~each project~~for cash or other assets and certain ~~thereby~~obligations ~~achieving~~that ~~technological~~can ~~feasibility,~~be ~~the~~settled ~~percentage~~with shares of stock. SFAS 150 is ~~completion~~effective offor ~~each~~interim ~~project~~periods beginning after June 15, ~~anticipated~~2003. ~~market~~In ~~acceptance~~November 2003, the ~~and~~FASB ~~penetration~~issued FASB Staff Position No. 150-3, “Effective Date, Disclosures, ~~market~~and ~~growth~~Transition ~~rates~~for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and ~~risks~~Certain ~~related~~Mandatorily toRedeemable Noncontrolling Interests under SFAS No. 150” (“FSP 150-3”), which defers the ~~impact~~effective date for various provisions of ~~potential~~SFAS ~~changes~~150. inThe adoption of SFAS 150, as modified by FSP 150-3, did ~~future~~not ~~target~~have ~~markets~~a material impact on the Company’s financial statements.

~~Pro Forma Results~~10 ~~(Unaudited)~~

TheTable unaudited pro forma financial information presented below combine the actual results of operations of the Company and the historical results of operations of Yxlon for the respective periods as if the acquisition of Yxlon had occurred at the beginning of each of the periods presented. Adjustments of $5.0 million, $285,000, $5.3 million and $5.9 million have been made to the combined results of operations for the three and nine-month periods ended September 28, 2003 and the three and nine-month periods ended September 29, 2002, respectively, reflecting amortization of purchased intangibles, net of tax, timing of acquisition-related in-process research and development expense recognition, and bank settlement fees for debt as a result of acquisition, net of tax, as if the acquisition had occurred at the beginning of each of the periods presented. The unaudited pro forma financial information is not intended to represent or be indicative of the consolidated results of operations or financial condition of the Company that would have been reported had the acquisition been completed as of the dates presented, and should not be taken as representative of the future consolidated results of operations or financial condition of the Company.Contents

	Three Months Ended				Nine Months Ended
	Sept. 28 2003		Sept. 29 2002		Sept. 28 2003		Sept. 29 2002
	(in thousands, except per share amounts)
Revenue	$	86,118	$	135,078	$	356,913	$	262,545
Net income	4,270		14,500		50,881		24,058
Net income per share:
Basic	$	0.25	$	0.87	$	2.96	$	1.54
Diluted	$	0.23	$	0.79	$	2.76	$	1.37

2. Business Combinations

11 In accordance with Statement of Financial Accounting Standards No. 141, “Business Combinations” (“SFAS 141”) the Company allocates the purchase price of its acquisitions to the tangible assets, liabilities and intangible assets acquired, as well as in-process research and development, based on their estimated fair values. The excess purchase price over those fair values is recorded as goodwill. The fair value assigned to intangible assets acquired is based on valuations prepared by independent third party appraisal firms using estimates and assumptions provided by the Company’s management. In accordance with SFAS 142, goodwill and purchased intangibles with indefinite lives acquired after June 30, 2001 are not amortized but will be reviewed periodically for impairment. Purchased intangibles with finite lives will be amortized on a straight-line basis over their estimated useful lives.

~~Hattinger~~Yxlon ~~Pruf-~~International ~~und~~Holding ~~Entwicklungs-~~ GmbH

~~Effective~~ On ~~August~~March 131, 2003, ~~Yxlon~~the ~~International~~Company ~~X-Ray~~completed ~~GmbH~~its acquisition of Yxlon, a company ~~wholly~~based ~~owned~~in ~~subsidiary~~Hamburg, ofGermany. ~~the~~Yxlon ~~Company~~develops, ~~acquired~~ ~~Hattinger~~manufactures, ~~Pruf~~markets and supports X-ray ~~und~~based ~~Entwicklungs~~non-destructive ~~GmbH~~testing (“~~Hapeg~~NDT”), systems for a ~~private~~wide range ~~engineering~~of industrial applications, and systems ~~company~~ that ~~provides~~use ~~industrial~~X-ray ~~testing~~based ~~and evaluation~~diffraction ~~solutions~~(“XRD”) ~~utilizing~~technology ~~computed~~for ~~tomography,~~explosives ~~for~~detection. ~~approximately~~The Company acquired Yxlon for €238.9 6 million in cash, or $341.4 7 million~~. The~~, incurred additional acquisition ~~was~~costs of ~~accounted~~$2.1 million, and paid a subsequent purchase price adjustment of $483,000 in December 2003 for ~~using~~a ~~the~~total purchase ~~method~~price of ~~accounting~~$44.3 million. Under the terms of ~~The~~the ~~excess~~amended purchase ~~price~~agreement, ~~over~~ the ~~fair~~Company ~~value~~was ofrequired ~~the~~to ~~underlying~~make ~~net~~an additional ~~assets~~payment of $2€5.3 0 million ~~was~~if ~~allocated~~Yxlon’s toXRD ~~goodwill~~system ~~and~~was ~~other~~certified ~~intangible~~for ~~assets~~explosives ~~and~~detection ~~property~~by ~~based~~the ~~upon~~Transportation ~~preliminary~~Security ~~estimates~~Administration of(“TSA”) ~~fair~~by ~~values~~June 30, 2004. ~~The~~ ~~Company~~As ~~does~~of June 30, 2004, the XRD system had not ~~believe~~been ~~that~~certified for explosives detection by the ~~final purchase~~TSA, ~~price~~but ~~allocation~~remained ~~will~~in ~~differ~~certification ~~significantly~~trials. ~~from~~The Company is currently considering whether the ~~preliminary purchase~~certification ~~price~~requirement ~~allocation~~has ~~recorded~~been or atwill ~~August 1~~be met, ~~2003. Estimated~~and ~~amortization~~has ~~expense~~not ofyet ~~$42~~determined what portion,~~000 was~~ ~~recorded~~if ~~during~~any, of the ~~third~~up ~~quarter~~to €5.0 million potentially payable upon timely certification of ~~2003.~~ the XRD system ~~The~~will ~~unaudited~~actually ~~pro~~be ~~forma~~paid ~~results~~by ~~were~~the ~~not~~Company. ~~provided~~The asCompany ~~they~~would ~~were~~record ~~not~~the payment of ~~deemed~~any tosuch beadditional ~~material~~consideration as goodwill.

3 An independent valuation to determine the allocation of the fair value of the net assets acquired was completed in September 2003. ~~Comprehensive~~ ~~Income~~The total purchase price of $44.3 million has been allocated as follows (in thousands):

The components of comprehensive income are as follows (in thousands):


Cash and cash equivalents	$	1,946
Current assets		29,101
Other non-current assets		1,726
Amortizable intangible assets:
Developed and core technology		8,700
Other		1,480
Intangible assets with indefinite lives:
Goodwill		18,736
Trademark		2,780
Current liabilities		(22,866	)
Other non-current liabilities		(1,644	)
In-process research and development		4,300

Total purchase price	$	44,259

	Three Months Ended				Nine Months Ended
	September 28, 2003		September 29, 2002		September 28, 2003		September 29, 2002
Net income	$	9,276	$	21,473	$	50,658	$	33,898
Derivatives classified as cash flow hedges (net of taxes):
Net increase (decrease) in foreign exchange forward contracts	304		926		107		(985		)
Net increase in cumulative translation adjustment (net of taxes)	48		—		577		—
Comprehensive income	$	9,628	$	22,399	$	51,342	$	32,913

Amortizable Intangible Assets

4 Of the total purchase price, approximately $10. ~~Net~~2 million ~~Income~~has ~~Per~~been allocated ~~Share~~to amortizable intangible assets, including maintenance contracts and renewals, contract backlog, direct customer relationships, supplier agreements and developed and core technology. The maintenance contracts and renewals represent a value assigned to the revenue stream estimated from existing maintenance contracts as of the acquisition date with an assumed renewal rate. Contract backlog represents the gross contract backlog to be recognized over the twelve-month period following the close of the acquisition. Direct customer relationships represent the sale of products and services by Yxlon’s internal sales and marketing force. Supplier agreements represent the value in material supplier agreements where Yxlon receives below market rates on inventory component purchases. The Company is amortizing the fair value of these assets on a straight-line basis over estimated useful lives ranging from twelve months to six years.

~~Basic net income per~~11 share is computed by dividing net income by the weighted-average shares of common stock outstanding for the period. Diluted net income per share reflects the weighted-average shares of common stock outstanding plus the potential effect of dilutive securities or contracts which are convertible to shares of common stock such as options, warrants, convertible debt and preferred stock (using the treasury stock method) and shares issuable in future periods, except in cases where the effect would be anti-dilutive.

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

	Three Months Ended												Nine Months Ended
	September 28, 2003						September 29, 2002						September 28, 2003						September 29, 2002
	Income		Shares	Per Share Amount			Income		Shares	Per Share Amount			Income		Shares	Per Share Amount			Income		Shares	Per Share Amount
Basic net income per share	$	9,276	17,269	$	0.54		$	21,473	16,740	$	1.28		$	50,658	17,182	$	2.95		$	33,898	15,671	$	2.16
Effect of dilutive securities:
Options and warrants	—		1,181	(0.04		)	—		1,690	(0.11		)	—		1,233	(0.20		)	—		1,880	(0.23		)
Stock payable in connection with acquisition of subsidiary	—		—	—			—		—	—			—		—	—			—		10	—
Diluted net income per share	$	9,276	18,450	$	0.50		$	21,473	18,430	$	1.17		$	50,658	18,415	$	2.75		$	33,898	17,561	$	1.93

Developed and core technology, which consists of products that have reached technological feasibility, includes Yxlon’s XRD system and NDT system products. The Company is amortizing the fair value of the developed and core technology on a straight-line basis over an estimated useful life of seven years.

12 Intangible Assets With Indefinite Lives

5 The estimated fair value of intangible assets with indefinite lives was $18. ~~Segment~~7 million ~~Information~~for goodwill and $2.8 million for the Yxlon trade name. These intangible assets will not be amortized because the assets have indefinite useful lives based on many factors and considerations, including the length of time that the Yxlon name has been in use, the Yxlon brand awareness and market position and the plans for continued use of the Yxlon brand within a portion of the Company’s overall product portfolio.

~~The~~ In-Process ~~Company~~Research ~~determines its segments based on how its Chief Executive Officer~~ and ~~its Chief Operating~~Development ~~Officer assess performance and allocate resources. Through the first~~ ~~quarter of 2003, the Company presented segment information based on three~~ reportable segments: EDS, Quantum and Wood. As a result of the acquisition of Yxlon, the Company now has 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 tomography technology. 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. Other segments, including Quantum, Wood and XRD, were aggregated to form an “All Other” category as they did not meet the threshold for a reportable segment.

~~Segment~~ Of ~~financial data for~~ the ~~three~~total ~~and~~purchase ~~nine-month~~price, ~~periods ended September~~$4.3 ~~29,~~million ~~2002~~ has been ~~restated~~ allocated to ~~reflect~~in-process research ~~the~~and ~~change~~development in(“IPR&D”) ~~reportable~~and ~~segments. As~~was ofexpensed in the second quarter of fiscal 2003,. ~~a reportable~~There ~~segment~~were ~~line~~two ~~item~~projects ~~also~~expected ~~has~~to ~~been~~be ~~changed~~completed ~~from~~between ~~net~~2004 ~~income~~and 2007. ~~(loss)~~Projects ~~to income~~that ~~(loss)~~qualify ~~from~~as ~~operations.~~IPR&D ~~Financial~~represent ~~information~~those bythat ~~segment~~have not yet reached technological viability. Technological viability is defined as ~~follows~~being equivalent (to a beta-phase working prototype in ~~thousands):~~which there is lower remaining risk relating to the development.

	EDS		NDT			All Other			Consolidating Eliminations			Total
Third quarter 2003
Revenues:
Product revenues	$	48,467	$	14,955		$	5,859		$	—		$	69,281
Service revenues	10,098		3,082			565			—			13,745
Contract research and development revenues	—		—			3,092			—			3,092
Intercompany revenues	3		—			16			(19		)	—
Total revenues	$	58,568	$	18,037		$	9,532		$	(19	)	$	86,118
Income (loss) from operations	$	16,443	$	185		$	(479	)	$	—		$	16,149
September 28, 2003
Total assets	$	443,398	$	48,911		$	21,296		$	(7,367	)	$	506,238
Third quarter 2002
Revenues:
Product revenues	$	109,574	$	—		$	1,585		$	—		$	111,159
Service revenues	3,059		—			508			—			3,567
Contract research and development revenues	—		—			2,334			—			2,334
Intercompany revenues	19		—			1,119			(1,138		)	—
Total revenues	$	112,652	$	—		$	5,546		$	(1,138	)	$	117,060
Income (loss) from operations	$	35,553	$	—		$	(169	)	$	—		$	35,384
December 31, 2002
Total assets	$	421,344	$	—		$	10,777		$	(14,334	)	$	417,787
Nine months 2003
Revenues:
Product revenues	$	263,382	$	24,273		$	9,435		$	—		$	297,090
Service revenues	27,179		5,550			1,438			—			34,167
Contract research and development revenues	—		—			9,456			—			9,456
Intercompany revenues	29		—			1,302			(1,331		)	—
Total revenues	$	290,590	$	29,823		$	21,631		$	(1,331	)	$	340,713
Income (loss) from operations	$	93,411	$	(716	)	$	(6,112	)	$	—		$	86,583
Nine months 2002
Revenues:
Product revenues	$	193,367	$	—		$	5,888		$	—		$	199,255
Service revenues	8,972		—			1,484			—			10,456
Contract research and development revenues	0		—			8,973			—			8,973
Intercompany revenues	299		—			1,614			(1,913		)	—
Total revenues	$	202,638	$	—		$	17,959		$	(1,913	)	$	218,684
Income (loss) from operations	$	58,196	$	—		$	(1,443	)	$	—		$	56,753

The value assigned to IPR&D was determined by considering the importance of each project to the overall development plan, estimating costs to develop the purchased IPR&D into commercially viable products, estimating the resulting net cash flows from the projects when completed and discounting the net cash flows to their present value. The revenue estimates used to value the purchased IPR&D were based on estimates of the relevant market sizes and growth factors, expected trends in technology and the nature and expected timing of new product introductions by Yxlon.

13 The rates utilized to discount the net cash flows to their present values are based on Yxlon’s weighted average cost of capital of 25%. The weighted average cost of capital was adjusted to reflect the difficulties and uncertainties in completing each project and thereby achieving technological feasibility, the percentage of completion of each project, anticipated market acceptance and penetration, market growth rates and risks related to the impact of potential changes in future target markets.

~~Substantially~~ Pro ~~all~~Forma ofResults ~~the~~(Unaudited) ~~Company’s long-lived assets are located in the United States.~~

The unaudited pro forma financial information presented below combine the actual results of operations of the Company and the historical results of operations of Yxlon for the respective years as if the acquisition of Yxlon had occurred at the beginning of each of the years presented. Adjustments of $285,000 and $6. ~~Inventories~~2 million have been made to the combined results of operations for the years ended December 31, 2003 and 2002, reflecting amortization of purchased intangibles, net of tax, timing of acquisition-related in-process research and development expense recognition, and bank settlement fees for debt as a result of acquisition, net of tax, as if the acquisition had occurred at the beginning of each of the years presented. The unaudited pro forma financial information is not intended to represent or be indicative of the consolidated results of operations or financial condition of the Company that would have been reported had the acquisition been completed as of the dates presented, and should not be taken as representative of the future consolidated results of operations or financial condition of the Company.

The components of inventory consist of the following (in thousands):


	2003		2002
	(in thousands, except per share amounts)
Revenues	$	432,697	$	492,728
Net income	$	57,169	$	65,686
Basic	$	3.34	$	4.11
Diluted	$	3.11	$	3.69
Basic weighted average shares outstanding		17,132		15,987
Diluted shares		18,368		17,803

	September 28, 2003		December 31, 2002
Inventories:
Raw material and purchased components	$	24,595	$	22,696
Field service spare parts	28,095		16,145
Work-in-process	10,152		21,927
Finished goods	13,541		3,996
Total	$	76,383	$	64,764

7. AccruedTable Liabilitiesof Contents

~~The~~Hattinger ~~components~~Prufund ~~of accrued~~Entwicklungs-GmbH ~~liabilities consist of the following (in thousands):~~

	September 28, 2003		December 31, 2002
Accrued liabilities:
Warranty and other reserves	$	17,841	$	19,890
Accrued employee compensation	10,155		7,540
Income taxes	4,567		17,919
Foreign exchange forward contracts	651		4,948
Material cost reduction accrual	6,441		8,259
Other	9,536		6,808
Total	$	49,191	$	65,364

Effective August 1, 2003, Yxlon International X-Ray GmbH, a wholly owned subsidiary of the Company, acquired Hattinger Prufund Entwicklungs-GmbH (“Hapeg”), a private engineering and systems company that provides industrial testing and evaluation solutions utilizing computed tomography, or CT, technology for approximately €2.9 million or $3.4 million. The acquisition was accounted for using the purchase method of accounting. The excess purchase price over the fair value of the underlying net assets of $2.3 million was allocated to goodwill and other intangible assets and property based upon an independent valuation of fair values. Amortization expense of $122,000 was recorded during the fiscal year ended 2003. Unaudited pro forma results were not provided as they were not deemed to be material.

143. Comprehensive Income

~~8. Litigation~~ The components of comprehensive income are as follows (in thousands):

InVision and its subsidiary, Quantum Magnetics, together with many other entities, were named as defendants in a number of lawsuits in approximately 100 products liability lawsuits by individual plaintiffs seeking damages for wrongful death relating to the terrorist acts of September 11, 2001. The litigation in connection with the terrorist acts 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. The Company anticipates that additional lawsuits relating to the terrorist acts of September 11, 2001 will name it as a defendant. To date, the Company has been served with 14 of these complaints. All of the served complaints have been placed on the court’s suspense docket, and no action is permitted or required in these cases until December 23, 2003. Each of the served complaints 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. The Company believes that the plaintiffs’ claims lack merit, especially in light of the fact that the Company 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. The Company intends to vigorously defend these lawsuits.


	Three Months Ended					Six Months Ended
	June 27,			June 29,		June 27,			June 29,
	2004			2003		2004			2003
Net income	$	6,907		$	6,975	$	12,086		$	41,382
Derivatives classified as cash flow hedges (net of taxes):
Unrealized gain (loss) on cash flow hedges		(1,436	)		177		(1,207	)		(399	)
Reclassification of gain on cash flow hedges		502			12		536			202
Translation adjustment		(22	)		530		(716	)		530

Comprehensive income	$	5,951		$	7,694	$	10,699		$	41,715

~~The Company is involved in routine civil litigation arising in the ordinary course of business~~4. ~~Management~~ ~~believes~~Net ~~that~~Income ~~collectively~~Per ~~these proceedings will not have a~~Share ~~material effect on the Company’s business, financial condition or results of~~ ~~operations.~~

9 Basic net income per share is computed by dividing net income by the weighted-average shares of common stock outstanding for the period. ~~Financing~~ Diluted ~~Arrangements~~net income per share reflects the weighted-average shares of common stock outstanding plus the potential effect of dilutive securities or contracts which are convertible to shares of common stock such as options, warrants, convertible debt and preferred stock (using the treasury stock method) and shares issuable in future periods, except in cases where the effect would be anti-dilutive. Specifically, the computations of diluted net income per share for the three-month and six-month year-to-date periods ended June 27, 2004 include the impact of the contingent conversion provision related to the Company’s 3% convertible senior notes due 2023. Diluted shares include 3,906,250 shares “as if” the notes had been converted at the beginning of each period, and diluted net income excludes $535,000 of avoided interest expense for the three months ended June 27, 2004 and $1.1 million of avoided interest expense for the six months ended June 27, 2004, net of tax.

~~Convertible~~ The ~~Debt~~following ~~Financing~~is a reconciliation between the components of the basic and diluted net income per share calculations for the periods presented below (in thousands, except per share data):

In September 2003, the Company completed a private offering of $125.0 million aggregate principal amount of its 3% convertible senior notes due 2023. The notes are convertible into the Company’s common stock, under certain circumstances, at an initial conversion rate of 31.25 shares per $1,000 principal amount of notes, subject to adjustment. At the initial conversion rate, the notes will be convertible into common stock at a conversion price of $32.00 per share. The notes will be redeemable for cash at the Company’s option beginning on October 1, 2008. Holders of the notes have the option to require the Company to purchase the notes in cash, in whole or in part, on October 1 in each of 2008, 2013 and 2018. The holders of the notes will also have the ability to require the Company to purchase the notes in the event that the Company undergoes a change in control. In each such case, the redemption or purchase price would be at 100% of the principal amount of the notes, plus accrued and unpaid interest to, but excluding, the redemption or purchase date, as the case may be.


	Three Months Ended														Six Months Ended
	June 27, 2004							June 29, 2003							June 27, 2004							June 29, 2003
			Weighted		Per					Weighted		Per					Weighted		Per					Weighted		Per
			Average		Share					Average		Share					Average		Share					Average		Share
	Income		Shares		Amount			Income		Shares		Amount			Income		Shares		Amount			Income		Shares		Amount
Basic net income per share	$	6,907		17,509	$	0.39		$	6,975		17,210	$	0.41		$	12,086		17,391	$	0.69		$	41,382		17,139	$	2.41
Effect of dilutive securities:
Options and warrants		—		1,624		(0.03	)		—		1,205		(0.03	)		—		1,516		(0.05	)		—		1,258		(0.16	)
Converted debt shares		535		3,906		(0.04	)									1,090		3,906		(0.06	)

Diluted net income per share	$	7,442		23,039	$	0.32		$	6,975		18,415	$	0.38		$	13,176		22,813	$	0.58		$	41,382		18,397	$	2.25

~~Short-Term Financing~~13

AsTable of July 19, 2003, one of the Company’s two lines of credit agreements with Silicon Valley Bank expired. Therefore, the Company currently has one line of credit agreement with Silicon Valley Bank that provided for maximum borrowings in an amount up to $25.0 million, which will expire in July 2004.Contents

~~As of September 28, 2003, Yxlon had a balance of $6~~5.6 ~~million~~Segment ~~of draws against its lines of credit~~Information ~~with its German banks.~~

15 The Company determines its segments based on how its Chief Executive Officer and its Chief Operating Officer assess performance and allocate resources. Through the first quarter of 2003, the Company presented segment information based on three reportable segments: EDS, Quantum and Wood. As a result of the acquisition of Yxlon, the Company now has 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 CT technology. 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. Other segments, including Quantum, Wood and XRD, were aggregated to form an “All Other” category as they did not meet the threshold for a reportable segment.

Segment financial data for the six-month period ended June 29, 2003 has been restated to reflect the change in reportable segments. As of the second quarter of 2003, a reportable segment line item also has been changed from net income (loss) to income (loss) from operations. Financial information by segment is as follows (in thousands):


									Consolidating
	EDS		NDT			All Other			Eliminations			Total
Second quarter 2004
Revenues:
Product revenues	$	44,422	$	12,641		$	3,117		$	—		$	60,180
Service revenues		19,730		3,111			909			—			23,750
Contract research and development revenues		—		—			2,738			—			2,738
Intercompany revenues		47		—			—			(47	)		—

Total revenues	$	64,199	$	15,752		$	6,764		$	(47	)	$	86,668
Income (loss) from operations	$	13,689	$	(105	)	$	(592	)	$	—		$	12,992
June 27, 2004
Total assets	$	490,282	$	55,710		$	30,705		$	(29,240	)	$	547,457

Second quarter 2003
Revenues:
Product revenues	$	63,791	$	9,318		$	1,886		$	—		$	74,995
Service revenues		8,589		2,468			456			—			11,513
Contract research and development revenues		—		—			2,919			—			2,919
Intercompany revenues		26		—			749			(775	)		—

Total revenues	$	72,406	$	11,786		$	6,010		$	(775	)	$	89,427
Income (loss) from operations	$	19,830	$	(868	)	$	(5,469	)	$	—		$	13,493
December 31, 2003
Total assets	$	436,914	$	57,809		$	18,757		$	(27,412	)	$	486,068

Six months 2004
Revenues:
Product revenues	$	83,379	$	25,596		$	5,150		$	—		$	114,125
Service revenues		35,816		6,372			1,639			—			43,827
Contract research and development revenues		—		—			5,611			—			5,611
Intercompany revenues		144		—			—			(144	)		—

Total revenues	$	119,339	$	31,968		$	12,400		$	(144	)	$	163,563
Income (loss) from operations	$	23,488	$	(328	)	$	(957	)	$	—		$	22,203

Six months 2003
Revenues:
Product revenues	$	214,915	$	9,318		$	3,576		$	—		$	227,809
Service revenues		17,081		2,468			873			—			20,422
Contract research and development revenues		—		—			6,364			—			6,364


									Consolidating
	EDS		NDT			All Other			Eliminations			Total
Intercompany revenues		26		—			1,286			(1,312	)		—

Total revenues	$	232,022	$	11,786		$	12,099		$	(1,312	)	$	254,595
Income (loss) from operations	$	76,968	$	(868	)	$	(5,666	)	$	—		$	70,434

Substantially all of the Company’s long-lived assets are located in the United States.

6. Inventories

The components of inventory consist of the following (in thousands):


	June 27,		December 31,
	2004		2003
Inventories:
Raw material and purchased components	$	24,183	$	22,821
Field service spare parts		29,408		27,805
Work-in-process		10,651		10,123
Finished goods		14,757		18,145

Total	$	78,999	$	78,894

7. Accrued Liabilities

The components of accrued liabilities consist of the following (in thousands):


	June 27,		December 31,
	2004		2003
Accrued liabilities:
Warranty and other reserves	$	14,429	$	14,259
Accrued employee compensation		13,838		10,409
Income taxes		2,548		255
Other		8,915		10,135

Total	$	39,730	$	35,058

8. Litigation

InVision and its subsidiary, Quantum Magnetics, together with many other entities, were named as defendants in approximately 156 products liability lawsuits by individual plaintiffs seeking damages for wrongful death in connection with the terrorist acts of September 11, 2001. The litigation was consolidated in In re: September 11 Litigation, 21 MC 97 (AKH), United States District Court for the Southern District of New York. InVision and Quantum Magnetics have been served with 103 complaints. Each complaint with which the Company has been served alleges that defendants have breached a duty to airplane passengers and others by failing to properly screen passengers and carry-on baggage for dangerous weapons. The Company believes that the plaintiffs’ claims lack merit, especially in light of the fact that InVision and Quantum Magnetics 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. By court order, the plaintiffs were required to file and serve Amended Master Complaints and Appendices by March 31, 2004 to reflect all defendants and causes of action in the In re: September 11 Litigation that had been added since their original Master Complaints were filed. InVision and Quantum Magnetics were not included in plaintiffs’ Amended Master Complaints and their Appendices. Since these Amended Master Complaints are controlling over the individual complaints filed by plaintiffs, all plaintiffs in the In re: September 11 Litigation have effectively dismissed their claims against InVision and Quantum Magnetics. Notices of dismissals or dismissal orders have been received in all of the individual complaints.

On March 19, 2004, two alleged holders of InVision common stock filed purported class action lawsuits in California Superior Court for the County of Alameda. The complaints name as defendants each of the Company’s

directors as well as InVision. The complaints allege that, in pursuing the transaction with General Electric Company (“GE”) and approving the merger agreement, the directors violated their fiduciary duties to the holders of InVision common stock by, among other things, failing to obtain the highest price reasonably available, tailoring the terms of the transaction to meet GE’s needs, engaging in self-dealing and obtaining personal financial benefits not shared equally by the plaintiffs and other stockholders. The complaints also allege that the merger agreement resulted from a flawed process designed to ensure a sale to one buyer. The lawsuits have been consolidated by stipulation of the parties under one lead case, Waltman, et al. v. InVision Technologies, Inc., et al., Lead Case No. RG04146722. On May 3, 2004, InVision and three directors filed a demurrer to the consolidated complaint on the grounds that the plaintiffs failed to allege sufficient facts to state a cause of action. The remaining five directors filed a motion to quash the service of summons because they are not California residents, and, therefore, the court lacks jurisdiction over them. On May 25, 2004, in response to the demurrer, the plaintiffs filed a consolidated amended class action complaint asserting similar causes of action, thereby rendering the demurrer moot. The plaintiffs served initial written discovery requests and following the May 26, 2004 Initial Complex Case Management Conference, the plaintiffs were permitted limited expedited discovery for the purpose of a bringing a motion for a preliminary injunction. On June 17, 2004, prior to the filing of any motion for a preliminary injunction, the parties entered into a memorandum of understanding to settle the consolidated class action suit. Under the terms of the memorandum, InVision and the plaintiffs to the consolidated action have agreed, subject to approval by the court, to enter into a settlement with respect to all claims raised by the plaintiffs to the consolidated action. The terms of the settlement contemplated by the memorandum require that additional disclosures be made concerning the merger. Those disclosures were made available in the June 18, 2004 joint press release issued by GE Infrastructure and InVision. The parties also agreed that the plaintiffs may seek attorneys’ fees and costs in the amount of $450,000 that InVision will pay, if the attorney’s fees and costs are granted by the court. There will be no other settlement payment by InVision, GE or any of the members of InVision’s board of directors, who were also named as defendants in the lawsuits. The court’s preliminary hearing to approve the settlement is currently scheduled for August 24, 2004, at which time the court is expected to set a date for a final approval hearing. If the court approves the settlement contemplated in the memorandum, the lawsuits will be dismissed. However, there can be no assurance that the court will approve the proposed settlement or that any ultimate settlement will be under terms substantially similar to those contemplated by the memorandum.

