INVISION TECHNOLOGIES INC - 10-K Annual Report

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K

(Mark One)

[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES EXCHANGE
ACT OF 1934 For the fiscal year ended DECEMBER 31, 1998 or

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934 For the transition period from ________ to ________

Commission File Number: 0-20815

INVISION TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)

DELAWARE 94-3123544

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

7151 GATEWAY BOULEVARD, NEWARK, CALIFORNIA 94560
(Address of principal executive offices, including zip code)

(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, $.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
--- ---

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. [ ]

Based on the average of the closing bid and asked prices of $5.03 on March 26,
1999, the aggregate market value of the voting stock held by non-affiliates of
the Registrant was $44,505,480. 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 26, 1999, there were 12,067,627 shares of the Registrant's Common Stock
outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Registrant's definitive Proxy Statement which will be filed with
the Securities and Exchange Commission in connection with the Registrant's
Annual Meeting of Stockholders to be held May 27, 1999, are incorporated by
reference in Part III, Items 10, 11, 12 and 13 of this report.

INVISION TECHNOLOGIES, INC.
TABLE OF CONTENTS

PAGE

COVER PAGE

TABLE OF CONTENTS i

PART I 1
Item 1. Business 1
Item 2. Properties 17
Item 3. Legal Proceedings 17
Item 4. Submission of Matters to a Vote of Security Holders 17

PART II 17
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters 17
Item 6. Selected Financial Data 19
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 20
Item 8. Financial Statements and Supplementary Data 27
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 27

PART III 27
Item 10. Directors and Executive Officers of the Registrant 27
Item 11. Executive Compensation 27
Item 12. Security Ownership of Certain Beneficial
Owners and Management 27
Item 13. Certain Relationships and Related Transactions 27

PART IV 27
Item 14. Exhibits, Financial Statement Schedules, and
Reports on Form 8-K 27

SIGNATURES 30

PART I.

ITEM 1. BUSINESS.

THE FOLLOWING DISCUSSION CONTAINS FORWARD-LOOKING STATEMENTS WHICH INVOLVE
RISKS AND UNCERTAINTIES. WHEN USED IN THIS DISCUSSION, THE WORDS
"ANTICIPATE," "BELIEVE," "ESTIMATE," AND "EXPECT" AND SIMILAR EXPRESSIONS AS
THEY RELATE TO THE COMPANY OR ITS MANAGEMENT ARE INTENDED TO IDENTIFY SUCH
FORWARD-LOOKING STATEMENTS. THE COMPANY'S ACTUAL RESULTS, PERFORMANCE, OR
ACHIEVEMENTS COULD DIFFER MATERIALLY FROM THE RESULTS EXPRESSED IN, OR
IMPLIED BY, THESE FORWARD-LOOKING STATEMENTS. FACTORS THAT COULD CAUSE OR
CONTRIBUTE TO SUCH DIFFERENCES INCLUDE RISKS RELATED TO MARKET ACCEPTANCE OF
THE COMPANY'S MAIN PRODUCT, FLUCTUATIONS IN THE COMPANY'S QUARTERLY AND
ANNUAL OPERATING RESULTS, THE LOSS OF ORDERS FOR THE COMPANY'S MAIN PRODUCT,
INCLUDING THE LOSS OF THE COMPANY'S ORDER FROM THE FEDERAL AVIATION
ADMINISTRATION OR THE FAILURE TO OBTAIN ADDITIONAL ORDERS, LOSS OF ANY OF THE
COMPANY'S SOLE SOURCE SUPPLIERS, INTENSE COMPETITION, RELIANCE ON LARGE
ORDERS, CONCENTRATION OF THE COMPANY'S CUSTOMERS, RISKS RELATED TO THE
LENGTHY SALES CYCLES FOR THE COMPANY'S PRODUCTS, BUDGETING LIMITATIONS OF THE
COMPANY'S CUSTOMERS AND PROSPECTIVE CUSTOMERS, RISKS INHERENT TO THE
DEVELOPMENT AND PRODUCTION OF NEW PRODUCTS AND NEW APPLICATIONS AND THE
CERTIFICATION OF CERTAIN OF THESE PRODUCTS, AS WELL AS THOSE DISCUSSED IN
"--COMPETITION," "--BUSINESS RISKS" AND IN "ITEM 7. MANAGEMENT'S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" AND ELSEWHERE
IN THIS ANNUAL REPORT ON FORM 10-K.

GENERAL

InVision Technologies, Inc. ("InVision" or together with its
subsidiaries, the "Company") is the worldwide leader in explosive detection
technology. InVision develops, manufactures, markets and supports an
explosive detection system for civil aviation security based on advanced
computed tomography ("CT") technology. To date, the Company's CTX 5000 and
CTX 5500 systems (together, the "CTX 5000 Series") are the only explosive
detection system ("EDS") to be certified by the Federal Aviation
Administration ("FAA") deployed for use in the inspection of checked luggage
on commercial flights. Historically, the FAA has been the leader in
establishing standards for aviation security worldwide, and the Company
believes that airports around the world will migrate over time towards
security policies consistent with those of the FAA. As a result, the Company
believes that the CTX 5000 Series and its successors currently under
development by the Company are well positioned to become the industry
standard. Through December 31, 1998, the Company has received orders from the
FAA for 69 CTX 5000 Series systems to be installed at the busiest U.S.
airports and 59 kits to upgrade all of the FAA's CTX 5000 systems to CTX 5500
systems. In March 1999, it received another order from the FAA for an
additional 21 CTX 5500 systems. For the years ended December 31, 1998 and
1997, the Company had revenues of $63.3 million and $56.4 million,
respectively, and at December 31, 1998 had in backlog equipment orders and
service agreements of approximately $10.1 million. As of December 31, 1998,
146 CTX 5000 series systems had been shipped to 43 airports in 16 countries
around the world.

The Company believes that CT based EDS technology is the only type
of equipment capable of detecting all types of explosives designated by the
FAA to be a threat to commercial aviation and that the CTX 5000 Series is
superior to competing systems by virtue of its advanced detection technology.
The CT technology is capable of capturing and processing substantially more
data than other explosive detection systems. The Company believes that there
are important technological advantages that lead to the superiority of the
CTX 5000 Series over the deployed systems of the Company's primary
competitors. By combining heightened levels of data capture and diagnosis
capabilities with simple user interfaces, InVision's CTX 5000 Series is
capable of providing high detection and low false alarm rates, as well as
advanced threat resolution capability and increased operator efficiency.

InVision's principal subsidiary, Quantum Magnetics, Inc. ("Quantum")
develops and commercializes patented and proprietary technology for inspection,
detection and analysis of explosives and other materials based on quadrupole
resonance ("QR") technology, a form of magnetic resonance, and passive magnetic
sensing. Its products, in the prototype stage, include advanced detection
systems for such markets as carry-on luggage screening, drug detection, postal
inspection, detection of concealed weapons and landmine detection. Quantum is
also a leading supplier of research and development services in the area of QR
technology and passive magnetic sensing to a number of government agencies.
Quantum was acquired by InVision in 1997 in a pooling of interests transaction.

InVision was incorporated in Delaware in 1990. Its headquarters and
principal manufacturing facilities are located in Newark, California.

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INDUSTRY BACKGROUND

MARKET SIZE. There are over 600 airports worldwide providing scheduled
service for an aggregate of approximately 2.5 billion passengers per year. Of
these airports, over 400 are located in the United States, and a substantial
portion of the remainder are located in Europe and the Asia/Pacific region.

THE TERRORIST THREAT. In recent years, increased incidents of bombings
and airline terrorism have contributed to an enhanced perception of the threat
of terrorism among the general public. According to a report of the President's
Commission on Aviation Security and Terrorism dated May 15, 1990, there were 41
bombings against civilian aviation targets worldwide between 1975 and 1989.
According to Time Magazine, there were 10,222 bombings in the United States
between 1983 and 1993. According to a CBS poll conducted in July 1996, airline
passengers have expressed a willingness to pay more for airline travel and
endure delays if such actions will decrease the threat of successful airline
bombings.

THE EVOLUTION OF EXPLOSIVE DETECTION TECHNOLOGIES. In the 1970's, in
response to hijackings, airports worldwide began to install x-ray systems to
screen carry-on baggage for weapons such as guns and knives. In response to the
implementation of this technology, terrorists in some cases adopted the tactic
of airline bombings. The effort to develop automated explosive detection
capabilities was first established in the late 1970's by the FAA and was
predicated on the application of conventional x-ray technology. However, until
the advent of certified explosive detection systems in 1994, the Company
believes that EDS technology remained largely inadequate. Following the bombing
of Pan American Flight 103 over Lockerbie, Scotland in December 1988, certain
European countries hastened to implement explosive detection capabilities based
upon then-existing technologies. In order to placate immediate public safety
concerns, these conventional systems were designed to process 100% of checked
baggage. However, these conventional systems were and continue to remain
deficient in that they are unable to reliably detect and identify all of the
types and amounts of explosives determined by the FAA to be a threat to civil
aviation.

Several advanced explosive detection technologies have been
developed to attempt to address the need for effective explosive detection.
These systems include CT, dual energy x-ray, QR and trace detection. CT
technology uses a source of x-rays rotating around an object to create
multiple two-dimensional images, commonly know as "slices," of the density
distribution of the object's cross section and compares parameters derived
from the analysis of the density images to a database of explosives
characteristics. Dual energy x-ray systems measure the x-ray absorption
properties of a bag's contents at two different x-ray energies to determine
if any of the contents have the physical characteristics of explosive
materials. QR is an electromagnetic field based detection system which
examines volume without imaging by using radio frequencies to detect the
chemical make-up of an object. Trace detection equipment, known as
"sniffers," detect particulate and chemical traces of explosive materials
collected by an operator by wiping or vacuuming the bag under inspection. The
only explosive detection systems to be certified by the FAA are based on CT
technology. To the best of the Company's knowledge, the Company's CTX 5000
Series is the only certified EDS which has been commercially deployed.

THE EMERGENCE OF WORLDWIDE STANDARDS AND FAA CERTIFICATION.
Throughout the history of civil aviation, the FAA has been a leader in
setting the standards for aviation security worldwide. In the 1970's, the FAA
first established standards for worldwide security by setting guidelines for
screening of carry-on baggage for guns and knives. These standards were
subsequently mandated by the United Nations for adoption by all of its member
states, leading to the installation of over 7,000 detection systems
worldwide. Following the December 1988 bombing of Pan American Flight 103,
the United States enacted the Aviation Security Improvement Act of 1990 (the
"Aviation Security Act"), in response to which the FAA increased research and
development funding for advanced explosives detection technology. In the last
two years alone, $96 million has been budgeted by Congress for spending by the
FAA on such activities and the FAA has requested another $53.2 million for
research and development in this area in fiscal year 2000.

In 1993, as required by the Aviation Security Act, the FAA adopted a
certification protocol regarding explosive detection systems for use on checked
baggage. The FAA certification process was developed to certify equipment that,
alone or as part of an integrated system, can detect under realistic air carrier
operating conditions the amounts, configurations and types of explosive material
which would be likely to be used to cause catastrophic damage to commercial
aircraft. To do so, the FAA contracted with the National Academy of Sciences to
establish a scientifically valid protocol for certification. The FAA also
consulted with a variety of public agencies, including the Federal Bureau of
Investigation and the Central Intelligence Agency. The result of this
collaboration was the establishment of a detection protocol which focuses on (i)
the categories of explosive substances to be detected, (ii) the probability of
detection by explosive category, (iii) the minimum quantity of explosive that
must be detectable, (iv) the number of bags processed per hour, and (v) the
maximum acceptable false alarm rates. To date only one explosive detection
system, InVision's CTX 5000 Series, has been both certified by the

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FAA as meeting the requirements of the protocol, and commercially deployed. In
order to meet the throughput criteria established in the FAA protocol, the CTX
5000 Series was certified with two units operating in parallel.

