UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

FORM 10-K

(Mark One)

For the fiscal year ended December 31, 2003 or

For the transition period from                      to

Commission file number: 0-28236

INVISION TECHNOLOGIES, INC.

7151 GATEWAY BOULEVARD, NEWARK, CALIFORNIA 94560

(510) 739-2400
(Registrant’s Telephone Number, Including Area Code)

Securities Registered Pursuant to Section 12(b) of the Act:
NONE

Securities Registered Pursuant to Section 12(g) of the Act:
COMMON STOCK, $0.001 PAR VALUE

     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

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

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

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

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

INVISION TECHNOLOGIES, INC
TABLE OF CONTENTS

Table of Contents

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

PART I.

ITEM 1. BUSINESS

     References to “we,” “us” and “our” mean InVision Technologies, Inc. and its consolidated subsidiaries, including Yxlon International X-Ray GmbH, Yxlon International Security GmbH, Quantum Magnetics, Inc. and Inovec, Inc.

Forward Looking Statements

     This Annual Report on Form 10-K of InVision Technologies, Inc. includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, and Section 21E of the Securities Exchange Act of 1934. We intend these forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995, and we are including this statement for purposes of complying with these safe harbor provisions. We have based these forward-looking statements on our current expectations and projections about future events. These forward-looking statements are not guarantees of future performance and are subject to risks, uncertainties and assumptions, including those in the section entitled “Risk Factors” at the end of this Item 1. Actual results may vary materially from these forward-looking statements as a result of these and other risks.

     Words such as “expect,” “anticipate,” “intend,” “plan,” “believe,” “estimate” and variations of these words and similar expressions are intended to identify forward-looking statements. We undertake no obligations to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, unless we are required to do so by law. In light of these risks, uncertainties and assumptions, the forward-looking events discussed below might not occur.

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

Introduction

     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. From inception through December 31, 2003, we shipped 872 EDS for installation at U.S. airports and 202 EDS for installation in airports outside of the United States. We believe that the EDS products we have shipped through December 31, 2003 represent approximately two-thirds of the total number of FAA/TSA-certified EDS products delivered for screening checked baggage at U.S. airports and an even larger percentage of the total number of FAA/TSA-certified EDS products delivered internationally.

     Our EDS products are based on advanced computed tomography, or CT, which is the only technology for bulk explosives detection that has met the FAA/TSA certification standards. We were the first manufacturer, and are currently one of only two manufacturers, whose EDS products have been certified by the FAA/TSA for screening checked baggage for bulk explosives. Our installed base of EDS products provides us with significant opportunities for recurring revenue through our offering of aftermarket services and hardware and software upgrades. We offer to our customers the opportunity to buy a service contract from us, which provides for scheduled maintenance, repairs and parts, and field service once a warranty period on one of our CTX products has expired (which is typically a one-year period).

     Through our acquisition of Yxlon International Holding GmbH, a privately held company based in Hamburg, Germany, on March 31, 2003, we now offer a wide range of non-destructive testing, or NDT, systems. Our NDT products are based on X-ray and CT technologies and are used for inspection of finished products and materials in a wide range of industries. Our NDT equipment is used in more than sixty countries, including the United States.

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     In addition, we offer explosives detection products based on Yxlon’s X-ray based diffraction, or XRD, technology and products using quadrupole resonance, or QR, and magnetic sensing technologies for the inspection, detection and analysis of explosives, concealed weapons and other materials. We also offer products, some of which are based on other technologies, that are used for non-aviation applications, including landmine detection and maximization of timber industry output.

Products and Technologies

     Explosives and Weapons Detection Products

     We provide explosives and weapons detection products for use at key security checkpoints within airports, including checked baggage, carry-on baggage and passenger screening. The following table summarizes our key products, as well as their applications and key features:

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     Products Based on CT Technology. We began developing our CT-based EDS technology in 1990, pioneering our proprietary combination of X-ray and CT technology with sophisticated image processing capabilities in a two-step process for the detection of explosives. CT technology uses a source of X-rays rotating around an object to create multiple two-dimensional images, commonly known as “slices,” of the density distribution of the object in cross-section. CT technology compares parameters derived from the analysis of the density images to a database of explosives’ density characteristics. CT is the only technology to base its detection on the density of the object examined. We believe that our EDS products produce higher resolution images than our competitors’ products by displaying more pixels and providing more useful views of suspicious objects.