The Company also is involved in legal proceedings, claims and litigation arising in the ordinary course of business. While the outcome of these matters is currently not determinable, the Company does not believe that the ultimate cost to resolve these matters will have a material adverse effect on the Company’s consolidated financial condition, results of operations or cash flows.

9. Subsequent Events

Internal Investigation

On July 30, 2004, the Company announced that it had met with the Department of Justice and the Securities and Exchange Commission concerning its voluntary disclosure of an internal investigation of certain possible offers of improper payments by the Company’s distributors in connection with foreign sales activities. The Company has been informed that the Department of Justice and the Securities and Exchange Commission may commence an investigation of the Company with respect to these matters, including with respect to possible violations of the Foreign Corrupt Practices Act. Completion of the acquisition of the Company by GE remains subject to the closing conditions in the merger agreement, including regulatory approvals. If the acquisition is not completed by October 31, 2004, either InVision or GE may be entitled to terminate the merger agreement.

The Department of Justice and the Securities and Exchange Commission are not obligated to complete their investigation, if any, or settle or resolve matters such as this on an expedited basis and may require substantial investigation or other information before they are willing to settle or resolve such matters. The internal investigation and any related investigation by the Department of Justice and/or the Securities and Exchange Commission may not be completed by October 31, 2004.

Stockholder Litigation

On August 4, 2004, an alleged holder of InVision common stock filed a purported class action lawsuit in the United States District Court for the Northern District of California, captioned Engelken, Individually and On Behalf of All Others Similarly Situated, v. InVision Technologies, Inc., et al. The complaint names as defendants Giovanni Lanzara, the Chairman of the Company’s Board of Directors, Sergio Magistri, the Company’s Chief Executive Officer and a director, and Ross Mulholland, Senior Vice President and Chief Financial Officer of the Company, as well as InVision. The complaint alleges that the Company and the individual defendants failed to disclose that our foreign distributors had made improper payments in connection with foreign sales activities, that the Company had improperly accounted for such payments, that the Company’s improper accounting for such payments allowed the Company to enter into a definitive merger agreement with GE, that the Company and the individual defendants made related misrepresentations, and that these alleged nondisclosures and misrepresentations violated Section 10(b) of the Exchange Act and Rule 10b-5. As described above, the Company is conducting an internal investigation of certain possible offers of improper payments by the Company’s distributors in connection with foreign sales activities. The Company is also evaluating the merits of the complaint.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Cautions about Forward-Looking Statements

Throughout this Form 10-Q, we make “forward-looking” statements, or statements about events or circumstances that have not yet occurred. In some cases, we identify these statements by forward-looking words such as “may,” “will,” “should,” “plans,” “believes,” “predicts,” “intends” or “continue,” and other similar terms. These forward-looking statements involve risks and uncertainties, and our actual results could differ materially. We cannot guarantee future results or that current expectations will be accurate, and we will not update information in this Form 10-Q if any forward-looking statement later turns out to be inaccurate. Important factors that could cause our results to differ are discussed under the section ” “Risk Factors.” Readers should read this Item 2 in conjunction with the condensed consolidated financial statements and related notes in Part I, Item 1 of this Form 10-Q, as well as “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial statements and related notes in our Form 10-K for the fiscal year ended December 31, ~~2002~~2003. We ~~encourage~~ encourage readers to read these sections carefully.

Overview

We are the leading provider of Transportation Security Administration, or TSA (formerly Federal Aviation Administration, or FAA) certified explosives detection systems, or EDS, used at airports for screening checked passenger baggage.

In On ~~September~~March ~~2003~~15, we ~~completed~~2004, awe ~~private~~entered ~~offering~~into ofan ~~$125~~Agreement ~~million~~and ~~aggregate~~Plan ~~principal~~of ~~amount~~Merger ofwith ~~our~~General 3%Electric ~~convertible~~Company, ~~senior~~or ~~notes~~GE, ~~due~~under ~~2023.~~which ~~The~~GE ~~notes~~would ~~are~~acquire ~~convertible~~us ~~into~~through ~~our~~the ~~common~~merger ~~stock,~~of ~~under~~a ~~certain~~wholly ~~circumstances,~~owned atsubsidiary ~~an initial conversion rate~~ of ~~31.25~~ ~~shares~~GE ~~per~~with ~~$1,000~~and ~~principal~~into ~~amount of notes~~InVision, ~~subject~~and ~~to adjustment. At~~each ~~the~~outstanding ~~initial~~share ~~conversion~~of ~~rate,~~our ~~the~~common ~~notes~~stock ~~will~~would be ~~convertible~~converted into ~~common~~the ~~stock~~right atto areceive ~~conversion price of~~ $3250.00 ~~per~~in ~~share~~cash. ~~The~~ ~~notes~~On ~~will~~June 25, be2004, ~~redeemable~~our ~~for~~stockholders ~~cash~~voted atto ~~our~~adopt ~~option~~the merger ~~beginning~~agreement ~~on October 1,~~with ~~2008~~GE. ~~Holders~~Completion of the ~~notes~~merger ~~have~~remains ~~the~~subject ~~option~~ to ~~require us to~~the ~~purchase~~closing ~~the~~conditions ~~notes~~ in ~~cash,~~the inmerger ~~whole or in part~~agreement, onincluding ~~October 1~~regulatory inapprovals. ~~each of~~We ~~2008~~continue, ~~2013~~together ~~and~~with ~~2018.~~GE, ~~The~~to ~~holders~~cooperate ofwith ~~the~~regulatory ~~notes~~authorities ~~will~~in ~~also have the ability to~~an ~~require~~effort us to ~~purchase~~conclude the ~~notes~~antitrust inreview ~~the~~process. ~~event~~The ~~that~~merger weagreement ~~undergo a change in~~contains ~~control.~~covenants Inthat ~~each~~restrict ~~such~~our ~~case,~~operations ~~the~~without ~~redemption~~GE’s orwritten ~~purchase~~consent. ~~price~~While ~~would~~GE has beagreed atto ~~100% of~~not ~~the~~withhold ~~principal~~or ~~amount~~delay ofits ~~the~~consent ~~notes~~unreasonably, ~~plus~~these ~~accrued~~operational covenants ~~and~~limit ~~unpaid~~our ~~interest~~flexibility ~~to,~~during ~~but excluding,~~ the ~~redemption~~term orof ~~purchase date, as~~ the ~~case~~merger ~~may be~~agreement.

On ~~March~~July 3130, ~~2003~~2004, we ~~completed~~announced that we had met with the ~~acquisition~~Department of Justice ~~Yxlon~~and ~~International~~the ~~Holding~~Securities ~~GmbH,~~and orExchange ~~Yxlon,~~Commission ~~for $41.7~~concerning ~~million~~our involuntary disclosure ~~cash,~~of ~~calculated~~an atinternal ~~the~~investigation ~~then~~of ~~effective~~certain ~~conversion~~possible ~~rate~~offers ~~for~~of ~~the~~improper ~~euro,~~payments ~~and~~by ~~incurred~~our ~~additional~~distributors ~~acquisition~~in ~~costs~~connection ofwith $2foreign sales activities.1 ~~million~~We have ~~for~~been ainformed ~~total purchase~~that ~~price~~the Department of ~~$43.8~~Justice ~~million. Yxlon~~and ~~develops,~~the ~~manufactures,~~Securities ~~markets~~ and Exchange ~~supports~~Commission ~~X-ray~~may ~~based~~commence ~~non-destructive~~an ~~testing,~~investigation orof ~~NDT,~~us ~~systems~~with ~~for~~respect ato ~~wide range~~these ofmatters, ~~industrial~~including ~~applications,~~with ~~and~~respect ~~systems~~to ~~that~~possible ~~use~~violations ~~X-ray~~of ~~based~~the ~~diffraction,~~Foreign orCorrupt ~~XRD~~Practices Act, ~~technology~~or ~~for~~the ~~explosives detection~~FCPA. We ~~would~~Completion ~~make~~of anthe ~~additional payment~~acquisition of ~~€7.5~~us ~~million~~by ifGE ~~Yxlon’s~~remains subject ~~XRD~~to ~~system~~the isclosing ~~certified~~conditions ~~for~~in ~~explosives~~the merger agreement, including regulatory ~~detection~~approvals. byIf the ~~TSA~~acquisition is not completed by ~~December~~October 31, ~~2003~~2004, either InVision or ~~€5.0~~GE ~~million~~may ifbe ~~Yxlon’s~~entitled ~~XRD system~~to isterminate ~~thereafter~~the ~~certified~~merger ~~for~~agreement. ~~explosives~~The Department ~~detection~~of byJustice and the ~~TSA~~Securities ~~by June 30,~~and ~~2004. On~~Exchange ~~August 1,~~Commission are not ~~2003,~~obligated weto ~~completed~~complete ~~the~~their ~~acquisition~~investigation, ofif ~~Hattinger~~any, ~~Pruf-~~or ~~und~~settle ~~Entwicklungs-~~or ~~GmbH,~~resolve matters orsuch ~~Hapeg,~~as this on an ~~engineering~~expedited basis and ~~systems~~may ~~company~~require ~~that~~substantial ~~provides~~investigation ~~industrial testing~~or ~~and~~other ~~evaluation~~information ~~solutions~~before ~~utilizing~~they ~~computed~~are ~~tomography~~willing ~~for~~to ~~€2.9~~settle ~~million~~ or $3resolve such matters.4 ~~million~~The ininternal ~~cash,~~investigation ~~calculated~~and atany ~~the~~related ~~then~~investigation ~~effective~~by ~~conversion~~the ~~rate~~Department ~~for~~of Justice and/or the ~~euro~~Securities and Exchange Commission may not be completed by October 31, 2004.

~~Our~~ The ~~goodwill~~foregoing ~~and intangible~~descriptions ~~assets~~of ~~increased~~provisions byof ~~$34.2~~the ~~million~~merger ~~from~~agreement ~~$1.6 million at~~are ~~December 31,~~qualified ~~2002~~in totheir ~~$35.8~~entirety ~~million~~by atreference ~~September 28,~~to ~~2003,~~the ~~primarily as~~full atext ~~result~~ of ~~$31~~the merger agreement.2 ~~million~~The ofAgreement ~~goodwill~~ and ~~intangible~~Plan ~~assets acquired pursuant to our acquisition~~ of ~~Yxlon,~~Merger ~~partially~~is ~~offset~~attached byas ~~amortization~~Exhibit 2.2 ofto our ~~existing~~annual ~~intangible~~report ~~assets. Based~~ on anForm ~~independent~~10-K ~~valuation,~~for the ~~intangible~~ ~~assets~~year weended ~~acquired included $8.7 million of developed and core technology~~December 31, $22003.~~8 million of trademarks, $18.3 million of goodwill and $1.5~~ ~~million of other intangible assets.~~

We In ~~determine~~September 2003, ~~our~~we ~~segments~~completed a private offering of $125.0 million ~~based~~aggregate onprincipal ~~how~~amount of our ~~Chief~~3% ~~Executive~~convertible ~~Officer~~senior ~~and~~notes ~~Chief~~due ~~Operating~~2023. ~~Officer assess~~The ~~performance~~notes ~~and~~are ~~allocate~~convertible ~~resources. Through~~into ~~the~~our ~~first~~common ~~quarter~~stock, ofunder ~~2003~~certain circumstances, weat an ~~presented~~initial ~~segment~~conversion ~~information~~rate ~~based~~of on31.25 ~~three~~shares ~~reportable~~per ~~segments: EDS~~$1, ~~Quantum~~000 ~~and~~principal ~~Wood. As~~amount aof ~~result~~notes, subject ofto adjustment. At the ~~acquisition~~initial ofconversion ~~Yxlon~~rate, wethe ~~now~~notes ~~have~~will be ~~two~~convertible ~~reportable~~into ~~segments,~~common ~~EDS~~stock ~~and~~at ~~NDT~~a conversion price of $32. 00 per share. The notes ~~“EDS”~~will ~~segment~~be isredeemable ~~comprised~~for ofcash at our option beginning on October 1, 2008. Holders of the ~~business~~notes ~~unit~~have ~~that~~the isoption ~~engaged~~to inrequire us to purchase the ~~development,~~notes ~~manufacturing~~in cash, ~~marketing and~~in ~~support~~whole ofor ~~explosives~~in ~~detection~~part, ~~systems~~on ~~based~~October on1 ~~advanced~~in ~~computed tomography~~each ~~technology~~of 2008, 2013 and 2018. The holders ~~“NDT”~~of ~~segment~~the isnotes ~~comprised~~will ofalso have the ~~Yxlon business~~ability ~~unit~~to ~~that~~require isus ~~engaged~~to purchase the notes in the event that we undergo a

1617

development,Table manufacturing, marketing and support of non-destructive testing systems for a wide range of industrial applications. Other segments including Quantum, Wood and XRD were aggregated to form an “All Other” category as they did not meet the threshold for a reportable segment. See Note 5 of the condensed consolidated financial statements for additional information about our reportable segments.Contents

~~Our~~change ~~revenues~~in ~~are~~control. In each such case, the redemption or purchase price would ~~primarily~~be ~~comprised~~at 100% of: the principal amount of the notes, plus accrued and unpaid interest to, but excluding the redemption or purchase date, as the case may be.

~~• EDS product~~ On ~~revenues~~March 31, ~~which~~2003, ~~include~~we ~~revenues~~completed ~~from~~our ~~sales~~acquisition of ~~CTX~~Yxlon ~~systems~~International Holding GmbH, ~~accessories~~a company based in Hamburg, Germany. Yxlon develops, manufactures, markets and ~~related~~supports ~~installation~~X-ray based non-destructive testing, or NDT, systems for a wide range of industrial applications, and ~~configuration~~systems that use X-ray based diffraction, or XRD, technology for explosives detection. We acquired Yxlon for €38.6 million in cash, or $41.7 million, incurred additional acquisition costs of $2.1 million, and ~~EDS~~paid ~~service~~a ~~revenues~~subsequent purchase price adjustment of $483,000 ~~which~~in December 2003 for a total purchase price of $44.3 ~~include~~million. ~~revenues~~Under ~~from~~the ~~maintenance~~terms ~~contracts~~of ~~related~~the toamended ~~product~~purchase ~~support~~agreement, we were required to ~~integration~~make ~~and~~an ~~other~~additional ~~services~~payment of €5.0 million if Yxlon’s XRD system was certified for explosives detection by the TSA by June 30, ~~including~~2004. ~~those~~As ~~complex~~of ~~integrations~~June 30, ~~and~~2004, the ~~configurations~~XRD ~~that~~system had not been certified for explosives detection by the TSA, but remained in certification trials. We are ~~separate~~currently ~~from~~considering ~~product~~whether ~~revenues;~~the certification requirement has been, or will be met, and have not yet determined what portion, if any, of the up to €5.0 million potentially payable upon timely certification of the XRD system will actually be paid by us. We would record the payment of any such additional consideration as goodwill.

~~• NDT product~~ On ~~revenues~~August 1, ~~which~~2003, ~~include~~we ~~revenues~~completed ~~from~~ the ~~design,~~acquisition ~~assembly~~of ~~and~~Hattinger Prufund ~~installation~~Entwicklungs-GmbH, ofor ~~X-ray~~Hapeg, ~~systems~~an engineering and ~~associated~~systems ~~components~~company ~~for~~that provides industrial ~~NDT,~~testing and ~~NDT~~ ~~service~~evaluation ~~revenues~~solutions utilizing computed tomography, ~~which~~or CT, ~~include~~technology ~~revenues~~for ~~from~~€2.9 million ~~maintenance~~or ~~contracts~~$3.4 million ~~related~~in cash, calculated at the then toeffective ~~product~~conversion ~~support~~rate for the euro.

We ~~market~~determine our ~~products and~~segments ~~services~~based ~~directly~~on ~~through~~how ~~internal~~our ~~sales~~Chief ~~personnel~~Executive Officer and Chief ~~indirectly~~Operating ~~through authorized~~Officer ~~agents,~~assess ~~distributors~~performance and ~~system~~allocate ~~integrators~~resources. In ~~the~~Through ~~United~~the ~~States~~first quarter of 2003, we ~~market~~presented ~~our~~segment ~~products~~information based on three reportable segments: EDS, Quantum, and ~~services~~Wood. ~~primarily~~As ~~through~~a ~~direct~~result ~~sales~~of the acquisition ~~personnel. Internationally~~of Yxlon, we ~~use~~now ahave ~~direct~~two ~~sales~~reportable ~~force~~segments, EDS and ~~authorized~~NDT. The “EDS” segment ~~representatives~~is tocomprised ~~sell~~of ~~our~~the ~~products. International~~business ~~sales~~unit ~~represented~~that is engaged in the development, 26manufacturing, marketing and support of explosive detection systems based on advanced CT technology.1% The “NDT” segment is comprised of ~~total~~the ~~revenues~~Yxlon business unit that is engaged in the ~~first~~development, ~~nine~~manufacturing, ~~months~~marketing and support of ~~2003~~non-destructive ~~and~~testing ~~16.5%~~systems for a wide range of ~~total~~industrial applications. ~~revenues~~Other insegments including Quantum, Wood and XRD were aggregated to form an “All Other” category as they did not meet the ~~first~~threshold ~~nine~~for ~~months~~a ofreportable ~~2002~~segment. See Note 5 to the condensed consolidated financial statements for additional information about our reportable segments.

~~EDS. In~~ As ~~any given fiscal quarter or year, our EDS product revenues are derived from orders of multiple units of our products from~~ a ~~limited~~result ~~number~~ of ~~customers. For example, in~~ the ~~third~~completion ~~quarter~~ of ~~2003~~the ~~four~~initial ~~customers~~deployment ~~accounted~~following ~~for all of our~~the ~~EDS~~September 11, ~~products~~2001 ~~sold~~terrorist ~~during~~attacks ~~the~~and ~~quarter, in~~ the ~~first~~time ~~nine~~it ~~months~~takes ofto ~~2003 15~~construct ~~customers~~modifications ~~accounted~~to ~~for~~retrofit ~~all~~airports ofto ~~our~~accommodate in-line EDS ~~products sold during the period~~equipment, ~~and for~~ the market ~~fiscal year 2002 ten customers accounted~~ for ~~all~~many of our ~~EDS~~ products ~~sold during~~is ~~the~~in ~~year. The~~a ~~number~~period of ~~our customers does not vary widely from period to period~~transition. ~~Therefore,~~ aThe ~~cancellation~~demand orfor ~~delay of an order from~~ a ~~customer could have a~~ significant ~~negative~~portion ~~impact~~of on our ~~operations~~products inis aalso ~~given period. Including~~subject ~~revenues from the Siemens subcontract~~ to ~~provide maintenance service for TSA-owned EDS systems, EDS sales to~~ the ~~FAA~~budgetary ~~and, following~~process ~~the formation~~ of the ~~TSA,~~federal togovernment. ~~the~~We ~~TSA,~~anticipate ~~accounted~~a ~~for~~decline ~~80%~~in ~~of our~~ EDS revenues infor the ~~nine~~year ending ~~months ended September~~December 2831, ~~2003~~2004, ~~and~~compared ~~85.4%~~to ~~of our~~ EDS revenues induring the year ended December 31, ~~2002~~2003. ~~There~~ ~~were~~As noa ~~other EDS~~result, ~~customers~~we ~~who~~have ~~accounted~~implemented ~~for~~cost-reduction ~~more than 10% of total revenues in the first nine months of 2003 or the year ended December 31, 2002~~programs.

We Our ~~typically~~ability ~~bill~~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, inparticularly ~~three~~the ~~stages~~TSA, asour ~~generally~~revenues ~~provided~~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 ~~contracts~~quarterly ~~with~~and annual operating results to vary substantially. Our ability to increase our operating efficiency, further ~~customers:~~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.

~~• amounts to~~ Our ~~cover~~revenues ~~the bill of materials when materials~~ are ~~received~~primarily ~~from~~comprised ~~suppliers, typically 30% to 40%~~ of ~~the total system price;~~:

• ~~an additional~~ ~~amount~~EDS ~~upon~~product ~~factory~~revenues, ~~acceptance~~which orinclude ~~shipment~~revenues ~~ranging~~from sales of CTX systems, accessories and related installation and configuration, and EDS service revenues, which include revenues from ~~30%~~maintenance contracts related to ~~60%~~product support, integration and other services, including those complex integrations and configurations that are separate from product revenues; and

~~• the~~18 ~~balance upon installation and site acceptance, ranging from 5% to 30%.~~

TheseTable payment terms generally provide the necessary working capital for acquisition of 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.Contents

~~Payment~~• ~~terms~~NDT ~~for~~product ~~TSA invoices~~revenues, ~~are~~which ~~net~~include 30revenues ~~days~~from the design, ~~while~~assembly ~~terms~~and installation of X-ray systems and associated components for ~~international~~industrial ~~invoices~~NDT, ~~vary~~and ~~from amounts~~NDT ~~due~~service ~~upon~~revenues, ~~receipt~~which ofinclude ~~invoice~~revenues from maintenance contracts related to ~~160~~product ~~days~~support.

~~NDT. Our~~ We ~~NDT product~~market ~~and~~our ~~service~~products ~~revenues~~and ~~are~~services ~~primarily~~directly ~~derived~~through ~~from~~internal sales personnel ofand ~~X-ray~~indirectly ~~based NDT~~through ~~products~~authorized ~~primarily~~agents, todistributors and system integrators. In the ~~automotive~~United States, we market our products and ~~aerospace~~services primarily ~~industries~~through direct sales personnel. ~~There~~ Internationally, we use a direct ~~were~~sales noforce ~~NDT~~and ~~customers~~authorized ~~who~~representatives ~~accounted~~to ~~for~~sell ~~more~~our ~~than~~products. 10International sales represented 43.2% of total revenues ~~since~~ in the ~~acquisition~~first six months of ~~Yxlon~~2004 onand 22.4% ~~March 31,~~of total revenues in the first six months of 2003.

17 EDS. In any 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 the second quarter of 2004 eight customers accounted for all of our EDS products sold during the quarter, in the first six months of 2004 ten customers accounted for all of our EDS products sold during the period, and for the fiscal year 2003 eighteen customers accounted for all of our EDS products sold during the year. 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. Including revenues from the Boeing and Siemens subcontracts to provide maintenance service for TSA-owned EDS systems, EDS sales to the TSA accounted for 63.0% of our EDS revenues in the six months ended June 27, 2004 and 77.9% of our EDS revenues in the year ended December 31, 2003. For the first six months of 2004, we generated $75.1 million from EDS sales to our largest customer, the TSA, representing 45.9% of total revenues. For the first six months of 2003, we generated $184.2 million from EDS sales to the FAA and, following the formation of the TSA, the TSA, representing 72.4% of total revenues. The Canadian Air Transport Security Authority accounted for approximately 11.8% of total EDS revenues in the first six months of 2004. There were no other EDS customers who accounted for more than 10% of total revenues in the first six months of 2004 or the year ended December 31, 2003.

~~Results~~ We oftypically ~~Operations~~bill our customers in three stages, as generally provided in our contracts with our customers:

~~The~~• ~~following~~amounts ~~table~~to ~~sets forth~~cover ~~certain~~the ~~income~~bill ~~and~~of ~~expenditure~~materials ~~items~~when ~~from~~materials ~~our~~are ~~consolidated~~received ~~statements~~from ~~of operations~~suppliers, ~~expressed~~typically as30% ato ~~percentage~~40% of the total ~~revenues~~system ~~for the periods indicated.~~price;

	Three Months Ended				Nine Months Ended
	September 28, 2003		September 29, 2002		September 28, 2003		September 29, 2002
Revenues:
Product revenues	80.4	%	95.0	%	87.2	%	91.1	%
Service revenues	16.0		3.0		10.0		4.8
Contract research and development revenues	3.6		2.0		2.8		4.1
Total revenues	100.0		100.0		100.0		100.0
Cost of revenues:
Product costs	49.1		53.7		50.3		51.6
Service costs	9.7		2.2		6.0		3.6
Contract research and development costs	2.1		1.4		1.7		2.8
Total cost of revenues	60.9		57.3		58.0		58.0
Gross profit	39.1		42.7		42.0		42.0
Operating expenses:
Research and development	6.1		4.9		5.9		6.5
Selling, general and administrative	14.3		7.6		9.3		9.6
In process research and development (Yxlon)	—		—		1.3		—
Total operating expenses	20.4		12.5		16.5		16.1
Income from operations	18.7		30.2		25.5		25.9
Interest expense	(0.4	)	(0.1	)	(0.1	)	(0.1	)
Interest and other income, net	0.8		0.4		0.6		0.2
Income before provision for income taxes	19.1		30.5		26.0		26.0
Provision for income taxes	8.4		12.2		11.0		10.5
Net income	10.7	%	18.3	%	15.0	%	15.5	%

•

an additional amount upon factory acceptance or shipment ranging from 30% to 60%; and

On• ~~March 31, 2003,~~ the ~~first~~balance ~~day~~upon ofinstallation ~~our~~and ~~second~~site ~~quarter~~acceptance, weranging ~~acquired~~from ~~Yxlon.~~5% ~~Yxlon’s~~to ~~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 second and third quarters of 2003~~30%.

~~Revenues~~ These payment terms generally provide the necessary working capital for acquisition of 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.

~~EDS~~ Payment ~~product~~terms ~~revenues~~for ~~were $48.5~~TSA ~~million~~invoices inare ~~the~~net ~~third quarter of 2003~~30 days, awhile ~~decrease~~terms ~~of 55.8% from $109.6~~for ~~million~~international ininvoices ~~the~~vary ~~third quarter of 2002. EDS product revenues were $263.4 million in the first nine months of 2003, an increase of 36.2%~~ from ~~$193.4 million~~amounts indue ~~the~~upon ~~first~~receipt ~~nine months~~ of ~~2002. The~~invoice ~~revenue decrease in the third quarter 2003 is primarily due~~ to ~~the fulfillment by the end of the second~~160 ~~quarter of 2003 of several large orders received from the TSA during 2002~~days. ~~The revenue increase year-to-date is mainly due to the relatively~~ ~~low level of shipments to the TSA during the first three months of 2002 as~~ ~~compared to the same period in 2003, as the first large TSA delivery order of~~ ~~2002 was not received until late in the first quarter of 2002.~~

~~EDS service revenues were $10~~ NDT.1 ~~million~~Our ~~for~~NDT ~~the~~product ~~third~~and ~~quarter of 2003, an increase of 230% from $3.1 million in the third quarter of 2002. EDS~~ service revenues ~~were~~are ~~$27.2 million~~primarily ~~for~~derived ~~the first nine months of 2003, an increase of 203%~~ from ~~$9.0~~ ~~million~~sales ~~in the first nine months~~ of ~~2002. The revenue increase in the third quarter 2003 and the nine~~X-~~month~~ray ~~period~~based ~~results~~NDT products primarily ~~from~~to ~~a larger number of units installed in~~ the ~~United~~automotive ~~States,~~ and ~~from services provided~~aerospace ~~under~~industries. aThere ~~contract~~were ~~with~~no ~~Siemens,~~NDT ~~which~~customers ~~was~~who ~~signed~~accounted ~~in January 2003, to provide extended hour service~~ for ~~our~~more ~~EDS~~than ~~products~~10% ~~owned by the TSA in the~~of ~~United~~total ~~States and its territories. We anticipate that service~~ revenues ~~will~~ ~~increase~~since inthe ~~2003~~acquisition ~~compared~~of toYxlon ~~2002~~on ~~due~~March 31, ~~to services provided under the~~2003. ~~agreement with Siemens and a~~

1819

largerTable installed based of EDS coming off of warranty. As of September 28, 2003, we had in backlog EDS equipment orders and service agreements of $92.8 million, primarily consisting of orders for EDS systems and services from the TSA and international customers.Contents

~~NDT~~Results ~~product revenues were $15.0 million in the third quarter~~ of ~~2003. NDT service revenues were~~Operations ~~$3.1 million in the third quarter of 2003. As of September 28, 2003,~~ ~~we had in backlog NDT equipment orders and service agreements of $19.5 million,~~ ~~primarily consisting of orders for standard industrial and custom NDT~~ ~~systems. NDT product revenues were $24.3 million in the period since the acquisition of Yxlon, and NDT service revenues were $5.6 million for the same period.~~

~~Gross~~ The ~~Profit~~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.

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.