In late 1998, an EDS developed by L-3 Communications Corporation
("L-3") was certified by the FAA as meeting the requirements of the protocol.
However, to the best of the Company's knowledge, this system has not yet been
commercially deployed. The Company's next generation EDS, the CTX 9000,
designed to compete with the L-3 system, is currently awaiting certification
testing by the FAA at its Technical Center in Atlantic City, New Jersey. Such
testing is expected to occur in the second quarter of 1999. The CTX 9000 will
contain a number of technical advantages, especially in the areas of
throughput and ease of integration, over the competing L-3 system. See "--The
InVision Technology Advantage" and "--Competition."

IMPLEMENTATION OF MULTI-LEVEL SCREENING PROCESSES. As the capabilities
of EDS technology have evolved and worldwide detection standards have become
more pervasive, certain airports around the world have sought to augment their
detection capabilities by implementing various multi-level screening processes.
To date, two distinct processes have become most prevalent: a system first
implemented by the BAA (the "BAA Approach"); and a system endorsed by the FAA
(the "FAA Approach"). Prior to the development of certified detection technology
and in recognition of the deficiencies of existing x-ray technology in providing
comprehensive detection, certain European airports adopted the BAA Approach,
which consists of the use of several explosive detection systems operating in
series in order to attempt to increase detection rates while maintaining
throughput rates.

The FAA Approach was developed following the advent of certified
detection technology. Currently, the FAA Approach is comprised of a process of
passenger "profiling" combined with the use of certified EDS equipment for the
detection of explosives in baggage deemed to be high risk. Profiling involves an
initial determination of whether a particular passenger represents a high threat
based on certain decision criteria which are believed to be reasonable
predictors of risk. Based on this determination, a passenger's baggage may
undergo a higher level of investigation, which will in most cases involve the
baggage being screened with the use of certified EDS equipment. In contrast to
the BAA Approach, in which the effectiveness of the entire detection process is
dependent on technologies with greater emphasis on throughput than detection,
the FAA Approach is predicated on the use of high-detection technology and is
focused on the ability to accurately and effectively detect explosives and to
identify individuals believed to pose the greatest threat to civil aviation. The
Company believes that the FAA Approach, as it is currently being implemented at
major airports throughout the United States, will prove to be the more effective
process in reducing the dangers associated with the use of explosives against
civil aviation.

THE GORE COMMISSION. In response to the crash of TWA Flight 800 off
Long Island, New York in July 1996, President Clinton announced the formation
of the White House Commission on Aviation Safety and Security, chaired by
Vice President Gore (the "Gore Commission"), to review airline and airport
security and oversee aviation safety. The Gore Commission concluded that "the
threat against civil aviation is changing and growing, and that the federal
government must lead the fight against it" and recommended that "the federal
government commit greater resources to improving aviation security." The Gore
Commission released its initial report in September 1996, and in October 1996
the United States enacted legislation which included a $144 million
appropriation for fiscal 1997 for the deployment of explosives detection
systems and other advanced security equipment for use by air carriers and
airport authorities. Of this amount, $52.2 million, or 36.2%, was allocated
to the purchase of certified CT technology. Although no money was
appropriated for the deployment of additional explosive detection systems in
fiscal 1998, $17.3 million of funds from the Department of Transportation
were reprogrammed to purchase 15 of the Company's new CTX 5500 systems and 59
kits to upgrade all of the FAA's CTX 5000 systems to CTX 5500 status. The
approved budget for fiscal 1999 (which began in September 1998) contains $100
million for purchase of additional EDS systems, TIP (threat image projection,
a system of checking operator performance under actual operating conditions)
enhancement of existing x-ray systems, integration and installation of the
purchased systems and coverage of some FAA operating expenses. In March 1999,
the Company received another order from the FAA for 21 additional CTX 5500
systems. A substantial portion of the 1999 budget appropriation remains to be
allocated among the various manufacturers of EDS.

THE INVISION TECHNOLOGY ADVANTAGE

CT TECHNOLOGY

The Company believes that the CTX 5000 Series is the only EDS presently
capable in a commercial application of reliably detecting all types of
explosives designated by the FAA to be a threat to commercial aviation and that
the CTX 5000 Series is superior to other competing systems by virtue of its
advanced detection technology and its pioneering lead in applying CT technology
to aviation security.

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The Company's CTX 5000 Series employs CT technology which was pioneered
in the medical field in the 1970's and enhanced for use in explosive detection
by the Company's engineers in the 1990's. As its principal detection vehicle,
the CTX 5000 Series uses a source of x-rays rotating around an object to create
two-dimensional images of the density distribution of the object's cross
section. These cross-sectional images are commonly known as "slices." The CTX
5000 Series is capable of measuring data from several contiguous slices of an
object in order to capture the 3-dimensional characteristics of an object. The
data gathered from the slices is used to measure the physical characteristics of
objects by determining their linear attenuation coefficients (density),
morphology (shape), and granularity (uniformity). Once measured, each
characteristic is automatically compared, using sophisticated image processing
algorithms, to a database of characteristics of compounds used in explosive
devices in order to assess the threat. If an object is determined to contain the
characteristics of an explosive, additional slices of the object are collected
in order to determine the mass discriminates (quantity) of the threat. At this
stage, potential threats which cannot be cleared automatically by the CTX 5000
Series are submitted to an operator for threat resolution. The operator is also
presented with information regarding the presence of detonators, power sources,
proximity charges, metallic objects and other characteristics of a potential
bomb, and the suspicious objects are highlighted in different colors.

The Company believes that there are three important technical
characteristics which lead to the superiority of the CTX 5000 Series over
systems of the Company's primary competitors which are based on dual energy
technology. These characteristics are:

DATA QUALITY AND QUANTITY. Dual energy x-ray systems collect data from
one or two views of an object to determine the atomic number of materials
encountered during the scan. CT technology, with approximately 500 views per
slice, yields more data and is capable of measuring the density of an object.
While explosives have well defined density ranges which are generally distinct
from those of the contents of checked baggage, certain classes of explosives
have atomic numbers which are similar to those of many materials found in
checked baggage. As a result, the CTX 5000 Series is better able to distinguish
between explosives and the benign contents of checked baggage, resulting in
higher detection and lower false alarm rates.

THREE DIMENSIONAL DATA. CT technology's ability to render
three-dimensional data concerning an object also contributes to its superior
detection compared to dual energy x-ray technology. By utilizing these data, CT
technology is able to map characteristics of an object, such as mass and
density, regardless of the object's position in the bag and the superposition of
other objects. Dual energy x-ray systems render only two-dimensional data. As a
result, if multiple objects are superimposed over the potential explosive, the
system's ability to calculate the atomic number of the potential explosive is
diminished. Given the inherent limitations of the use of atomic numbers as a
parameter for explosive detection, this diminished capacity with regard to
stacked objects is particularly problematic.

ADVANCED THREAT RESOLUTION. Threat resolution refers to the process
following an alarm of determining whether checked baggage is safe or contains a
threat. Once an alarm occurs, the CTX 5000 Series presents its operators with
images and threat analysis tools that are unavailable in dual energy systems.
For example, the CTX 5000 Series simultaneously provides operators with both
x-ray images and CT images on separate screens. These data are cross-referenced
with each other to give the operator an overall image of a suitcase and detailed
CT information relating to the contents, and in particular relating to the
potential threat. In addition to the images, the CTX 5000 Series provides an
abundance of tools and data, designed to allow operators to determine whether a
bag is a threat requiring further action or is safe to clear to the plane. One
of these tools is the ability to take additional slices to provide more data and
focus in on the threat. In contrast, dual energy x-ray systems display a single
x-ray image of a potential threat and have a limited ability to provide
additional information to an operator who suspects that an explosive is present.

The Company also believes that there are several important technical
reasons which lead to the superiority of the CTX 5000 Series and, when
released, the CTX 9000 system over the system planned to be deployed by the
Company's only CT-based competitor. Once the CTX 9000 is released, the CTX
5500 will continue to be sold primarily for stand-alone applications where
its proven track record and easy-to-use user interface will provide
advantages over the competing CT-system. The competitive advantages of the
CTX 9000 include:

AUTOMATIC DETECTION SOFTWARE. The detection software used by the
CTX 9000 includes all the advances and developments made for the CTX 5000
Series over a period of ten years, including four years of operational
experience after the first FAA certification in December 1994, a number of
subsequent re-certifications of the CTX 5000 Series and a number of
refinements to the capabilities of the software dictated by operational
airport experience and customer requirements. These capabilities apply to
both explosive and narcotics detection.

DESIGN FOR AIRPORT OPERATION AND INTEGRATION. The CTX 9000 was
developed for high throughput airport operation. The conveyor belt is one
meter wide for ease of integration with the luggage movement system of the
airport whose width is standardized world wide to one meter. Past experience
of the Company with the CTX 5000 series demonstrated that it is very
difficult to funnel luggage to a smaller conveyor belt at high speed.
Another key design requirement of the CTX 9000 was to assure x-ray shielding
during high throughput operation. This was achieved with the use of "active
curtains," an automated set of lead shielded sliding doors which will allow
the system to operate more effectively while assuring proper x-ray shielding.
The Company believes that the wide conveyor belt and the use of "active
curtains" are essential to achieve operational performance at high rates of
throughput in an airport environment and will become a key competitive
advantage.

SCALABLE DESIGN. The CTX 9000 has been designed to operate with one
to five detector rings at 120 revolutions per minute (RPM). With one
detector ring the unit will produce two times more data per time unit than
the CTX 5000 Series, with five detector rings the unit will produce ten times
more data per time unit than the CTX 5000 Series. The current CTX 9000 model
undergoing FAA certification is equipped with a single detector ring. The
Company believes that a one detector ring CTX 9000 will be competitive with
other certified EDS and that, when necessary, a CTX 9000 equipped with five
detector rings will further enhance the advantages of the design. Another
advantage of a one to five detector ring design is the capability of trading
performance for cost depending on customer requirements. Based on the
Company forecast of customer requirements, cost of detectors and cost of
computational power over time, the Company expects a multi-detector CTX 9000
to become competitive in few years. Meanwhile the Company believes that a
one detector ring design that offers the same performance as competing
multi-detector ring design is more cost effective.

InVision believes that the strengths of the CTX 5000 Series over
non-CT systems with respect to the first three important technical
characteristics described above were central to the CTX 5000 Series meeting
the stringent FAA standards for certification and to gaining operational
acceptance by the commercial aviation industry. In addition, InVision
believes that the limitations of competing

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non-CT technologies with respect to these important characteristics will
limit these technologies' ability to attain the high detection and low false
alarm rates necessary to obtain FAA certification. Furthermore, the Company
believes that the second three characteristics will allow the CTX 9000 to
gain operational acceptance over the L-3 system, when released, and that
certain of L-3 design limitations will inhibit the system's ability to
achieve targeted throughput and seamless integration with automated baggage
handling systems in integrated applications. However, there can be no
assurance that future technological innovations will not enable competing
non-CT technologies or the L-3 CT-based EDS to overcome these limitations. As
the only EDS to be certified by the FAA and commercially deployed, the
Company believes its CTX 5000 Series and, when released, CTX 9000 are well
positioned to be the cornerstone of the advanced explosive detection process
being promoted by the FAA for implementation at airports around the world.

QR TECHNOLOGY

QR technology has a high detection rate for selected types of explosives
combined with one of the lowest false alarm rates for any type of technology. In
particular, QR technology has significant detection capabilities for identifying
components typically found in sheet explosive, which has been the most difficult
type of explosive to detect, as well as a military and plastic explosives.
Quadrupole resonance analysis is related to magnetic resonance imaging ("MRI")
technology commonly used in hospitals, but without a large and expensive magnet.
The characteristic signal emitted by each type of explosive is unique and easily
distinguished from harmless materials. Different molecules have different
resonance frequencies, even if they contain the same atoms. QR directly measures
the presence of the specific target material, by identifying the explosive's
characteristic signals. This method is more accurate than other bulk detection
systems which predict the explosives presence by measuring object density or
atomic number. These capabilities can create a stand-alone product for certain
applications, such as the carry-on baggage scanner the Company already offers
(the QSCAN-160), but also provide advantages when combined with x-ray or CT
explosive detection technologies. The Company believes that systems combining
these technologies based on different physical principles will be more robust
and more difficult to defeat than single technology systems.