     Our FAA/TSA-certified EDS product offering, the CTX series, consists of our CTX 9000 DSi, CTX 5500 DS and CTX 2500 products. Our CTX series is designed to provide a family of checked baggage explosives detection systems for airports of various sizes and design. For example, we offer variations in throughput speeds, belt width and aperture size, installation and integration options and price through the different products in the series. We believe that all of our CTX products feature, in comparison to our competition, an ability to detect the greatest variety and smallest amount of explosives, a lower false alarm rate and greater operational reliability. We believe customers favor our CTX products over competitors’ products because of our experience in installing systems in airports, our service engineering force and the reliable performance of our CTX products. The following provides a more detailed description of our CTX series:

•

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

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The CTX 5500 DS model was certified in 1998 as an upgraded version of our first EDS product, the CTX 5000 model, which was certified in 1994. The CTX 5500 DS system can be integrated into baggage handling systems or used as a stand-alone machine. The system has an FAA-certified throughput of 362 bags per hour.

•

The CTX 2500 model, also certified in 1999, is a less expensive EDS operating at slower throughputs with a smaller footprint than other CT-based explosives detection systems. The CTX 2500 system is designed for use in small airports and low-traffic stations within larger airports. The system has an FAA-certified throughput of 128 bags per hour.

     In May 2000, we were selected as one of three participants in an FAA-funded research program known as ARGUS. The FAA asked participants to develop a smaller EDS, which would be less expensive than existing products, and which could be used to scan carry-on baggage in addition to scanning checked baggage for low throughput applications in small airports. We developed our CTX 1000 model under this program. We have submitted our CTX 1000 model to the TSA for certification, and expect to obtain TSA certification in 2004.

     We continue to incorporate improvements into our CTX series based upon customer requirements, operational airport experience, a need for more advanced detection capabilities and a number of TSA re-certifications of various models. For example, we are developing new upgrades for our EDS products, which are designed to significantly

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reduce false alarm rates and increase throughput rates. This detection upgrade has been submitted to the TSA for certification.

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

     XRD-based systems can be used alone or to complement existing CT-based screening systems. The current system available for sale is the XES 3000 system to screen checked baggage at airports. Yxlon has received orders for 18 of its XES systems from six European airports and the Israeli Airport Authority. Yxlon’s XES system is currently undergoing certification testing by the TSA, and we anticipate that it will receive TSA certification during the first half of 2004. We are currently developing the XES 3500 system, which is intended to be more compact and lighter while providing faster throughput than the XES 3000 system.

     Products Based on QR Technology. We offer entry point screening systems based on QR technology, developed by Quantum. QR detection is based on molecular structure, while CT detection is based on density. QR technology has a high detection rate for specific explosives combined with a low false alarm rate. In particular, QR technology has significant detection capabilities to identify components typically found in the most difficult types of explosives to detect. QR technology is a form of magnetic resonance, similar to medical magnetic resonance imaging. The QR detector sends out specially tuned low frequency radio waves into the material. The nuclei in the material align and then as they relax to their previous state, they emit a unique radio wave response, which is analyzed and compared to a database of known threats. Our QR systems can be used alone or to complement existing CT or X-ray screening systems. The current system available for sale is the QScan QR 2000S, a successor to the QScan QR 160 system, to screen mail, parcels and personal items at secure facilities and carry-on baggage at airports.

     With funding from the Department of State Technical Support Working Group, Quantum is developing an explosives detection portal using QR technology. We anticipate that, once QR is developed as a personnel screening technology, it will be combined with other detection technologies in a multi-sensor portal to screen people at airport checkpoints.