	Three Months Ended						Six Months Ended
	June 27,			June 29,			June 27,			June 29,
	2004			2003			2004			2003
Revenues:
Product revenues		69.4	%		83.9	%		69.8	%		89.5	%
Service revenues		27.4			12.9			26.8			8.0
Contract research and development revenues		3.2			3.2			3.4			2.5

Total revenues		100.0			100.0			100.0			100.0

Cost of revenues:
Product costs		41.9			49.7			42.8			50.7
Service costs		17.1			8.0			16.5			4.8
Contract research and development costs		2.4			2.2			2.6			1.6

Total cost of revenues		61.4			59.9			61.9			57.1

Gross margin		38.6			40.1			38.1			42.9

Operating expenses:
Research and development		8.1			8.5			8.1			5.9
Selling, general and administrative		15.5			11.7			16.4			7.7
In-process research and development (Yxlon)		—			4.8			—			1.6

Total operating expenses		23.6			25.0			24.5			15.2

Income from operations		15.0			15.1			13.6			27.7
Interest expense		(1.5	)		(0.1	)		(1.6	)		(0.1	)
Interest and other income, net		0.5			0.7			0.8			0.5

Income before provision for income taxes		14.0			15.7			12.8			28.1
Provision for income taxes		6.0			7.9			5.4			11.9

Net income		8.0	%		7.8	%		7.4	%		16.2	%

~~Gross~~ On ~~profit~~March 31, ~~for EDS products was $21.2 million in the third quarter of~~ 2003, ~~a decrease of 55.6% from $47.9 million in~~ the ~~third~~first ~~quarter~~day of ~~2002. Gross~~our ~~margin~~second ~~percentages for EDS products were 43.8% in the third~~ quarter of 2003, ~~and 43.7% in the third~~we ~~quarter~~acquired ~~of 2002~~Yxlon. ~~Gross~~ ~~profit for EDS products was $116.7 million in the first nine months of 2003~~Accordingly, anYxlon’s ~~increase~~results ofhave ~~37.4%~~been ~~from~~included ~~$84.9 million~~ in ~~the~~our ~~first~~results ~~nine~~since ~~months of 2002. Gross margin percentages for EDS products were 44.3% in~~ the ~~first~~acquisition ~~nine~~date, ~~months of 2003~~ and ~~43.9% in~~ the ~~first~~operating ~~nine~~results ~~months of 2002. The decrease in gross profit~~ for the ~~third~~NDT ~~quarter~~segment ~~was due to~~also ~~decreased~~have ~~sales~~been ofincluded ~~our~~only ~~CTX~~beginning ~~products~~with ~~and~~ the ~~increase~~second ~~in year-to-date period is primarily due to increased revenues. Product gross margin percentages for the third~~ quarter ~~and year-to-date periods remained approximately the same primarily as a result~~ of ~~improved manufacturing overhead~~2003. ~~per unit, offset by decreases in sales price as a result of volume orders from~~ ~~the TSA.~~

~~Gross profit for EDS~~Revenues ~~services were $4.2 million in the third quarter of 2003, an increase of 471%~~ ~~from $730,000 in the third quarter of 2002. Gross margin percentages for EDS~~ ~~services were 41.3% in the third quarter of 2003 and 23.9% in the third quarter~~ of 2002. Gross profit for EDS services were $11.1 million in the first nine months of 2003, an increase of 517% from $1.8 million in the first nine months of 2002. Gross margin percentages for EDS services were 40.8% in the first nine months of 2003 and 20% in the first nine months of 2002. The increase in gross profit for EDS services in the third quarter and year-to-date periods is primarily due to increased EDS service revenues from the growing installed base of domestic systems covered by the Siemens contract, 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, in the first nine months of 2002, we incurred costs associated with the build-up of our customer support staff in anticipation of an increase in EDS services as more units were sold.

~~Cost~~ EDS ofproduct ~~NDT products~~ revenues ~~primarily~~were ~~consists~~$44.4 million ofin ~~purchased~~the ~~materials~~second ~~procured~~quarter ~~for~~of ~~use~~2004, ~~in the~~a ~~assembly~~decrease of ~~our~~30.4% ~~products,~~from as$63.8 million ~~well~~in asthe ~~manufacturing~~second ~~labor~~quarter ~~and~~of ~~overhead,~~2003. EDS ~~installation,~~product ~~training~~revenues ~~and~~were ~~warranty~~$83. ~~Cost~~4 million ofin ~~NDT~~the ~~services~~first ~~revenues primarily~~six ~~consists~~months of ~~direct~~2004, ~~labor~~a ~~and~~decrease of ~~materials~~61.2% ~~and~~from ~~customer support overhead~~$214. ~~Gross~~9 million ~~profit~~in ~~for~~the ~~NDT~~first ~~products~~six ~~was~~months $4of 2003.2 ~~million~~The revenue decrease in the ~~third~~ second quarter and the first six months of ~~2003. Gross~~2004 ~~margin~~is ~~percentage~~primarily due ~~for~~to ~~NDT~~decreased ~~products~~EDS ~~was~~shipments ~~27.8%~~to in the ~~third~~TSA ~~quarter~~relative ofto the same periods in 2003. ~~Gross~~ The ~~profit~~first ~~for~~six ~~NDT~~months ~~service~~of ~~was~~2003 ~~$1.2 million~~revenues inreflected the ~~third~~large ~~quarter~~continued deployment of ~~2003. Gross~~EDS ~~margin~~units ~~percentage~~that ~~for~~had ~~NDT services~~begun ~~was~~in ~~39.7%~~2002 inafter the ~~third~~increased ~~quarter~~focus ofon ~~2003. For~~aviation security ~~the~~due ~~period~~to ~~since~~ the ~~acquisition~~terrorist attacks of ~~Yxlon~~September 11, ~~gross~~2001. During ~~profit~~the ~~for NDT~~second ~~products~~quarter ~~was~~of 2004, we recognized approximately $64.3 4 million, ~~with~~of arevenue ~~gross~~from ~~margin~~one ~~percentage~~customer ofwho accepted ~~26.0%. For~~and ~~the~~took ~~period~~title ~~since~~to the ~~acquisition~~EDS ofequipment and agreed to normal ~~Yxlon~~payment terms, ~~gross~~but ~~profit~~requested ~~for~~that ~~NDT~~we ~~service~~store ~~was~~the $2equipment until predetermined shipment dates.0 ~~million~~At June 27, ~~with~~2004, awe ~~gross~~were ~~margin percentage~~storing $4.4 million of 36such equipment.~~5%.~~

~~Research and Development~~20

ResearchTable and development expenses consist primarily of compensation paid to personnel engaged in research and development activities, amounts paid for outside services and costs of materials utilized in theContents

EDS service revenues were $19.7 million for the second quarter of 2004, an increase of 129.7% from $8.6 million in the second quarter of 2003. EDS service revenues were $35.8 million for the first six months of 2004, an increase of 109.7% from $17.1 million in the first six months of 2003. The revenue increase for the quarter and the first six months of 2004 is primarily due to an increased number of units coming off of warranty and into contractual service agreements. We anticipate that service revenues will continue to rise in 2004 compared to 2003 as this trend continues. As of June 27, 2004, we had in backlog EDS equipment orders and service agreements of $148.0 million, primarily consisting of orders for EDS equipment.

~~development~~ NDT ofproduct ~~hardware~~revenues ~~products~~were $12.6 million in the second quarter of 2004, ~~including~~an increase ~~prototype~~of ~~units~~35.7% from $9.3 million in the second quarter of 2003. NDT product ~~Research~~revenues ~~and~~for ~~development~~the ~~expenditures~~first ~~are~~six ~~partially~~months ~~offset~~of by2004 ~~amounts~~were $25.6 million. Because we ~~reimbursed~~acquired bythe NDT business at the ~~TSA~~beginning ~~and~~of ~~other~~the ~~government~~second ~~agencies~~quarter ~~and~~of ~~private~~2003, ~~entities~~there is ~~under~~no comparable six-month amount for 2003. The revenue increase for the ~~research~~second quarter of 2004 compared to the second quarter of 2003 is due mainly to an increase in orders for standard industrial and ~~development~~custom ~~contracts~~NDT systems received late in 2003 and ~~grants~~in the first six months of 2004. ~~These~~ ~~services~~We ~~are~~expect ~~provided~~that NDT revenues ~~and~~for ~~reimbursed~~the onremainder aof ~~cost~~2004 ~~basis~~will continue to be greater than revenues for comparable periods in 2003.

~~Net~~ NDT ~~research~~service ~~and development~~revenues ~~expenses for EDS~~ were $23.8 1 million in the ~~third~~second quarter of ~~2003~~2004, aan ~~decrease~~increase of 4726.2 1% from $~~5.3 million in the third quarter of 2002. The net numbers reflect amounts reimbursed by the TSA of $~~2.0 5 million in the ~~third quarter~~second ~~of 2003 and $26,000 from FAA and other government agencies in the third~~ quarter of ~~2002~~2003. ~~Net~~ ~~research~~NDT ~~and development expenses for EDS as a~~service ~~percentage of EDS~~ revenues ~~were 4.8% in the third quarter of 2003 and 4.7% in the third quarter of 2002. Net research and development expenses~~ for ~~EDS were $14.7 million in~~ the first ~~nine~~six months ofwere ~~2003, an increase of 24.7% from~~ $116.8 4 million ~~in the first nine months of 2002~~. The ~~net~~increase ~~numbers reflect amounts reimbursed by the FAA and other government agencies of $2.0 million~~ in ~~the~~ ~~first nine months of 2003 and $566,000 in the first nine months of~~service ~~2002. Net~~revenues ~~research and development expenses~~ for ~~EDS~~the assecond aquarter ~~percentage~~ of ~~EDS~~ ~~revenues~~2004 ~~were~~compared ~~5.1%~~to in the ~~first~~second ~~nine~~quarter ~~months~~ of 2003 is ~~and~~due ~~5.8%~~mainly into ~~the~~customers ~~first nine~~upgrading ~~months~~components of ~~2002. The~~standard ~~decrease~~industrial ~~in research~~ and ~~development expenses~~ ~~for~~custom ~~EDS~~NDT ~~for~~systems, ~~the~~as ~~third~~well ~~quarter~~as ~~was~~an ~~due to the receipt of $2.0 million of government funding for a research project. The~~ increase in ~~year-to-date periods was primarily due to increased spending on several initiatives to support our growth partially offset by~~ the ~~receipt~~ ofnumber ~~$2.0 million~~ of ~~government~~service ~~funding for a research project~~contracts. ~~With~~As ~~the goal~~ of ~~100%~~June 27, ~~checked baggage screening in U.S. airports~~2004, we ~~expect that~~had ~~our EDS machines will be operated at or near capacity for extended periods. We are investing~~ in ~~sustaining~~backlog ~~engineering~~NDT ~~efforts~~equipment toorders ~~ensure that our products achieve high levels of serviceability~~ and ~~reliability when~~service ~~operating~~agreements ~~at capacity. We are also continuing to develop product enhancements for our existing line~~ of ~~EDS machines~~$32. ~~In addition~~3 million, weprimarily ~~are continuing~~consisting ~~our development~~ of ~~the~~orders ~~ARGUS~~for ~~program, an FAA-sponsored program~~standard ~~designed~~industrial ~~to develop a smaller, low-cost EDS product to scan checked baggage in small airports~~ and ~~low-traffic~~custom ~~stations~~NDT ~~within larger airports~~systems.

~~Research~~Gross ~~and development~~Profit ~~expenses for NDT were $767,000 in the third quarter of 2003. Research and~~ ~~development expenses for NDT as a percentage of NDT revenues were 4.3% in the~~ ~~third quarter of 2003. For the period~~ ~~since the acquisition of Yxlon, research and development expenses for NDT were $1.4 million, or 4.8% of NDT revenues.~~

~~Selling~~ Cost of EDS product revenues primarily consists of purchased materials procured for use in the assembly of our products, ~~General~~as well as manufacturing labor and ~~Administrative~~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.

~~Selling~~ Gross profit for EDS products was $20.3 million in the second quarter of 2004, ~~general~~a decrease of 26.8% from $27.7 million in the second quarter of 2003. Gross margin percentages for EDS products were 45.7% in the second quarter of 2004 and 43.5% in the second quarter of 2003. Gross profit for EDS products ~~administrative~~was ~~expenses~~$37.1 million ~~consist~~in the first six months of 2004, a decrease of 61.1% from $95.3 million in the first six months of 2003. Gross margin percentages for EDS products were 44.5% in the first six months of 2004 and 44.4% in the first six months of 2003. The decrease in gross profit for the second quarter and year-to-date periods is primarily due to decreased revenues. The product gross margin percentage for the second quarter of ~~compensation~~2004 ~~paid~~improved due to ~~direct~~the sale of EDS systems which incorporated materials which had previously been written-down by approximately $1.4 million as excess inventory and due to a ~~indirect~~product ~~sales~~mix that included more higher margin accessories and ~~marketing~~upgrade ~~personnel,~~sales. The ~~administrative~~product ~~personnel,~~gross ~~including~~margin percentage for the first six months of 2004 improved ~~directors,~~due ~~consultant~~to ~~fees,~~the ~~professional~~sale ~~service~~of ~~fees,~~EDS ~~insurance~~systems ~~costs,~~which ~~travel,~~incorporated materials which had ~~selling~~previously ~~and~~been ~~distribution~~written down by approximately $2.0 million as excess inventory. This was offset somewhat by fixed manufacturing overhead costs, ~~and~~being ~~other~~spread over ~~general~~fewer ~~expenses~~units in the first six months of 2004 compared to the same period in 2003.

~~Selling,~~ Gross ~~general~~profit ~~and administrative expenses~~ for EDS services were $67.1 6 million in the ~~third~~second quarter of ~~2003,~~ a2004, ~~decrease~~an increase of 20133.39% from $73.7 3 million in the ~~third~~second quarter of ~~2002~~2003. ~~Selling,~~Gross ~~general~~margin ~~and~~percentages ~~administrative expenses~~ for EDS asservices ~~a percentage of EDS revenues~~ were 1038.56% in the ~~third~~second quarter of 2004 ~~2003~~ and 637.89% in the ~~third~~second quarter of ~~2002~~2003. ~~Selling,~~ ~~general~~Gross ~~and~~profit ~~administrative expenses~~ for EDS services were $1914.7 3 million in the first ~~nine~~six months of ~~2003~~2004, an increase of 17106.78% from $166.7 9 million in the first ~~nine~~six months of ~~2002~~2003. ~~Selling,~~Gross ~~general~~margin ~~and~~percentages ~~administrative expenses~~ for EDS services ~~as a percentage of EDS revenues~~ were 640.80% in the first ~~nine~~ six months of ~~2003~~2004 and 840.36% in the first ~~nine~~ six months of ~~2002~~2003. The ~~decrease~~increase in ~~selling,~~ ~~general~~gross ~~and~~profit ~~administrative expenses~~ for EDS services in ~~absolute dollars for~~ the ~~third~~ second quarter ofand ~~2003 compared~~ year-to-date ~~the~~periods ~~third quarter of 2002~~ is primarily due to ~~the non-recurrence~~increased ofEDS ~~third quarter of 2002 expenses associated with investigations~~service ~~relating~~revenues tofrom ~~potential~~the ~~acquisitions~~growing ~~offset~~installed ~~somewhat~~base byof ~~increases~~domestic insystems ~~headcount~~ and ~~employee-related~~service agreements ~~expenses~~from ininternational ~~the third quarter of 2003~~customers. ~~The~~ ~~increase~~Gross inmargin ~~selling,~~percentages ~~general~~for ~~and~~the ~~administrative~~second ~~expenses~~quarter ~~for~~and ~~EDS in absolute dollars for the~~ year-to-date ~~period was~~periods ~~primarily~~remained ~~due~~approximately ~~to an increase in headcount and employee-related expenses in~~ the ~~first nine months of 2003 as compared to the~~ same ~~period a year ago~~.

~~Selling, general and~~21 administrative expenses for NDT were $4.4 million in the third quarter of 2003. Selling, general and administrative expenses for NDT as a percentage of NDT revenues were 24.5% in the third quarter of 2003. For the period since the acquisition of Yxlon, selling, general and administrative expenses for NDT were $7.6 million, or 25.6% of NDT revenues.

20Table of Contents

~~Interest~~ Cost ~~Expense~~of 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. Cost of NDT service revenues primarily consists of direct labor and materials and customer support overhead. Gross profit for NDT products was $2.9 million in the second quarter of 2004, an increase of 34.5% from $2.1 million in the second quarter of 2003. Gross margin percentages for NDT products were 22.9% in the second quarter of 2004 and 23.0% in the second quarter of 2003. Gross margin for the first six months of 2004 was $5.7 million with a gross margin percentage for product of 22.4%. Because we acquired the NDT business at the beginning of the second quarter of 2003, there is no comparable six-month amount for 2003. The increase in gross profit for the second quarter of 2004 compared to the second quarter of 2003 is primarily due to the increase in revenues. 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 second half of 2004, although such anticipated improvements may be reduced due to exchange rate fluctuations.

~~Interest~~ Gross ~~expense~~profit for NDT services was $~~343~~835,000 in the ~~third~~second quarter of ~~2003~~2004, an ~~and~~increase of 4.0% from $~~107~~803,000 in the ~~third~~second quarter of ~~2002~~ 2003. ~~Interest~~Gross ~~expense~~margin percentages ~~resulted~~for ~~primarily~~NDT ~~from~~services ~~fees~~were ~~associated~~26.8% ~~with~~in ~~our~~the ~~working capital~~second ~~lines~~quarter of ~~credit,~~2004 ~~equipment~~and ~~term~~32.5% in ~~loans,~~the ~~capital~~second ~~leases~~quarter ~~and~~of ~~financing~~2003. ~~for insurance~~Gross ~~premiums~~profit ~~and~~for ~~interest~~the ~~expense~~first ~~associated~~six ~~with~~months ~~long~~of ~~term~~2004 was ~~debt~~$1.7 ~~Interest~~million ~~expense~~and ~~was~~gross ~~$488,000~~margin percentage of 27.3%. The decrease in ~~the~~gross margin ~~first~~percentage ~~nine~~for ~~months~~the second quarter of ~~2003~~2004 ~~and~~compared ~~$316,000~~to in the ~~first~~second ~~nine~~quarter of ~~months~~2003 ofis ~~2002.~~primarily ~~Interest~~due ~~expense~~to ~~resulted~~an ~~primarily~~increase ~~from~~in ~~fees~~ service costs associated with ~~our~~an expansion ~~working~~of ~~capital~~service ~~lines~~capability ofin ~~credit,~~the ~~equipment~~United ~~term~~States. ~~loans, capital~~We ~~leases~~do ~~and~~not ~~financing~~anticipate meaningful ~~for~~changes ~~insurance~~in ~~premiums~~gross ~~and~~profit ~~interest~~for ~~expense associated~~NDT ~~with~~services ~~long~~in ~~term debt~~2004.

~~Interest~~Research and ~~Other Income, Net~~Development

~~Interest~~ Research and ~~other income,~~development ~~net~~expenses ~~was~~consist ~~$667,000~~primarily ~~in the third quarter~~ of ~~2003~~compensation ~~and~~paid to ~~$510,000~~personnel engaged in ~~the~~research ~~third quarter~~and ofdevelopment ~~2002.~~activities, ~~The~~amounts ~~amount~~paid for outside ~~the~~services ~~third~~and ~~quarter~~costs of ~~2003~~materials ~~consisted~~utilized ~~primarily of~~in ~~interest~~the ~~income~~development ~~on cash and cash equivalents~~ of ~~$425~~hardware products,~~000,~~ ~~and~~including ~~other~~prototype ~~income, net of $242,000~~units. ~~The~~Research ~~amount~~and ~~for~~development ~~the~~expenditures ~~third quarter of 2002 consisted primarily~~are ofpartially ~~interest~~offset ~~income~~by onamounts ~~cash~~reimbursed ~~and~~by ~~cash~~the ~~equivalents of $832~~FAA,~~000,~~ ~~offset~~TSA byand other government ~~expenses,~~agencies ~~net~~and ofprivate ~~$322,000,~~entities ~~including~~under ~~$306,000~~research inand ~~net~~development ~~foreign~~contracts ~~exchange losses,~~and ~~primarily~~grants. onThese ~~outstanding~~services ~~foreign~~are ~~exchange~~provided ~~forward~~and ~~contracts~~reimbursed ~~at September 29,~~on ~~2002~~a cost basis.

~~Interest~~ Net research and ~~other~~development expenses for EDS were $5.7 million in the ~~income,~~second ~~net~~quarter of 2004, ~~was~~an $2increase of 1.09% from $5.6 million in the ~~first~~second quarter ~~nine~~of ~~months~~2003. Net research and development expenses for EDS as a percentage of EDS revenues were 8.9% in the second quarter of 2004 and 7.7% in the second quarter of 2003. Net research and development expenses for EDS were $~~373,000~~11.1 million in the first ~~nine~~six months of ~~2002.~~2004, ~~The~~a ~~amount~~decrease ~~for~~of 6.9% from $11.9 million in the first ~~nine~~six months of 2003 ~~consisted~~. ~~primarily~~The ofnet ~~interest~~numbers ~~income~~reflect onreimbursements ~~cash~~by the TSA and ~~cash~~other ~~equivalents~~government agencies of $1683,~~263,~~000, ~~and~~for ~~other~~the ~~income,~~second ~~net~~quarter of 2004 and $~~759,000~~1.2 million ~~including~~for athe ~~net~~first ~~$336,000~~six months of 2004. There were no such reimbursements in the first six months of 2003. Net research and development ~~foreign~~for ~~exchange~~the ~~gain~~second quarter remained about the same for the years 2003 and 2004. Net ~~The~~research ~~amount~~and development for the first ~~nine~~six months ofshowed ~~2002~~a ~~consisted~~decrease as a ~~primarily~~result of ~~interest~~the ~~income~~funding received. This decrease is partially offset by increased effort on ~~cash~~projects ~~and~~with ~~cash~~Yxlon ~~equivalents~~to ofdevelop ~~$1,354,000,~~a ~~offset~~solution that integrates Yxlon’s byX-ray ~~other~~diffraction ~~expenses,~~technology ~~net~~with ofour ~~$978,000,~~CT ~~including~~technology. ~~$994,000~~We continue to invest in sustaining engineering efforts with the goal of ensuring that our products achieve high levels of serviceability and reliability when operating at capacity. The increase of net ~~foreign~~research ~~exchange~~and development expenses for EDS as a ~~losses,~~percentage of revenues was primarily ondue ~~outstanding~~to ~~foreign~~decreased ~~exchange~~revenues ~~forward~~during ~~contracts~~the atfirst ~~September 29,~~six ~~2002~~months of 2004.

~~Provision~~ Research and development expenses for ~~Income~~NDT ~~Taxes~~were $802,000 in the second quarter of 2004, an increase of 22.8% from $653,000 in the second quarter of 2003. Research and development expenses for NDT as a percentage of NDT revenues were 5.1% in the second quarter of 2004 and 5.5% in the second quarter of 2003. Research and development expenses for NDT were $1.7 million and 5.2% of revenue for the first six months of 2004. Because we acquired the NDT business at the beginning of the second quarter of 2003, there is no comparable six-month amount for 2003. The increase in research and development expenses for the second quarter of 2004 compared to the second quarter of 2003 was mainly due to efforts related to new designs for standard industrial and custom NDT systems. In order to strengthen our role as a leading supplier of X-ray solutions for NDT applications, we plan to increase the research and development expenses for NDT in 2004.

The provision for income taxes was $7.2 million in the third quarter of 2003 and $14.3 million in the third quarter of 2002. Our effective tax rate was 43.7% in the third quarter of 2003 and 40% in the third quarter of 2002. The provision for income taxes was $37.5 million in the first nine months of 2003 and $22.9 million in the first nine months of 2002. Our effective tax rate was 42.5% in the first nine months of 2003 and 40.3% in the first nine months of 2002. The increase in the effective tax rates in the third quarter compared to the comparable period in the prior year is due primarily to valuation reserves recorded against deferred tax assets related to net operating loss carryforwards of certain Yxlon subsidiaries. We expect that our effective tax rate will be reduced to a limited extent in future quarters. The increase in the first nine months of 2003 versus the comparable period in the prior year is 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. At December 31, 2002, we had federal and state net operating loss carryforwards of approximately $1.8 million and $321,000 available to reduce future federal and state 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 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.

LiquidityTable andof Capital ResourcesContents

~~At September 28~~Selling, ~~2003,~~ weGeneral ~~had $282.4 million in cash~~ and ~~cash equivalents, compared to $159.7~~Administrative ~~million at December 31, 2002.~~

~~Net~~ Selling, ~~cash~~general ~~provided~~and ~~by operating~~administrative ~~activities~~expenses ~~was~~consist ~~$56.7~~primarily ~~million in the first nine months~~ of ~~2003,~~ ~~compared~~compensation paid to ~~$16.9~~direct ~~million~~and ~~provided~~indirect bysales ~~operating~~and ~~activities~~marketing ~~in the first nine~~personnel, ~~months~~administrative ofpersonnel, ~~2002. Cash~~including ~~provided~~directors, byconsultant ~~operating~~fees, ~~activities in the first nine~~professional ~~months~~service offees, ~~2003~~insurance ~~primarily~~costs, ~~resulted~~travel, ~~from~~selling ~~significant~~and ~~accounts~~distribution ~~receivable collections from the TSA resulting in a $90.4 million decrease in accounts receivable. Other significant items include net income of $50.7 million~~costs, ~~enhanced~~ ~~by the non-cash effects of the $4.3 million of depreciation~~ and ~~amortization,~~other ~~and~~general ~~the $4~~expenses.3

21 Selling, general and administrative expenses for EDS were $8.5 million in the second quarter of 2004, an increase of 52.9% from $5.6 million in the second quarter of 2003. Selling, general and administrative expenses for EDS as a percentage of EDS revenues were 13.3% in the second quarter of 2004 and 7.7% in the second quarter of 2003. Selling, general and administrative expenses for EDS were $16.9 million in the first six months of 2004, an increase of 25.2% from $13.5 million in the first six months of 2003. Selling, general and administrative expenses for EDS as a percentage of EDS revenues were 14.2% in the first six months of 2004 and 5.8% in the first six months of 2003. The increase in selling, general and administrative expenses for EDS in absolute dollars for the second quarter and year-to-date was due to expenses of approximately $600,000 and $2.4 million, respectively, associated with the pending acquisition of InVision by GE, compensation-related expenses and professional fees, which were partially offset by decreases in commission related expenses. The increase in selling, general and administrative expenses as a percentage of revenue is a result of increased expenses and decreased revenue.

Selling, general and administrative expenses for NDT were $3.0 million in~~-process~~ the ~~research~~second ~~and~~quarter ~~development~~of ~~expense~~2004, ~~related~~a todecrease of 5.3% from $3.2 million in the second ~~Yxlon~~quarter ~~acquisition~~of 2003. ~~Partially~~ ~~offsetting~~Selling, ~~these~~general ~~increases~~and toadministrative ~~net~~expenses ~~cash~~as a percentage ~~provided~~of byNDT ~~operating~~revenues ~~activities~~were ~~was~~19.2% ain the second quarter of 2004 and 26.9% in the second quarter of 2003. Selling, general and administrative expenses were $696.1 million ~~decrease~~for inthe ~~deferred revenue~~first six months of 2004. Selling, ~~primarily~~general ~~due~~and toadministrative expenses for NDT as a percentage of NDT revenues were 19.2% for the ~~shipment~~first six months of ~~units~~2004. toBecause we acquired the ~~TSA~~NDT ~~for~~business ~~which~~at ~~deposits~~the beginning of the ~~had~~second ~~been~~quarter ~~received~~of in2003, ~~prior~~there ~~periods~~is ~~for~~no ~~long~~comparable six-~~lead~~month ~~shipments. A~~amount ~~$43~~for 2003.1 ~~million~~Selling, ~~decrease~~general inand ~~accounts~~administrative ~~payable~~expenses ~~and~~in ~~accrued~~the ~~liabilities~~second ~~also~~quarter ~~contributed to~~of ~~decreasing~~2004 were approximately the ~~net~~same ~~cash~~as ~~provided~~the bysecond ~~operating~~quarter ~~activities~~of 2003.

~~Cash~~Interest ~~provided by~~Expense ~~operating activities in the first nine months of 2002 primarily resulted from a~~ ~~$72.4 million increase in deferred revenues, consisting primarily of~~ ~~long-lead deposits on delivery orders from the TSA, a $46.9 million~~ increase in accounts payable and accrued liabilities, net income of $33.9 million enhanced by the $5.8 million effect of income tax benefits from employee stock transactions, and the $2.6 million non-cash effect of depreciation and amortization, partially offset by a $62.5 million increase in accounts receivable, a $55.9 million increase in inventories, and a $23.4 million increase in other current assets, consisting of approximately $16.8 million in prepaid inventory purchases, approximately $6.2 million of ramp up costs to be recovered from the TSA, and a $4.4 million increase in deferred income taxes.