GROWTH STRATEGY

The Company's objective is to be the leading provider of explosive
detection systems worldwide and to extend its technology expertise to address
broader applications for detection. Specific elements of the Company's growth
strategy are to:

ENHANCE TECHNOLOGICAL LEADERSHIP. The Company believes that its
technological capabilities provide it with a significant competitive
advantage. Accordingly, the Company considers research and development to be
a vital part of its operating discipline, and continues to make substantial
investments to enhance the performance, functionality and reliability of its
CTX 5000 Series hardware and software. Among the Company's priorities in
enhancing its technological capabilities are to increase throughput rates
while maintaining certified detection capability and to increase threat
resolution capabilities. The Company is looking to QR technology with its
increased ability to detect certain types of explosives and its lower false
alarm rate as one way to achieve these goals. The Company has also sought to
continue to improve upon its original CT technology by developing the new CTX
5500, the first major upgrade to the CTX 5000, which was shipped in January
1998 and certified in April 1998, as well as the CTX 9000 currently in the
prototype stage and recently shipped to the FAA Technical Center to begin
certification testing. See "--The InVision Technology Advantage" and
"--Product Development." In 1998, 1997 and 1996, the Company spent $18.1
million, $15.9 million and $7.7 million (before development contract
offsets), respectively, for research and development to improve the Company's
technology.

EXPAND SALES AND MARKETING CAPABILITIES. The Company believes that its
sales and marketing capability is vital to achieving high levels of market
penetration for its systems. The objectives of the Company's sales force include
promoting broader acceptance for EDS technology worldwide and emphasizing the
importance of high detection rate EDS technology. Because sales cycles for the
CTX 5000 Series can be lengthy, the Company's sales and marketing efforts are
focused on developing and maintaining close working relationships with key
management personnel at regulatory authorities, airports and airport authorities
worldwide. As the market for certified explosive detection technology expands,
the Company intends to supplement its sales and marketing capability by adding
sales personnel in the U.S. and in Asia, enhancing customer support capabilities
in Europe through the addition of systems integration expertise, and continuing
to educate governmental entities worldwide about the benefits of certified
detection and the advantages of the CTX 5000 Series.

LEVERAGE TECHNOLOGY EXPERTISE TO ENTER NEW MARKETS FOR DETECTION. The
Company believes that installations of advanced automated explosive detection
systems at airports will accelerate the adoption of this technology for
additional aviation applications such as screening of carry-on baggage and
trailer-mounted mobile units for inspections at remote location, as well as for
other security applications, including the detection of drugs, the protection of
government and private facilities, and the screening of mail. Since the amount
of government money spent in drug interdiction efforts far surpasses

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the amount spent for the development of EDS technology, the Company believes
that drug detection applications afford significant market opportunities for the
application of InVision's certified detection technology. The Company believes
that its leadership in high detection technology will be a competitive advantage
as these markets develop. With the acquisition of Quantum, the Company has also
added powerful new tools to its detection capabilities for potential
applications such as postal, customs and cargo inspection as well as airport
security. QR technology can detect currency, narcotics and other contraband in
addition to explosives and Quantum already has developed several products, in
the prototype stage, including devices to inspect carry-on luggage and cargo at
airports and customs facilities, a small scanner to detect explosives and
illegal drugs in the mail and other small packages, and an advanced system for
the detection of liquid explosives and flammables in sealed glass or plastic
containers.

PURSUE STRATEGIC RELATIONSHIPS AND ACQUISITIONS. From time to time the
Company reviews strategic relationship opportunities, including potential
acquisitions, that would complement its existing product offerings, augment its
market coverage, enhance its technological capabilities or otherwise offer
growth opportunities. The Company believes that the CTX 5000 Series is suited to
the integration of applications which are direct extensions of its strength in
explosive detection technology. The Company acquired Quantum in September 1997
to gain access to QR technology, the application of which when applied to the
explosive detection field, either in a stand alone system or in combination with
x-ray or CT, is still largely in the development stage, but offers increased
ability to detect certain types of explosives and a lower false alarm rate and
applications to products beyond the Company's traditional aviation security
market such a landmine and concealed weapons detection.

PRODUCT DEVELOPMENT

The Company considers research and development to be a vital part of
its operating discipline and continues to dedicate substantial resources to
research and development to enhance the performance, functionality and
reliability of its current CTX 5000 Series hardware and software and
development of its next generation EDS, the CTX 9000 system. In particular,
the Company recognizes the need to improve certain of its system
capabilities, specifically related to throughput and gantry size, both
addressed in the CTX 9000, in order to accommodate the breadth of market
potential for EDS technology. At December 31, 1998 the Company had 100
full-time employees engaged in research and development activities, and also
was using the services of seven specialized contract employees and
consultants in this area.

InVision's ongoing development efforts are primarily focused on two
areas. The first area consists of increasing the speed (throughput) and
decreasing the manufacturing cost of the CTX 5000 Series and developing its
next generation system, the CTX 9000. In 1998 InVision also completed
improvements to the user-interface, inspection algorithms, and operator
on-line testing techniques for this system. The first new product resulting
from these efforts, the CTX 5500, was certified by the FAA in April 1998 and
is now the Company's main product. This new system, which is also available
in upgrade-kit form to allow customers to convert their existing CTX 5000
units, offers increased throughput and several other enhancements requested
by customers. It relies on a concept called Dynamic Screening-tm-, which
continuously monitors bag flow through an airport's conveyor system and the
security status of each bag. The CTX 5500 then uses this information to adapt
its screening to meet the specific threat and the demands of the airport. It
also uses faster computers, enhanced software and an improved operator
interface which includes the ability to test operators while they work. The
second area of focus is the development of its next generation system, the
CTX 9000, a new system with improved detection, reduced false alarms, a
factor of two higher throughput, and an improved design which will
substantially improve integrity of the system into airport baggage handling
systems. See "--The InVision Technology Advantage," "--Competition" and
"--Business Risks -- No Assurance of Continued Certification; Risk of
Certification of Competing Technologies; Risk of Changing Standards."

In the EDS field Quantum is currently working to develop a product which
will combine QR and x-ray technologies into a more powerful detection device
than either technology offers alone by providing the ability to detect a wider
range of explosives with more reliability than x-ray but with an ability to see
images to assist with threat resolution that QR technology alone does not offer.
This project is in an early stage of development. In addition, in 1998 Quantum
received a $1 million grant from the FAA for additional research and development
of Quantum's QR technology for aviation security applications. Quantum is using
the grant to support development of hardware and software enhancements designed
to increase the range of detectable explosives and increase throughput. The
grant will also be applied towards research on Quantum's next generation coil
design technology which uses circular polarization to significantly increase
sensitivity of detection, lower false alarm rate and increase throughput. During
1998 Quantum also received approximately $1 million in government grants to
support development of a landmine detection system using QR technology for
locating metallic and non-metallic landmines, particularly those containing TNT
as the explosive charge. This product, which is truck mounted, utilizes an
externally applied radio frequency magnetic field pulse at the characteristic
frequency to generate a coherent

6

signal that can be detected with a tuned antenna and a very sensitive receiver.
The QR-resonant frequency is specific to individual compounds, resulting in a
very low incidence of false alarms.

In addition to EDS research and development, Quantum is also a
leading supplier of research and development services in the areas of QR and
electromagnetic sensing and detection technologies to a number of government
and quasi-government agencies. Since 1994, Quantum has completed over 105
research and development programs for various federal government agencies and
private companies, establishing itself as a leading developer of novel
applications for electromagnetic sensing while developing substantial
proprietary know-how and patented technology. As part of these programs,
Quantum has formed research and development collaborations, totaling
approximately $28 million, with over 25 leading academic institutions and
research groups world-wide. Quantum continues to perform contract research
and development services in order to stay at the technical forefront of the
industry and to augment its product development. As of December 31, 1998
Quantum had a backlog of approximately $4.6 million in research and
development contracts and grants. At the end of the first quarter of 1999,
Quantum received an additional $2.1 million research grant.

During the years ended December 31, 1998, 1997 and 1996, respectively,
the Company spent $18.1 million, $15.9 million and $7.7 million on research and
development activities, of which $10.8 million, $8.5 million and $4.9 million,
respectively, were funded by the FAA and other agencies under development
contracts and grants. In order to fulfill the objectives of its growth strategy,
the Company intends to continue to invest heavily in product development.

CUSTOMERS

In December 1996, as an extension of legislation enacted upon the
recommendation of the Gore Commission, the Company received a $52.2 million
order for 54 CTX 5000 systems from the FAA with the option to purchase up to
46 additional systems, bringing the total purchase price under such contract,
if such option is fully exercised, to $110.9 million. In 1998 the FAA placed
orders totaling $17.3 million for 15 CTX 5500 systems and 59 kits to upgrade
all of its CTX 5000 units to CTX 5500 status. Under the terms of the FAA
contract as revised by the FAA, these systems were installed during 1997 and
1998 at the United States' busiest airports. As of December 31, 1998, all of
these systems have been shipped. In March 1999, the Company received an order
for an additional 21 CTX 5500 systems from the FAA bringing the total orders
to date to $88.4 million. The FAA may cancel this contract at any time and
for any reason, in which case the FAA would only be obligated to pay for
units delivered and to reimburse the Company for costs incurred and
commitments made by the Company in order to fulfill the contract. The 21 unit
order is being funded by a $100 million appropriation for the purchase of
aviation security systems in the 1999 federal budget. A substantial portion
of the remaining amount remains to be allocated among the various
manufacturers of EDS. See "Industry Background - The Gore Commission."

In order to capitalize on the global opportunity for deployment of
explosive detection technology for civil aviation, the Company currently
focuses on three important markets: (i) installations at high profile U.S.
airports, (ii) installations at new airports under construction worldwide and
(iii) installations at international airports. As of December 31, 1998, the
Company had sold 146 systems worldwide, including 69 to the FAA. For reasons
of security, the FAA will not divulge the deployment schedule or locations of
the systems at this time. Other airports at which the Company's systems are
deployed include major international airports in England, Belgium, The
Netherlands, Israel, The Philippines, Malaysia, Hong Kong, France, Spain and
South Africa.

The Company's QR products are still primarily in the prototype stage
with the first order for two QSCAN advanced technology systems delivered to the
FAA in 1998 for deployment in undisclosed locations.

The Company believes that customer service and support are critical
to its success and has committed significant resources to these functions.
Accordingly, the Company provides a high level of customer support to assist
in the site planning, installation and integration of the Company's products
into its customer's facilities in addition to field service for maintaining
the reliability of the Company's products once installed. InVision's service
organization includes customer service engineers, product application
specialists, operator training engineers and technical support engineers. As
of December 31, 1998, the Company had 44 individuals employed in customer
service and support roles. InVision typically hires and trains its own
support staff throughout the world rather than relying on third-party
maintenance providers although a small but growing number of third party
relationships exist. In addition to providing generally a one year parts and
service warranty, InVision offers fee-based primary and back-up service
contracts to its customers to provide system maintenance, ongoing technical
support, documentation, training and, where no new hardware is required,
periodic software releases.

The Company believes that operator qualification and training is as
important to the explosives detection process as the CTX 5000 Series' automated
detection process. In this regard, the Company has developed and provides in
depth

7

operator training and testing as a critical component of each sale and
installation. See "Business Risks-Limited Field Operations; Dependence on
Operator Performance."

SALES AND MARKETING

The Company markets its products both directly through internal sales
personnel and indirectly through authorized agents, distributors and systems
integrators. As of December 31, 1998, the Company employed a total of 18 people
in sales and marketing. In North America, the Company markets its CTX 5000
Series primarily through direct sales personnel, which as of December 31, 1998
consisted of eight individuals. Internationally, the Company utilizes both a
direct sales force and authorized agents to sell its products. As of December
31, 1998, the Company had four direct international sales personnel broadly
covering Europe, Asia, and the Middle East and additional authorized agents
representing the Company in specific countries. For sales through its authorized
agents and distributors, the Company generally is directly involved in
developing proposal documents and negotiating contract terms. During the fiscal
years ended December 31, 1998, 1997 and 1996 international sales represented
33.7%, 43.0% and 76.2%, respectively, of the Company's revenues. See "Business
Risks - International Business; Risk of Change in Foreign Regulations;
Fluctuation in Exchange Rates."