     As of December 31, 2002, we commenced in-airport testing of a prototype system consisting of a QScan system coupled to a CTX product, known as “QRCT.” This test system is planned for certification testing following further development. We believe the advantages of such a system include automated resolution of alarms, leading to lower operational cost and more efficient throughput of checked baggage.

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

     Non-Destructive Testing Products

     We offer X-ray based non-destructive testing, or NDT, equipment. Yxlon’s NDT technology has wide industrial applications, including testing the internal structural integrity of tires, structural castings and mechanical and electrical components; verifying maintenance work, welds and wall thickness; and testing for corrosion. Yxlon’s NDT equipment is used in more than sixty countries, including Denmark, Germany, Japan and the United States.

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     In August 2003, Yxlon acquired German-based Hattinger Pruf- und Entwicklungs- GmbH, or Hapeg, a private engineering and systems company that designs and develops CT-based NDT systems for the automotive and aerospace industries for clients, including DaimlerChrysler and Goodyear. The use of CT imaging in industrial testing and evaluation permits the inspection and calculation of distances, surfaces and volumes inside volumetric objects such as cast parts, turbines and tires. Its uses include rapid prototyping, casting simulations, design-phase testing and virtual CAD modeling of existing objects.

     Other Products

     Landmine Detection Systems. With funding from the Department of Defense, we have developed and continue to improve QR-based landmine detection technology. Most current landmines possess low metal content, forcing current metal detection devices to be very sensitive to metal, which creates high false alarm rates and slow clearing times. QR technology does not detect explosives based on metal content and therefore exhibits much lower false alarm rates and faster clearing times than metal detectors. We believe the current QR prototype system is able to detect the vast majority of all landmines deployed throughout the world and that QR technology can operate in almost all soil conditions, including saturated soils, as well as through fresh water. Through December 31, 2003, Quantum has received $43.9 million in government funding for the development of landmine detection systems. Due to current regulations, our ability to export our landmine detection technology outside of the United States is limited.

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

     Advanced Personnel Checkpoint Systems. Current passenger checkpoint security technology is capable of identifying only metallic weapons. SafeView, Inc. is commercializing an advanced passenger checkpoint portal system

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

Industry Segments

     We determine our segments based on how our Chief Executive Officer and Chief Operating Officer assess performance and allocate resources. Through the first quarter of 2003, we presented segment information based on three reportable segments: EDS, Quantum and Wood. As a result of the acquisition of Yxlon, we now have two reportable segments, EDS and NDT. The “EDS” segment is comprised of the business unit that is engaged in the development, manufacturing, marketing and support of explosives detection systems based on advanced computed 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. Financial information for each segment, including revenues, net income (loss) and total assets, is reported in Note 11 of the consolidated financial statements in this annual report.

     EDS. The “EDS” segment develops, manufactures, markets and supports explosives detection systems for civil aviation security based on advanced CT technology. Our products were the first automated explosives detection system to be certified by the FAA. From inception through December 31, 2003 we have shipped 1,074 systems to the FAA and the TSA, to foreign aviation security agencies and to domestic and foreign airports and airlines. Our EDS product sales accounted for 72.7% of our total revenues in 2003, 91.8% of our total revenues in 2002 and 49.1% of our total revenues in 2001, and our EDS service revenues accounted for 9.9% of our total revenues in 2003, 3.1% of our total revenues in 2002 and 12.9% of our total revenues in 2001. As a result, we are substantially dependent on the TSA for the majority of our EDS business.

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

     Other segments, including Quantum, Wood and XRD, are aggregated to form an “All Other” category as they did not meet the threshold for a reportable segment.

Customers

     EDS

     From inception through December 31, 2003, we shipped 1,074 EDS units for installation. Substantially all purchases of EDS products for U.S. airports are made by the TSA. Prior to the establishment of the TSA, substantially all purchases of EDS products for U.S. airports were made by the FAA. Of the total EDS products shipped, 872 were shipped to the FAA, the TSA and U.S. airlines for installation at commercial U.S. airports. For security reasons, the FAA and the TSA will not divulge the deployment schedule or locations of these systems. We had EDS sales to the TSA and the FAA of $268.1 million in 2003, $356.7 million in 2002, and $20.0 million in 2001.