~~Net~~ Interest ~~cash~~expense ~~used in investing activities~~ was $491.4 3 million in the ~~first~~second ~~nine~~quarter ~~months~~ of ~~2003,~~2004 ~~compared~~and to $~~1.6~~103,000 ~~million~~ in the ~~first~~second ~~nine~~quarter ~~months~~ of ~~2002~~2003. ~~Net~~ ~~cash~~Interest ~~used~~expense ~~in investing~~was ~~activities~~$2.6 million in the first ~~nine~~six months of ~~2003~~2004 ~~resulted~~and ~~primarily~~$145,000 ~~from payments~~in ofthe ~~$41.8~~first ~~million,~~six ~~net~~months of ~~cash~~2003. ~~acquired,~~The increase in ~~connection~~interest ~~with~~expense compared to the ~~Yxlon acquisition. In~~second ~~addition,~~quarter ~~other~~and ~~net~~the ~~cash~~first ~~uses~~half of ~~were~~2003 ~~$2.6~~was ~~million~~primarily ~~in acquisition~~due ofto ~~capital~~approximately ~~equipment~~$938,000 aand $1.5 9 million, respectively, ~~payment~~of ~~for~~interest anon ~~equity investment~~$125.0 million ~~and~~of ~~product~~convertible ~~distribution~~senior ~~rights~~notes issued in ~~SafeView~~September 2003, ~~Inc.,~~along awith ~~company developing~~fees anassociated ~~advanced~~with ~~personnel~~our ~~screening~~working ~~portal~~capital ~~system,~~lines ~~and $3.4 million for~~of ~~the~~credit, ~~Hapeg~~equipment ~~acquisition. Net~~leases, ~~cash~~capital ~~used~~leases, infinancing ~~investing~~for ~~activities~~insurance ~~in the first~~premiums, ~~nine~~amortization ~~months~~ of ~~2002~~debt ~~resulted~~issuance ~~primarily~~costs ~~from~~and ~~$3.4 million~~interest inexpense ~~purchases~~associated ofwith ~~capital equipment, offset by proceeds from the sale of short~~long-term ~~investments of $2~~debt.~~0 million.~~

~~Net~~Interest cash provided by financing activities was $116.0 million in the first nine months of 2003, compared to $85.0 million in the first nine months of 2002. Net cash provided by financing activities in the first nine months of 2003 primarily resulted from the issuance of $125.0 million of convertible senior debt (as discussed above in “—Overview”), offset by related debt issuance costs of $4.4 million and aOther ~~stock repurchase of $12.5 million. In addition~~Income, there was $4.9 million in net proceeds from increased short-term borrowings and $3.2 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 the first nine months of 2002 primarily resulted from $86.4 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 $1.3 million in repayments of short-term debt, net of proceeds.~~

As Interest ofand ~~September 28~~other income, ~~2003,~~ wenet ~~had~~was a$418,000 ~~line~~in ofthe ~~credit~~second ~~agreement~~quarter ~~for~~of ~~our U.S. operations that provides~~2004 ~~for~~and ~~maximum borrowings of~~ $~~25.0~~670,000 ~~million. Borrowings~~in ~~under this agreement bear interest at~~ the ~~bank’s~~second ~~prime~~quarter ~~rate minus 0.5%, for a rate~~ of ~~3.5% at September 28,~~ 2003. ~~This~~ ~~agreement~~The ~~expires~~amount infor ~~July 2004 and requires that~~ the ~~EDS~~second ~~segment maintain certain levels~~ quarter of ~~tangible~~2004 ~~net worth. We~~consisted ~~may~~primarily ~~use proceeds~~ of ~~loans~~interest ~~under~~income ~~this~~on ~~agreement for general corporate purposes. At September 28~~cash, ~~2003,~~cash weequivalents ~~had no borrowings outstanding~~and ~~under~~short-term ~~this~~investments ~~agreement. However,~~of ~~at September~~$1.0 ~~28,~~million. ~~2003,~~Interest weincome ~~had outstanding~~was ~~guarantees~~offset ~~to customers and foreign creditors to our subsidiary~~by ~~entities~~other ~~through~~expenses ~~the issuance~~ of ~~letters~~approximately of$600,000, ~~credit~~arising ~~for~~primarily ~~which~~from a ~~reserve~~charge of ~~$15.8~~ ~~million~~the issame ~~secured~~amount byfor ~~the~~ineffectiveness ~~line~~ of ~~credit,~~a ~~and~~ foreign exchange forward contract. ~~contracts~~The amount for ~~which~~the asecond ~~10%~~quarter ~~reserve~~ of ~~$2.2~~2003 ~~million~~consisted isprimarily ~~secured by the line~~ of interest ~~credit. We~~income ~~had~~on ~~remaining~~cash, ~~available~~cash ~~borrowing~~equivalents ~~capacity~~and ~~under~~short-term ~~the~~investments ~~line~~ of ~~credit~~ of $~~7.0 million at September 28~~400,000, ~~2003 based on eligible EDS~~and ~~accounts~~other ~~receivable~~income, ~~and~~net ~~inventories as~~ of ~~that date~~$270,000.

As Interest ofand ~~September 28~~other income, ~~2003~~ net, wewas ~~had~~$1.3 million ~~two~~in ~~primary~~the ~~sources of financing from German banks for our Yxlon subsidiary. The~~ first ~~agreement~~six ~~is a line~~ months of ~~credit~~2004 ~~that~~and ~~provides for maximum borrowings in an amount up to €6~~$1.6 4 million orin ~~approximately~~the ~~$7.6 million~~first atsix ~~September 28,~~months of 2003. The ~~second~~amount ~~agreement~~for isthe first ~~also~~six amonths ~~line~~ of ~~credit~~2004 ~~that~~consisted ~~provides~~primarily ~~for~~of ~~maximum~~interest ~~borrowings~~income inon ancash, ~~amount~~cash equivalents upand toshort-term ~~€5.2~~investments ~~million or~~of ~~approximately~~ $52.~~9 million at September~~3 ~~28, 2003~~million. ~~There~~ isInterest ~~currently~~income ~~no expiration date for~~was ~~these~~offset ~~agreements. Borrowings~~by ~~under~~other ~~these~~expenses ~~agreements bear interest at 5.75%. During the third quarter~~ of ~~2003,~~ ~~Yxlon~~approximately ~~borrowed~~ $21.5 0 million, ~~under~~due ~~the~~primarily ~~lines~~to ~~of credit. At September 28,~~a ~~2003~~$600,000 wecharge ~~had~~arising ~~debt~~from ~~balances~~ineffectiveness of ~~$6.4~~a ~~million~~foreign ~~outstanding~~exchange ~~under these~~forward ~~agreements. In addition~~contract, atand ~~September 28,~~a ~~2003~~$500,000 weaccrual ~~had~~for ~~outstanding guarantees~~litigation. toThe ~~customers~~amount ~~through~~for the ~~issuance~~first ofsix months ~~letters~~ of ~~credit~~2003 ~~for~~consisted ~~which~~primarily ~~a reserve~~ of ~~$6.0~~interest ~~million~~income ison ~~secured~~cash, bycash ~~the~~equivalents and ~~lines~~short-term investments of ~~credit. Therefore~~$838,000, ~~we had~~and ~~remaining~~other ~~available~~income, ~~borrowing~~net ~~capacity under the lines~~ of ~~credit of approximately €1.0 million or~~ $~~1.1 million at September 28~~517, ~~2003~~000.

2223

WeTable believe that existing cash and cash equivalents, available borrowings under our lines of credit 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 agreement, or our receivables do not support the upper limits of the credit agreement, then we may not be able to have access to further funds under our credit agreement. In addition, if we are unable to deliver EDS units in a timely manner under 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.Contents

~~Contractual~~Provision ~~Obligations~~for ~~and~~Income ~~Commitments~~Taxes

The ~~following~~provision ~~table~~for income taxes was $5.2 million in the second quarter of ~~depicts~~2004 ~~our~~and ~~contractual~~$7.1 million ~~obligations~~in asthe second quarter of ~~September~~2003. Our effective tax rate was 43.0% in the second quarter of 2004 and 50.4% in the second quarter of 2003. The provision for income taxes was $8.8 28million in the first six months of 2004 and $30.3 million in the first six months of 2003. Our effective tax rate was 42.1% in the first six months of 2004 and 42.2% in the first six months of 2003. The decrease in the effective tax rates in the second quarter and first six months of 2004 relative to the comparable periods in the prior year is due mainly to a $4.3 million expense in the second quarter of 2003 for in-process research and development associated with the acquisition of Yxlon’s X-ray diffraction business, which was not tax deductible. Offsetting this decrease is additional tax expense in the second quarter of 2004 related to certain non-deductible costs arising from the anticipated acquisition of InVision by GE. Our effective tax rate was different than statutory tax rates primarily due to the non-deductible acquisition expenses described above, along with certain other permanent differences between book and taxable income. 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 ~~thousands):~~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.

	Payments Due by Period
Contractual Obligations	Total		Less than 1 year		1-3 years		Thereafter
Long-term debt	$	125,000	$	—	$	—	$	125,000
Operating leases	22,669		4,617		7,360		10,692
Short-term debt	7,365		7,365		—		—
Capital lease obligations	687		289		392		6
Other long-term liabilities	683		—		—		683
Total contractual cash obligations	$	156,404	$	12,271	$	7,752	$	136,381

Liquidity and Capital Resources

~~Risk~~ At ~~Factors~~June 27, 2004, we had $334.7 million in cash, cash equivalents, restricted cash and short-term investments, compared to $276.9 million at December 31, 2003.

~~Risks~~ Net ~~Related~~cash provided by operating activities was $57.5 million in the first six months of 2004 compared to ~~Our~~$42.4 million ~~Business~~in the first six months of 2003. Cash provided by operating activities in the first six months of 2004 primarily resulted from net income of $12.1 million, enhanced by the non-cash effects of $5.6 million of depreciation and amortization expense, and $4.8 million in tax benefits from employee stock transactions. In addition, there was a $12.1 million increase in accounts payable and accrued liabilities and a $29.8 million increase in deferred revenue. The increase in deferred revenue was primarily due to a large deposit in April 2004 for a March 2004 EDS product order from the TSA. Partially offsetting these increases to net cash provided by operating activities was a $4.6 million increase in accounts receivable. This increase was primarily due to billings to the TSA and other customers for units shipped near the end of the second quarter of 2004. In addition, there was a $1.4 million increase in inventory and a $2.0 million increase in other assets.

A Cash ~~number~~provided by operating activities in the first six months of ~~factors~~2003 ~~that~~of $42.4 million ~~affect~~primarily ~~our~~resulted ~~revenues~~from ~~make~~accounts ~~our~~receivable ~~future~~collections from the ~~results~~TSA ~~difficult~~resulting toin ~~predict~~a $92.7 million decrease in accounts receivable. Other significant items include net income of $41.4 million enhanced by the non-cash effects of $2.4 million of depreciation and amortization, and ~~therefore~~the we$4.3 million in-process ~~may~~research ~~not~~and ~~meet~~development ~~expectations~~expense related to the Yxlon acquisition. Partially offsetting the net cash provided by operating activities was a $77.6 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. Certain changes in operating liabilities, such as a $33.2 million ~~particular~~decrease ~~period~~in accounts payable and accrued liabilities, also contributed to partially decreasing the net cash provided by operating activities.

We Net ~~believe~~cash ~~that~~used ~~our revenues~~in ~~have~~investing ~~the~~activities ~~potential~~was to$132.1 million ~~vary~~in ~~significantly~~the ~~from~~first ~~time~~six months toof ~~time. For example~~2004, ~~our~~compared ~~total~~to ~~revenues were~~ $8945.41 million ~~for~~in the ~~second~~first ~~quarter~~six months of ~~fiscal~~ 2003~~, $165~~.~~2 million~~ ~~for~~Net cash used in investing activities in the first ~~quarter~~six months of ~~fiscal~~2004 ~~2003~~resulted primarily ~~and~~from the purchase of short-term investments of $176.0 million offset by $~~220~~51.47 million ~~for~~in proceeds from short-term investments. Net cash used in investing activities in the ~~fourth~~first ~~quarter~~six months of ~~fiscal~~2003 ~~2002,~~resulted ~~and~~primarily ~~were~~from net payments of $~~439~~41.18 million, ~~for~~net ~~fiscal~~of ~~2002~~cash acquired in connection with the acquisition of Yxlon. In addition, other net cash uses were $741.38 million ~~for~~in acquisition ~~fiscal~~of ~~2001~~capital equipment and $~~79.~~1.5 million payment for ~~fiscal~~an ~~2000.~~equity investment Weand ~~believe~~product ~~that~~distribution ~~these~~rights ~~variations~~in ~~may~~SafeView ~~result~~Inc., a company ~~from~~developing ~~many~~an ~~factors,~~advanced ~~including:~~personnel screening system.

~~• the~~24 ~~timing, size and mix of orders from our major customers, including in particular, the TSA and agencies of other governments;~~

• legislative orTable other government actions driven, in part, by the public’s perception of the threats facing commercial aviation, leading to fluctuations in demand for aviation security products and services;Contents

~~• delays~~ Net cash provided by financing activities was $6.6 million in the first six months of 2004, compared to $5.8 million in ~~product~~the ~~shipments~~first ~~caused~~six months of 2003. Net cash provided by financing activities in the ~~inability~~first six months of ~~airports~~2004 primarily toresulted ~~install~~from or$7.1 million in net proceeds from the sale of common ~~integrate~~stock under our ~~products~~employee stock purchase plan and exercises of stock options. Net cash provided by financing activities in athe ~~timely~~first ~~fashion;~~six months of 2003 primarily resulted from $3.8 million in net proceeds from increased short-term borrowings and $2.2 million in net proceeds from the sale of common stock under our employee stock purchase plan and exercises of stock options.

• As of June 27, 2004, we had a line of credit agreement for our U.S. operations that provides for maximum borrowings in an amount up to $30.0 million. Borrowings under this agreement bear interest at the bank’s prime rate ~~availability~~minus 0.5% (3.5% at June 27, 2004). The agreement expires in January 2005 and requires ~~cost~~that the EDS segment maintain certain levels of ~~key~~tangible ~~components;~~net worth. We may use proceeds of loans under this line of credit for general corporate purposes. At June 27, 2004, we had no borrowings outstanding under this agreement. However, at June 27, 2004, we had outstanding guarantees to customers through the issuance of letters of credit for which a partial reserve of $16.3 million is secured by the line of credit, and foreign exchange forward contracts for which a 10% reserve of $2.4 million is secured by the line of credit. We had remaining available borrowing capacity under the line of credit of $11.3 million at June 27, 2004.

~~• the timing~~ As of ~~completion~~June 27, 2004, we had letters of ~~acceptance~~credit ~~testing~~totaling $16.3 million as guarantees primarily to customers for ~~some~~performance and delivery commitments, and to foreign creditors of ~~our~~Yxlon. ~~products;~~In addition, we have one guarantee to an insurance carrier for premium payment commitments. The guarantees range from two months to nine years from June 27, 2004 until expiration.

~~• the~~ As of June 27, 2004, we had two primary sources of financing from German ~~introduction~~banks ~~and~~for ~~acceptance~~Yxlon. The first agreement is a line of ~~new~~credit ~~products~~that provides for maximum borrowings in an amount up to €6.6 million or ~~enhancements~~$8.1 million at June 27, 2004. The second agreement is also a line of credit that provides for maximum borrowings in an amount up to ~~existing~~€5.2 million, or $6.3 million, at June 27, 2004. ~~products~~There ~~offered~~is currently no expiration date on either of these agreements. Borrowings under these agreements bear interest at a rate of 5.75%. At June 27, 2004, we had debt balances of $5.3 million outstanding under these agreements. In addition, at June 27, 2004, we had outstanding guarantees to customers through the issuance of letters of credit for which a reserve of $8.8 million is secured by usthe line of credit. Therefore, we had remaining available borrowing capacity under the line of credit of approximately €207,000, or ~~our~~$252,000, ~~competitors;~~at June 27, 2004.

~~• changes in~~ We ~~pricing~~believe ~~policies~~that byexisting uscash and cash equivalents, available borrowings under our ~~competitors~~lines orof credit and funds expected to be generated from operations will be sufficient to finance our ~~suppliers~~working capital and capital expenditure requirements for at least the next twelve months. However, ~~including~~if ~~possible~~we fail to meet ~~decreases~~required financial covenants in ~~average~~our ~~selling~~credit ~~prices~~agreement, or our receivables do not support the upper limits of the credit agreement, then we may not be able to have access to further funds under our ~~products~~credit ~~caused~~agreement. byIn ~~customer~~addition, ~~volume~~if we are unable to deliver EDS units in a timely manner under orders from the TSA, the TSA may cancel its orders or innot ~~response~~place toadditional ~~competitive~~orders. ~~pressures;~~If ~~and~~any of these events occur, our capital resources would be significantly impaired.

~~• our sales~~Contractual ~~mix~~Obligations ~~to domestic~~ and ~~international customers.~~Commitments

23 The following table summarizes our contractual obligations as of June 27, 2004 (in thousands):

Further, we depend on a small number of customers for a substantial portion of our revenues. In the past, the number of orders placed by these customers has changed significantly from period to period, and we expect that this may continue in the future.


	Payments Due by Period
			Less than		1-3
Contractual Obligations	Total		1 year		years		Thereafter
Long-term debt	$	125,000	$	—	$	—	$	125,000
Operating leases		20,802		4,649		7,452		8,701
Short-term debt		5,319		5,319		—		—
Other long-term liabilities		1,345		—		—		1,345
Capital lease obligations		475		278		197		—

Total contractual cash obligations	$	152,941	$	10,246	$	7,649	$	135,046

~~A significant portion of~~25 our quarterly and annual operating expenses is, 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. We also may choose to increase spending to pursue new market opportunities, which may negatively affect our financial results.

Accordingly,Table we believe that period-to-period comparisons of our results of operations cannot be relied upon as indicators of future performance. Because of all of the foregoing factors, our operating results have from time to time in the past been, and may again in the future be, different from expectations of public market analysts and investors. Failure to meet market expectations has in the past resulted, and may again in the future result, in fluctuations in the trading price of our common stock.Contents

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

~~Substantially~~ Many ~~all of the customers for our EDS products and our other products under development to date have been public agencies or quasi-public agencies~~factors, ~~such~~including asthose ~~the~~described ~~FAA~~below, ~~the~~could ~~TSA and~~cause ~~airport~~actual ~~authorities. Public agencies are subject~~ results to ~~budgetary~~differ ~~processes~~materially ~~and expenditure~~from ~~constraints.~~those Indiscussed ~~the~~in ~~past,~~any ~~many~~forward-looking ~~domestic and foreign government~~statements. ~~agencies have experienced budget deficits that have led to decreased capital~~ ~~expenditures in certain areas.~~

~~The~~Risks ~~funding~~Related ~~of government programs is subject~~ to ~~legislative~~Our ~~appropriation.~~Internal ~~Budgetary~~Investigation ~~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~~Possible ~~threat~~Offers of ~~commercial airline bombings. For example, the terrorist~~Improper ~~attacks~~Payments ofby ~~September 11,~~Distributors ~~2001 resulted~~ in ~~the~~connection ~~passage~~with ofForeign ~~the~~Sales ~~Aviation and~~Activities ~~Transportation 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.

~~Legislative~~The ~~actions~~Department ~~could~~of ~~lead~~Justice toand/or ~~fluctuations~~the inSecurities ~~demand~~and ~~for~~Exchange Commission may ~~aviation~~initiate ~~security~~an ~~products~~investigation, ~~and~~which ~~services~~may delay the acquisition of us by GE or lead to the termination of the merger agreement.

In On ~~addition~~July 30, ~~to the Congressional budgetary process~~2004, ~~other~~we ~~legislation~~announced ~~could~~that bewe ~~introduced~~had ~~that would~~met ~~impact~~with ~~demand~~the ~~for~~Department ~~aviation~~of Justice ~~security~~and ~~products~~the Securities and ~~services.~~Exchange InCommission ~~response~~concerning toour voluntary ~~fluctuation~~disclosure inof ~~concern~~an oninternal ~~the~~investigation ~~part~~ of ~~voters~~certain ~~about~~possible ~~aviation~~offers ~~security~~of ~~and~~improper ~~competing~~payments ~~homeland~~by ~~security~~our ~~demands,~~distributors orin ~~for~~connection ~~other~~with ~~reasons,~~foreign ~~the~~sales ~~plans~~activities. ~~for~~We ~~deployment~~have ofbeen ~~EDS~~informed tothat ~~screen~~the ~~baggage~~Department ~~could~~of beJustice ~~changed.~~and ~~Budgetary~~the ~~debates~~Securities and ~~delays~~Exchange ~~could~~Commission ~~result~~may incommence ~~fewer~~an ~~EDS~~investigation ~~being~~of ~~sold~~us with respect to ~~the~~these matters, ~~TSA~~including ~~and~~with ~~elected~~respect ~~officials who~~to ~~support~~possible violations of the ~~EDS~~Foreign ~~program~~Corrupt Practices ~~could~~Act, ~~fail~~or FCPA. We intend to ~~maintain~~cooperate ~~their~~fully ~~offices,~~with any ofinvestigation ~~which~~of ~~events~~these ~~could~~matters ~~cause~~by athe ~~decrease~~Department inof ~~the~~Justice ~~demand~~and/or ~~for~~the ~~our~~Securities ~~EDS~~and ~~products~~Exchange Commission.

~~Governmental~~ Among ~~agencies~~the ~~have~~closing ~~special~~conditions ~~contracting~~in ~~requirements~~the merger agreement is a requirement that there not be any pending or threatened investigation by a governmental authority for the purpose of imposing criminal sanctions on us or any of our consolidated subsidiaries. The Department of Justice and the Securities and Exchange Commission may require substantial investigation or other information before they are willing to settle or resolve matters such as this. They are not obligated to complete their investigations, if any, or settle or resolve ~~which~~matters ~~create~~such ~~additional~~as ~~risks~~this on an expedited basis. The internal investigation and any related investigation by the Department of Justice and/or the Securities and Exchange Commission may not be completed by October 31, 2004. If the acquisition is not completed by October 31, 2004, either we or GE may be entitled to terminate the merger agreement.

In Also ~~contracting~~among ~~with~~the closing conditions in the merger agreement is a requirement ~~public~~that ~~agencies,~~there wenot ~~are~~have ~~subject~~been toany ~~public~~change, ~~agency~~event, ~~contract~~occurrence ~~requirements~~or state of facts that, ~~vary~~individually ~~from~~or ~~jurisdiction~~in the aggregate, has had or would reasonably be expected to have ~~jurisdiction~~a material adverse effect on the business, assets, results of operations or financial condition of InVision and our subsidiaries taken as a whole. ~~Future~~A material ~~sales~~adverse effect is one that has resulted in or would reasonably be expected to ~~public~~result ~~agencies~~in ~~will~~liability to GE or its consolidated subsidiaries ~~depend~~(including, infor ~~part~~this purpose, onInVision and our ~~ability~~consolidated tosubsidiaries) ~~meet~~or diminution ~~public~~in ~~agency~~the ~~contract~~value ~~requirements~~of InVision and our consolidated subsidiaries, taken ~~certain~~together, of ~~which~~$90 million or more in the aggregate. Even if any governmental investigation is completed by October 31, 2004, GE may beclaim, among ~~onerous~~other things, that the impact of the public announcement of our internal investigation, the costs related to our internal investigation, any criminal or ~~even~~civil ~~impossible~~sanctions ~~for~~imposed usby the government, and any liabilities associated with private lawsuits related to this ~~satisfy~~matter have had such a material adverse effect, and GE may claim on that basis that it is not required to complete the acquisition of us.

~~Government~~ The ~~contracts typically~~descriptions ~~contain~~of ~~termination~~ provisions ~~unfavorable~~of tothe usmerger ~~and~~agreement are ~~subject~~qualified toin ~~audit~~their ~~and~~entirety ~~modification~~ by reference to the ~~government~~full attext ~~its~~of ~~sole~~the ~~discretion,~~merger ~~which~~agreement. ~~subject~~See the usAgreement toand ~~additional~~Plan ~~risks~~of Merger attached as Exhibit 2.2 ~~These~~to ~~risks~~our ~~include~~annual report on Form 10-K for the ~~ability~~year ended December 31, 2003 for the full text of the Umerger agreement.~~S. government~~ ~~to unilaterally:~~

~~• suspend~~ As a result of any investigation by the Department of Justice and/or ~~prevent~~the Securities usand ~~for~~Exchange aCommission ~~set~~into ~~period~~whether there were possible offers of improper ~~time~~payments ~~from~~by ~~receiving~~our ~~new~~distributors ~~contracts~~in orconnection with foreign sales ~~extending~~activities ~~existing~~and ~~contracts~~related ~~based~~issues onin ~~violations~~violation of the FCPA or ~~suspected~~other ~~violations~~applicable law, the Department of Justice and/or the Securities and Exchange Commission could ~~laws~~seek criminal or ~~regulations;~~civil sanctions against us and/or some of our employees, and we may be subject to private lawsuits.

~~• terminate~~ If as a result of any investigation by the Department of Justice and/or the Securities and Exchange Commission, the government determines that unlawful payments were offered or made, the government could take action against us and/or some of our ~~existing~~employees. These actions could include criminal and civil fines, penalties, criminal sanctions and limitations on our ability to export products or enter into future U.S. government contracts;.

~~• reduce~~26 ~~the scope and value of our existing contracts;~~

24Table of Contents

~~• audit~~ Conduct that violates the anti-bribery provisions of the FCPA may also ~~and~~give ~~object~~rise to ~~our~~a ~~contract-~~private lawsuit under applicable foreign, federal or state laws, including securities laws. For example, on August 4, 2004, an alleged holder of InVision common stock filed a purported class action lawsuit alleging nondisclosures and misrepresentations by us and the individual defendants related ~~costs~~to the subject of the internal investigation in violation of Section 10(b) of the Exchange Act and ~~fees~~Rule 10b-5. In addition, ~~including~~our ~~allocated~~results ~~indirect~~of operations for the third quarter of 2004 may be adversely affected by costs; related to our internal investigations, any related governmental investigations, defense of private lawsuits and merger-related activities.

~~• control and~~Risks ~~potentially~~Related ~~prohibit~~to the ~~export~~Proposed Acquisition of ~~our~~InVision ~~products;~~by ~~and~~GE

~~• change certain~~If ~~terms~~the ~~and~~proposed ~~conditions~~merger inwith GE is not completed, our ~~contracts~~business and stock price may be adversely affected.

~~The~~ On ~~U.S.~~March 15, ~~government~~2004, ~~can terminate~~we ~~any~~entered ofinto ~~its~~an ~~contracts~~Agreement ~~with~~and usPlan ~~either~~of ~~for~~Merger ~~its~~with General ~~convenience~~Electric Company, or ifGE, weunder which GE would acquire us through the ~~default~~merger byof ~~failing~~a towholly-owned ~~perform~~subsidiary inof ~~accordance~~GE with ~~the~~and ~~contract~~into ~~schedule~~ InVision, and each ~~terms.~~outstanding ~~Termination~~share ~~for~~of ~~convenience~~our ~~provisions~~common ~~generally~~stock ~~enable~~would usbe toconverted ~~recover~~into the right to ~~only~~receive ~~our~~$50.00 ~~costs~~in ~~incurred~~cash. orThe ~~committed,~~merger ~~and~~is ~~settlement~~subject ~~expenses~~to ~~and~~customary ~~profit~~closing onconditions, including the ~~work~~ ~~completed~~expiration ~~prior~~or to termination. ~~Termination~~of ~~for~~waiting ~~default~~periods ~~provisions~~under doU.S. ~~not~~and ~~permit~~applicable ~~these~~foreign ~~recoveries~~antitrust ~~and~~laws. ~~make~~In usaddition, ~~liable~~there ~~for~~are ~~excess~~other ~~costs~~closing conditions ~~incurred~~that may be triggered by any governmental investigation resulting from our voluntary disclosure to the Department of Justice and the Securities ~~U.S.~~and ~~government~~Exchange inCommission ~~procuring~~of ~~undelivered~~our ~~items~~internal ~~from~~investigation ~~another~~of ~~source.~~certain ~~Our~~possible ~~contracts~~offers of improper payments by our distributors in connection with foreign sales ~~governments~~activities. ~~may~~Therefore, ~~contain~~there ~~similar~~is ~~provisions.~~a risk that the merger will not be ~~Consequently,~~completed ~~our~~or ~~backlog~~that isit will not ~~necessarily~~be ~~indicative~~completed ofin ~~future~~the ~~revenues~~expected time period. ~~The~~If the ~~government’s~~merger ~~termination~~is ofnot ~~one~~completed or ~~more~~the ofcompletion ~~the~~is ~~contracts~~substantially ~~for~~delayed, ~~our~~we ~~EDS~~could ~~products~~be orsubject ~~our~~to ~~other~~a ~~products~~number ~~under~~of ~~development~~risks ~~would~~that ~~harm~~may adversely affect our business. and stock price, including:

In• ~~addition, U.S. government contracts are conditioned upon~~ the ~~continuing~~market ~~availability~~price of ~~Congressional~~ ~~appropriations.~~our ~~Congress~~common ~~usually~~stock ~~appropriates~~could ~~funds~~decline ~~annually~~following ~~for a~~an ~~given~~announcement ~~program~~that ~~on a September 30 fiscal year-end basis, even though contract performance may take years. Consequently, our contracts with~~ the ~~TSA may~~merger ~~only~~has bebeen ~~partially~~abandoned ~~funded~~or atsubstantially ~~the outset~~delayed, ~~and additional monies are normally committed~~ to the ~~contract~~extent bythat the ~~TSA~~current ~~only~~market asprice ~~appropriations~~reflects ~~are~~a ~~made~~market ~~by Congress~~assumption ~~for~~that ~~future periods. The government’s failure to fully fund one or more of~~ the ~~contracts~~merger ~~for~~will ~~our~~be ~~EDS products or our other products under development would harm our business.~~completed;

~~Under~~• ~~our new three-year agreement with~~ the ~~TSA~~diversion ~~announced~~of onmanagement ~~August 12,~~attention ~~2003,~~and the ~~TSA~~unavoidable ~~has~~disruption ~~the right~~ to ~~purchase~~our ~~system~~relationships ~~options~~with ~~and~~customers ~~accessories, engineering~~ and ~~installation support~~vendors ~~and~~may ~~550~~detract ~~CTX~~from ~~units, principally~~ our ~~CTX~~ability ~~9000 DSi systems, over the three-year term. While the TSA placed an initial $54.8 million delivery order under the new agreement, the TSA has no obligation~~ to ~~place~~grow ~~additional~~revenues ~~delivery orders or purchase additional engineering~~ and ~~installation~~minimize support under the new agreement. We cannot assure you that the TSA will make any additional delivery orders under the new agreement or will not cancel its existing order. The new agreement is subject to all of the limitations and restrictions that apply to U.S. government contracts, including those described above.costs;

~~Because~~• we ~~contract~~have ~~with the~~and ~~U.S.~~will ~~government,~~continue ~~we are subject~~ to ~~periodic~~incur ~~audits~~significant ~~and~~expenses ~~reviews. Based on the results of its audits, the U.S. government may adjust our contract-~~related ~~costs~~ ~~and~~to ~~fees, including allocated indirect costs. In~~ the ~~future,~~merger ~~government audits~~prior ~~and reviews could result in adjustments~~ to ~~our~~its ~~revenues~~closing ~~and~~that 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.recovered;

In• ~~addition,~~depending ~~public agency~~on ~~contracts~~the ~~are frequently awarded only after formal competitive bidding processes~~circumstances, ~~which~~we ~~are often protracted and typically contain provisions that permit cancellation in the event that funds are unavailable to the public agency. We~~ may ~~not~~ be ~~awarded~~obligated ~~any~~to ofpay ~~the~~GE ~~contracts~~a ~~for which our products are bid~~$32.0 ~~Even~~million iftermination wefee; ~~are awarded contracts, substantial delays or cancellations of purchases could result from protests initiated by losing bidders.~~and

~~Our~~• ~~growth~~we ~~depends~~may onbe ~~our~~unable ~~introduction~~to ofrespond ~~new~~effectively ~~products~~to ~~and services~~competitive pressures, ~~which~~industry ~~may~~developments ~~be costly to develop~~ and ~~may~~future ~~not achieve market acceptance~~opportunities.