Support for the direct and indirect sales representatives is provided
by product application specialists who assist in pre- and post-sale support.
Such support includes assistance in designing customer configurations, educating
customers on the system and technology and supporting the implementation and
integration process. In addition, the Company provides its sales representatives
with training, promotional literature, a multi-media presentation, videos and
competitive analysis.

The selling process often involves a team comprised of individuals
from sales, marketing, engineering, customer service and support, 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 or conveyor integrators,
individual airlines and airline operating committees. 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
leads to a typical sales cycle lasting from six to twelve months, or more,
from initial contact with a customer. Often, local government regulators
become involved in the sales decision process or provide funds for the
purchase. For repeat orders from existing customers, the Company can
sometimes expedite the sales cycle by utilizing existing contracts and
contract extensions and thereby avoid lengthy procurement processes. See
"Business Risks-Dependence on Large Orders; Customer Concentrations; Lengthy
Sales Cycle" and "-Public Agency Contract and Budget Considerations."

BACKLOG

The Company measures its backlog of revenues for systems and upgrades
as orders for which contracts or purchase orders have been signed, but which
have not yet been shipped and for which revenues have not yet been recognized.
The Company includes in its backlog only those customer orders which are
scheduled for delivery within the next 18 months. The Company typically ships
its 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 the Company or customers' readiness to accept delivery for reasons
of site preparation or otherwise. At December 31, 1998, the Company's system
revenues backlog was approximately $2.1 million.

A majority of the Company's systems backlog as of December 31, 1998 is
expected to be shipped during the next three months. Any failure of the Company
to meet an agreed upon schedule could lead to the cancellation of the related
order. Variations in the size, complexity and delivery requirements of the
customer order may result in substantial fluctuations in backlog from period to
period. The Company believes that it is important for competitive reasons and to
better satisfy customer requirements to reduce order lead times and expects that
the Company's backlog may decrease on a relative basis over time. In addition,
all orders are subject to cancellation or delay by the customer and,
accordingly, there can be no assurance that such backlog will eventually result
in revenues. For these reasons, the Company believes that backlog cannot be
considered a meaningful indicator of the Company's performance on an annual or
quarterly basis.

MANUFACTURING

The Company seeks to focus its manufacturing resources on activities
which emphasize the Company's core competencies and distinctive value. The
Company's manufacturing operations consist primarily of: materials management;
assembly, test and quality control of parts and components subassemblies; and
final system testing. Using the Company's designs and specifications,
subcontractors assemble mechanical and electrical sub-components. The Company
performs final assembly and test of systems, including configuration to
customers orders and testing with current release software, prior to

8

shipment. The Company's manufacturing organization has expertise in
mechanical, electrical, electronic and software assembly and testing. In
addition, because quality and reliability over the life of the Company's
products are vital to customer satisfaction and repeat purchases, the Company
believes its quality assurance program to be a key component of its business
strategy.

The Company generally purchases major contracted assemblies from
single source suppliers in order to ensure high quality, prompt delivery and
low cost. The Company reviews its single source procurements on a case by
case basis, where feasible, and has qualified second sources for certain
contracted assemblies. The Company purchases components, materials and
electro-mechanical subsystems from single source suppliers pursuant to
purchase orders placed from time to time in the ordinary course of business
and has no guaranteed supply arrangements with such suppliers. Although to
date the Company has not experienced any significant delays in obtaining any
of its single source assemblies, there can be no assurance that the Company
will not face shortages of one or more of these systems in the future. See
"--Business Risks - Dependence on Suppliers."

The Company outsources certain manufacturing processes, including
standard and build-to-print fabricated parts such as mechanical sub-assemblies,
sheet metal fabrication, cables and assembled printed circuit boards. This
strategy enables the Company to leverage product development, manufacturing and
management resources while retaining greater control over product delivery,
final product configuration and timing of new product introductions, all of
which the Company believes are critical to exceeding customer expectations.

COMPETITION

The market for explosive detection systems is intensely competitive
and is characterized by continuously developing technology and frequent
introductions of new products and features. The Company expects competition
to increase as other companies introduce additional and more competitive
products in the EDS market and as the Company develops additional
capabilities and enhancements for the CTX 5000 Series, introduces the CTX
9000 and develops new applications for its certified technology.
Historically, the principal competitors in the market for explosive detection
systems have been the Company, Vivid Technologies, Inc., EG&G Astrophysics,
Heimann Systems GmbH, Thermedics Detection Inc., and Barringer Technologies
Inc. Each of these competitors provides non-CT-based EDS solutions and
products for use in the inspection of checked luggage, although to date none
of them offer a product certified by the FAA. The Company is aware of certain
major corporations competing in other markets that intend to enter the EDS
market. In particular, in January 1996 Lockheed Martin Corporation received a
grant in the amount of approximately $8.5 million from the FAA for the design
and development of a certified CT-based EDS over a two-year period, which it
transferred to its affiliate, L-3, in May 1997. In late 1998 L-3's prototype
EDS passed the FAA certification test. After an operational trial period
which the Company believes will last up to one year, the FAA may begin
procuring significant numbers of the L-3 devices. International customers
could begin purchasing the L-3 system before that time, although to the best
of the Company's knowledge, none have done so to date. Announcements of
currently planned or other new products, including the L-3 system, may cause
customers to delay their purchasing decisions for EDS products, which could
have a material adverse effect on the Company's business, financial condition
or results of operations. Each of the Company's competitors may have
substantially greater financial resources than the Company. There can be no
assurance that the Company will be able to compete successfully with its
competitors or with new entrants to the EDS market.

The Company believes that its ability to compete in the EDS market
is based upon such factors as: product performance, functionality, quality
and features; quality of customer support services, documentation and
training; and the capability of the technology to appeal to broader
applications beyond the inspection of checked baggage. Although the Company
believes that the CTX 5000 Series is superior to its competitors' products in
its explosive detection capability and accuracy, the CTX 5000 Series must
also compete on the basis of price, throughput, the ability to handle all
sizes of baggage, and the ease of integration into existing baggage handling
systems. Certain of the Company's competitors may have an advantage over the
Company's existing technology with respect to these factors. Currently, the
CTX 5000 Series has an average selling price of approximately $1.0 million,
compared to substantially lower prices for systems offered by the Company's
competitors; has a throughput rate of approximately 300 bags per hour ("bph")
(up to 400 bph for the CTX 5500), compared to rates claimed to exceed 600 bph
by the L-3 system and 1,000 bph by certain of the Company's non-CT
competitors; has a gantry size which limits the ability of the unit to accept
all sizes of baggage; and requires that the baggage remain still while being
scanned, making it difficult to integrate into the continuously moving
baggage handling systems found in most airports. There can be no assurance
that the Company will be successful in convincing potential customers that
the CTX 5000 Series is superior to other systems given all of the necessary
performance criteria, that new systems with comparable or greater
performance, lower price and faster or equivalent throughput will not be
introduced, or that, if such products are introduced, customers will not
delay or cancel existing or future orders for the Company's system. Further,
there can be no assurance that the Company will be able to enhance the CTX
5000 Series or to complete development and certification of the CTX 9000 to
better compete on the basis of cost, throughput, accommodation of baggage

9

size and ease of integration, or that the Company will otherwise be able to
compete successfully with existing or new competitors. The failure of the
Company to develop such enhancements or otherwise successfully compete in the
EDS market for any of the above reasons would have a material adverse effect on
the Company's business, financial condition or results of operations.

INTELLECTUAL PROPERTY AND PROPRIETARY RIGHTS

The Company's performance depends in part upon its proprietary
technology. In the United States, InVision relies upon patents, copyrights
and trade secrets for the protection of the proprietary elements of the CTX
5000 Series and InVision's CT technology, including the technology being used
in the development of the CTX 9000 system. There can be no assurance,
however, that InVision could enforce such patents, trade secrets or
copyrights. InVision has two United States patents for automatic concealed
object detection systems using a pre-scan stage which expire in the years
2010 and 2011 (the "Patents"). There can be no assurance that the Patents
would be effective in preventing CT-based competition, including competition
from L-3's new certified EDS. In accordance with certain Federal Acquisition
Regulations included in InVision's development contract, dated September 27,
1991, with the FAA (the "FAA R&D Contract"), the United States Government has
rights to use certain of InVision's proprietary technology developed after
the award of the FAA R&D Contract and funded by the FAA R&D Contract. The
U.S. Government may use such rights to produce or have produced for the U.S.
Government competing products using InVision's CT technology. In the event
that the U.S. Government were to exercise these rights, InVision's
exclusivity in supplying the U.S. Government with CTX 5000 Series and,
ultimately, CTX 9000 explosive detection systems could be materially
adversely affected.

Outside the United States, the time period for filing foreign
counterparts of the Patents has expired, and InVision has not sought or obtained
patent protection (except to the extent of licenses held under patents owned by
Imatron Inc. ("Imatron") and has relied to date primarily on software copyrights
and trade secrets for the protection of its proprietary technology. The absence
of a foreign counterparts to the Patents could adversely affect the InVision's
ability to prevent a competitor from using technology similar to technology used
in the CTX 5000 Series.

InVision also holds an exclusive, worldwide, perpetual and fully-paid
license from Imatron (obtained in connection with the formation of InVision)
under Imatron's patents and know-how to develop, manufacture and sell (a)
systems for the inspection of mail, freight, parcels and baggage, and (b)
compact medical scanner products for military field applications based on a
different type of CT technology than is currently incorporated in the Company's
CTX 5000 Series. InVision, in exchange, granted to Imatron an exclusive,
worldwide, perpetual and fully paid license under InVision's Patents or future
patents and know-how to permit Imatron to utilize such technology in medical
scanner products (other than compact medical scanner products for military field
applications). Imatron is a manufacturer of medical scanning systems and holds a
portfolio of CT patents.

In the United States, Quantum relies upon licenses, patents, copyrights
and trade secrets, held by Quantum for the protection of the proprietary
elements of its QSCAN products, other QR development stage products and its
ability to obtain research and development contracts in the areas of
electromagnetic sensing and detection. In connection with its QR technology,
Quantum utilizes three key QR patents from the Naval Research Laboratory and has
been granted a ten-year exclusive license, recently expanded to cover landmine
detection applications and extended to 2009, to commercialize the technology.
Additionally, Quantum has been granted several key patents, with additional
patents pending, and has developed a significant amount of know-how in the
magnetic sensing and detection areas. These patents and know-how enable field
deployable security systems to be designed and cost-effectively manufactured.
The intellectual property and proprietary rights held by Quantum are subject to
the same risks and uncertainties as those held directly by InVision, as
described above.

The Company generally enters into confidentiality agreements with each
of its employees, and on a case-by-case basis enters into similar agreements
with distributors, customers, and potential customers. In addition, the Company
limits access to distribution of its software, documentation and other
proprietary information. There can be no assurance that these agreements will
not be breached, that the Company will have adequate remedies for any breach, or
that the Company's trade secrets will not otherwise become known to or
independently developed by others. There can be no assurance that the steps
taken by the Company to protect its proprietary technology will be adequate or
that its competitors will not be able to develop similar, functionally
equivalent or superior technology. (See "Item 5. Legal Proceedings.")

10

Although the Company believes that its intellectual property rights are
valuable, the Company also believes that because of the rapid pace of
technological change in the industry, factors such as innovative skills,
technical expertise, the ability to adapt quickly to new technologies and
evolving customer requirements, product support, and customer relations are of
greater competitive significance.

EMPLOYEES

As of December 31, 1998, the Company directly employed 265 people,
of whom 100 were primarily engaged in research and development activities, 62
in marketing and sales, customer support and field service, 61 in
manufacturing and 42 in administration and finance. In addition, InVision
utilized the services of 35 full-time consultants and temporary employees in
1998. Management believes that the Company's relationship with its employees
is good.