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

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

     From inception to December 31, 2003, we shipped 202 EDS products to customers in Belgium, Canada, Chile, China, France, Greece, Hong Kong, Israel, Italy, Japan, Malaysia, the Netherlands, the Philippines, South Africa, South Korea, Spain, Sweden, Taiwan and the United Kingdom.

     We typically bill our customers in three stages, as generally provided in our contracts with our customers:

•		amounts to cover the bill of materials when materials are received from suppliers, typically 30% to 40% of the total system price;
•		an additional amount upon factory acceptance or shipment, ranging from 30% to 60%; and
•		the balance upon installation and site acceptance, ranging from 5% to 30%.

     NDT

     Our NDT product and service revenues are primarily derived from sales of X-ray based NDT products primarily to the automotive and aerospace industries. There were no NDT customers who accounted for more than 10% of total revenues since the acquisition of Yxlon on March 31, 2003. We had NDT equipment sales of $34.6 million since completion of our acquisition of Yxlon on March 31, 2003. We believe future sales of our NDT equipment will be driven primarily by overall economic and industrial activity in the countries in which we market our NDT equipment.

Sales and Marketing

     EDS

     We market our EDS products and services both directly through internal sales personnel and indirectly through authorized agents, distributors and EDS systems integrators. For EDS sales through our authorized representatives and distributors, we are generally directly involved in developing proposal documents and negotiating contract terms.

     The selling process often involves a team comprised of individuals from sales and marketing, engineering, customer service and support, legal and senior management. The team frequently engages in a multi-level sales effort directed toward a variety of constituents, including government regulators, the local airport operator or authority, systems and conveyor integrators, and individual airlines. We provide our sales representatives with training, promotional literature, a multi-media presentation, videos and competitive analysis. The sales process includes assisting customers to design baggage handling system configurations, including the use of computer modeling, educating customers on the system and technology, and supporting the implementation and integration process.

     The combination of the high average selling prices, the time needed for various agencies to secure funding for systems, and the negotiation and execution of actual contracts historically has led to a typical sales cycle lasting from six to twelve months, or more, after initial contact with a customer. For repeat orders from existing customers, we can sometimes expedite the sales cycle by utilizing existing contracts and contract extensions.

     NDT

     We market our NDT products and services directly through internal sales personnel and indirectly through authorized agents and distributors. As of December 31, 2003, Yxlon employed approximately 33 employees in NDT

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sales and marketing. For NDT sales through our authorized representatives and distributors, we are generally directly involved in developing proposal documents and negotiating contract terms.

Research and Development

     We continue to make substantial investments to enhance the performance, functionality and reliability of our products. We believe that continued and timely development of new products and enhancements to existing products is necessary to maintain our competitive position. Accordingly we devote a significant portion of our personnel and financial resources to engineering and research and development programs. As of December 31, 2003, we had 235 employees engaged in research and development and product development activities. We are also using the services of 18 specialized contract employees and consultants in this area. For the year ended December 31, 2003, we spent $29.4 million on total research and development activities, of which $3.1 million was funded by the FAA, the TSA and other agencies under development contracts and grants. For the year ended December 31, 2002, we spent $21.2 million on total research and development activities, of which $566,000 was funded by the FAA, the TSA and other agencies under development contracts and grants. For the year ended December 31, 2001, we spent $13.7 million on total research and development activities, of which $5.7 million was funded by the FAA and other agencies under development contracts and grants.

Competition

     EDS

     We believe that the market for explosives detection systems will become increasingly competitive. Several advanced explosives detection technologies have been developed to attempt to address the need for effective explosives detection for checked baggage, including CT technology and other technologies described below:

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

     Only explosives detection systems based on CT technology have been certified by the FAA/TSA for bulk explosives detection. Competitors have attempted to obtain FAA/TSA certification of systems for bulk explosives detection based on non-CT technology in the past without success. To meet the increased demand for EDS products, the TSA may change its certification standards and certify non-CT-based technology or other CT-based products.