As The ~~part~~inability ~~of our strategy for growth, we intend~~ to ~~develop~~complete ~~products~~the tomerger ~~address~~would ~~additional aviation security opportunities, such as passenger, carry-on baggage and air cargo screening. We~~ also ~~intend~~likely toresult ~~address homeland security requirements beyond~~in ~~aviation~~litigation, ~~such~~which ascould ~~screening at border checkpoints, government offices and transportation terminals and ports. We will~~ be ~~required~~costly ~~to spend significant funds to develop or acquire technologies~~ and ~~products~~could ~~for~~further ~~these initiatives, and these initiatives may~~ divert ~~our~~the ~~development~~attention ~~and management resources away~~of ~~from our core EDS products~~management. ~~In addition, we have acquired, rather than~~ ~~developed internally, some of our technologies in connection with our~~ ~~acquisitions of companies and businesses, and these technologies may not~~ ~~perform as we expect. The development~~

25The uncertainty created by the proposed merger could have an adverse effect on our revenue and results of operations.

Prior to the closing of ~~new~~the ~~products~~proposed ~~may~~merger ~~require~~or ~~greater~~the ~~time~~termination of the Agreement and ~~financial~~Plan ~~resources~~of ~~than~~Merger, the proposed merger creates uncertainty about weInVision’s ~~currently~~future. ~~anticipate~~As ~~and~~a result of this uncertainty, ~~despite~~customers may decide to delay, defer, or cancel purchases of our products pending resolution of the proposed merger. If these decisions represent a significant ~~investments~~portion inof ~~research~~our anticipated revenue, our results of operations and quarterly revenues could be ~~development,~~substantially ~~may~~below ~~not~~the ~~yield~~expectations ~~commercially~~of ~~successful~~market ~~products~~analysts.

The ~~development~~merger ofagreement ~~our products~~contains ~~for~~many ~~explosives~~restrictive ~~and~~covenants ~~weapons~~that ~~detection~~limit ~~is highly complex~~our flexibility. ~~Successful~~ ~~product development and market acceptance of any new products and services that~~ ~~we develop depend on a number of factors, including:~~

• The merger agreement contains covenants that restrict our operations ~~timely~~without ~~completion~~GE’s ~~and~~written ~~introduction~~consent. For example, we have agreed that, subject to specified exceptions, without GE’s prior written consent, neither we nor any of our ~~new~~subsidiaries ~~products;~~may, among other things:

• ~~our accurate~~ ~~prediction~~enter ~~of the demand for homeland security products and the changing requirements of the homeland security industry~~into, ~~including certification~~terminate or ~~other~~amend ~~required~~any ~~performance~~material ~~standards~~contract;

~~• the~~27 ~~availability of key components of our products;~~

• the quality,Table price and operating performance of our products and those of our competitors;Contents

• ~~our customer~~ ~~service~~issue, ~~capabilities~~sell, ~~and~~grant ~~responsiveness;~~or ~~and~~otherwise dispose of, or redeem, purchase or otherwise acquire, our equity securities;

• ~~the success~~ amend or waive any of our ~~relationships~~rights ~~with~~under, ~~existing~~or ~~and~~accelerate ~~potential~~the ~~customers.~~vesting under, any provision of our stock plans;

~~Finally,~~• ~~new~~incur ~~products~~any ~~for aviation~~indebtedness ~~security applications may require certification or approval by the TSA, and we believe that the TSA does not currently have standards~~ for ~~the certification~~borrowed ofmoney ~~aviation security products other than bulk explosives detection systems and explosives trace detectors,~~ or ~~ETD.~~guarantee ~~Other~~any ~~products~~indebtedness, ~~such as metal detectors, are subject to TSA testing prior to approval. Market acceptance of new products may be limited if the TSA has not developed standards for certification~~ or ~~approval~~enter ofinto ~~such~~a ~~products,~~“keep ~~and~~well” ~~even if it does develop such standards, we may be unable to obtain any such certification~~ or ~~approval,~~similar 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.agreement;

In• ~~addition~~sell, ~~even~~transfer, ~~if successful~~lease, inlicense, ~~the United States~~mortgage, ~~new~~encumber ~~products~~or ~~that~~otherwise wedispose ~~develop may not achieve market acceptance outside~~ of ~~the~~(including ~~United~~pursuant ~~States.~~to ~~Unlike~~a ~~the~~sale-leaseback ~~U.S.~~transaction ~~government, foreign~~or ~~governments~~an ~~may~~asset besecuritization ~~unwilling~~transaction) toany ~~commit~~of ~~financial resources to purchase~~ our ~~new~~properties ~~products,~~or ~~which~~assets ~~would~~(including ~~reduce~~securities of our ~~potential~~subsidiaries) ~~revenues~~to ~~and~~any ~~harm our business.~~person;

We• ~~depend~~make ~~upon~~any acapital ~~limited~~expenditures, ~~number~~except ofin ~~suppliers~~the ~~for~~ordinary ~~components~~ course of ~~our~~business ~~products,~~consistent ~~and~~with ifpast wepractice ~~are~~and ~~unable~~in toan ~~obtain~~amount ~~parts~~not ~~from~~in ~~these~~excess ~~suppliers~~of ~~on a timely basis~~$2,000,000 ~~then~~in wethe ~~may~~aggregate ~~not~~during beany ~~able~~three-consecutive tomonth ~~deliver our products as required.~~period;

~~Key~~• ~~components~~make ~~used~~any ~~in our~~acquisition ~~products have been designed~~ (by uspurchase ~~to our specifications and are currently available only from one or a limited number~~ of ~~suppliers.~~securities We currently do not have long-term agreements with any of these suppliers. In addition, some of the suppliers of the key components used in our products are our competitors, and they may be motivated not to supply us with the components we need. Our inability to develop alternative sources for single or ~~sole source components~~assets, to ~~find~~merger ~~alternative third party manufacturers~~ or ~~sub-assemblers~~consolidation, or tootherwise) ~~obtain sufficient quantities~~ of ~~these~~any ~~components, could result in delays or interruptions in product shipments, which could cause current or potential customers to seek~~ other ~~suppliers of our products. In view of the high cost of many of these components~~entity, ~~we strive to avoid excess supplies. If our suppliers experience financial~~business, ~~operational,~~division ~~production~~ or quality assurance difficulties, or our sole source suppliers are acquired or otherwise influenced by our competitors, the supply of components to us would be reduced or interrupted. In the event that a supplier ceases operations, discontinues a product or withholds or interrupts supply for any reason, we may be unable to acquire the product from alternative sources within a reasonable period of time.assets;

~~Our~~• ~~future~~make ~~EDS~~any ~~products~~investment ~~may~~(by ~~fail~~contribution to ~~obtain~~capital, ~~certification~~property by transfers, purchase of securities or otherwise) in, or loan or advance (other than travel and similar advances to our employees in the ~~TSA.~~ordinary course of business consistent with past practice) to, any entity other than a wholly owned subsidiary in the ordinary course of business consistent with past practice;

We• ~~plan~~enter ~~to continue to develop new models for our family of EDS products~~into, ~~including systems utilizing X-ray based diffraction~~establish, ~~or XRD~~amend, ~~technology,~~modify ofor ~~our~~terminate ~~recently~~any ~~acquired subsidiary~~employment, ~~Yxlon~~ ~~International Holding GmbH~~consulting, ~~or Yxlon~~retention, ~~and~~change ~~to continue our participation~~ in ~~the~~control, ~~ARGUS~~collective ~~program~~bargaining, anbonus ~~FAA/TSA-sponsored~~or ~~program~~other ~~designed~~incentive tocompensation, ~~develop~~profit ~~a smaller~~sharing, ~~low-cost~~health ~~EDS~~or ~~product.~~other ~~However~~welfare, westock ~~cannot~~option beor ~~certain~~other ~~that~~equity, ~~any~~pension, ~~new~~retirement, ~~EDS product~~vacation, ~~including~~severance, ~~systems~~deferred ~~utilizing~~compensation ~~Yxlon’s~~or ~~XRD~~other ~~technology~~compensation or ~~our~~benefit ~~CTX~~plan, ~~1000 (ARGUS)~~policy, ~~system~~agreement, ~~will~~trust, befund ~~certified~~or byarrangement ~~the~~with, ~~TSA. The failure to gain certification~~ for anor ~~EDS~~in ~~product~~respect ~~would~~of, ~~harm~~any ~~our~~stockholder, ~~ability~~director, toofficer, ~~sell~~other ~~the product~~employee, ~~and~~consultant ~~recognize associated~~or ~~revenues.~~affiliate;

26• pay, discharge, settle or satisfy any material claims, liabilities or obligations, other than the payment, discharge, settlement or satisfaction in the ordinary course of business consistent with past practice or in accordance with their terms; or

~~Our~~• ~~existing~~settle ~~EDS~~or ~~products~~compromise ~~may~~any ~~fail~~litigation toor ~~obtain~~proceeding ~~re-certification by~~to the ~~TSA~~extent ~~for~~that ~~changes~~such settlement or compromise (1) requires that we pay more than $1,000,000 in the ~~EDS~~aggregate ~~systems~~or (2) does not provide for a full release of us.

~~Our~~ While ~~existing~~GE ~~EDS~~has ~~products can~~agreed ~~be required~~ to benot ~~re-certified~~withhold byor ~~the~~delay ~~TSA.~~its ~~This~~consent ~~can happen when a critical~~unreasonably, ~~component~~these isoperational ~~changed,~~covenants orlimit weour ~~wish~~flexibility toand ~~make~~agility ~~other~~during ~~changes~~the toterm of the ~~EDS~~merger ~~systems~~agreement. ~~When this~~As ~~happens~~a result, ~~the~~we ~~affected~~may ~~EDS~~be ~~model~~unable ~~requires~~to ~~re-certification~~react byquickly ~~the TSA. The~~to ~~failure~~changing circumstances or ~~delay~~to inaccomplish ~~gaining~~a ~~re-certification~~smooth ~~for~~transition anto ~~existing EDS product could~~independent ~~harm~~operation ~~our~~if ~~ability to continue to sell~~ the ~~product~~merger ~~and~~agreement ~~recognize~~is ~~associated revenues~~terminated.

~~Our~~Risks ~~major~~Related ~~customer,~~to ~~the~~Our ~~TSA, is a part of the Department of~~Business ~~Homeland Security, a newly created agency that has experienced, and may~~ ~~continue to experience, delays in its operations, which may cause delays in our~~ ~~receiving orders from the TSA.~~

~~The~~A ~~TSA~~number isof afactors ~~relatively new agency~~ that ~~was~~affect 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~~revenues ~~orders~~make ~~for~~ our ~~EDS~~future ~~products.~~results ~~Further, the TSA is now a~~difficult ~~part~~to ~~of the Department of Homeland Security~~predict, ~~which was created subsequent to the creation of the TSA~~ and is therefore inwe ~~an earlier stage of formation, which~~ may ~~further~~not ~~create~~meet ~~delays~~expectations infor ~~our~~a ~~receiving~~particular ~~orders as this agency is organized~~period.

~~Future~~ We ~~sales~~believe ofthat our ~~EDS~~revenues ~~products~~have ~~will~~the ~~depend~~potential onto ~~the~~vary ~~ability~~significantly from time to time. For example, our total revenues were $163.6 million for the first six months of ~~airports~~2004, to$254.6 million ~~secure~~for ~~funding~~the tofirst ~~build~~six ~~baggage~~months ~~handling~~of ~~systems~~2003 and to ~~integrate~~$101.6 million ~~our~~for ~~EDS~~the ~~products~~first ~~into~~six ~~such~~months ~~systems~~of 2002, ~~which~~and ~~they~~were ~~may~~$416.5 million ~~not~~for fiscal be2003, ~~able~~$439.1 million tofor do2002 and $74.3 million for 2001. We believe that these variations may result from many factors, including:

~~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~~timing, ~~such~~size ~~as reinforced airport lobby floors~~ and ~~baggage platforms.~~mix Ifof ~~our~~orders ~~EDS~~from ~~products cannot easily be installed in airport lobbies or integrated into existing baggage handling systems, we may experience reduced sales of~~ our ~~EDS~~major ~~products or these sales may be delayed. In addition~~customers, ~~installations~~ ~~and~~including ~~integrations are currently partially funded by the TSA~~ in ~~the United~~particular, ~~States. Recent legislation established a “letter of intent” program under which an airport can present a request to~~ the TSA for reimbursement 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~~agencies ~~at the current level or at all. If there is a reduction in funding, we may experience reduced sales~~ of ~~our~~other ~~EDS products or these sales may be delayed.~~governments;

~~We believe that a~~28 substantial opportunity exists for our CTX 9000 DSi model to be integrated into baggage handling systems. If airports determine, in conjunction with governmental authorities, that they will be unable or unwilling to modify or finance such in-line baggage handling systems, this opportunity may be limited.

AsTable a result of the Transportation Security Act, our EDS products are undergoing substantially increased usage per day, which could cause unforeseen problems with their ability to sustain this increased usage.Contents

As• ~~required~~legislative byor ~~the Transportation~~other ~~Security~~government ~~Act,~~actions ~~as of December 31~~driven, ~~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~~part, 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~~public’s ~~baggage~~perception ~~handling~~of ~~system, it has, in addition to~~ the ~~detection function~~threats ~~and~~facing ~~mechanisms,~~commercial ~~components that integrate it into the baggage handling system~~aviation, ~~which~~leading ~~also require maintenance and may also contribute~~ to ~~increased maintenance~~fluctuations ~~needs~~in ~~and~~demand ~~down~~for ~~time.~~aviation Ifsecurity ~~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.~~services;

27• delays in product shipments caused by the inability of airports to install or integrate our products in a timely fashion;

We• ~~may seek to grow by acquisition, which subjects us to substantial risks, including~~ the ~~failure~~availability toand ~~successfully~~cost ~~integrate~~of ankey ~~acquired business.~~components;

As• part of our growth 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~~timing of ~~acquisition~~completion ~~candidates at acceptable prices. We may incur costs in connection with our pursuit~~ of ~~acquisitions~~acceptance testing for ~~which~~some ~~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:~~products;

• ~~difficulties in~~ the ~~assimilation~~introduction ofand ~~acquired~~acceptance, ~~operations~~including certification by the TSA, ~~technologies~~of ~~and~~new products or enhancements to existing products offered by us or our competitors;

• ~~diversion~~ changes in pricing policies by us, our competitors or our suppliers, including possible decreases in average selling prices of ~~management’s~~our ~~attention~~products ~~from~~caused ~~other~~by ~~business~~customer ~~concerns~~volume orders or in response to competitive pressures;

• ~~lack of~~ ~~experience~~our ~~operating~~sales inmix ~~the~~to ~~geographic~~domestic ~~market~~and orinternational ~~industry sector of acquired companies~~customers; and

• ~~exposure to~~ ~~unanticipated~~fluctuations ~~contingent~~in ~~liabilities~~currency exchange rates, particularly the exchange rate of ~~acquired~~the ~~companies;~~U.S. ~~and~~dollar against the euro.

~~• potential~~ Further, we depend on a small number of customers for a substantial ~~loss~~portion of ~~key~~our ~~employees~~revenues. In the past, the number of ~~acquired~~orders ~~companies~~placed by these customers has changed significantly from period to period, and we expect that this may continue in the future.

~~The~~ A ~~process~~significant portion of ~~integrating~~ ~~supply~~our ~~and~~quarterly ~~distribution channels, computer~~ and ~~accounting~~annual ~~systems and~~operating ~~other~~expenses ~~aspects of operations~~is, ~~while managing a larger entity, may present a~~ ~~significant~~and ~~challenge~~will tocontinue ~~our management. We may not be able~~ to ~~successfully integrate any businesses~~be, ~~products,~~relatively ~~technologies~~fixed ~~or personnel that might be acquired~~ in ~~the future~~nature. InThis ~~such~~means ~~case,~~that ~~we would not fully realize the~~revenue ~~anticipated~~fluctuations ~~benefits~~will ofcause aour ~~business~~quarterly ~~combination,~~ and ~~the~~annual ~~failure~~operating ofresults ~~such~~to ~~efforts~~vary ~~would harm our business~~substantially. ~~Maintaining~~We ~~uniform~~also ~~standards, controls, procedures and policies~~ may bechoose ~~harder~~to ~~than~~increase wespending ~~anticipate~~to ~~and~~pursue ~~interfere~~new ~~with efficient~~market ~~administration~~opportunities, ofwhich ~~the~~may ~~company~~negatively asaffect aour ~~whole~~financial results.

~~For example~~ Accordingly, ~~on March 31, 2003,~~ we ~~completed~~believe ~~the~~that ~~acquisition~~period-to-period comparisons of ~~Yxlon.~~our ~~Yxlon is active in~~results ~~businesses~~of ~~that~~operations ~~are~~cannot ~~new~~be torelied usupon ~~and~~as ~~present~~indicators aof ~~challenge~~future ~~to our management~~performance. In ~~order~~Because toof ~~successfully~~all ~~integrate~~of ~~Yxlon’s~~the ~~security~~foregoing ~~technologies and products~~factors, ~~we must,~~our ~~among~~operating ~~other~~results ~~things,~~have ~~integrate~~from ~~these~~time to ~~into~~time ~~our~~in ~~suite~~the ofpast ~~products~~been, ~~both from an engineering~~ and amay ~~sales~~again ~~and~~in ~~marketing~~the ~~perspective.~~future ~~As a result~~be, wedifferent ~~may take~~from ~~longer~~expectations toof ~~develop~~public ~~and~~market ~~introduce~~analysts ~~new~~and ~~products than we anticipate~~investors. InFailure ~~addition, Yxlon’s non-destructive testing business is new~~ to ~~us.~~meet ~~We do not have~~market ~~experience~~expectations ~~developing,~~has ~~marketing and selling products~~ in the ~~non-destructive testing~~past ~~business~~resulted, and we may ~~not~~again ~~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~~future ~~distance between our U.S. offices and Yxlon’s headquarters~~result, ~~which are located~~ in ~~Germany. If we are not~~ ~~successful~~fluctuations in ~~integrating~~the ~~Yxlon’s~~trading ~~security~~price ~~technologies~~of ~~into~~ our ~~product~~common ~~line,~~stock. ~~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.~~

~~Our~~We ~~strategic~~are ~~investments~~anticipating ~~may~~decreased ~~not~~EDS ~~provide~~sales ~~any~~in of2004 ~~the~~and ~~benefits we~~increased ~~anticipate,~~difficulty ~~and~~in predicting asfuture agross ~~result~~margins, wewhich may ~~incur~~cause ~~economic~~our ~~losses~~stock orprice ~~be required~~ to ~~write-down~~ ~~these investments~~decline.

~~From~~ We ~~time~~anticipate a decline in EDS revenues for 2004 compared to ~~time~~2003 and, weas ~~consider~~a ~~strategic~~result, ~~investments~~we inhave ~~development~~implemented cost-~~stage~~reduction ~~companies~~programs. ~~that~~However, weour ~~believe~~ability to ~~provide~~control ~~strategic~~costs ~~opportunities~~during ~~for~~a ~~us,~~period ~~such~~of asfurther ~~our~~declining ~~recent~~sales ~~investment~~is indifficult ~~SafeView, Inc.,~~to ~~which~~predict. This difficulty is ~~developing~~a ~~portal~~result ~~systems~~of ~~for~~factors ~~passenger~~such ~~screening.~~as ~~Although~~our weability ~~intend~~to ~~that~~increase ~~these~~our ~~investments~~operating ~~will~~efficiency ~~provide~~and ~~access~~further toreduce ~~new~~the ~~technologies~~costs ~~and~~of ~~emerging~~components. ~~markets,~~We wemay ~~cannot~~be ~~assure~~unable ~~you~~to ~~that~~reduce ~~these~~costs ~~investments~~as ~~will~~much ~~create~~as ~~opportunities~~we anticipate. As a consequence, ~~for~~the usgross tomargins ~~increase~~for our ~~sales.~~products Ifand ~~these~~services ~~companies~~may ~~are~~vary ~~unsuccessful~~significantly infrom ~~their~~our ~~product~~anticipated ~~development~~gross ~~efforts~~margins orand ~~are~~the ~~unable~~gross tomargins ~~obtain~~of ~~additional~~our ~~private~~products and services in ~~financing,~~recent weperiods. ~~may~~If, beas ~~required~~a toresult ~~write-down~~of these ~~investments~~uncertainties, orour wegross ~~may lose~~margins, ~~some~~operating results or ~~all~~earnings per share are below the expectations of ~~these~~market analysts ~~investments~~and investors, ~~which~~the ~~would~~trading ~~harm~~price of our ~~results~~common stock may decline.

WeGovernmental ~~may~~agencies, ~~not~~the beprimary ~~able~~customers tofor ~~grow~~ our ~~service~~EDS ~~organization~~and ~~quickly~~other products, ~~enough~~are subject to ~~support~~budget ~~our~~processes ~~EDS~~which ~~products~~could ~~deployed~~limit in the ~~field~~demand for these products.

We Substantially ~~are~~all ~~responsible~~of ~~for supporting~~ the ~~installation~~customers ~~of,~~for ~~and~~our ~~providing~~EDS ~~warranty~~products ~~service~~and ~~for,~~ our ~~EDS~~other products. ~~With~~under ~~the~~development ~~rapid~~to ~~increase~~date inhave been public agencies or quasi-public agencies, such as the ~~number~~TSA ofand ~~units~~airport ~~being~~authorities. ~~shipped,~~Public weagencies are subject ~~expanding~~to ~~our~~budgetary ~~service~~processes ~~organization’s~~and ~~capability~~expenditure constraints. ~~EDS~~In ~~products~~the ~~are~~past, ~~relatively~~many domestic ~~complex~~and ~~machines,~~foreign ~~which~~government ~~employ~~agencies ~~high-speed~~have ~~conveyors~~experienced ~~and~~budget ~~sophisticated~~deficits ~~imaging~~that have led to decreased capital expenditures in certain areas.

2829

technology.Table If we are unable to hire and train sufficient service personnel supported by an expanded logistical system, the reliability of our machines could suffer. If this were to occur, there could be a decrease in demand for our products.Contents

If The ~~our~~funding ~~EDS~~of ~~products~~government ~~fail~~programs is subject to ~~detect~~legislative appropriation. ~~explosives~~Budgetary allocations for EDS depend, wein ~~could~~part, beupon ~~exposed~~governmental policies, which fluctuate from time to ~~product~~time ~~liability~~in response to political and ~~related~~other ~~claims~~factors, ~~for~~including ~~which~~the wepublic’s ~~may~~perception ~~not~~of ~~have~~the threat of ~~adequate~~commercial ~~insurance~~airline ~~coverage~~bombings. For example, ~~and~~the weterrorist ~~may~~attacks ~~lose~~of ~~current~~September 11, 2001 resulted in the passage of the Aviation and ~~potential~~Transportation ~~customers~~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.

~~Our~~Legislative ~~business~~actions ~~exposes~~could ~~us to~~lead ~~potential product liability risks, which are inherent in the manufacturing, sale and maintenance of EDS products. Our machines are not designed~~ to ~~detect, and~~fluctuations ~~FAA/TSA certification does not require, 100% detection of any and all explosives contained~~ in ~~scanned~~demand ~~baggage.~~for ~~For~~aviation ~~this reason, or if our products~~security ~~malfunction, it is possible that explosive material could pass undetected through our~~ products, ~~which~~and ~~could lead to product liability claims~~services. ~~There are~~ ~~also many other factors beyond our control that could lead to liability claims,~~ ~~such as the reliability and competence of the customer’s operators and the~~ ~~training of the operators.~~

~~InVision~~ In ~~and~~addition ~~our subsidiary, Quantum Magnetics, were named as defendants in a number of lawsuits relating~~ to the ~~terrorist~~Congressional ~~acts~~budgetary ~~of September 11~~process, ~~2001.~~other Welegislation could ~~anticipate~~be introduced that ~~additional~~ ~~lawsuits~~would ~~relating~~impact todemand ~~the~~for ~~terrorist~~aviation ~~acts~~security ofproducts ~~September 11, 2001~~and ~~will~~services. ~~name~~In usresponse asto ~~defendants.~~fluctuation ~~The~~in ~~cost~~concern ofon ~~defending~~the ~~these~~part ~~and~~of ~~other~~voters ~~product~~about ~~liability~~aviation ~~claims~~security ~~brought~~and ~~against~~competing ushomeland ~~could~~security ~~be significant~~demands, ~~and~~or ~~any~~for ~~adverse determination~~other ~~may~~reasons, ~~result~~the inplans ~~liabilities~~for indeployment ~~excess~~ of ~~our~~EDS ~~insurance~~to ~~coverage.~~screen Webaggage ~~currently have~~could ~~product~~be ~~liability insurance in the amount of $200~~changed.~~0 million. We also~~ ~~have~~Budgetary ~~war~~debates and ~~terrorism~~delays ~~insurance~~could result in ~~the~~fewer ~~amount~~EDS ofbeing ~~$200.0 million, including~~sold up to ~~$50.0 million~~the ~~under~~TSA and ~~our~~elected ~~product~~officials ~~liability~~who ~~insurance. However,~~support ~~since~~ the ~~terrorist~~EDS ~~acts~~program ofcould ~~September 11,~~fail ~~2001,~~to ~~insurance~~maintain ~~rates~~their ~~have increased dramatically~~offices, ~~and~~any weof ~~cannot~~which beevents ~~certain~~could ~~that~~cause ~~our~~a ~~current insurance~~decrease ~~can~~in bethe ~~maintained,~~demand orfor ~~additional~~our ~~insurance coverage could be obtained,~~EDS ~~on acceptable terms, if at all~~products.

InGovernmental ~~addition,~~agencies ~~the~~have ~~failure of~~special ~~any~~contracting ~~EDS product to detect explosives~~requirements, ~~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 effectively,~~ which ~~may cause~~create ~~potential customers to not place orders and current customers to cancel orders already placed or to not place~~ additional ~~orders, any of which would harm our business and financial results~~risks.

We In ~~substantially~~contracting ~~depend~~with onpublic ~~large~~agencies, ~~orders~~we ~~from~~are asubject ~~limited~~to ~~number~~public agency ofcontract ~~customers.~~requirements Asthat avary ~~result,~~from ~~order~~jurisdiction ~~cancellations~~to ~~from~~jurisdiction. ~~any~~Future sales ofto ~~our~~public ~~customers~~agencies orwill ~~the failure~~depend, ofin ~~these~~part, ~~customers~~on toour ~~continue~~ability to ~~purchase~~meet ~~EDS~~public agency ~~products~~contract ~~could~~requirements, ~~have~~certain ~~a material~~of ~~negative~~which ~~impact~~may onbe ~~our~~onerous ~~business~~or ~~and~~even impossible ~~financial~~for ~~results~~us to satisfy.

In Government ~~any~~contracts ~~given~~typically ~~fiscal quarter~~contain ortermination ~~year,~~provisions ~~our revenues are derived from orders of multiple units of our~~unfavorable ~~EDS~~to ~~products~~us ~~from a limited number of customers. Through September 28, 2003, substantially all of our orders from U.S. customers have been funded by the FAA~~ and ~~the~~are ~~TSA,~~subject ~~which allocate our products~~ to ~~airports~~audit inand ~~the~~modification ~~United~~by ~~States. Including revenues from~~ the ~~Siemens~~government ~~subcontract~~at toits ~~provide maintenance service~~sole ~~for TSA-owned EDS systems~~discretion, ~~EDS~~which ~~sales~~subject tous ~~the FAA, and following the formation of the TSA,~~ to ~~the~~additional ~~TSA, accounted for 79~~risks.9% ofThese ~~our~~risks ~~EDS~~include ~~revenues in~~ the ~~nine months~~ ~~ended~~ability ~~September 28, 2003 and 85.4%~~ of ~~our EDS revenues in~~ the year ended December 31, 2002. In the nine months ended September 28, 2003, 15 customers accounted for all of our EDS units sold during the quarter, and in the year ended December 31, 2002, ten customers accounted for all of our EDS products sold during the year. The failure of these customers, particularly the U.S. government, to ~~continue to purchase our EDS products or the cancellation~~unilaterally: ~~of existing orders would harm our business.~~

We• ~~have~~suspend ~~granted~~or aprevent ~~royalty-bearing~~us ~~license~~for toa ~~the~~set ~~U.S. government~~period toof ~~have~~time ~~our~~from ~~products~~receiving ~~produced~~new bycontracts ~~other~~or ~~manufacturers~~extending ~~and~~existing ifcontracts ~~other manufacturers~~based ~~produce~~on ~~our~~violations ~~products,~~or wesuspected ~~may~~violations ~~lose~~of ~~expected~~laws ~~revenue~~or ~~opportunities.~~regulations;

In• ~~connection~~terminate with orders for EDS products, the TSA required that we grant the TSA a two-year royalty-bearing license, commencing in March 2002, to enable other manufacturers to build for the TSA EDS products based on our ~~technology~~existing used in these products. With this license, the TSA may purchase EDS products from other manufacturers rather than us, even if we have the manufacturing capacity to build those EDS products. If this happens, the royalty we receive under the license may not fully compensate us for the lost business opportunity. Further, since licensed manufacturers will be building substantially the same products as we build, if we fail to timely deliver EDS products which the TSA has ordered from us, the TSA may not give us the opportunity to cure the failure to deliver, and it may transfer the order from us to a licensed manufacturer. The TSA has not exercised this license to date.contracts;

29• reduce the scope and value of our existing contracts;

~~The~~• ~~U.S.~~audit ~~government’s~~and ~~right~~object to ~~use~~our ~~technology~~contract-related ~~developed~~costs byand usfees, ~~but~~ ~~funded~~including byallocated ~~the~~indirect ~~U.S. government, limits our intellectual property rights.~~costs;

In• ~~accordance~~control ~~with Federal~~and ~~Acquisition~~potentially ~~Regulations~~prohibit ~~included in our development contracts with~~ the ~~FAA,~~ ~~the~~export ~~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.~~

~~The~~• ~~sales~~change ~~cycle~~certain ~~for~~terms ~~our EDS products is lengthy,~~ and weconditions ~~may expend a significant amount of effort~~ in ~~obtaining~~our ~~sales orders and not receive them~~contracts.