EXECUTIVE OFFICERS

The following sets forth certain information regarding the Company's
executive officers:

NAME AGE POSITION
---- --- --------

Dr. Sergio Magistri 45 President and Chief Executive Officer
Tim Black 50 Chief Operating Officer and Acting Chief Financial Officer (1)
David M. Pillor 44 Senior Vice President, Sales and Marketing

- -----------------
(1) Mr. Black became Acting Chief Financial Officer of the Company in addition
to his other duties upon the resignation of Curtis P. DiSibio as Senior
Vice President, Finance and Administration and Chief Financial Officer on
March 19, 1999.

DR. SERGIO MAGISTRI has served as President, Chief Executive Officer
and Director of InVision since December 1992. From June 1991 to November 1992,
he was a Project Manager with AGIE, Switzerland, a manufacturer of high
precision tooling equipment, responsible for all aspects of a family of new
products for high precision electro-erosion machining with sub-micron precision.
From 1988 to June 1991, Dr. Magistri was a consultant to high technology
companies, including FI.M.A.I. Holding, S.A. As a consultant to FI.M.A.I., Dr.
Magistri was involved in the formation of InVision and the development of its
business plan and of its technology. From 1983 to 1988, Dr. Magistri held
various positions with Imatron Inc. ("Imatron"), a CT medical scanner company,
including as an Engineering Physicist and Manager of Advanced Reconstruction
Systems, and Director of Computer Engineering. Dr. Magistri holds a degree in
Electrical Engineering and a doctorate in Biomedical Engineering from the Swiss
Institute of Technology, Zurich, Switzerland.

TIM BLACK has served as Chief Operating Officer since November 1998.
From January 1995 until he joined InVision, Mr. Black was first Deputy
General Manager and later General Manager and a director in the Tactical
Systems Division of the Systems Integration Group at TRW Inc. ("TRW"), which
develops, manufactures and markets military reconnaissance systems. From 1975
until January 1995, he held a variety of management positions at ESL Inc.
("ESL"), a subsidiary of TRW, most recently as Vice President of the
Surveillance Systems Division from July 1994 to January 1995. Before it was
merged into TRW, this division of ESL was also engaged in the military
reconnaissance business. Mr. Black holds a degree in Materials Engineering,
and a Masters of Science degree in Cybernetic Systems from San Jose State
University.

11

DAVID M. PILLOR joined InVision in July 1994 as Vice President, Sales
and Marketing, and has served as Senior Vice President, Sales and Marketing
since November 1995. From 1988 to July 1994, Mr. Pillor held various positions
including Area Sales Manager, National Sales Manager and Vice President of Sales
of Technomed International, a medical products company. Mr. Pillor holds a
Bachelor of Science degree in Chemistry from the University of Maryland.

BUSINESS RISKS

IN ADDITION TO THE RISKS SET FORTH IN "--COMPETITION," "--INTELLECTUAL
PROPERTY AND PROPRIETARY RIGHTS" AND THE OTHER PORTIONS OF THIS "ITEM 1.
BUSINESS," AN INVESTMENT IN THE COMPANY HAS THESE ADDITIONAL RISKS:

HISTORY OF LOSSES; NO ASSURANCE OF CONTINUED PROFITABILITY. The Company
commenced operations in September 1990, remained in the development stage
through 1994 and received its first revenues from product sales in the first
quarter of 1995. The Company experienced net losses for each year from inception
through December 31, 1996. The year ended December 31, 1997 was the Company's
first year of profitability. As of December 31, 1998, the Company had an
accumulated deficit of approximately $9.6 million. Although the Company has been
profitable on a quarterly and annual basis the past two years, there can be no
assurance that the Company will maintain profitability on a quarterly and annual
basis. The Company significantly expanded its manufacturing, research and
development, sales and marketing, and administrative capabilities in 1997 to
meet the increased demand for its product. The increase in the Company's
operating expenses caused by this expansion could have a material adverse effect
on the Company's business, financial condition or results of operations if
revenues do not increase at an equal or greater rate. See "Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Liquidity and Capital Resources."

SINGLE PRODUCT; UNCERTAINTY OF MARKET ACCEPTANCE. The CTX 5000
Series currently is the only product line offered by the Company and the
Company derives substantially all of its revenues from the sale of CTX 5000
Series units. The Company's orders to date have been received from a limited
number of customers and the substantial majority of these have been from a
single customer, the FAA. The commercial success of the CTX 5000 Series and
its successors, including the CTX 9000, will depend upon its acceptance by
domestic and international airports, government agencies and airlines as a
useful and cost-effective alternative to less expensive, higher throughput
(i.e., bags per hour) competing products employing different technologies.
The large capital commitment (approximately $1.0 million each) required to
purchase units in the CTX 5000 Series may limit the marketability of the CTX
5000 Series. In addition, the Company's failure to compete successfully with
respect to throughput, the ability to scan all sizes of baggage, the ease of
integration of the CTX 5000 Series into existing baggage handling systems and
other factors could delay, limit or prevent market acceptance of the CTX 5000
Series and its successors, including the CTX 9000. Moreover, the market for
EDS technology is largely undeveloped, and the Company believes that the
overall demand for EDS technology will depend significantly upon public
perception of the risk of terrorist attacks. There can be no assurance that
the public will perceive the threat of terrorist bombings to be substantial
or that the airline industry and governmental agencies will actively pursue
EDS technology. As a result, there can be no assurance the Company will be
able to achieve market penetration, revenue growth or maintain profitability.
See "--Competition" and "--Industry Background."

FLUCTUATIONS IN OPERATING RESULTS. The Company's past operating
results have been, and its future operating results will be, subject to
fluctuations resulting from a number of factors, including: the timing and
size of orders from, and shipments to, major customers; budgeting and
purchasing cycles of its customers; delays in product shipments caused by
custom requirements of customers or ability of the customer to accept
shipment; the timing of enhancements to the CTX 5000 Series by InVision or
introduction of new products by it or its competitors; changes in pricing
policies by InVision, its competitors or suppliers, including possible
decreases in average selling prices of the CTX 5000 Series in response to
competitive pressures; the proportion of revenues derived from competitive
bid processes; the mix between sales to domestic and international customers;
market acceptance of enhanced versions of the CTX 5000 Series and its
successors, including the CTX 9000; the availability and cost of key
components; and fluctuations in general economic conditions. InVision also
may choose to reduce prices or to increase spending in response to
competition or to pursue new market opportunities, all of which may have a
material adverse effect on InVision's business, financial condition or
results of operations. InVision's systems revenues in any period are derived
from sales of multiple CTX 5000 Series systems to a limited number of
customers and are recognized upon shipment which, in view of the high sales
price of units in the CTX 5000 Series, causes minor variations in the number
of orders, or the timing of shipments, to substantially affect the Company's
quarterly revenues. Because a significant portion of the Company's quarterly
operating expenses are, and will continue to be, relatively fixed in nature,
such revenue fluctuations will cause the Company's quarterly and annual
operating results to vary substantially. Accordingly, the Company believes
that period-to-period comparisons of its results of operations are not
meaningful and cannot be relied upon as indicators of future performance.
Because of all of the foregoing factors, the Company's operating results may
be below the expectations of public market analysts and investors in some
future quarters, which would likely result in a decline in the trading price
of the Common Stock.

12

DEPENDENCE ON SUPPLIERS. Certain key components used in the
Company's products have been designed by the Company to its specifications
and are currently available only from one or a limited number of suppliers.
The Company currently does not have long-term agreements with these
suppliers. Moreover, in view of the high cost of many of these components,
the Company does not maintain significant inventories of some necessary
components. If the Company's suppliers were to experience financial,
operational, production or quality assurance difficulties, the supply of
components to the Company would be reduced or interrupted. In the event that
a supplier were to cease operations, discontinue a product or withhold supply
for any reason, the Company may be unable to acquire such product from
alternative sources within a reasonable period of time. The Company also uses
a variety of independent third party manufacturers and subassemblers. The
inability of the Company to develop alternative sources for single or sole
source components, to find alternative third party manufacturers or
subassemblers, or to obtain sufficient quantities of these components could
result in delays or interruptions in product shipments, which could have a
material adverse effect on the Company's business, financial condition or
results of operations. See "Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations - Year 2000 Compliance."

DEPENDENCE ON LARGE ORDERS; CUSTOMER CONCENTRATIONS; LENGTHY SALES
CYCLE. In any given fiscal year, the Company's revenues have principally
consisted, and the Company believes will continue to consist, of orders of
multiple units from a limited number of customers. While the number of
individual customers may vary from period to period, the Company is nevertheless
dependent upon these multiple orders for a substantial portion of its revenues.
There can be no assurance that the Company will obtain such multiple orders on a
consistent basis. During the year ended December 31, 1998, approximately $53.0
million, or 83.7%, of the Company's revenues were generated from sales to the
Company's five largest customers. During the year ended December 31, 1997,
revenues from the Company's five largest customers were approximately $50.2
million, or 89.0%, of the Company's revenues. During the year ended December 31,
1996, revenues from the Company's six largest customers were approximately $14.0
million, or 88.4%, of the Company's revenues. To date, all orders from United
States customers have been entirely funded by the FAA, and the Company's largest
sales contract to date, for 90 CTX 5000 systems, including an order for 21 units
in March 1999, and 59 CTX 5500 upgrade kits, is with the FAA. There can be no
assurance that such funding or sales will continue in the future. The Company's
inability to obtain sufficient multiple orders or the failure of the FAA to
continue such purchases or funding would have a material adverse effect on the
Company's business, financial condition or results of operations. Moreover, the
timing and shipment of such orders could cause the operating results in any
quarter to differ from the projections of securities analysts, which could
adversely affect the trading price of the Common Stock. Losses arising from
customer disputes regarding shipping schedules, product condition or
performance, or the Company's inability to collect accounts receivable from any
major customer could also have a material adverse effect on the Company's
business, financial condition or results of operations. See "Industry Background
- - The Gore Commission."

The Company's revenues depend in significant part upon the decision of
a government agency to upgrade and expand existing facilities, alter workflows
and hire additional technical expertise in addition to procuring the CTX 5000
Series, all of which involve a significant capital commitment as well as
significant future support costs. The sales cycle of the CTX 5000 Series is
often lengthy due to the protracted approval process that typically accompanies
large capital expenditures and the time required to manufacture the CTX 5000
Series and install and assimilate the CTX 5000 Series. Typically, six to twelve
months may elapse between a new customer's initial evaluation of the Company's
systems and the execution of a contract. Another three months to a year may
elapse prior to shipment of the CTX 5000 Series as the customer site is prepared
and the CTX 5000 Series is manufactured. During this period the Company expends
substantial funds and management resources but recognizes no associated revenue.
See "Fluctuations in Operating Results" and "Item 7. Management's Discussion and
Analysis of Financial Condition and Results of Operation - Overview."

PUBLIC AGENCY CONTRACT AND BUDGET CONSIDERATIONS. Substantially all of
InVision's customers and a high percentage of Quantum's research and development
customers to date have been public agencies or quasi-public agencies. In
contracting with public agencies, the Company is subject to public agency
contract requirements which vary from jurisdiction to jurisdiction and which are
subject to budgetary processes and expenditure constraints. Budgetary
allocations for explosive detection systems are dependent, 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. Many domestic and foreign government agencies have experienced
budget deficits that have led to decreased capital expenditures in certain
areas. The Company's results of operations may be subject to substantial
period-to-period fluctuations as a result of these and other factors affecting
capital spending. A reduction of funding for explosive detection technology
deployment could materially and adversely affect the Company's business,
financial condition or results of operations. Future sales to public agencies
will depend, in part, on the Company's ability to meet public agency contract
requirements, certain of which may be onerous or even impossible for the Company
to satisfy. In addition, public agency contracts are frequently awarded

13

only after formal competitive bidding processes, which have been and may
continue to be protracted, and typically contain provisions that permit
cancellation in the event that funds are unavailable to the public agency. There
can be no assurance that the Company will be awarded any of the contracts for
which its products are bid or, if awarded, that substantial delays or
cancellations of purchases will not result from protests initiated by losing
bidders. See "Sales and Marketing."