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

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

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•		Dual Energy X-ray and Multi-View Competition. Competitors such as L-3 Communications Holdings, Inc. and Heimann Systems GmbH offer non-certified explosives detection systems using dual energy X-ray technology.
•		X-ray Diffraction Competition. Heimann Systems GmbH offers an X-ray diffraction system that can be used in combination with one of its dual-energy X-ray units.

     The primary competition for our QR-based products in the area of checked and carry-on baggage currently includes the large installed base of conventional X-ray scanners and trace detection systems for commercial aviation. In addition, other companies are developing QR technology in these markets, including QR Sciences Limited (formerly Thorlock International Ltd.). We believe that government requirements to screen carry-on baggage for explosives are needed to increase demand for our QR technology products. If demand increases, we believe that the competitive factors in these markets will be government certification, if any, performance, price and ease of use.

     NDT

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

     To some extent, our NDT products, which are based on X-ray and CT technologies, compete with products based on other non-destructive techniques such as ultrasound, eddy current, magnetic particle and dye penetration. However, for many applications those alternative techniques offer inferior performance. Often, our NDT products are complementary to products based on alternative techniques and customers will use our NDT products as well as products based on these alternatives.

Manufacturing

     Our manufacturing operations consist primarily of materials management, assembly, test and quality control of complete systems and final system testing. Using our designs and specifications, subcontractors assemble some mechanical and electrical sub-components, and in times of peak production, we engage subcontractors to assemble entire CTX products. We perform all final assembly and testing of products prior to shipment. Because quality and reliability over the life of our products are vital to customer satisfaction and repeat purchases, we believe our quality assurance program is a key component of our EDS business strategy.

Suppliers

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

     NDT. We outsource certain manufacturing processes, including electronic boards, mechanical sub-assemblies and cabling. We generally purchase major contracted assemblies from single source suppliers, although we are in the process of qualifying second sources for certain components.

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Intellectual Property and Proprietary Rights

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

     EDS. We have relied primarily on copyrights and trade secrets for the protection of our EDS technology. We have two U. S. patents for automatic concealed object detection systems using a pre-scan stage as used in the CTX Series. These patents expire in 2010 and 2011. The patents have not prevented competition 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 Series. 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.

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

     NDT. We have relied on copyrights and trade secrets for the protection of our NDT technology. In addition, we have three groups of NDT patents and patent applications. The first group of U.S. and foreign patents relates to the usage of Compton Backscatter X-ray technology applicable for the inspection of aircraft fuselages and other surface near areas of extended objects. A sub-patent relates to a device for a generation of a scanning X-ray beam with a small cross-section to be used for the area inspection of large, extended objects. These patents expire between 2005 and 2010. The second group of patents, which has been issued in Europe and is pending in the United States, relates to a method for high speed object manipulation to increase the through-put of automated in-line X-ray inspection systems for small and mid-size parts. The patents expire in 2021. The third group of patents covers the design and construction of a three-dimensional test object with artificial defects dedicated for the automated, regular performance check of in-line inspection machines during operation. Patents are pending in Europe and the United States.

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

Backlog

     We 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 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.

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

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

Employees

     As of December 31, 2003, we directly employed 1,009 people, of whom 235 were primarily engaged in research and development activities, 43 in marketing and sales, 344 in customer support and field service, 247 in manufacturing, 20 in quality assurance and 120 in administration and finance. In addition, we utilized the services of 50 full-time consultants and temporary employees. The number of our EDS customer support and field service personnel was significantly increased in 2003 in response to a greater number of our EDS in the field. In addition, the number of our EDS manufacturing personnel increased in 2003 as we relied on our internal manufacturing personnel for final assembly instead of contract manufacturers. The aggregate number of employees also increased due to our acquisition of Yxlon. We believe that our relationship with our employees is good.