The ~~sales~~U.S. ~~cycle~~government ofcan ~~our EDS~~terminate ~~products~~any isof ~~often~~its ~~lengthy~~contracts ~~due~~with tous ~~the~~either ~~protracted~~for its ~~approval~~convenience ~~process~~or ~~that typically~~if ~~accompanies~~we ~~large~~default ~~capital~~by ~~expenditures~~failing ~~and~~to ~~the~~perform ~~time~~in ~~required~~accordance towith the ~~manufacture~~contract schedule and ~~install our EDS products~~terms. ~~Typically,~~Termination ~~six~~for toconvenience ~~twelve~~provisions ~~months may~~generally ~~elapse~~enable ~~between~~us ato ~~new~~recover ~~customer’s~~only ~~initial~~our ~~evaluation~~costs ofincurred ~~our~~or ~~systems~~committed, and ~~the~~settlement ~~execution~~expenses ofand aprofit ~~contract.~~on ~~Another~~the ~~three~~work ~~months~~completed ~~to a year may elapse~~ prior to ~~shipment~~ oftermination. ~~our~~Termination for ~~EDS~~default ~~products~~provisions asdo ~~the~~not ~~customer~~permit ~~site~~these isrecoveries ~~prepared~~ and ~~our~~make ~~EDS products~~us ~~are~~liable ~~manufactured.~~for excess Incosts ~~addition,~~incurred inby the ~~United~~U.S. ~~States,~~government ~~the~~in ~~creation~~procuring ofundelivered items ~~the~~from ~~TSA~~another ~~and~~source. ~~debate~~Our oncontracts ~~formation~~with offoreign agovernments ~~Department~~may ofcontain similar ~~Homeland~~provisions. ~~Security~~Consequently, asour ~~well as~~backlog ~~budgetary~~is ~~debates~~not innecessarily ~~Congress,~~indicative ~~may~~of future ~~result~~revenues. inThe ~~additional~~government’s ~~delays~~termination ~~in the purchase~~ of ~~additional~~one ~~EDS~~or ~~products.~~more ~~During~~of the ~~sales~~contracts for ~~cycle~~our weEDS ~~expend substantial~~products ~~funds~~or ~~and~~our ~~management~~other ~~resources~~products ~~but~~under ~~recognize~~development nowould ~~associated~~harm ~~revenue~~our business.

~~Our~~ In ~~backlog~~addition, isU.S. ~~not~~government ~~necessarily~~contracts ~~indicative~~are conditioned upon the continuing availability of ~~future~~Congressional ~~revenues~~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 TSA may only be partially funded at the outset, and additional monies are normally committed to the contract by the TSA only as

~~We measure our backlog of~~30 product revenues as orders for systems and upgrades for 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.

WeTable measure our backlog of Quantum government contracts as funded and unfunded awards from government agencies for which services have not yet been performed. At September 28, 2003, our Quantum government contracts backlog was $16.5 million, $4.9 million of which was funded.Contents

~~Any~~appropriations ~~failure~~are made by usCongress tofor ~~meet an~~future ~~agreed upon schedule could lead to the cancellation of the related order~~periods. ~~Variations~~The ~~in the size, complexity and delivery requirements of the~~government’s ~~customer~~failure ~~order may result in substantial fluctuations in backlog from period~~ to ~~period.~~ Infully ~~addition,~~fund ~~all~~one ~~orders are subject to cancellation~~ or ~~delay~~more byof the ~~customer~~ ~~and,~~contracts ~~accordingly,~~for weour ~~cannot~~EDS ~~assure~~products ~~investors~~or ~~that~~ our ~~backlog will~~ ~~eventually~~other ~~result~~products inunder ~~revenues.~~development ~~For~~would ~~these~~harm ~~reasons, we believe that backlog cannot be considered a meaningful indicator of~~ our ~~performance on an annual or quarterly basis~~business.

~~Our~~ Under ~~international~~our ~~sales~~three-year ~~subject~~agreement uswith the TSA announced on August 12, 2003, the TSA has the right to ~~risks~~purchase ~~that~~system ~~could~~options and accessories, engineering ~~materially~~and ~~harm~~installation support and 550 CTX units, principally our ~~business~~CTX 9000 DSi systems, over the three-year term. While the TSA has placed delivery orders totaling $162.8 million under the agreement, the TSA has no obligation to place additional delivery orders or purchase additional engineering and installation support under the agreement. We cannot assure you that the TSA will make any additional delivery orders under the agreement or will not cancel its existing order. The agreement is subject to all of the limitations and restrictions that apply to U.S. government contracts, including those described above.

~~Sales~~ Because towe ~~countries~~contract ~~other than~~with the ~~United~~U.S. ~~States~~government, ~~accounted~~we ~~for~~are 26subject to periodic audits and reviews.1% Based on the results of its audits, the U.S. government may adjust our ~~revenues~~contract-related incosts ~~the~~and ~~nine~~fees, ~~months~~including allocated indirect ~~ended~~costs. ~~September 28~~In the future, ~~2003~~government audits and ~~11.7%~~reviews ofcould result in adjustments to our revenues inand ~~the~~cause ~~year~~other ~~ended~~adverse effects, particularly to ~~December 31~~our relationship with the TSA. In addition, ~~2002~~under U.S. Itgovernment ispurchasing regulations, ~~part~~some of our ~~growth~~costs, ~~strategy~~including tomost ~~increase~~financing costs, amortization of intangible assets, portions of our research and development costs, and some ~~international~~marketing ~~operations.~~expenses Amay ~~number~~not be reimbursable or allowed in our negotiation of fixed-price ~~factors~~contracts. ~~related~~Further, because we contract with the U.S. government, we are subject to ~~our~~an ~~international~~increased ~~sales~~risk of investigations, criminal prosecution, civil fraud, whistleblower lawsuits and ~~operations~~other ~~could~~legal ~~adversely~~actions ~~affect~~and ~~our~~liabilities ~~business,~~to which ~~including:~~purely private sector companies are not.

~~• changes~~ In addition, public agency contracts are frequently awarded only after informal ~~domestic~~competitive bidding processes, which are often protracted and ~~foreign~~typically contain ~~regulatory~~provisions ~~requirements;~~that permit cancellation in the event that funds are unavailable to the public agency. We may not be awarded any of the contracts for 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.

~~• political instability~~Our ingrowth ~~the~~depends ~~countries~~on ~~where~~our weintroduction ~~sell~~of new products; and services, which may be costly to develop and may not achieve market acceptance.

~~• possible~~ As part of our strategy for growth, we intend to develop products to ~~foreign~~address ~~currency~~additional ~~controls;~~aviation security opportunities, such as passenger, carry-on baggage and air cargo screening. We also intend to address homeland security requirements beyond aviation, such as screening at border checkpoints, government offices and transportation terminals and ports. We will be required to spend significant funds to develop or 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 with 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.

~~• fluctuations~~ The development of our products for explosives and weapons detection is inhighly ~~currency~~complex. ~~exchange~~Successful ~~rates;~~product development and market acceptance of any new products and services that we develop depend on a number of factors, including:

30• our timely completion and introduction of new products;

• our ~~ability~~ toaccurate ~~protect~~prediction of the demand for homeland security products and ~~utilize~~the ~~our~~changing ~~intellectual~~requirements ~~property~~of inthe ~~foreign jurisdictions~~homeland security industry, including certification or other required performance standards;

• ~~tariffs, embargoes~~ orthe ~~other~~availability ~~barriers~~of key components of our products;

• ~~difficulties in~~ ~~staffing~~the quality, price and ~~managing~~operating ~~foreign~~performance ~~operations~~of our products and those of our competitors;

• ~~difficulties in~~ ~~obtaining~~our ~~and~~customer ~~managing~~service ~~distributors~~capabilities and responsiveness; and

~~• potentially~~31 ~~negative tax consequences.~~

Further,Table the sale of some of our products outside the United States is subject to compliance with the U.S. International Traffic in Arms Regulations and Export Administration Regulations. Our failure to obtain the requisite licenses, meet registration standards or comply with other government export regulations, may affect our ability to generate revenues from the sale of our products outside the United States, which could harm our business. In particular, some of our EDS products and our landmine detection equipment are deemed regulated military devices subject to export restrictions under the U.S. Department of State regulations. Consequently, these regulations may make these products more difficult to sell to a number of countries. Compliance with government regulations may also subject us to additional fees and costs. The absence of comparable restrictions on competitors in other countries may adversely affect our competitive position.Contents

~~Exchange~~• ~~rate~~the ~~fluctuations~~success ~~could~~of ~~cause~~our arelationships ~~decline~~with inexisting ~~our financial condition~~ and ~~results~~potential ~~of operations~~customers.

~~In 2003~~ Finally, ~~the~~new ~~cost~~products ~~of certain~~for ~~international~~aviation ~~currencies~~security ~~has~~applications ~~increased~~may ~~due~~require certification toor ~~fluctuations~~approval inby the ~~exchange~~ ~~rate~~TSA, ofand ~~the~~we ~~U.S.~~believe ~~dollar~~that ~~against~~ the ~~euro.~~TSA Asdoes ~~a result of our~~not ~~international~~currently ~~operations~~have ~~and~~standards ~~recently~~for ~~acquired~~the ~~Yxlon~~certification ~~operations,~~of weaviation ~~generate~~security aproducts ~~significant~~other ~~portion~~than ofbulk ~~our~~explosives ~~net~~detection ~~sales~~systems and ~~incur~~explosives atrace ~~significant~~detectors. Other ~~portion~~products, ofsuch ~~our expenses~~as inmetal ~~currencies~~detectors, ~~other~~are ~~than~~subject ~~the~~to ~~U.S.~~TSA ~~dollar,~~testing ~~primarily~~prior ~~the euro~~to approval. ~~Future fluctuations~~Market inacceptance ~~this~~of ~~exchange~~new ~~rate~~products ~~could~~may ~~adversely~~be ~~affect~~limited ~~our~~if ~~results~~the ~~because we~~TSA ~~pay~~has ~~our~~not developed ~~non-U.S.~~standards ~~employees~~for ~~and~~certification ~~certain~~or ~~suppliers~~approval inof ~~local~~such ~~currencies~~products, and~~, in~~ ~~some~~even ~~cases,~~if it ~~our~~does ~~sales~~develop ~~contracts~~such ~~are~~standards, ~~denominated~~we inmay ~~local~~be ~~currencies.~~unable ~~From time~~ to ~~time,~~obtain asany ~~and~~such certification ~~when~~or weapproval, ~~determine~~which itcould ismaterially ~~appropriate~~limit ~~and~~market ~~advisable~~acceptance toof such doproducts. ~~so,~~If we ~~will~~ ~~seek~~fail to ~~mitigate~~timely ~~the~~introduce ~~effect~~new ofproducts ~~exchange~~or ~~rate~~if ~~fluctuations through the use~~these ofproducts ~~derivative~~fail ~~financial~~to ~~instruments.~~gain Wemarket ~~cannot assure you~~acceptance, ~~however,~~our ~~that~~results ~~we will~~of ~~continue~~operations ~~this~~would ~~practice or~~ be ~~successful in these efforts~~ harmed.

~~Yxlon,~~ In ~~which we acquired on March 31~~addition, ~~2003,~~even ~~generally~~if ~~transacts~~successful ~~business~~ in ~~euros.~~the ~~Consequently~~United States, ~~its~~ ~~financial~~new ~~condition~~products ~~and~~that ~~results~~we develop ofmay ~~operations~~not ~~are~~achieve ~~reported~~market inacceptance ~~euros~~outside ~~and then~~of ~~translated into U.S. dollars at~~ the ~~applicable~~United ~~exchange rate for inclusion in our consolidated financial statements~~States. ~~As a result, appreciation of~~ Unlike the U.S. ~~dollar~~ ~~against~~government, ~~the~~foreign ~~euro~~governments ~~will~~may ~~have~~be aunwilling ~~negative~~to ~~impact~~commit ~~on our reported revenues~~financial ~~and~~resources ~~operating~~to ~~profit~~purchase ~~while~~our ~~depreciation~~new ofproducts, ~~the~~which ~~U.S.~~would ~~dollar~~reduce ~~against~~our ~~the euro~~potential ~~will have a positive effect on reported~~ revenues and ~~operating~~harm ~~profit~~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, then we may ~~have~~not ~~warranty~~be ~~claims~~able ~~that~~to ~~exceed~~deliver our ~~reserves~~products as required.

~~Our~~ Key ~~EDS~~components used in our products ~~are~~have been designed by us to our ~~typically~~specifications ~~sold~~and ~~with~~are currently available only from one~~-year~~ ~~warranties~~or a limited number of suppliers. We currently do not have ~~established~~long-term ~~reserves~~agreements ~~for~~with many of these suppliers. In addition, some of the suppliers of the key components used in ~~liability~~our ~~associated~~products ~~with~~are ~~product~~our ~~warranties~~competitors, ~~based~~and onthey ~~historical~~may ~~experience~~be motivated not to supply us with ~~warranty~~the ~~claims~~components we need. ~~However,~~Our ~~our~~inability ~~actual~~to ~~warranty~~develop ~~costs~~alternative sources for single or sole source components, ~~including~~to ~~actual~~find alternative third party manufacturers ~~material~~or ~~usage~~sub-assemblers, or ~~service~~to ~~delivery~~obtain ~~costs~~sufficient quantities of these components, could ~~may~~result ~~exceed~~in ~~our~~delays ~~reserves~~or interruptions in product shipments, which could cause ~~have~~current anor ~~adverse~~potential ~~effect~~customers onto seek other suppliers of our ~~operating~~products. ~~results~~In view of the high cost of many of these components, we strive to avoid excess supplies. If our suppliers experience financial, operational, production or quality assurance difficulties, or our sole source suppliers are acquired or otherwise influenced by our competitors, the supply of components to us would be reduced or interrupted. In the event that a supplier ceases operations, discontinues a product or withholds or interrupts supply for any reason, we may be unable to acquire the product from alternative sources within a reasonable period of time.

WeOur ~~may~~future ~~not~~EDS beproducts ~~selected~~may tofail ~~provide post-warranty service on our CTX systems, and if we are selected~~ to ~~provide~~obtain ~~post-warranty~~certification ~~services, these~~by ~~services~~the ~~may not be profitable for us~~TSA.

We ~~offer~~plan to ~~our~~continue ~~customers the opportunity~~ to ~~buy~~develop anew ~~service~~models ~~contract from us, which provides~~ for ~~scheduled maintenance,~~our ~~repairs~~family ~~and~~of ~~parts~~EDS ~~once a warranty period on a CTX system has~~products, ~~expired~~including ~~(which~~systems isutilizing ~~typically a one~~X-~~year~~ray ~~period).~~based Ifdiffraction, weor ~~are~~XRD, ~~not selected to provide post-warranty service~~technology, ~~this would harm our business. Some~~ of our ~~post-warranty~~subsidiary, ~~service~~Yxlon ~~contracts~~International ~~contain~~Security ~~fixed pricing terms~~GmbH. ~~If our actual costs~~However, ~~including~~we ~~actual~~cannot ~~material~~be ~~usage or service delivery costs, exceed our~~certain ~~revenues~~that ~~under~~any ~~these~~new ~~service~~EDS ~~agreements~~product, ~~our~~including ~~operating~~systems ~~results~~utilizing ~~could~~Yxlon’s ~~be adversely~~XRD ~~affected. In January 2003~~technology, ~~we entered into an agreement with~~ ~~Siemens~~will ~~pursuant~~be tocertified ~~which~~by ~~Siemens subcontracted to us its CTX service obligations to~~ the ~~FAA/~~TSA. The ~~agreement~~failure ~~is retroactive~~ to ~~November 2002. Commencing~~gain incertification ~~January 2003,~~for ~~Siemens~~an ~~has~~EDS product ~~the~~would ~~option,~~harm ~~exercisable~~our ~~each~~ability ~~year,~~ to ~~extend~~sell the ~~agreement~~product ~~for~~and ~~the~~recognize ~~following year, through 2007. Siemens has~~associated ~~exercised its option for 2003~~revenues. ~~We cannot assure investors that Siemens will~~ ~~renew the agreement in subsequent years. In addition, historically, we have~~ ~~sold service contracts on most eligible CTX systems deployed internationally.~~ ~~We may not achieve this level of service contract sales in the future.~~

31Our existing EDS products may fail to obtain re-certification by the TSA for changes in the EDS systems.

Our ~~inability~~existing EDS products can be required to ~~adapt~~be re-certified by the TSA. This can happen when a critical component is changed, or we wish to ~~rapid~~make ~~technological~~other changes ~~change~~to ~~could~~the EDS products. When this happens, the affected EDS model ~~impair~~requires re-certification by the TSA. The failure or delay in gaining re-certification for an existing EDS product could harm our ability to ~~remain~~continue to ~~competitive~~sell the product and recognize associated revenues.

~~The~~Future ~~EDS~~sales ~~industry~~of ~~may undergo~~our ~~significant~~EDS ~~technological~~products ~~development~~will independ ~~response~~on tothe ~~increased~~ability ~~demand~~of airports to ~~for~~secure ~~aviation~~funding ~~security~~to ~~products.~~build Abaggage ~~fundamental~~handling ~~shift~~systems inand ~~technology~~to inintegrate our EDS ~~product~~products ~~markets~~into ~~could~~such ~~harm us~~systems, ~~because~~which wethey ~~derive~~may ~~substantially~~not ~~all~~be ofable ~~our revenues~~to ~~from sales of EDS products and services~~do.

We Future ~~anticipate~~sales ~~that~~will wedepend, in part, on installing our EDS products into ~~will~~airport ~~incur~~lobbies ~~significant~~or ~~expenses~~integrating inthem ~~the~~into ~~design~~existing ~~and~~baggage ~~initial~~handling ~~manufacturing~~systems. ~~and~~If ~~marketing~~an airport is not configured for these systems, deployment of ~~new~~our EDS products may ~~and~~require ~~services.~~changes ~~Our~~in ~~competitors~~the ~~may~~airport ~~implement~~infrastructure, ~~new~~such as reinforced airport ~~technologies~~lobby ~~before~~floors weand ~~are~~baggage ~~able~~platforms. ~~to,~~If ~~allowing~~our ~~them~~EDS toproducts ~~provide~~cannot ~~more~~easily ~~effective~~be ~~products~~installed atin ~~more~~airport ~~competitive~~lobbies ~~prices.~~or ~~Future~~integrated ~~technological~~into ~~developments~~existing ~~could:~~baggage

~~• adversely~~32 ~~impact our competitive position;~~

• require write-downsTable of obsolete technology;Contents

~~• require~~handling systems, we may experience reduced sales of our EDS products or these ussales 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 ~~discontinue~~the ~~production~~TSA for reimbursement of ~~obsolete~~up ~~products~~to ~~before~~90% weof costs incurred by the airport in improving baggage handling systems to increase security. There can be ~~recover~~no ~~any~~assurance orthat the government will continue to fund installations, integrations and reimbursements at the current level or at all. ofIf ~~our~~there ~~related~~is ~~research~~a reduction in funding, ~~development~~we ~~and~~may ~~commercialization~~experience ~~expenses;~~reduced sales of our EDS products or these sales may be delayed.

~~• require~~ We believe that a substantial opportunity exists for our CTX 9000 DSi ~~significant~~model ~~capital~~to ~~expenditures~~be ~~beyond~~integrated ~~those~~into ~~currently~~baggage ~~contemplated~~handling systems. If airports determine, in conjunction with governmental authorities, that they will be unable or unwilling to modify or finance such in-line baggage handling systems, this opportunity may be limited.

WeAs ~~cannot~~a ~~assure investors~~result ~~that~~of ~~we will be able to achieve~~ the ~~technological~~Transportation ~~advances~~Security ~~to remain competitive and profitable~~Act, ~~that~~our ~~new~~EDS products ~~and~~are ~~services will be developed~~undergoing ~~and~~substantially ~~manufactured~~increased onusage ~~schedule or~~per ~~on a cost-effective basis~~day, ~~that anticipated~~which ~~markets~~could ~~will~~cause ~~exist~~unforeseen ~~or develop for new products or services, or that~~problems ~~our~~with ~~existing~~their ~~products~~ability ~~and~~to ~~services~~sustain ~~will~~this ~~not~~increased ~~become technologically obsolete~~usage.

~~The~~ As a result of the 100% checked baggage screening requirement under the Transportation Security Act, our EDS ~~industry~~products isin ~~highly~~operation ~~competitive~~are being used more hours per day than prior to 2003. ~~Given~~This increased operation for an extended period places a heavier burden on our EDS products than previously experienced, resulting in an increase in the ~~anticipated~~amount of maintenance required to keep them ~~continuing~~operating. If unforeseen problems were to occur as a result, 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 are still gaining experience in sustaining extensive usage. Our CTX 9000 DSi product may experience maintenance needs and increased down time beyond that experienced by our other EDS products, particularly because it has components that integrate it into an airport’s ~~security~~baggage handling system not found in other EDS products. These additional components require maintenance and may also contribute to increased maintenance needs and down time. If our CTX 9000 DSi product experiences additional maintenance needs beyond that of our other products, ~~competition~~our customers may ~~increase~~favor of our other products or the products of our competitors.

~~The~~We ~~EDS industry is intensely competitive and we~~ may ~~not~~seek ~~compete~~to ~~successfully.~~grow Asby ~~a result of increased demand for security systems~~acquisition, ~~additional~~which ~~companies~~subjects ~~may~~us ~~enter~~to ~~the~~substantial ~~EDS industry. Some of our competitors~~risks, including ~~L-3 Communications Holdings, Inc. and many of~~ the potential new entrants into the EDS industry, have financial, technical, production and other resources substantially greater than ours. We believe that some of our competitors have EDS products undergoing TSA certification. Our failure to ~~compete~~ successfully ~~could~~ ~~result~~integrate inan ~~lost~~acquired ~~sales and could hamper our financial results~~business.

We As ~~depend~~part onof ~~key~~our ~~management~~growth ~~and~~strategy, ~~personnel~~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 ~~not~~incur becosts ~~able~~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 ~~retain~~acquired ~~those~~operations ~~employees~~and orassets, any ~~recruit~~of ~~additional~~which ~~qualified~~could ~~personnel~~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:

We• ~~believe~~difficulties ~~that our future success will be due,~~ in ~~part, to~~ the ~~continued~~assimilation ~~services~~ of ~~our~~acquired senior management team. We do not have long-term employment agreements with any of our executive officers. Losing the services of one or more members of our management team could negatively affect our business and our expansion efforts. We do not maintain key person life insurance policies for members of our management. We could be seriously harmed by the 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 additionoperations, intechnologies ~~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.products;

~~Natural~~• ~~disasters,~~diversion ~~including~~of ~~earthquakes,~~management’s ~~may~~attention ~~damage~~from ~~our facilities.~~other business concerns;

~~Our~~• ~~corporate~~lack ~~and manufacturing~~of ~~facilities~~experience inoperating ~~California are located near major earthquake faults, which have experienced earthquakes~~ in the ~~past.~~geographic Inmarket ~~the event of a major earthquake~~ or ~~other~~industry ~~natural~~sector ~~disaster,~~of ~~our~~acquired ~~facilities may sustain significant damage and our operations could be harmed.~~companies;

~~Our~~• ~~business~~exposure ~~could~~to beunanticipated ~~harmed~~contingent ifliabilities weof ~~fail~~acquired tocompanies; ~~properly protect our intellectual property.~~and

~~Our~~• ~~success~~potential ~~depends~~loss ~~in part~~of onkey ~~our~~employees ~~ability~~of toacquired ~~protect our intellectual property~~companies. Although we attempt to protect our intellectual property in the United States and other countries through various methods such as patents and patent applications, trademarks, copyrights and non-disclosure agreements, there can be no assurance that we will successfully protect our technology or that competitors will not be able to develop similar technology independently.

32 The process of integrating supply and distribution channels, computer and accounting systems and other aspects of operations, while managing a larger entity, may present a significant challenge to our management. We may not be able to successfully integrate any businesses, products, technologies or personnel that might be acquired in the future. In such case, we would not fully realize the anticipated benefits of a business combination, and the failure of

~~We have two U.S. patents~~33 for automatic concealed object detection systems using a pre-scan stage as used in our CTX products. These patents expire in 2010 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 foreign counterparts of our two U.S. EDS patents has expired, and we did not seek or obtain patent protection. The absence of foreign counterparts to our patents could adversely affect our ability to prevent a competitor from using technology similar to technology used in our CTX products. We also have a U.S. patent for a mechanical radiation shield for our CTX 9000 DSi model, which expires in 2021. We rely on this technology to increase the speed of the baggage inspection process. We have filed other applications in the United States and Europe for patents covering other features contained in our CTX 9000 DSi model. We cannot assure investors that the claims allowed under any patents held by us will be sufficiently broad to protect our technology against competition from third parties with similar technologies or products. In addition, we cannot assure investors that any patents issued to us will not be challenged, invalidated or circumvented or that the rights granted under these patents will provide a competitive advantage to us. Moreover, the laws of some foreign countries do not protect intellectual property rights to the same extent as the laws of the United States, and we could experience various obstacles and high costs in protecting our intellectual property rights in foreign countries. If we are unable to obtain or maintain these protections, we may not be able to prevent third parties from using our intellectual property.

WeTable also rely on trade secrets, proprietary know-how and continuing technological innovation to remain competitive. We have taken measures to protect our trade secrets and know-how, including the use of confidentiality agreements with our employees. It is possible that these agreements may be breached and that the available remedies for any breach will not be sufficient to compensate us for damages incurred.Contents

~~Litigation~~such ~~may~~efforts bewould ~~necessary~~harm toour ~~enforce~~business. orMaintaining ~~defend~~uniform ~~against~~standards, controls, ~~claims~~procedures ofand ~~intellectual~~policies ~~property~~may ~~infringement,~~be ~~which~~harder ~~could~~than bewe ~~expensive~~anticipate and, ifinterfere with weefficient ~~lose,~~administration ~~could~~of ~~prevent~~the uscompany ~~from~~as ~~selling~~a ~~our products~~whole.

~~Litigation~~ For ~~may~~example, beon March 31, 2003, we completed the acquisition of Yxlon ~~necessary~~International Holding GmbH. Yxlon is active in ~~the~~businesses ~~future~~that are new to ~~enforce~~us and present a challenge to our ~~patents~~management. ~~and~~In ~~other~~order ~~intellectual~~to ~~property~~successfully integrate ~~rights~~Yxlon’s security technologies and products, towe ~~protect~~must, among other things, integrate these into our ~~trade~~suite ~~secrets~~of orproducts, toboth ~~determine~~from ~~the~~an ~~validity~~engineering and ~~scope~~a sales ofand marketing perspective. As a result, we may take longer to develop ~~the~~and ~~proprietary~~introduce ~~rights~~new ofproducts ~~others~~than we anticipate. ~~Any~~In ~~litigation~~addition, ~~regardless~~we ofdo not have experience developing, marketing and selling products in the ~~outcome~~non-destructive testing business, and we may not be successful competing for customers in ~~could~~industries with which we are unfamiliar. The difficulties of integration of Yxlon may be ~~costly~~further ~~and~~complicated ~~require~~by ~~significant~~the ~~time~~geographic distance between our U.S. offices and ~~attention~~Yxlon’s ofheadquarters, ~~key~~which ~~members~~are oflocated in Germany. If we are not successful in integrating Yxlon’s security technologies into our ~~management~~product line, or in managing Yxlon’s non-destructive testing business, we may incur additional expenses or lose revenue opportunities for Yxlon and ~~technical~~us, ~~personnel~~and our business results may suffer.