LIMITED FIELD OPERATIONS; DEPENDENCE ON OPERATOR PERFORMANCE. As of
December 31, 1998, 146 CTX 5000 Series systems had been shipped to 43 airports
in 16 countries around the world. A majority of these units were installed since
January 1997, and the Company's customers have only limited experience with the
operation of the CTX 5000 Series in high-volume airport operations. Many of the
factors necessary to make the overall baggage scanning system a success, such as
the CTX 5000 Series's integration with the baggage handling system, ongoing
system maintenance and the performance of operators, are beyond the control of
the Company. In particular, once the CTX 5000 identifies a threat, the operator
must make a determination whether the threat is actual or a false alarm and,
therefore, whether or not to allow the bag to continue onto the aircraft.
Unsatisfactory performance of operators can lead to reduced efficacy of the CTX
5000 Series. The failure of the CTX 5000 Series to perform successfully in
deployments, whether due to the limited experience of the Company's customers
with the CTX 5000 Series, operator error or any other reason, may have an
adverse effect on the market's perception of the efficacy of the CTX 5000
Series, which in turn could have a material adverse effect on the Company's
business, financial condition or results of operations.

MANAGEMENT OF GROWTH. As a result of the FAA's initial order of 54
CTX 5000 systems, the Company substantially increased its rate of manufacture
of the CTX 5000 in 1997, which placed significant demands on the Company's
management, working capital and financial and management control systems.
Failure to continue to upgrade the Company's operating, management and
financial control systems when necessary, or difficulties encountered during
such upgrades, could have a material adverse effect on the Company's
business, financial condition or results of operations. The continued success
of the increase in production capability will depend in part upon the
Company's ability to continue to improve and expand its engineering and
technical resources and to attract, retain and motivate key personnel. The
failure of the Company to maintain such production capability or to increase
its revenues sufficiently to compensate for the increase in operating
expenses resulting from the recent or any future expansion would have a
material adverse effect on the Company's business, financial condition or
results of operations. To accommodate the increase in the manufacturing rate,
the Company entered into a lease in 1997 for a new, substantially larger,
manufacturing facility. The operation of this new facility also requires the
Company to incur substantially larger fixed costs than it has experienced in
the past. Failure of the FAA to perform under the December 1996 purchase
contract, or failure to maintain an order rate sufficient to fully utilize
this new manufacturing facility each could have a material adverse effect on
the Company's business, financial condition or results of operations. See
"Industry Background - The Gore Commission," "Manufacturing" and "Item 2.
Properties."

NO ASSURANCE OF CONTINUED CERTIFICATION; RISK OF CERTIFICATION OF
COMPETING TECHNOLOGIES; RISK OF CHANGING STANDARDS. There currently is no
requirement that U.S. airlines or airports (or international airlines or
airports) deploy FAA-certified explosive detection systems or that U.S. airlines
or airports (or most international airlines or airports) deploy explosive
detection systems at all. However, the FAA has the responsibility for setting
and maintaining performance standards for explosive detection systems for all
U.S. airlines, both in the United States and abroad. The FAA Final Criteria for
Certification of EDS, published in September 1993, requires, among other things,
a throughput of 450 bph for an explosive detection system. Both the Company's
CTX 5000 and CTX 5500 systems have been tested by the FAA at less than 450 bph
and therefore have not been certified as a single unit. When combined in a
system consisting of two units, the CTX 5000 system was certified by the FAA in
1994 and the CTX 5500 was certified in April 1998 L-3's CT-based EDS was
certified in November 1998 and at least one other manufacturer of a non-CT based
system has also submitted it for certification testing. To the best of the
Company's knowledge, no sales of L-3's system have yet been made. However,
should commercial deployment of the L-3 system commence, should other
competitive systems become certified or should the FAA certification standards
be lowered, resulting in other lower priced or higher throughput explosive
detection systems becoming certified, the Company would lose a significant
competitive advantage. Under such circumstances, there can be no assurance that
the Company's product would be able to compete successfully with these systems.
Accordingly, the certification by the FAA of any competing EDS could have a
material adverse effect on the Company's business, financial condition or
results of operations. In addition, should the FAA increase its certification
standards, there can be no assurance that the CTX 5000 Series would meet such
standards. See "--Industry Background." The Company intends to continue to
modify the CTX 5000 Series in an effort to make throughput enhancements, cost
reductions and other modifications to the CTX 5000 Series based upon the
availability of adequate funds. In addition the Company is currently engaged in
the development of its next generation EDS, the CTX 9000, which is being
designed to have significantly higher throughput Any such modifications or
updated versions of the CTX 5000 Series may require FAA approval in order to
retain

14

certification or may require re-certification. There can be no assurance
that any such modifications will be approved or, if required, certified by the
FAA, and the failure to gain approval or certification for such products could
have a material adverse effect on the Company's business, financial condition or
results of operations. the Company believes that its long-term success will
depend in part upon its ability to manufacture an EDS that meets or exceeds the
throughput standards of the FAA Final Certification Criteria without being
combined with another unit. To this end, the Company has developed its next
generation EDS, the CTX 9000, with a number of advanced features, including
significantly higher throughput, that is designed to compete with L-3's new
system when commercially deployed. However, there can be no assurance that any
such new product will be approved or, if required, certified by the FAA, and the
failure to gain approval or certification for such product could have a material
adverse effect on the Company's business, financial condition or results of
operations. See "Product Development."

COMPETITION FOR FAA GRANTS. The U.S. Government currently plays an
important role in funding the development of EDS technology and sponsoring its
deployment in U.S. airports. Through December 31, 1998, the Company had received
$16.8 million from FAA grants and contracts, and expects to receive an
additional $0.8 million for further throughput enhancement and cost reduction
activities in 1999. The Company is also aware that Lockheed Martin Corporation
was awarded a grant of approximately $8.5 million in January 1996 from the FAA,
subsequently transferred to its spin-out, L-3, for the design and development of
a CT-based EDS over a two-year period. There can be no assurance that additional
research and development funds from the FAA will become available in the future
or that the Company will receive any such additional funds. Failure by the FAA
to continue to sponsor the Company's technology could have a material adverse
effect on the Company's business, financial condition or results of operations.
In addition, the grant to L-3 and any future grants to the Company's other
competitors may improve such competitors' ability to develop and market high
detection EDS technology and cause the Company's customers to delay any purchase
decisions, which could have a material adverse effect on the Company's ability
to market the CTX 5000 Series and on the Company's business, financial condition
or results of operations. See "Product Development."

DEPENDENCE ON PROPRIETARY TECHNOLOGY. The Company in the past has
received, and from time to time in the future may receive, communications from
third parties alleging infringements by the Company or one of its suppliers of
patents or other intellectual proprietary rights owned by such third parties.
There can be no assurance that any infringement claims (or claims for
indemnification resulting from infringement claims against third parties, such
as customers) will not be asserted against the Company. If the Company's product
is found to infringe a patent, a court may grant an injunction to prevent
making, selling or using the product in the applicable country. Protracted
litigation may be necessary to defend the Company against alleged infringement
of others' rights. Irrespective of the validity or success of such claims,
defense of such claims could result in significant costs to the Company and the
diversion of time and effort by management, either of which by itself could have
a material adverse effect on the business, financial condition or results of
operations of the Company. Further, adverse determinations in such litigation
could result in the Company's loss of proprietary rights, subject the Company to
significant liabilities (including treble damages in certain circumstances), or
prevent the Company from selling its products. If infringement claims are
asserted against the Company, the Company may seek to obtain a license of such
third party's intellectual property rights, which may not be available under
reasonable terms or at all. In addition, litigation may be necessary to enforce
patents issued to or licensed exclusively to the Company and to protect trade
secrets or know-how owned or licensed by the Company and, whether or not the
Company is successful in defending such intellectual property, the Company could
incur significant costs and divert considerable management and key technician
time and effort with respect to the prosecution of such litigation, either of
which by itself could have a material adverse effect on the business, financial
condition or results of operations of the Company. See "Intellectual Property
and Proprietary Rights."

INTERNATIONAL BUSINESS; RISK OF CHANGE IN FOREIGN REGULATIONS;
FLUCTUATION IN EXCHANGE RATES. The Company markets its products to customers
outside of the United States and, accordingly, is exposed to the risks of
international business operations, including unexpected changes in regulatory
requirements, changes in foreign control legislation, possible foreign currency
controls, uncertain ability to protect and utilize its intellectual property in
foreign jurisdictions, currency exchange rate fluctuations or devaluation,
tariffs or other barriers, difficulties in staffing and managing foreign
operations, difficulties in obtaining and managing vendors and distributors, and
potentially negative tax consequences. International sales are subject to
certain inherent risks including tariffs, embargoes and other trade barriers,
staffing and operating foreign sales and service operations and collecting
accounts receivable. The Company is also subject to risks associated with
regulations relating to the import and export of high technology products. The
Company cannot predict whether quotas, duties, taxes or other charges or
restrictions upon the importation or exportation of the Company's products in
the future will be implemented by the United States or any other country.
Fluctuations in currency exchange rates could cause the Company's products to
become relatively more expensive to customers in a particular country, leading
to a reduction in sales or profitability in that country. There can be no
assurance that any of these factors will not have a material adverse effect on
the Company's business, financial condition or results of operations.

15

PRODUCT LIABILITY RISKS; RISK OF FAILURE TO DETECT EXPLOSIVES;
AVAILABILITY OF INSURANCE. The Company's business exposes it to potential
product liability risks which are inherent in the manufacturing and sale of
explosive detection systems. There are many factors beyond the control of the
Company that could lead to liability claims, such as the reliability of the
customer's operators, the training of the operators after the initial
installation and training period, and the maintenance of the units by the
customers. For these and other reasons, including software and hardware
limitations and malfunctions of the CTX 5000 Series, there can be no assurance
that the systems will detect all explosives hidden in the luggage scanned. The
Company does not believe that it would be liable for any such claims, but the
cost of defending any such claims would be significant and any adverse
determination may be in excess of the Company's insurance coverage. Moreover,
the failure of the CTX 5000 Series to detect an explosive would also result in
negative publicity which could have a material adverse effect on sales and may
cause customers to cancel orders already placed, either of which could have a
material adverse effect on the Company's business, financial condition or
results of operations. Many of the Company's customers require the Company to
maintain insurance at certain levels. The Company currently has product
liability insurance in the amount of $150 million. There can be no assurance
that additional insurance coverage, if required by customers or otherwise, could
be obtained on acceptable terms, if at all.

UNCERTAINTY OF PRODUCT DEVELOPMENT. The Company's success will depend
upon its ability to enhance its existing products, and to develop new products,
including the CTX 9000, to meet regulatory and customer requirements and to
achieve market acceptance. The enhancement and development of these products
will be subject to all of the risks associated with new product development,
including unanticipated delays, expenses, technical problems or other
difficulties that could result in the abandonment or substantial change in the
commercialization of these enhancements or new products. Given the uncertainties
inherent with product development and introduction, there can be no assurance
that the Company will be successful in introducing products or product
enhancements, including products that meet FAA certification standards, on a
timely basis, if at all, or that the Company will be able to market successfully
these products and product enhancements once developed.

RISKS ASSOCIATED WITH POTENTIAL ACQUISITIONS. An element of the
Company's strategy is to review acquisition prospects that would complement its
existing product offerings, augment its market coverage, enhance its
technological capabilities or otherwise offer growth opportunities. Future
acquisitions by the Company could result in potentially dilutive issuances of
equity securities, the incurrence of debt and contingent liabilities, and
amortization expenses related to goodwill and other intangible assets, any of
which could have a material adverse effect on the Company's business, financial
condition or results of operations. Acquisitions entail numerous risks,
including difficulties in the assimilation of acquired operations, technologies
and products, diversion of management's attention from other business concerns,
risks of entering markets in which the Company has no or limited prior
experience and potential loss of key employees of acquired organizations. The
Company's management has limited experience in assimilating acquired
organizations. No assurance can be given as to the ability of the Company to
successfully integrate any businesses, products, technologies or personnel that
might be acquired in the future, and the failure of the Company to do so could
have a material adverse effect on the Company's business, financial condition or
results of operations.