Long-Lived Assets

     For 2001, 2002 and 2003, substantially all of our long-lived assets were located in the United States.

Available Information

     We file electronically with the Securities and Exchange Commission our annual reports on From 10-K, quarterly reports on Form 10-Q, current reports on From 8-K, and amendments to those reports pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934. We make available on our website at http://www.invision-tech.com, free of charge, copies of these reports as soon as reasonably practicable after filing or furnishing the information to the SEC. You can also request copies of such documents by contacting our Investor Relations Department at (510) 739-2200 or sending an email to investor_relations@invision.iip.com.

Risk Factors

     Many factors, including those described below, could cause actual results to differ materially from those discussed in any forward-looking statements.

Risks Related to Our Business

A number of factors that affect our revenues make our future results difficult to predict, and therefore we may not meet expectations for a particular period.

     We believe that our revenues have the potential to vary significantly from time to time. For example, our total revenues were $89.4 million for the second quarter of fiscal 2003, $165.2 million for the first quarter of fiscal 2003 and $220.4 million for the fourth quarter of fiscal 2002, and were $416.5 million for fiscal 2003, $439.1 million for fiscal 2002 and $74.3 million for fiscal 2001. We believe that these variations may result from many factors, including:

•

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

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•		legislative or 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;
•		delays in product shipments caused by the inability of airports to install or integrate our products in a timely fashion;
•		the availability and cost of key components;
•		the timing of completion of acceptance testing for some of our products;
•		the introduction and acceptance, including certification by the TSA, of new products or enhancements to existing products offered by us or our competitors;
•		changes in pricing policies by us, our competitors or our suppliers, including possible decreases in average selling prices of our products caused by customer volume orders or in response to competitive pressures;
•		our sales mix to domestic and international customers; and
•		fluctuations in currency exchange rates, particularly exchange rate of the U.S. dollar against the euro.

     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.

     A significant portion of 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, 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.

We are anticipating decreased EDS sales in 2004 and increased difficulty in predicting future gross margins, which may cause our stock price to decline.

     We anticipate a decline in EDS revenues for 2004 compared to 2003 and, as a result, we are planning to reduce costs. However, our ability to control costs during a period of further declining sales is difficult to predict. This difficulty is a result of factors such as our ability to increase our operating efficiency and further reduce the costs of components. We may be unable to reduce costs as much as we anticipate. As a consequence, the gross margins for our products and services may vary significantly from our anticipated gross margins and the gross margins of our products and services in recent periods. If, as a result of these uncertainties, our gross margins, operating results or earnings per share are below the expectations of market analysts and investors, the trading price of our common stock may decline.

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

     Substantially all of the customers for our EDS products and our other products under development to date have been public agencies or quasi-public agencies, such as the FAA, the TSA and airport authorities. Public agencies are subject to budgetary processes and expenditure constraints. In the past, many domestic and foreign government agencies have experienced budget deficits that have led to decreased capital expenditures in certain areas.

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

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attacks of September 11, 2001 resulted in the passage of the Aviation and 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 actions could lead to fluctuations in demand for aviation security products and services.

     In addition to the Congressional budgetary process, other legislation could be introduced that would impact demand for aviation security products and services. In response to fluctuation in concern on the part of voters about aviation security and competing homeland security demands, or for other reasons, the plans for deployment of EDS to screen baggage could be changed. Budgetary debates and delays could result in fewer EDS being sold to the TSA and elected officials who support the EDS program could fail to maintain their offices, any of which events could cause a decrease in the demand for our EDS products.

Governmental agencies have special contracting requirements, which create additional risks.

     In contracting with public agencies, we are subject to public agency contract requirements that vary from jurisdiction to jurisdiction. Future sales to public agencies will depend, in part, on our ability to meet public agency contract requirements, certain of which may be onerous or even impossible for us to satisfy.