Our ~~domestic~~strategic ~~and international 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~~provide anany ~~independent review~~ of ~~patents issued to third parties. Because of~~ the ~~perceived~~benefits ~~market opportunity~~ we ~~face~~anticipate, ~~companies~~and ~~possessing~~as ~~technology~~a ~~rights~~result, ~~that they believe~~ we ~~might be infringing will now be much more motivated to assert infringement of their rights. These third parties~~ may ~~assert~~incur ~~infringement~~economic losses or ~~invalidity claims against us and litigation may~~ be ~~necessary~~required to ~~defend against~~ write-down these ~~claims~~investments. ~~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.~~

We From ~~have~~time ~~received~~to ~~significant~~time, ~~amounts~~we ofconsider ~~funding~~strategic ~~from~~investments in development-stage ~~government~~companies ~~grants~~that ~~and~~we ~~contracts~~believe provide strategic opportunities for us, such as our investment in SafeView, Inc., Wewhich 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 ~~investors~~you that wethese investments will ~~continue~~ create opportunities for us to ~~receive~~increase ~~this~~our ~~level~~sales. ofIf ~~funding~~these companies ~~for~~are ~~future~~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.

~~The~~If ~~U.S.~~our ~~government currently plays an important role in funding the development of~~ EDS ~~technology and sponsoring its deployment in U.S. airports. We performed reimbursable research and development for EDS~~ products ~~pursuant~~fail to ~~FAA~~detect ~~and TSA grants and contracts totaling $886~~explosives,~~000~~ ~~for~~we ~~the~~could ~~year~~be ~~ended~~exposed ~~December 31,~~to ~~2002. We~~product ~~received~~liability ~~reimbursable research~~ and ~~development~~related ~~for~~claims ~~EDS products of $2.0 million in the nine months ended September 28, 2003. This is a significant reduction from the $8.3 million~~ for ~~reimbursable~~which ~~research~~we ~~and~~may ~~development for~~not ~~EDS products from FAA grants and contracts in the year ended December 31, 2001. We are also aware that other competitors and potential competitors in the EDS market~~ have ~~received~~adequate ~~FAA and TSA development grants. The~~insurance ~~U.S. government also currently funds almost all of the development of Quantum products~~coverage, ~~including QR~~ and ~~passive~~we ~~magnetic~~may ~~sensing.~~lose Wecurrent ~~had contract research~~ and ~~development~~potential ~~revenues from the U~~customers.~~S. government for the development of~~ ~~Quantum products of $9.5 million for the nine months ended~~ ~~September 28, 2003 and of $12.1 million for the year ended~~ December 31, 2002. We cannot assure investors that additional research and development funds from the government will become available in the future or that we will receive any of these additional funds. If the government fails to continue to sponsor our technology, we would have to expend more resources on product development, which

33 Our business exposes us to potential product liability risks, which are inherent in the manufacturing, sale and maintenance of EDS products. Our machines are not designed to detect, and TSA certification does not require, 100% detection of any and all explosives contained in scanned baggage. For this reason, or if our products malfunction, it is possible that explosive material could pass undetected through our products, which could lead to product liability claims. There are also many other factors beyond our control that could lead to liability claims, such as the reliability and competence of the customer’s operators and the training of the operators.

~~could~~ For ~~adversely~~example, ~~affect~~InVision and our ~~business.~~subsidiary, InQuantum ~~addition~~Magnetics, ~~any~~were ~~future~~named ~~grants to~~as ~~our~~defendants ~~competitors~~in ~~may~~a ~~improve~~number ~~their~~of ~~ability~~lawsuits relating to ~~develop~~the ~~and~~terrorist ~~market~~acts ~~advanced~~of September ~~detection~~11, ~~products~~2001, even though InVision and ~~cause~~Quantum ~~our~~Magnetics ~~customers~~did tonot, ~~delay~~as ~~any~~of ~~purchase~~September 11, ~~decisions~~2001, have any passenger or carry-on baggage screening equipment at security checkpoints in any of the airports from which the hijacked airplanes departed. Amended Master Complaints controlling over the individual complaints filed by plaintiffs in the In re: September 11 Litigation have effectively dismissed these claims against InVision and Quantum Magnetics. The cost of defending product liability claims such as these, and other product liability claims, brought against us could ~~harm~~be significant and any adverse determination may result in liabilities in excess of our ~~ability~~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 ~~market~~under our ~~products~~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.

~~The~~ In ~~U.S.~~addition, the failure of any EDS product to detect explosives, even if ~~government~~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 effectively, which may ~~obligate~~cause uspotential customers to ~~give~~not ~~priority~~place orders and current customers to ~~the~~cancel ~~TSA~~orders already placed or to not place additional orders, any of which ~~could~~would harm our ~~relationships~~ ~~with~~business ~~other~~and ~~customers~~financial results.

~~The TSA has been~~34 authorized by the U.S. Department of Commerce to place a priority rating on EDS contracts, which would obligate us to timely fulfill the TSA’s orders and delay any unrated or lower-rated orders. In addition, as part of any future orders, the TSA may request that we agree to timely fill its orders prior to fulfilling the needs of any other customers. Accordingly, we may not be able to fulfill orders for our EDS products from non-U.S. government customers during a period of demand from the U.S. government. This could cause our current and potential non-U.S. government customers to seek EDS products from other sources, and could trigger financial penalties under the agreements with such customers. We also may lose our goodwill and relationships with these customers, which could harm our ability to make sales in the future.

SubstantialTable leverageof and debt service obligations may adversely affect our cash flow.Contents

AsWe asubstantially ~~result~~depend ofon ~~the convertible~~large ~~debt~~orders ~~offering~~from ~~that~~a welimited ~~completed~~number inof ~~September 2003, our debt service obligations increased substantially~~customers. ~~There is the possibility that we~~As ~~may~~a ~~be unable to generate cash sufficient to pay the principal of~~result, ~~interest~~order ~~on and~~cancellations ~~other~~from ~~amounts~~any ~~due in respect~~ of our ~~indebtedness~~customers ~~when~~or ~~due.~~the Wefailure ~~may~~of ~~also add~~these ~~equipment~~customers ~~loans~~to ~~and~~continue ~~lease~~to ~~lines~~purchase toEDS ~~finance~~products ~~capital~~could ~~expenditures~~have ~~and~~a ~~may~~material ~~obtain~~negative ~~additional~~impact ~~long-term~~on ~~debt,~~our ~~working~~business ~~capital lines of credit~~ and ~~lease~~financial ~~lines~~results.

~~Our~~ In ~~substantial~~any ~~leverage~~given fiscal quarter or year, our revenues are derived from orders ~~could~~of multiple units of our EDS products from a limited number of customers. Through June 27, 2004, substantially all of our orders in the United States have ~~significant~~been ~~negative~~funded ~~consequences~~by the FAA and the TSA, ~~including:~~which allocate our products to airports in the United States. EDS product and service sales to the TSA accounted for 45.9% of our total revenues in the six months ended June 27, 2004 and 72.4% of our total revenues in the six months ended June 29, 2003. In the six months ended June 27, 2004, ten customers accounted for all of our EDS units sold during the period, and in the six months ended June 29, 2003, thirteen customers accounted for all of our EDS products sold during the period. The failure of these customers, particularly the U.S. government, to continue to purchase our EDS products or the cancellation of existing orders would harm our business.

~~• increasing our~~The ~~vulnerability~~U.S. government’s right to ~~general~~use ~~adverse~~technology ~~economic~~developed ~~and~~by ~~industry~~us, ~~conditions;~~but funded by the U.S. government, limits our intellectual property rights.

~~• limiting~~ In accordance with Federal Acquisition Regulations included in our development contracts with the FAA and TSA, the U.S. government has rights to use our ~~ability~~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 ~~obtain~~produce ~~additional~~or ~~financing;~~have produced for the U.S. government competing products using CT technology found in our existing EDS products, including our CTX 1000 model. With respect to Quantum Magnetics, 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.

~~• requiring the~~The ~~dedication~~sales ofcycle afor ~~portion of~~ our ~~expected~~EDS ~~cash~~products ~~flow~~is ~~from~~lengthy, ~~operations~~and ~~to service~~we ~~our~~may ~~indebtedness,~~expend ~~thereby~~a significant ~~reducing the~~ amount of ~~our~~effort ~~expected~~in ~~cash~~obtaining ~~flow available~~sales ~~for~~orders ~~other~~and ~~purposes,~~not ~~including~~receive ~~capital expenditures;~~them.

~~• limiting~~ The sales cycle of our ~~flexibility~~EDS inproducts ~~planning~~is ~~for,~~often orlengthy ~~reacting~~due to, ~~changes~~the inprotracted approval process that typically accompanies large capital expenditures and the time required to manufacture and install our ~~business~~EDS products. Typically, six to twelve months may elapse between a new customer’s initial evaluation of our systems and the execution of a contract. Another three months to a year may elapse prior to shipment of our EDS products as the ~~industry~~customer site is prepared and our EDS products are manufactured. In addition, in ~~which~~the United States, budgetary debates in Congress, may result in additional delays in the purchase of additional EDS products. During the sales cycle we ~~compete;~~expend substantial funds and management resources but recognize no associated revenue.

~~• placing us~~Our atbacklog ais ~~possible~~not ~~competitive~~necessarily ~~disadvantage~~indicative ~~relative~~of tofuture ~~less leveraged competitors and competitors that have better access to capital resources~~revenues.

~~Risks~~ We ~~Related~~measure our backlog of product revenues as orders for systems and upgrades for 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 ~~Ownership~~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 ~~Our~~to ~~Common~~us ~~Stock~~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.

~~The~~ Quantum Magnetics’ contract research and development backlog includes ~~price~~funded ofand ~~our~~unfunded ~~common~~awards ~~stock~~from ~~may~~government ~~fluctuate~~agencies ~~significantly~~for which services have not yet been performed. At June 27, 2004, Quantum Magnetics’ contract research and development backlog was $11.2 million, $6.5 million of which was funded.

~~The~~ Any ~~trading~~failure ~~price~~by ofus ~~our common~~to ~~stock~~meet ~~has~~an ~~been~~agreed ~~and~~upon ~~may~~schedule ~~continue~~could lead to bethe cancellation ~~subject~~of tothe ~~large~~related ~~fluctuations, which~~order. ~~may~~Variations ~~result~~ in ~~losses~~the tosize, ~~investors.~~complexity ~~Our~~and delivery ~~stock~~requirements ~~price~~of the customer order may ~~increase~~result orin substantial ~~decrease~~fluctuations in ~~response~~backlog from period to aperiod. ~~number~~In ofaddition, ~~events~~all ~~and~~orders ~~factors,~~are subject ~~including:~~to cancellation or delay by the

~~• the~~35 ~~level and changing nature of terrorist activity;~~

• legislative andTable regulatoryof developments related to anti-terrorism efforts or aviation security;Contents

• customer and, accordingly, we cannot assure investors that our backlog will ~~quarterly~~eventually ~~operating~~result ~~results~~in orrevenues. ~~those~~For these reasons, we believe that backlog cannot be considered a meaningful indicator of ~~other~~our ~~explosives~~performance ~~detection~~on ~~companies;~~an annual or quarterly basis.

~~• the public’s~~Our ~~reaction~~international tosales ~~our~~subject ~~press~~us ~~releases,~~to ~~announcements~~risks ~~and~~that ~~our~~could ~~filings~~materially ~~with~~harm ~~the~~our ~~Securities and Exchange Commission;~~business.

34 Sales to countries other than the United States accounted for 43.2% of our total revenues in the six months ended June 27, 2004 and 22.4% of total revenues in the six months ended June 29, 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:

• ~~our announcement~~ ofchanges anin ~~acquisition~~domestic orand ~~strategic~~foreign ~~investment~~regulatory requirements;

• ~~changes in~~ ~~earnings~~political ~~estimates~~instability orin ~~recommendations~~the bycountries ~~research~~where ~~analysts~~we sell products;

• ~~changes in~~ ~~our~~possible ~~relationships~~foreign ~~with~~currency ~~customers~~controls; ~~and~~

• ~~developments affecting~~ ~~our~~fluctuations ~~competitors.~~in currency exchange rates;

~~The~~• ~~market price of~~ our ~~common~~ability ~~stock has fluctuated dramatically since the terrorist attacks of September 11, 2001. For example, immediately prior~~ to ~~September 11,~~protect 2001, our common stock closed at $3.11 per share. Since that date, our closing stock price has risen to a high of $48.29 per share on March 12, 2002. On September 26, 2003, the last trading day of our third quarter of 2003, our common stock closed at $24.40 per share. In addition, the stock market has periodically experienced significant price and ~~volume~~utilize fluctuations that have particularly affected the market prices of common stock of technology companies. These changes have often been unrelated to the operating performance of particular companies. These broad market fluctuations may also negatively affect the market price of our ~~common~~ ~~stock~~intellectual ~~and~~property ~~the~~in ~~notes.~~foreign jurisdictions;

~~Delaware~~• ~~law~~tariffs, ~~and~~embargoes ~~our charter documents may impede~~ or ~~discourage~~ aother ~~takeover, which could cause the market price of our shares to decline.~~barriers;

We• ~~are~~difficulties ~~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~~staffing 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 amanaging ~~prohibition~~foreign 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.operations;

We• ~~may~~difficulties ~~not~~in ~~pay~~obtaining ~~cash~~and ~~dividends.~~managing distributors; and

We• ~~have~~potentially ~~not~~negative ~~declared~~tax ~~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~~consequences. 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.

We Further, ~~may~~the ~~become~~sale of some of our products outside the United States is subject to ~~costly~~compliance with the U.S. International Traffic in Arms Regulations and ~~time-consuming~~Export ~~class~~Administration Regulations. Our failure to obtain the requisite ~~action~~licenses, ~~litigation~~meet ~~following~~registration ~~significant~~standards ~~changes~~or comply with other government export regulations, may affect our ability to generate revenues from the sale of our products outside the United States, which could harm our business. In particular, some of our landmine detection equipment are deemed regulated military devices subject to export restrictions under the U.S. Department of State regulations. Consequently, these regulations may make these products more difficult to sell to a number of countries. Compliance with government regulations may also subject us to additional fees and costs. The absence of comparable restrictions on competitors in other countries may adversely affect our ~~stock~~competitive ~~price~~position.

In Like ~~the~~other ~~past~~companies operating or selling internationally, ~~following~~we are subject ~~periods~~to the FCPA and other laws which prohibit improper payments or offers of payments ~~volatility~~to foreign governments and their officials and political parties by U.S. and other business entities for the purpose of obtaining or retaining business. We make sales in countries known to experience corruption. Our sales activities in such countries create the ~~market~~risk ~~price~~of an unauthorized payments or offers of apayments ~~company’s~~by ~~securities~~one of our employees, ~~securities~~consultants, sales agents or ~~class~~distributors ~~action~~which ~~litigation~~could ~~has~~be ~~often~~in ~~been~~violation ~~instituted~~of ~~against~~various laws including the FCPA, even though such aparties ~~company~~are not always subject to our control. ~~Were~~We have attempted to implement safeguards to prevent losses from such ~~litigation~~practices and to discourage besuch ~~commenced~~practices ~~against~~by usour employees, weconsultants, ~~would~~sales ~~incur~~agents ~~substantial~~and distributors. ~~costs~~We are in the process of improving such safeguards. However, our existing safeguards and ~~there~~any ~~would~~improvements may prove to be ~~diversion~~less ofthan effective and our ~~management’s~~employees, ~~attention~~consultants, sales agents or distributors may engage in conduct for which we might be held responsible. Violations of the FCPA may result in severe criminal or civil sanctions, and ~~resources~~we may be subject to other liabilities, which could ~~materially~~negatively ~~harm~~affect our business, financial condition and results of operations ~~and financial condition~~.

Exchange rate fluctuations could cause a decline in our financial condition and results of operations.

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 recently acquired 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.

Yxlon generally transacts business in euros. Consequently, its financial condition and results of operations are reported in euros and then translated into U.S. dollars at the applicable exchange rate for inclusion in our consolidated financial statements. As a result, appreciation of the U.S. dollar against the euro will have a negative impact on our reported revenues and operating profit while depreciation of the U.S. dollar against the euro will have a positive effect on reported revenues and operating profit. However, Yxlon’s customer contracts that are denominated in U.S. dollars will be adversely affected by the depreciation of the U.S. dollar.

We may have warranty claims that exceed our reserves.

Our EDS products are typically sold with one-year warranties. We have established reserves for the liability associated with product warranties based on historical experience with warranty claims. However, our actual warranty costs, including actual material usage or service delivery costs, may exceed our reserves, which could have an adverse effect on our operating results.

We may not be selected to provide post-warranty service on our CTX products, and if we are selected to provide post-warranty services, these services may not be profitable for us.

We offer to our customers the opportunity to buy a service contract from us, which provides for scheduled maintenance, repairs and parts once a warranty period on a CTX product has expired (which is typically a one-year period). If we are not selected to provide post-warranty service, this would harm our business. Some of our post-warranty service contracts contain fixed pricing terms. If our actual costs, including actual material usage or service delivery costs, exceed our revenues under these service agreements, our operating results could be adversely affected. We are currently in negotiations for the renewal of our agreement to provide service to our CTX products owned by the TSA. We cannot assure investors that the agreement will be renewed, or will be renewed on financially 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.

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

The EDS industry may undergo significant technological development in response to increased demand for aviation security products. A fundamental shift in technology in our product markets could harm us, because we derive substantially all of our revenues from sales of EDS products and services.

We anticipate that we will incur significant expenses in the design and initial manufacturing and marketing of new products and services. Our competitors may implement new technologies before we are able to, allowing them to provide more effective products at more competitive prices. Future technological developments could:

•

adversely impact our competitive position;

•

require write-downs of obsolete technology;

•

require us to discontinue production of obsolete products before we can recover any or all of our related research, development and commercialization expenses; or

•

require significant capital expenditures beyond those currently contemplated.

We cannot assure investors that we will be able to achieve the technological advances to remain competitive and profitable, that new products and services will be developed and manufactured on schedule or on a cost-effective basis, that anticipated markets will exist or develop for new products or services, or that our existing products and services will not become technologically obsolete.

The EDS industry is highly competitive. Given the anticipated continuing demand for airport security products, competition may increase.

The EDS industry is intensely competitive and we may not compete successfully. As a result of increased demand for security systems, additional companies may enter the EDS industry. Some of our competitors, including L-3 Communications Holdings, Inc. and many of the potential new entrants into the EDS industry, have financial, technical, production and other resources substantially greater than ours. We believe that some of our competitors have EDS products undergoing TSA certification. Our failure to compete successfully could result in lost sales and could hamper our financial results.

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

We believe that our future success will be due, in part, to the continued services of our senior management team. We do not have long-term employment agreements with any of our executive officers. Losing the services of one or more members of our management team could negatively affect our business and our expansion efforts. We do not maintain key person life insurance policies for members of our management. We could be seriously harmed by the 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.

Natural disasters, including earthquakes, may damage our facilities.

Our corporate and manufacturing facilities in California are located near major earthquake faults, which have experienced earthquakes in the past. In the event of a major earthquake or other natural disaster, our facilities may sustain significant damage and our operations could be harmed.

Our business could be harmed if we fail to properly protect our intellectual property.

Our success depends in part on our ability to protect our intellectual property. Although we attempt to protect our intellectual property in the United States and other countries through various methods such as patents and patent applications, trademarks, copyrights and non-disclosure agreements, there can be no assurance that we will successfully protect our technology or that competitors will not be able to develop similar technology independently.

We have two U.S. patents for automatic concealed object detection systems using a pre-scan stage as used in our CTX products. These patents expire in 2010 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 foreign counterparts of our two U.S. EDS patents has expired, and we did not seek or obtain patent protection. The absence of foreign counterparts to our patents could adversely affect our ability to prevent a competitor from using technology similar to technology used in our CTX products. We also have a U.S. patent for a mechanical radiation shield for our CTX 9000 DSi model, which expires in 2021. We rely on this technology to increase the speed of the baggage inspection process. We have filed other applications in the United States and Europe for patents covering other features contained in our CTX 9000 DSi model. We cannot assure investors that the claims allowed under any patents held by us will be sufficiently broad to protect our technology against competition from third parties with similar technologies or products. In addition, we cannot assure investors that any patents issued to us will not be challenged, invalidated or circumvented or that the rights granted under these patents will provide a competitive advantage to us. Moreover, the laws of some foreign countries do not protect intellectual property rights to the same

extent as the laws of the United States, and we could experience various obstacles and high costs in protecting our intellectual property rights in foreign countries. If we are unable to obtain or maintain these protections, we may not be able to prevent third parties from using our intellectual property.

We also rely on trade secrets, proprietary know-how and continuing technological innovation to remain competitive. We have taken measures to protect our trade secrets and know-how, including the use of confidentiality agreements with our employees. It is possible that these agreements may be breached and that the available remedies for any breach will not be sufficient to compensate us for damages incurred.

Litigation may be necessary to enforce or defend against claims of intellectual property infringement, which could be expensive and, if we lose, could prevent us from selling our products.

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 of the outcome, could be costly and require significant time and attention of key members of our management and technical personnel.

Our domestic and international 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.

We have received significant amounts of funding from government grants and contracts. We cannot assure investors that we will continue to receive this level of funding for future product development.

The U.S. government currently plays an important role in funding the development of EDS technology and sponsoring its deployment in U.S. airports. We performed reimbursable research and development for EDS products pursuant to FAA and TSA grants and contracts totaling $1.2 million in the six months ended June 27, 2004, $3.1 million for the year ended December 31, 2003, and $886,000 for the year ended December 31, 2002. This is a significant reduction from the $8.3 million for reimbursable research and development for EDS products from FAA grants and contracts in the year ended December 31, 2001. We are also aware that other competitors and potential competitors in the EDS market have received FAA and TSA development grants. The U.S. government also currently funds almost all of the development of Quantum Magnetics products, including QR and passive magnetic sensing. We had contract research and development revenues from the U.S. government for the development of Quantum Magnetics products of $5.6 million for the six months ended June 27, 2004, $13.1 million for the year ended December 31, 2003 and of $12.1 million for the year ended December 31, 2002. We cannot assure investors that additional research and development funds from the government will become available in the future or that we will receive any of these additional funds. If the government fails to continue to sponsor our technology, we would have to expend more resources on product development, which could adversely affect our business. In addition, any future grants to our competitors may improve their ability to develop and market advanced detection products and cause our customers to delay any purchase decisions, which could harm our ability to market our products.

Substantial leverage and debt service obligations may adversely affect our cash flow.

As a result of the convertible debt offering that we completed in September 2003, our debt service obligations increased substantially. There is the possibility that we may be unable to generate cash sufficient to pay the principal of, interest on and other amounts due in respect of our indebtedness when due. We may also add equipment loans and lease lines to finance capital expenditures and may obtain additional long-term debt, working capital lines of credit and lease lines.

Our substantial leverage could have significant negative consequences, including:

•

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.

Risks Related to Ownership of Our Common Stock

The price of our common stock may fluctuate significantly.

The trading price of our common stock has been and may continue to be subject to large fluctuations, which may result in losses to investors. If the proposed merger with GE is not completed, or there is heightened uncertainty about whether it will be completed, our stock price may increase or decrease in response to a number of events and factors, including:

•

the level and changing nature of terrorist activity;

•

legislative and regulatory developments related to anti-terrorism efforts or aviation security;

•

our quarterly operating results or those of 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 market price of our common stock has fluctuated dramatically since the terrorist attacks of September 11, 2001. For example, immediately prior to September 11, 2001, our common stock closed at $3.11 per share. Since that date, our closing stock price has risen to a high of $48.29 per share on March 12, 2002. During 2003, our closing stock price fluctuated from a low of $20.33 per share to a high of $34.41 per share. During the period from January 1, 2004 through March 12, 2004, the last trading day prior to the announcement of the proposed acquisition of InVision by GE, our closing stock price fluctuated from a low of $34.35 per share to a high of $41.58 per share. In addition, the stock market has periodically experienced significant price and volume fluctuations that have particularly affected the market prices of common stock of technology companies. These changes have often been unrelated to the operating performance of particular companies. These broad market fluctuations may also negatively affect the market price of our common stock and the notes.

Delaware law and our charter documents may impede or discourage a takeover, which could cause the market price of our shares to decline.

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.

We may not pay cash dividends.

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.

We may become subject to costly and time-consuming class action litigation following significant changes in our stock price.

In the past, following periods of volatility in the market price of a company’s securities, securities class action litigation has often been instituted against such a company. Were such litigation to be commenced against us, we would incur 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.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

~~Our~~ We ~~international~~consider ~~system sales~~investments ~~and~~purchased ~~maintenance~~with ~~contracts~~an ~~are~~original ~~generally~~or ~~denominated~~remaining ~~in U.S.~~maturity ~~dollars. In~~of ~~instances~~less ~~where~~than ~~there~~three ~~are~~months ~~significant~~at ~~international system~~the ~~sales~~date ~~contracts~~of ~~denominated~~purchase ~~in a foreign currency, we often enter into forward contracts~~ to ~~mitigate~~be ~~foreign~~cash ~~exchange risk~~equivalents. We ~~do not~~We ~~enter~~maintain ~~into~~an ~~market~~investment ~~risk~~portfolio ~~sensitive~~of ~~instruments~~various ~~for~~holdings, ~~trading~~types, ~~purposes. In~~and ~~the~~maturities. ~~third~~See ~~quarter~~Note of1 ~~2003,~~to wethe ~~entered~~condensed ~~into~~consolidated ~~foreign~~financial ~~exchange~~statements. ~~forward~~These ~~contracts with~~securities aare ~~total~~classified ~~notional~~as ~~value~~available offor ~~approximately~~sale ~~$4.6~~and ~~million~~consequently toare ~~hedge~~recorded ~~against~~on ~~foreign~~the ~~exchange~~consolidated ~~risk~~balance ~~for~~sheets ~~contracts with international customers denominated in euros, and~~ at ~~September 28,~~fair ~~2003,~~value ~~December 31,~~with ~~2002~~unrealized ~~and~~gains ~~December 31,~~or losses ~~2001,~~reported weas ~~had~~a ~~outstanding~~separate ~~contracts~~component toof ~~convert~~accumulated ~~euros~~other tocomprehensive ~~dollars with notional~~income ~~values totaling $21.9 million~~(loss), ~~$34.7 million~~net ~~and~~of ~~$16~~tax.9 ~~million,~~The ~~with negative~~following ~~fair~~table ~~values~~summarizes ofour ~~approximately $646~~cash,~~000~~ ~~and~~cash ~~$4.9 million~~ equivalents and ashort-term ~~positive fair~~investments ~~value~~for ~~of $47,000, respectively. The following table depicts~~ the ~~maturities~~ ofperiods ~~the~~indicated ~~outstanding contract amounts~~ (in thousands):


	June 27,		December 31,
	2004		2003
Cash and cash equivalents	$	114,270	$	182,382
Short-term investments		214,825		94,557
Restricted cash		5,633		—

Total	$	334,728	$	276,939

Contract Maturity	Within 3 months		4-6 months		7-9 months		10-12 months		13 months
Amount at 9/28/03	$	13,100	$	8,212	$	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

At any time, a sharp rise in interest rates could adversely impact the fair value of our investment portfolio. Conversely, declines in interest rates could have a positive impact on the fair value of 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 June 27, 2004 that are sensitive to changes in interest rates (in thousands) based on hypothetical adjustments in the applicable interest rates:

~~Purchases of raw~~41 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.

CertainTable costs of providing warranty and maintenance services for systems sold to foreign countries are denominated in local currencies. To the extent exchange rates 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.Contents

We are 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 September 28, 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.


	Valuation of securities								Valuation of securities
	given an interest rate						Fair value as of		given an interest rate
	increase of X basis points						June 27,		decrease of X basis points
	150 BPS		100 BPS		50 BPS		2004		(50 BPS)		(100 BPS)		(150 BPS)*
Total	$	332,601	$	333,708	$	334,826	$	334,728	$	337,066	$	338,210	$	339,303

~~The~~* ~~cash~~A ~~flow~~reduction ~~impacts~~ of ~~our~~ ~~sensitivity~~150 ~~analysis~~basis aspoints, ofor ~~September 28~~BPS, ~~2003~~is ~~are~~unlikely ~~summarized~~due into the ~~following~~ ~~table~~low ~~(the foreign currency exchange rates used were based on market~~interest rates in effect atas ~~September~~of June 2827, ~~2003):~~2004.

	Contract		Fair Value as of September 28,			Cash flow impact of change in exchange rates
(in thousands)	Amount		2003			10% Change			15% Change
Foreign exchange forward contracts	$	21,900	$	(646	)	$	2,261		$	3,391
Accounts receivable	11,190		12,524			(1,252		)	(1,879		)
Firm orders*	17,018		18,811			(1,881		)	(2,822		)
Other working capital balances, net	353		205			(21		)	(31		)
Total						$	(893	)	$	(1,341	)

These 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 BPS, 100 BPS and 150 BPS.

* Our ~~Firm~~international ~~orders~~system ~~represent~~sales and maintenance contracts are generally ~~orders~~denominated in U.S. dollars. In instances where there are significant international system sales contracts denominated in a foreign currency, we often enter into forward contracts to mitigate foreign exchange risk. We do not enter into market risk sensitive instruments for ~~which~~trading purposes. In the second quarter of 2004, we ~~have~~did ~~received~~not enter into any new foreign exchange options and forward contracts to hedge against foreign exchange risk for contracts with international customers denominated in euros and entered into $4.1 million to hedge against foreign exchange risk for anticipated expenditures denominated in euros and Swiss francs. At June 27, 2004, December 31, 2003 and December 31, 2002, we had outstanding contracts to convert euros to U.S. dollars with notional values totaling $12.6 million, $17.3 million and $34.7 million, with a positive ~~signed~~fair ~~purchase~~value ~~order~~of approximately $329,000 and negative fair values of $1.4 million and $4.9 million, respectively. At June 27, 2004, we had outstanding contracts to convert U.S. dollars to euros with notional values totaling $8.2 million and a negative fair value of $346,000. At June 27, 2004, we had outstanding contracts to convert dollars to Swiss francs with notional values totaling $3.5 million and a positive fair value of $154,000. The following table depicts the maturities of the outstanding contract amounts (in thousands):

The cash flow impact of changes in exchange rates at September 28, 2003 is not significantly different from the cash flow impact of changes in exchange rates at December 31, 2002. We do not expect the impact of changes in interest rates to have a material impact on our operations, cash flow or liquidity. In addition, the impact of inflation has not been material on our operations, cash flow or liquidity to date.