CONCENTRATION OF OWNERSHIP; CONTROL BY MANAGEMENT. As of December 31,
1998, the Company's principal stockholder, HARAX Holding, S.A. ("HARAX"), held
approximately 20% of the Company's Common Stock, and the present directors and
executive officers of the Company and their affiliates, in the aggregate,
beneficially owned approximately 12% of the outstanding Common Stock, in each
case including shares issuable pursuant to stock options exercisable within 60
days of December 31, 1998. Consequently, HARAX together with the Company's
directors and executive officers, acting in concert, have the ability to
significantly affect the election of the Company's directors and have a
significant effect on the outcome of corporate actions requiring stockholder
approval. In addition, HARAX, acting alone, will have the power to significantly
affect matters relating to the Company's affairs and business.

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

YEAR 2000 COMPLIANCE. See "Item 7. Management's Discussion and
Analysis of Financial Condition and Results of Operations - Year 2000
Compliance."

16

ITEM 2. PROPERTIES.

The Company's principal corporate office and manufacturing facility
is located in Newark, California, which consists of approximately 95,000
square feet under a lease which expires in May 2007. The Company has an
option to extend the lease for five years. InVision relocated to this new
facility in October 1997. Management believes that the new facility will be
sufficient to satisfy InVision's administrative and manufacturing needs for
the foreseeable future.

ITEM 3. LEGAL PROCEEDINGS.

On January 7, 1999, Vivid Technologies, Inc. ("Vivid") filed a summons
and complaint (the "Complaint") in Superior Court of the State of California for
the County of San Diego against InVision, Quantum, ESI International, Inc.
("ESI"), Robert Price and Sandra Price (collectively, "Defendants"). The
Complaint asserts causes of action for (1) misappropriation of trade secrets;
(2) inducing breach of contract; (3) interference with contractual relations;
(4) statutory unfair competition; (5) common law unfair competition; (6)
interference with prospective economic advantage; (7) defamation; and (8)
declaratory relief (declaring that Vivid has not misappropriated trade secrets
from Quantum). On February 8, 1999, defendants InVision and Quantum filed an
answer in which they denied all material allegations of the complaint and
asserted various affirmative defenses. Discovery has only recently commenced. No
specific amount of damages has been requested.

This complaint was filed by Vivid following efforts by Quantum and a
private investigator hired by Quantum, ESI, to investigate the alleged theft of
intellectual property from Quantum by a former officer and employee hired by
Vivid and to bring certain evidence to the attention of the Federal Bureau of
Investigation ("FBI") and the United States Attorney for the Southern District
of California. The U.S. Attorney for the Southern District of California has
opened a grand jury investigation into the alleged theft of intellectual
property from Quantum and two subpoenas and a search warrant were issued and
executed. To the best of the Company's knowledge, this investigation remains
open. On February 10, 1999, defendants InVision and Quantum filed a motion for a
temporary stay of all civil proceedings, including discovery, for a period of
ninety (90) days. On March 5, 1999, the court granted the motion and ordered the
entire case, including discovery, stayed for 90 days. A status conference has
been set for June 11, 1999. Management believes that the outcome of this matter,
even if adverse, will not have a material adverse effect on the Company's
business, financial condition or results of operations.

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

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

Not applicable.

PART II.

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.

MARKET INFORMATION

On April 23, 1996, the Company's Common Stock commenced trading on the
Nasdaq SmallCap Market under the symbol "INVN". Prior to that date, there was no
public market for the Common Stock. On May 15, 1997, the Company's Common Stock
commenced trading on the Nasdaq National Market and ceased to trade on the
Nasdaq SmallCap Market.

17

The following table sets forth, for the periods indicated, the high and low
bid quotations of the Company Common Stock as reported on the Nasdaq SmallCap
Market/Nasdaq National Market giving effect to the Company's 2-for-1 stock
split effected on February 7, 1997 as if the stock split had occurred on
April 23, 1996. These over-the-counter quotations reflect inter-dealer
prices, without retail markup, markdown or commission, and may not
necessarily represent the sales prices in actual transactions.

Common Stock Market Price:

QUARTER ENDED 1998 MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
----------------------- ------------ ------------ --------------- ----------------

High $ 11 7/16 $ 9 15/16 $ 8 9/16 $ 7 9/16
Low $ 6 5/8 $ 7 3/8 $ 5 3/4 $ 3 13/16

QUARTER ENDED 1997 MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
----------------------- ------------ ------------ --------------- ----------------

High $ 17 5/8 $ 16 3/4 $ 16 7/8 $ 14 5/8
Low $ 13 5/8 $ 12 1/16 $ 12 7/8 $ 6 15/16

On March 26, 1999, the last sale price of the Company Common Stock on
the Nasdaq National Market was $5.00 per share. On March 5, 1999, there were
approximately 369 stockholders of record of the Company Common Stock.

In May 1998, the Board of Directors of the Company adopted a stock
repurchase program, in which management of the Company is authorized to
repurchase up to 500,000 shares of the Company's Common Stock on the open
market at prevailing market prices or in negotiated transactions off the
market. As of December 31, 1998, the Company had repurchased approximately
115,000 shares of its Common Stock. The Company has not repurchased any
shares since October 1998 and there can be no assurance that all of such
shares will ultimately be repurchased by the Company.

DIVIDENDS

The Company has never declared or paid cash dividends on its Common
Stock and it is currently the intention of the Board of Directors not to pay
cash dividends in the foreseeable future. The Company plans to retain earnings,
if any, to finance its operations. In addition, the Company's bank credit
facility prohibits the payment of dividends without the lender's consent.

RECENT SALES OF UNREGISTERED SECURITIES

From January 1, 1998 through December 31, 1998, the Company neither
sold nor issued any unregistered securities.

18

ITEM 6. SELECTED FINANCIAL DATA

The following table sets forth for the periods and the dates indicated
certain consolidated financial data, which should be read in conjunction with
"Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations" and the consolidated financial statements and notes thereto
included elsewhere herein. In September 1997, InVision acquired Quantum in a
stock-for-stock transaction accounted for as a pooling of interests;
accordingly, all prior periods have been restated to include Quantum's results.

YEAR ENDED DECEMBER 31,
- ------------------------------------------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------------------
(In thousands, except per share data)

OPERATIONS

Revenues $ 63,284 $ 56,427 $ 15,841 $ 9,066 $ -
Cost of revenues 34,946 28,027 9,736 6,777 -
-------- -------- -------- ------ --------
Gross profit 28,338 28,400 6,105 2,289 -
-------- -------- -------- ------ --------

Operating expenses:
Research and development (a) 6,511 7,375 2,801 2,247 1,155
Sales and marketing 6,296 6,130 3,800 2,182 812
General and administrative 6,701 6,193 3,768 2,307 1,556
Acquisition costs - 685 - - -
-------- -------- -------- ------ --------
Total operating expenses 19,508 20,383 10,369 6,736 3,523
-------- -------- -------- ------ --------

Income (loss) from operations 8,830 (b) 8,017 (b) (4,264)(b) (4,447)(b) (3,523)
Interest expense (390) (428) (1,599)(c) (482) (429)
Interest and other income, net 697 242 187 34 7
-------- -------- -------- ------ --------
Income (loss) before provision for income taxes 9,137 7,831 (5,676) (4,895) (3,945)

Provision for income taxes 1,096 1,192 - - -
-------- -------- -------- ------ --------

Net income (loss) $ 8,041 $ 6,639 $ (5,676) $ (4,895) $ (3,945)
-------- -------- -------- ------ --------
-------- -------- -------- ------ --------
Net income (loss) per share:
Basic $ 0.67 $ 0.60 $ (0.90) $ (19.98) $ (25.45)
-------- -------- -------- ------ --------
-------- -------- -------- ------ --------
Diluted $ 0.63 $ 0.55 $ (0.90) $ (19.98) $ (25.45)
-------- -------- -------- ------ --------
-------- -------- -------- ------ --------
Weighted average shares outstanding:
Basic 12,046 11,141 6,338 245 155
Diluted 12,827 12,166 6,338 245 155

DECEMBER 31,
----------------------------------------------------------------
1998 1997 1996 1995 1994
-------- -------- -------- ------ --------
(In thousands)

FINANCIAL POSITION
Cash, cash equivalents and short-term investments $ 12,457 $ 19,190 $ 2,471 $ 3,715 $ 2,328
Working capital (deficit) $ 38,911 $ 31,806 $ 6,875 $(2,785) $(5,319)
Total assets $ 63,486 $ 57,251 $16,949 $ 9,863 $ 5,388
Long-term obligations $ 1,565 $ 1,336 $ 144 $ 95 $ -
Total stockholders' equity (deficit) $ 46,830 $ 38,816 $ 8,875 $(1,619) $(4,573)

- --------------
(a) Net of amounts reimbursed under research and development contracts and
grants with governmental agencies and private entities of $10.8 million,
$8.5 million, $4.9 million, $3.1 million and $3.3 million during 1998,
1997, 1996, 1995 and 1994, respectively. See Note 5 to the Consolidated
Financial Statements.

(b) The Company recorded noncash charges related to grants of stock options
having exercise prices below the fair market value on the date of grant to
employees and directors in the amounts of $68,000, $425,000, $489,000 and
$362,000 in 1998, 1997, 1996 and 1995, respectively. See Note 8 to the
Consolidated Financial Statements.

(c) The Company recorded a noncash charge resulting from amortization of a
discount in connection with Warrants in the amount of $1.3 million in 1996.
See Note 6 to the Consolidated Financial Statements.

19

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

THE FOLLOWING DISCUSSION CONTAINS FORWARD-LOOKING STATEMENTS WHICH
INVOLVE RISKS AND UNCERTAINTIES. WHEN USED IN THIS DISCUSSION, THE WORDS
"ANTICIPATE," "BELIEVE," "ESTIMATE," AND "EXPECT" AND SIMILAR EXPRESSIONS AS
THEY RELATE TO THE COMPANY OR ITS MANAGEMENT ARE INTENDED TO IDENTIFY SUCH
FORWARD-LOOKING STATEMENTS. THE COMPANY'S ACTUAL RESULTS, PERFORMANCE OR
ACHIEVEMENTS COULD DIFFER MATERIALLY FROM THE RESULTS EXPRESSED IN, OR
IMPLIED BY, THESE FORWARD-LOOKING STATEMENTS. FACTORS THAT COULD CAUSE OR
CONTRIBUTE TO SUCH DIFFERENCES INCLUDE RISKS RELATED TO MARKET ACCEPTANCE OF
THE COMPANY'S MAIN PRODUCT, INCLUDING THE LOSS OF THE COMPANY'S ORDER FROM
THE FAA OR THE FAILURE TO OBTAIN ADDITIONAL ORDERS, LOSS OF ANY OF THE
COMPANY'S SOLE SOURCE SUPPLIERS, INTENSE COMPETITION, RELIANCE ON LARGE
ORDERS, CONCENTRATION OF THE COMPANY'S CUSTOMERS, RISKS RELATED TO THE
LENGTHY SALES CYCLES FOR THE COMPANY'S PRODUCTS, BUDGETING LIMITATIONS OF THE
COMPANY'S CUSTOMERS AND PROSPECTIVE CUSTOMERS, RISKS INHERENT TO THE
DEVELOPMENT AND PRODUCTION OF NEW PRODUCTS AND NEW APPLICATIONS AND THE
CERTIFICATION OF CERTAIN OF THESE PRODUCTS, AS WELL AS THOSE DISCUSSED IN
"ITEM 1. BUSINESS" AND MORE PARTICULARLY IN THE "BUSINESS RISKS" SECTION
THEREOF.