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

•		suspend or prevent us for a set period of time from receiving new contracts or extending existing contracts based on violations or suspected violations of laws or regulations;
•		terminate our existing contracts;
•		reduce the scope and value of our existing contracts;
•		audit and object to our contract-related costs and fees, including allocated indirect costs;
•		control and potentially prohibit the export of our products; and
•		change certain terms and conditions in our contracts.

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

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

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     Under our new three-year agreement with the TSA announced on August 12, 2003, the TSA has the right to purchase system options and accessories, engineering and installation support and 550 CTX units, principally our CTX 9000 DSi systems, over the three-year term. While the TSA placed delivery orders totaling 162.8 million under the new agreement, the TSA has no obligation to place additional delivery orders or purchase additional engineering and installation 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.

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

     In addition, public agency contracts are frequently awarded only after formal competitive bidding processes, which 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 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.

Our growth depends on our introduction of new products and services, which may be costly to develop and may not achieve market acceptance.

     As part of our strategy for growth, we intend to develop products to address additional 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.

     The development of our products for explosives and weapons detection is highly complex. Successful product development and market acceptance of any new products and services that we develop depend on a number of factors, including:

•		our timely completion and introduction of new products;
•		our accurate prediction of the demand for homeland security products and the changing requirements of the homeland security industry, including certification or other required performance standards;
•		the availability of key components of our products;
•		the quality, price and operating performance of our products and those of our competitors;
•		our customer service capabilities and responsiveness; and
•		the success of our relationships with existing and potential customers;

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     Finally, new products for aviation security applications may require certification or approval by the TSA, and we believe that the TSA does not currently have standards for the certification of aviation security products other than bulk explosives detection systems and explosives trace detectors, or ETD. Other products, 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 of such products, and even if it does develop such standards, we may be unable to obtain any such certification or approval, which could materially limit market acceptance of such products. If we fail to timely introduce new products or if these products fail to gain market acceptance, our results of operations would be harmed.

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

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

     Key components used in our products have been designed by us to our specifications and are currently available only from one or a limited number of suppliers. 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, to find alternative third party manufacturers or sub-assemblers, or to obtain sufficient quantities of these 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, 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.

Our future EDS products may fail to obtain certification by the TSA.

     We plan to continue to develop new models for our family of EDS products, including systems utilizing X-ray based diffraction, or XRD, technology, of our subsidiary, Yxlon International Security GmbH, and to continue our participation in the ARGUS program, an FAA/TSA-sponsored program designed to develop a smaller, low-cost EDS product. However, we cannot be certain that any new EDS product, including systems utilizing Yxlon’s XRD technology or our CTX 1000 (ARGUS) system, will be certified by the TSA. The failure to gain certification for an EDS product would harm our ability to sell the product, and recognize associated revenues.

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

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

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

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

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

Future sales of our EDS products will depend on the ability of airports to secure funding to build baggage handling systems and to integrate our EDS products into such systems, which they may not be able to do.

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

     We believe that a 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.

As 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.

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

We may seek to grow by acquisition, which subjects us to substantial risks, including the failure to successfully integrate an acquired business.

     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 of acquisition candidates at acceptable prices. We may incur costs in connection with our pursuit of acquisitions for which we are responsible regardless of whether the acquisitions are actually consummated. Future acquisitions by us could result in dilutive issuances of equity securities, the incurrence of debt and contingent liabilities and expenses related to acquired operations and assets, any of which could harm our business and our operating results. Acquisitions entail numerous risks and we may not realize the expected benefits of these transactions. These risks include:

•		difficulties in the assimilation of acquired operations, technologies and products;
•		diversion of management’s attention from other business concerns;

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

     The 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 such efforts would harm our business. Maintaining uniform standards, controls, procedures and policies may be harder than we anticipate and interfere with efficient administration of the company as a whole.

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

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

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

If our EDS products fail to detect explosives, we could be exposed to product liability and related claims for which we may not have adequate insurance coverage, and we may lose current and potential customers.

     Our business exposes us to potential product liability risks, which are inherent in the manufacturing, sale and maintenance