	Within 3
Contract Maturity	Months		4-6 Months		7-9 Months		10-12 Months
Amount at 6/27/04	$	19,023	$	2,888	$	2,376	$	—
Amount at 12/31/03		16,738		588		—		—
Amount at 12/31/02		13,884		18,020		2,653		99

36 Certain costs of providing warranty and maintenance services for systems sold to foreign countries are denominated in local currencies. To the extent exchange rates 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.

~~The~~ We ~~cash~~are ~~flow~~exposed ~~impacts~~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 June 27, 2004, December 31, 2003 and December 31, 2002 ~~are~~using ~~summarized~~a modeling technique that measures the change in the fair values ~~following~~arising ~~table~~from (a hypothetical 10% and 15% adverse movement in the levels of foreign currency exchange rates ~~used~~relative ~~were~~to ~~based~~the onU.S. ~~market rates~~dollar in(that ~~effect~~is, strengthening atof ~~December 31,~~the ~~2002~~U.S. dollar): with all other variables held constant. The analysis covers all of our foreign exchange forward options and 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.

(in thousands)	Contract Amount			Fair Value as of Dec. 31, 2002			Cash flow impact of change in exchange rates
							10% Change			15% Change
Foreign exchange forward contracts	$	34,656		$	(4,948	)	$	3,973		$	5,960
Accounts receivable	13,216			14,803			(1,480		)	(2,220		)
Firm orders*	24,123			27,390			(2,739		)	(4,109		)
Net accounts payable	(835		)	(1,022		)	102			153
Total							$	(144	)	$	(216	)

The cash flow impacts of our sensitivity analysis as of June 27, 2004 are summarized in the following table (the foreign currency exchange rates used were based on market rates in effect at June 27, 2004):

* Firm orders represent42 ~~orders for which we have received a signed purchase order.~~

TheTable 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.Contents


					Cash flow impact of change in
					exchange rates}
	Contract		Fair Value as of
(in thousands)	Amount		June 27, 2004		10% Change			15% Change
Foreign exchange forward contracts	$	851	$	138	$	107		$	183
Foreign exchange forward options	$	6,029	$	126	$	(122	)	$	(126	)
Accounts receivable		6,177		6,529		(653	)		(979	)
Firm orders*		5,314		5,523		(552	)		(828	)
Other working capital balances, net		305		203		(30	)		(45	)

Total					$	(1,250	)	$	(1,795	)

Firm orders represent orders for which we have received a signed purchase order.

The cash flow impact of changes in exchange rates at June 27, 2004 is not significantly different from the cash flow impact of changes in exchange rates at December 31, 2003 and 2002.

We do not expect the impact of changes in interest rates to have a material impact on our operations, cash flow or liquidity. In addition, the impact of inflation has not been material on our operations, cash flow or liquidity to date.

Item 4. Controls and Procedures

~~The~~Evaluation Securities and Exchange Commission defines the term “disclosure controls and procedures” to mean a company’s controls and other procedures that are designed to ensure that information required to be disclosed in the reports that it files or submits under the Securities Exchange Act of ~~1934~~Disclosure isControls ~~recorded, processed, summarized~~ and ~~reported, within the time~~Procedures ~~periods specified in the Commission’s rules and forms. Our chief executive officer and our chief~~ ~~financial officer, based on their evaluation of the effectiveness of our~~ ~~“disclosure controls and procedures” as of the end of the period covered by~~ ~~this report, have concluded that our disclosure controls and procedures were effective for this purpose.~~

~~During~~ Based on our management’s evaluation (with the participation of our principal executive officer and principal financial officer) of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)), as of the end of the period covered by this quarterly report, ~~there~~our principal executive officer and principal financial officer have ~~been~~concluded nothat, ~~changes~~except for the matters described under “–Changes in ~~our~~Internal ~~internal~~Control ~~control~~Over ~~over~~Financial Reporting” ~~financial~~below, ~~reporting~~such disclosure controls and procedures are effective to ensure that information ~~have~~required ~~materially~~to ~~affected~~be disclosed by us in reports that we file or ~~are~~submit under ~~reasonably~~the ~~likely~~Exchange toAct is recorded, processed, summarized and reported within ~~materially~~the ~~affect~~time ~~our~~periods ~~internal~~specified ~~control~~in ~~over~~Securities ~~financial~~and ~~reporting~~Exchange Commission rules and forms.

Changes in Internal Control Over Financial Reporting

There was no change in our internal control over financial reporting during our second fiscal quarter of 2004 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

On July 30, 2004, we announced an internal investigation of certain possible offers of improper payments by our distributors in connection with foreign sales activities, potentially in violation of the Foreign Corrupt Practices Act. The internal investigation was in process during the course of management’s evaluation of our disclosure controls and procedures and is continuing. In connection with the internal investigation, we are continuing to evaluate whether there are deficiencies and weaknesses in our internal compliance programs, disclosure controls and procedures and internal controls over financial reporting. If we determined that there are deficiencies and weaknesses in our internal compliance programs or internal controls over financial reporting, we intend to implement the necessary changes to rectify any such deficiencies or weaknesses.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

InVision and our subsidiary, Quantum Magnetics, together with many other entities, were named as defendants in ~~a number of lawsuits in~~ approximately ~~100~~156 products liability lawsuits by individual plaintiffs seeking damages for wrongful death ~~relating~~in toconnection with the terrorist acts of September 11, 2001. The litigation ~~in connection with the terrorist acts of~~was ~~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. We anticipate that additional lawsuits relating to the terrorist acts of September 11, 2001 will name us as defendants. To date, we have been served with 14 of these complaints. All of the served complaints have been placed on the court’s suspense docket, and no action is permitted or required in these cases until December 23, 2003. Each of the served complaints 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 intend to vigorously defend these lawsuits.

~~We also are involved in~~43 legal proceedings, claims and litigation arising in the ordinary course of business. While the outcome of these matters is currently not determinable, management does not believe that the ultimate cost to resolve these matters will have a material adverse effect on our consolidated financial condition, results of operations or cash flows.

37Table of Contents

~~Item~~Litigation, 221 MC 97 (AKH), United States District Court for the Southern District of New York. ~~Changes~~InVision and Quantum Magnetics have been served with 103 complaints. Each complaint with which we have been served alleges that defendants have 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 ~~Securities~~light of the fact that InVision and Quantum Magnetics 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. By court order, the plaintiffs were required to file and serve Amended Master Complaints and Appendices by March 31, 2004 to reflect all defendants and causes of action in the In re: September 11 Litigation that had been added since their original Master Complaints were filed. InVision and Quantum Magnetics were not included in the plaintiffs’ Amended Master Complaints and their Appendices. Since these Amended Master Complaints are controlling over the individual complaints filed by the plaintiffs, all plaintiffs in the In re: September 11 Litigation have effectively dismissed their claims against InVision and Quantum Magnetics. Notices of dismissals or dismissal orders have been received in all of the individual complaints.

~~(c) Under~~ On March 19, 2004, two alleged holders of InVision common stock filed purported class action lawsuits in California Superior Court for the ~~terms~~County of Alameda. aThe ~~Purchase~~complaints ~~Agreement~~name ~~dated~~as ~~September 16,~~defendants ~~2003,~~each weof ~~sold~~our ~~$125~~directors as well as InVision.0 The complaints allege that, in pursuing the transaction with GE and ~~million~~approving ~~aggregate~~the ~~principal~~merger ~~amount~~agreement, the directors violated their fiduciary duties to the holders of ~~our~~InVision 3%common ~~convertible~~stock ~~senior~~by, ~~notes~~among ~~due~~other ~~2023~~ things, failing to obtain ~~Merrill~~the ~~Lynch~~highest price reasonably available, ~~Pierce~~tailoring the terms of the transaction to meet GE’s needs, ~~Fenner &~~engaging ~~Smith~~in ~~Incorporated~~self-dealing and obtaining personal financial benefits not shared equally by the plaintiffs and other stockholders. The ~~issuance~~complaints ~~and~~also allege that the merger agreement resulted from a flawed process designed to ensure a sale to one buyer. The lawsuits have been consolidated by stipulation of the ~~notes~~parties under one lead case, Waltman, et al. v. InVision Technologies, Inc., et al., Lead Case No. RG04146722. On May 3, 2004, InVision and three directors filed a demurrer to the consolidated ~~subsequent~~complaint ~~offering~~on the grounds that plaintiffs failed to allege sufficient facts to state a cause of action. The remaining five directors filed a motion to quash the ~~notes~~service byof summons because they are not California residents, and, therefore, the court lacks jurisdiction over them. On May 25, 2004, in response to the demurrer, the plaintiffs filed a consolidated amended class action complaint asserting similar causes of action, thereby rendering the demurrer moot. The plaintiffs served initial ~~purchaser~~written discovery requests and following the May 26, 2004 Initial Complex Case Management Conference, the plaintiffs were ~~exempt~~permitted ~~from~~limited expedited discovery for the purpose of a bringing a ~~registration~~motion ~~provisions~~for a preliminary injunction. On June 17, 2004, prior to the filing of any motion for a preliminary injunction, the ~~Securities~~parties ~~Act~~entered into a memorandum of ~~1933~~understanding to settle the consolidated class action suit. Under the terms of the memorandum, asInVision ~~amended~~and the plaintiffs to the consolidated action have agreed, subject to approval by the court, to enter into a settlement with ~~Section 4(2)~~respect ofto all claims raised by the ~~Securities~~plaintiffs ~~Act~~to ~~and~~the ~~Rule 144A~~consolidated ~~promulgated~~action. ~~under~~The terms of the ~~Securities~~settlement ~~Act~~contemplated by the memorandum require that additional disclosures be made concerning the merger. We ~~sold~~Those disclosures were made available in the ~~notes~~June 18, 2004 joint press release issued by GE Infrastructure ~~for~~and ~~cash~~InVision. The ~~aggregate~~parties ~~offering~~also ~~price~~agreed that plaintiffs may seek attorneys’ fees ~~was~~and costs in the amount of $~~125.0 million~~450,000 that InVision will pay, if the attorney’s fees and ~~our~~costs ~~net~~are ~~proceeds~~granted ~~were~~by ~~approximately~~the court. There will be no other settlement ~~$120~~payment by InVision, GE or any of the members of InVision’s board of directors, who were also named as defendants in the lawsuits.5 The court’s preliminary hearing to approve the settlement is currently scheduled for August ~~million~~24, 2004, at which time the court is expected to set a date for a final approval hearing. If the court approves the settlement contemplated in the memorandum, the lawsuits will be dismissed. However, there can be no assurance that the court will approve the proposed settlement or that any ultimate settlement will be under terms substantially similar to those contemplated by the memorandum.

~~The~~ On ~~notes will mature on October~~July 2330, ~~2023~~2004, ~~and~~we ~~are~~announced ~~convertible~~that ~~into~~we ~~our~~had ~~common~~met ~~stock~~with onthe orDepartment ~~before~~of ~~the~~Justice ~~maturity~~and ~~date,~~the ~~under~~Securities ~~certain~~and ~~circumstances,~~Exchange atCommission anconcerning ~~initial~~our ~~conversion rate~~voluntary disclosure of ~~31.25~~an ~~shares~~internal ~~per~~investigation ~~$1,000 principal amount~~ of ~~notes,~~certain ~~subject~~possible tooffers ~~adjustment. At~~of ~~the initial conversion rate, the notes~~improper ~~will~~payments beby ~~convertible~~our ~~into~~distributors ~~common~~in ~~stock~~connection atwith aforeign ~~conversion~~sales ~~price of $32~~activities.00 ~~per~~We ~~share. The~~have ~~notes~~been ~~will~~informed bethat ~~redeemable~~the ~~for cash~~Department ~~at our option beginning on October 1, 2008. Holders~~ of ~~the~~Justice ~~notes~~and ~~have~~ the ~~option~~Securities ~~to require us to purchase~~and ~~the~~Exchange ~~notes~~Commission inmay ~~cash,~~commence inan ~~whole~~investigation ~~or in part, on October 1 in each~~ of ~~2008,~~us ~~2013 and~~with ~~2018. The~~respect ~~holders~~to ~~of the notes will~~these ~~also~~matters, ~~have~~including ~~the~~with ~~ability~~respect to ~~require~~possible usviolations toof ~~purchase~~ the ~~notes~~Foreign ~~in the event that we~~Corrupt ~~undergo~~Practices aAct, ~~change~~or ~~in control~~FCPA. In ~~each such~~We ~~case,~~intend ~~the~~to ~~redemption~~cooperate orfully ~~purchase~~with ~~price~~any ~~would~~investigation beof these atmatters ~~100%~~by of the ~~principal amount~~Department of ~~the~~Justice ~~notes, plus accrued~~ and ~~unpaid interest to, but excluding, the redemption~~ /or ~~purchase date, as~~ the ~~case~~Securities ~~may~~and beExchange Commission.

~~Item~~ On August 4, 2004, an alleged holder of InVision common stock filed a purported class action lawsuit in the United States District Court for the Northern District of California, captioned Engelken, Individually and On Behalf of All Others Similarly Situated, v. InVision Technologies, Inc., et al. The complaint names as defendants Giovanni Lanzara, the Chairman of our Board of Directors, Sergio Magistri, our Chief Executive Officer and a director, and Ross Mulholland, Senior Vice President and Chief Financial Officer of InVision, as well as InVision. The complaint alleges that we and the individual defendants failed to disclose that our foreign distributors had made improper payments in connection with foreign sales activities, that we had improperly accounted for such payments, that our improper accounting for such payments allowed us to enter into a definitive merger agreement with GE, that we and the individual defendants made related misrepresentations, and that these alleged nondisclosures and misrepresentations violated Section 10(b) of the Exchange Act and Rule 10b-5. ~~Other~~As ~~Information~~described in “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations”, we are conducting an internal investigation of certain possible offers of improper payments by our distributors in connection with foreign sales activities. We are also evaluating the merits of the complaint.

~~Consistent~~ We ~~with~~also ~~Section 10A(i)(2)~~are ofinvolved ~~the Securities~~in ~~Exchange~~legal ~~Act of 1934~~proceedings, asclaims ~~added~~and bylitigation ~~Section 202~~arising in of the ~~Sarbanes-Oxley~~ ~~Act~~ordinary course of ~~2002,~~business. weWhile ~~are responsible for listing~~ the ~~non-audit services~~outcome ~~approved~~of bythese ~~our~~matters ~~Audit Committee to be performed by Deloitte &~~is ~~Touche~~currently ~~LLP~~not determinable, ~~our~~we ~~external~~do ~~auditor.~~not ~~Non-audit~~believe ~~services~~that ~~are~~the ~~defined~~ultimate ascost ~~services~~to resolve ~~other~~these ~~than~~matters ~~those~~will ~~provided~~have ina ~~connection~~material ~~with~~adverse aneffect ~~audit~~on ~~or a review of~~ our ~~financial~~ ~~statements. During~~consolidated ~~the~~financial ~~quarterly period covered by this filing~~condition, ~~the~~results ~~Audit Committee approved engagements~~ of ~~Deloitte~~operations &or ~~Touche~~cash ~~LLP for the following non-audit services:~~flows.

~~• tax~~44 ~~services, which includes consulting related to (1) the review of federal and state tax returns; (2) general tax consulting; and (3) sales and use tax consulting; and~~

• audit-related services,Table which includes consulting related to the (1) audit of the financial statements of our subsidiary, Yxlon International X-Ray GmbH; and (2) review of the reporting package and consolidation of our German subsidiaries.Contents

Item 4. Submission of Matters to a Vote of Security Holders

We held a Special Meeting of our Stockholders on June 25, 2004 to approve our merger with GE. Matters voted upon at that meeting were:

	(1)		Proposal for the adoption of the Agreement and Plan of Merger, dated as of March 15, 2004 (the “Merger Agreement”), by and among General Electric Company, Jet Acquisition Sub, Inc. and InVision; and

	(2)		Proposal to grant the persons named as proxies discretionary authority to vote to adjourn the Special Meeting one or more times, including for the purpose of soliciting proxies to vote in favor of adoption of the Merger Agreement.

Tabulations for each proposal were as follows*:

Proposal 1. Proposal for the adoption of the Merger Agreement:


For	Against		Abstain
10,330,940		132,644		17,886

Proposal 2. Proposal to grant the persons named as proxies discretionary authority to vote to adjourn the Special Meeting one or more times, including for the purpose of soliciting proxies to vote in favor of adoption of the Merger Agreement:


For	Against		Abstain
8,325,514		1,940,138		215,818

Broker non-votes were treated as shares that were present and entitled to vote at the Special Meeting for purposes of determining whether a quorum existed and had the same effect as votes “against” the adoption of the Merger Agreement. Broker non-votes had no effect on the proposal to grant the persons named as proxies the authority to vote to adjourn the Special Meeting.

Item 6. Exhibits and Reports on Form 8-K

(a)

Exhibits

2.1		Share and Purchase Transfer Agreement dated as of February 21, 2003 among the registrant, Yxlon Beteiligungs-Verwaltung GmbH, NDT International Holdings A.S, Yxlon International Holding GmbH, Yxlon International X-Ray GmbH, Joseph Kosanetzky, Reinhard Bonisch and Botts & Company Ltd. (1)
3.1		Amended and Restated Certificate of Incorporation of the registrant. (2)
2.2		Agreement and Plan of Merger, dated as of March 15, 2004, among the registrant, General Electric Company and Jet Acquisition Sub, Inc. (2)
3.2		Amendment to Amended and Restated Certificate of Incorporation of the registrant (3)
3.1		Amended and Restated Certificate of Incorporation of the registrant. (3)
3.3		Bylaws of the registrant, as amended. (4)
3.2		Amendment to Amended and Restated Certificate of Incorporation of the registrant (4)
3.3		Bylaws of the registrant, as amended. (5)
4.1		Reference is made to Exhibits 3.1 through 3.3.
4.2		Indenture, dated as of September 19, 2003, between the registrant and U.S. Bank National Association, as Trustee. (56)
4.3		Registration Rights Agreement, dated as of September 19, 2003 between the registrant and Merrill Lynch, Pierce, Fenner & Smith Incorporated. (56)
4.4		Form of Note for the registrant’s 3% Convertible Senior Notes due October 1, 2023. (46)
10.1		~~Solicitation,~~Modification ~~Offer~~to Loan and ~~Award~~Security Agreement, dated ~~August~~as 5of July 21, ~~2003~~2004, between the registrant and ~~the~~Silicon ~~TSA~~Valley ~~(the “Frame Agreement”)~~Bank. (5) *
10.2		Delivery Order #1 from the TSA under the Frame Agreement. (5) *
31.1		Section 302 Certification of Chief Executive Officer.
31.2		Section 302 Certification of Chief Financial Officer.
32.1		Certificate of Chief Executive Officer and Chief Financial Officer.

3845

10.3		Amendment of Solicitation/Modification of Contract between the Company and the TSA (the “Definitized Letter Agreement”). (5) *
10.4		Delivery Order #8 from the TSA under the Definitized Letter Agreement.(5)
10.5		Amendment to Delivery Order Delivery Order #5 from the TSA under the Definitized Letter Agreement. (5) *
10.6		Amendment to Delivery Order Delivery Order #3 from the TSA under the Definitized Letter Agreement. (5) *
10.7		Amendment to Loan Documents dated as of August 13, 2003 between the registrant and Silicon Valley Bank.
31.1		Section 302 Certification of Chief Executive Officer.
31.2		Section 302 Certification of Chief Financial Officer.
32.1		Certificate of Chief Executive Officer and Chief Financial Officer.

(1) Filed as an exhibit to the registrant’s Quarterly Report on Form 10-Q for the quarter ended March 30, 2003 and incorporated herein by reference.

(1)		Filed as an exhibit to the registrant’s Quarterly Report on Form 10-Q for the quarter ended March 30, 2003 and incorporated herein by reference.

(2)		Filed as an exhibit to the registrant’s Annual Report on Form 10-K for the year ended December 31, 2003 and incorporated herein by reference.

(3)		Filed as an exhibit to the registrant’s Registration Statement on Form S-1 (No. 333-05517) and incorporated herein by reference.

(4)		Filed as an exhibit to the registrant’s Annual Report on Form 10-K for the year ended December 31, 2001 and incorporated herein by reference.

(5)		Filed as an exhibit to the registrant’s Quarterly Report on Form 10-Q for the quarter ended June 29, 2003 and incorporated herein by reference.

(6)		Filed as an exhibit to the registrant’s Registration Statement on Form S-3 (No. 333-110289) and incorporated herein by reference.

(2b) ~~Filed~~ Reports ason anForm ~~exhibit~~8-K to filed during the ~~registrant’s~~fiscal ~~Registration~~quarter ~~Statement~~ended June 27, 2004: On April 22, 2004, we filed a current report on Form S8-1K, ~~(No.~~pursuant ~~333-05517)~~to ~~and~~Item 12 ~~incorporated~~thereof, ~~herein~~furnishing bya ~~reference~~copy of a press release titled “InVision Technologies Reports First Quarter 2004 Financial Results” and dated April 22, 2004.

~~(3) Filed~~ On asJune 18, an2004, ~~exhibit~~we ~~to the~~filed ~~registrant’s~~a ~~Annual~~current ~~Report~~report on Form 108-K, ~~for~~pursuant ~~the~~to ~~year ended~~Items ~~December 31~~5 and 7 thereof, ~~2001~~to provide a copy of a press release entitled “GE and ~~incorporated~~InVision Technologies ~~herein~~Announce byMemorandum ~~reference~~of Understanding To Settle Lawsuits Concerning Acquisition,” dated June 18, 2004.

~~(4) Filed as an exhibit to~~46 ~~the registrant’s Quarterly Report on Form 10-Q for the quarter ended June 29, 2003 and incorporated herein by reference.~~

(5) FiledTable asof an exhibit to the registrant’s Registration Statement on Form S-3 (No. 333-110289) and incorporated herein by reference.Contents

* ConfidentialSIGNATURES ~~treatment has been requested for portions of this exhibit.~~

~~(b) Report~~ Pursuant onto ~~Form 8-K filed~~the ~~during~~requirements of the ~~fiscal~~Securities ~~quarter~~Exchange ~~ended~~Act ~~September 28,~~of ~~2003: On July 22~~1934, ~~2003,~~the registrant wehas ~~filed~~duly acaused ~~current~~ this report ~~on Form 8-K, pursuant~~ to ~~Item 12~~be ~~thereof,~~signed ~~furnishing~~on aits ~~copy~~behalf ~~of a~~by ~~press release titled “InVision Technologies Reports Second-Quarter Earnings”~~the ~~and~~undersigned ~~dated~~thereunto ~~July 22,~~duly ~~2003~~authorized.

On September 9, 2003, we filed a current report on Form 8-K, pursuant to Item 5 thereof, furnishing a copy of press releases titled “InVision Technologies, Inc. Announces Proposed Private Offering of Convertible Senior Notes” and “InVision Technologies, Inc. Announces Pricing of Private Offering of Convertible Senior Notes,” dated August 12, 2003 and September 16, 2003, respectively.


	INVISION TECHNOLOGIES, INC.
Date: August 5, 2004	/s/ Sergio Magistri
	Sergio Magistri, Ph.D.
	President and Chief Executive Officer (Authorized Officer)



Date: August 5, 2004	/s/ Ross Mulholland
	Ross Mulholland
	Senior Vice President and Chief Financial Officer (Principal Financial and Accounting Officer)

~~SIGNATURES~~47

PursuantTable to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.Contents

	INVISION TECHNOLOGIES, INC.
Date: November 10, 2003	/s/ Sergio Magistri
	Sergio Magistri, Ph.D.
	President and Chief Executive Officer (Authorized Officer)
Date: November 10, 2003	/s/ Ross Mulholland
	Ross Mulholland
	Senior Vice President and Chief Financial Officer (Principal Financial and Accounting Officer)

EXHIBIT INDEX

40Exhibit

EXHIBIT INDEX

2.1		Share and Purchase Transfer Agreement dated as of February 21, 2003 among the registrant, Yxlon Beteiligungs-Verwaltung GmbH, NDT International Holdings A.S, Yxlon International Holding GmbH, Yxlon International X-Ray GmbH, Joseph Kosanetzky, Reinhard Bonisch and Botts & Company Ltd. (1)

2.2		Agreement and Plan of Merger, dated as of March 15, 2004, among the registrant, General Electric Company and Jet Acquisition Sub, Inc. (2)

3.1		Amended and Restated Certificate of Incorporation of the registrant. (3)

3.2		Amendment to Amended and Restated Certificate of Incorporation of the registrant (4)

3.3		Bylaws of the registrant, as amended. (5)

4.1		Reference is made to Exhibits 3.1 through 3.3.

4.2		Indenture, dated as of September 19, 2003, between the registrant and U.S. Bank National Association, as Trustee. (6)

4.3		Registration Rights Agreement, dated as of September 19, 2003 between the registrant and Merrill Lynch, Pierce, Fenner & Smith Incorporated. (6)

4.4		Form of Note for the registrant’s 3% Convertible Senior Notes due October 1, 2023. (6)

10.1		Modification to Loan and Security Agreement, dated as of July 21, 2004, between the registrant and Silicon Valley Bank.

31.1		Section 302 Certification of Chief Executive Officer.

31.2		Section 302 Certification of Chief Financial Officer.

32.1		Certificate of Chief Executive Officer and Chief Financial Officer.

Exhibit

(1)		Filed as an exhibit to the registrant’s Quarterly Report on Form 10-Q for the quarter ended March 30, 2003 and incorporated herein by reference.

(2)		Filed as an exhibit to the registrant’s Annual Report on Form 10-K for the year ended December 31, 2003 and incorporated herein by reference.

(3)		Filed as an exhibit to the registrant’s Registration Statement on Form S-1 (No. 333-05517) and incorporated herein by reference.

(4)		Filed as an exhibit to the registrant’s Annual Report on Form 10-K for the year ended December 31, 2001 and incorporated herein by reference.

(5)		Filed as an exhibit to the registrant’s Quarterly Report on Form 10-Q for the quarter ended June 29, 2003 and incorporated herein by reference.

(6)		Filed as an exhibit to the registrant’s Registration Statement on Form S-3 (No. 333-110289) and incorporated herein by reference.

2.1		Share and Purchase Transfer Agreement dated as of February 21, 2003 among the registrant, Yxlon Beteiligungs-Verwaltung GmbH, NDT International Holdings A.S, Yxlon International Holding GmbH, Yxlon International X-Ray GmbH, Joseph Kosanetzky, Reinhard Bonisch and Botts & Company Ltd. (1)
3.1		Amended and Restated Certificate of Incorporation of the registrant. (2)
3.2		Amendment to Amended and Restated Certificate of Incorporation of the registrant (3)
3.3		Bylaws of the registrant, as amended. (4)
4.1		Reference is made to Exhibits 3.1 through 3.3.
4.2		Indenture, dated as of September 19, 2003, between the registrant and U.S. Bank National Association, as Trustee. (5)
4.3		Registration Rights Agreement, dated as of September 19, 2003 between the registrant and Merrill Lynch, Pierce, Fenner & Smith Incorporated. (5)
4.4		Form of Note for the registrant’s 3% Convertible Senior Notes due October 1, 2023. (4)
10.1		Solicitation, Offer and Award dated August 5, 2003, between the registrant and the TSA (the “Frame Agreement”). (5) *
10.2		Delivery Order #1 from the TSA under the Frame Agreement. (5) *
10.3		Amendment of Solicitation/Modification of Contract between the Company and the TSA (the “Definitized Letter Agreement”). (5) *
10.4		Delivery Order #8 from the TSA under the Definitized Letter Agreement.(5)
10.5		Amendment to Delivery Order Delivery Order #5 from the TSA under the Definitized Letter Agreement. (5) *
10.6		Amendment to Delivery Order Delivery Order #3 from the TSA under the Definitized Letter Agreement. (5) *
10.7		Amendment to Loan Documents dated as of August 13, 2003 between the registrant and Silicon Valley Bank.
31.1		Section 302 Certification of Chief Executive Officer.
31.2		Section 302 Certification of Chief Financial Officer.
32.1		Certificate of Chief Executive Officer and Chief Financial Officer.

(1) Filed as an exhibit to the registrant’s Quarterly Report on Form 10-Q for the quarter ended March 30, 2003 and incorporated herein by reference.

(2) Filed as an exhibit to the registrant’s Registration Statement on Form S-1 (No. 333-05517) and incorporated herein by reference.

(3) Filed as an exhibit to the registrant’s Annual Report on Form 10-K for the year ended December 31, 2001 and incorporated herein by reference.

(4) Filed as an exhibit to the registrant’s Quarterly Report on Form 10-Q for the quarter ended June 29, 2003 and incorporated herein by reference.

(5) Filed as an exhibit to the registrant’s Registration Statement on Form S-3 (No. 333-110289) and incorporated herein by reference.

* Confidential treatment has been requested for portions of this exhibit.

Filing Compare · GE INVISION, INC.