OVERVIEW

InVision Technologies, Inc. ("InVision" or together with its
subsidiaries, the "Company") designs, manufactures and markets explosive
detection systems ("EDS") based on advanced computed tomography ("CT")
technology. InVision was formed in September 1990 to design and develop an EDS
based on CT technology and exited the development stage in 1995 upon the first
commercial sales of its product, the CTX 5000 system. Since such time, the
Company has received orders for a total of 148 CTX 5000 Series systems of which
a total of 146 had been shipped as of December 31, 1998. Today, the Company
markets its more advanced CTX 5500 explosive detection system and has other
products under development. To date, the Company's CTX 5000 system and the CTX
5500 system (together, the "CTX 5000 Series") are the only explosive detection
systems certified by the Federal Aviation Administration ("FAA") currently
deployed for use in the inspection of checked luggage on commercial flights. For
the years ended December 31, 1998, 1997 and 1996, the Company had revenues of
$63.3 million, $56.4 million and $15.8 million, respectively, and as of December
31, 1998 the Company had in backlog equipment orders and service agreements of
approximately $10.1 million. In the first quarter of 1999, the Company received
an order from the FAA in the amount of $18.9 million for an additional 21 CTX
5500 systems.

On September 30, 1997, InVision acquired Quantum, a privately-held
developer of explosives detection equipment based on quadrupole resonance
("QR") technology. The transaction has been accounted for as a pooling of
interests in the quarter ended September 30, 1997; therefore, all prior
periods have been restated to include Quantum's results. Quantum is currently
a development stage company with products in the prototype stage. Quantum is
also a leading supplier of research and development services in the area of
QR technology to a number of government agencies.

The Company considers research and development to be a vital part of
its operating discipline and continues to dedicate substantial resources to
research to enhance the performance, functionality and reliability of its CTX
5000 Series hardware and software as well as to the development of its next
generation system, the CTX 9000 system. At December 31, 1998, the Company had
100 full-time employees engaged in research and development activities while
also using the services of 7 specialized contract employees and consultants
in this area. Total research and development expenditures by the Company are
partially offset by amounts reimbursed by the FAA and other government
agencies and private entities under research and development contracts and
grants. The Company believes that investment in research and development in
absolute dollars will increase substantially to meet its future needs
regardless of the level of funding received from research and development
contracts and grants. For the years ended December 31, 1998, 1997 and 1996,
the Company spent $18.1 million, $15.9 million and $7.7 million,
respectively, on research and development activities. Of these amounts, $10.8
million, $8.5 million and $4.9 million, respectively, were funded under
research and development contracts and grants. To the extent that research
and development contracts and grants receipts decline in the future, research
and development expenses borne by the Company would increase, and the Company
expects that its results of operations would be adversely impacted. As of
December 31, 1998, the Company had in backlog research and development
contracts and grants of approximately $5.3 million. An additional $2.1
million research and development grant was received at the end of the first
quarter of 1999.

In any given year, the Company's revenues have principally consisted,
and the Company believes will continue to consist, of orders of multiple units
from a limited number of customers. For the year ended December 31, 1998, $37.9
million, or 59.9%, of the Company's revenues, were generated from sales to the
Company's largest customer, the U.S. government. For the year ended December 31,
1997, revenues from the Company's largest customer, the U.S. government, were
$32.1 million, or 56.9%, of the Company's revenues. There were no other
significant customers who accounted for more than 10% of the Company's revenues
in 1998 and 1997. For the year ended December 31, 1996, $14.0 million, or 88.4%,
of the Company's revenues were generated from six customers who individually
accounted for more than 10% of the Company's revenues. No revenues were
generated from sales to the U.S. government in 1996.

20

The Company markets its products both directly through internal sales
personnel and indirectly through authorized agents, distributors and systems
integrators. In the United States, the Company markets its CTX 5000 Series
primarily through direct sales personnel. Internationally, the Company utilizes
both a direct sales force and authorized agents to sell its products. For the
years ended December 31, 1998, 1997 and 1996, international sales represented
33.7%, 43.0% and 76.2%, respectively, of the Company's revenues.

The sales cycle of the CTX 5000 Series is often lengthy due to the
protracted approval process that typically accompanies large capital
expenditures and the time required to manufacture, install and assimilate the
CTX 5000 Series. Typically, six to twelve months may elapse between a new
customer's initial evaluation of the Company's systems and the execution of a
contract. Another three months to a year may elapse prior to shipment of the CTX
5000 Series as the customer site is prepared and the system is manufactured.
During this period the Company expends substantial funds and management
resources but recognizes no associated revenue.

The Company recognizes revenue on shipment unless extended acceptance
criteria exist, in which case revenue is recognized upon achievement of such
acceptance criteria. The Company typically requires customer deposits in advance
of shipment on customer purchase orders. Provision for estimated installation,
training, and warranty costs is recorded at the time revenue is recognized.
Systems typically carry a one-year warranty.

RESULTS OF OPERATIONS

The following table sets forth certain income and expenditure items from the
Company's consolidated statements of operations expressed as a percentage of
revenues for the periods indicated.

Year Ended December 31,
--------------------------------------------
1998 1997 1996
---------- ---------- ----------

Revenues 100.0 % 100.0 % 100.0 %
---------- ---------- ----------
Cost of revenues 55.2 49.7 61.5
---------- ---------- ----------
Gross Profit 44.8 50.3 38.5
---------- ---------- ----------
Operating expenses:
Research and development 10.3 13.1 17.7
Sales and marketing 9.9 10.8 24.0
General and administrative 10.6 11.0 23.8
Acquisition costs - 1.2 -
---------- ---------- ----------
Total operating expenses 30.8 36.1 65.5
---------- ---------- ----------
---------- ---------- ----------
Income (loss) from operations 14.0 14.2 (27.0)
Interest expense (0.6) (0.8) (10.1)
Interest and other income, net 1.1 0.5 1.2
---------- ---------- ----------
Income (loss) before provision for income taxes 14.5 13.9 (35.9)

Provision for income taxes 1.7 2.1 -
---------- ---------- ----------
Net income (loss) 12.8 % 11.8 % (35.9)%
---------- ---------- ----------
---------- ---------- ----------

COMPARISON OF FISCAL YEARS ENDED DECEMBER 31, 1998 AND 1997

REVENUES. The Company's revenues are comprised of system revenues,
which include sales of the CTX 5000 Series, accessories, installation and
configuration, and maintenance related to product support. Quantum research
and development contracts and grants were reported as revenues prior to the
acquisition by InVision. All Quantum research and development revenues have
been classified as a reduction to research and development expense in
accordance with the Company's policy.

Revenues were $63.3 million in 1998, an increase of 12.2% from the $56.4
million in 1997. The increase in 1998 revenues is primarily attributable to
increased sales of the CTX 5000 Series, reflecting a 10.7% increase in unit
shipments to 62 units in 1998 (37 units to the FAA, 4 units to San Francisco
Airport and 21 units to international customers) from the 56 units in 1997 (32
units to the FAA and 24 units to international customers) plus the shipment of
32 of the 59 CTX 5500 upgrade kits purchased by the FAA and the commencement of
maintenance related revenues in the domestic market. These factors were
partially offset by lower average selling prices of systems shipped in 1998 due
to configurations of units shipped and volume discounts in the second quarter of
1998. The Company typically ships against a backlog of orders for its

21

products. As of December 31, 1998, the Company had in backlog equipment
orders and service agreements of approximately $10.1 million. In the first
quarter of 1999, the Company received an order from the FAA in the amount of
$18.9 million for an additional 21 CTX 5500 systems.

GROSS PROFIT. Cost of revenues primarily consists of purchased materials
procured for use in the assembly of the Company's products, as well as
manufacturing labor and overhead, warranty costs and costs associated with
service agreements. In any given period the Company's gross profit may be
affected by several factors, including revenue mix, product configuration,
location of the installation, and complexity of integration into various airport
environments.

Gross profit was $28.3 million in 1998 compared to $28.4 million in
1997. Gross margins were 44.8% and 50.3%, respectively. The decrease in gross
margins was primarily due to higher manufacturing overhead costs as a result of
the Company's relocation to a new facility in late 1997, and configurations of
units shipped and volume discounts in the second quarter of 1998 that resulted
in lower average selling prices of systems in 1998.

RESEARCH AND DEVELOPMENT. Research and development expenditures
consist primarily of compensation paid to personnel engaged in research and
development activities, amounts paid for outside services, and costs of
materials utilized in the development of hardware products, including
prototype units. Research and development expenditures by the Company are
partially offset by amounts reimbursed by the FAA and other government
agencies and private entities under research and development contracts and
grants. These services are provided on both a cost and cost plus basis. The
Company believes that research and development expenditures in absolute
dollars will increase substantially in the future regardless of the level of
funding received from the FAA and other government agencies and private
entities.

Net research and development expenses would have been $7.3 million in
1998 without the capitalization of software development costs in accordance with
Statement of Financial Accounting Standards No. 86 ("SFAS 86"), "Accounting for
the Costs of Computer Software to be Sold, Leased, or Otherwise Marketed." Under
SFAS 86, software production costs for computer software that is to be used as
an integral part of the product or process are to be capitalized once
technological feasibility has been established for the software and all research
and development activities for the other components of the product or process
have been completed. In prior years, the period between achieving technological
feasibility and the availability of software included in the Company's product
was short and software development costs qualifying for capitalization had been
insignificant. Before considering the impact of software capitalization, gross
research and development expenditures were $18.1 million in 1998, an increase of
13.9% from the $15.9 million in 1997. Of these amounts, $10.8 million and $8.5
million, respectively, were funded by research and development contracts and
grants from the FAA and other government agencies and private entities. As a
percentage of revenues, net research and development expenditures were 10.3% in
1998 compared to 13.1% in 1997. The increase in gross research and development
expenditures is primarily the result of personnel additions and increased
spending on engineering materials and services.

SALES AND MARKETING. Sales and marketing expenses consist primarily of
compensation paid to direct and indirect sales and marketing personnel,
consultant fees, travel related to the sales process, and other selling and
distribution costs.

Sales and marketing expenses were $6.3 million in 1998, an increase of
2.7% from the $6.1 million in 1997. As a percentage of revenues, sales and
marketing expenses declined to 9.9% in 1998 from 10.8% in 1997. The increase in
sales and marketing expenditures in absolute dollars for 1998 reflect increased
selling costs associated with the higher unit sales, including foreign travel,
trade shows, public relations and commissions, as well as increases in staffing.

GENERAL AND ADMINISTRATIVE. General and administrative expenses consist
primarily of compensation paid to administrative personnel, including directors,
consultant fees, professional service fees, insurance, travel and other general
expenses.

General and administrative expenses were $6.7 million in 1998, an
increase of 8.2% from the $6.2 million in 1997. As a percentage of revenues,
general and administrative expenses were 10.6% in 1998 and 11.0% in 1997. The
increase in general and administrative expenses in absolute dollars for 1998 is
primarily the result of personnel additions and increased professional and
consulting costs associated with the Company's growth, increased insurance
costs, and increased costs of operations associated with being a publicly traded
company.

ACQUISITION COSTS. In 1997, the Company incurred one-time costs for
professional fees and costs related to the acquisition of Quantum. The
acquisition costs were $685,000, or 1.2%, of the total revenues.

INTEREST EXPENSE. Interest expense decreased to $390,000 in 1998 from
$428,000 in 1997. Interest expense in 1998 resulted primarily from debt
financing associated with the Company's working capital lines of credit,
equipment term loans and capital leases. Interest expense in 1997 resulted
primarily from short-term debt outstanding during the period.

22

INTEREST AND OTHER INCOME, NET. Interest and other income, net,
increased to $697,000 in 1998 from $242,000 in 1997. The 1998 amount consists
primarily of interest income on short-term investments and interest bearing cash
accounts of $754,000, offset by other expense of $57,000. The 1997 amount of
$242,000 consists primarily of interest income on short-term investments and
interest bearing cash accounts of $724,000, offset by a loss of $402,000 on the
sale of Quantum stock prior to the Quantum acquisition and other expense of
$80,000.

INCOME TAXES. The Company's effective tax rate for 1998 and 1997 was
12.0% and 15.2%, respectively. The Company's effective tax rate for 1998 and
1997 was lower than statutory tax rates primarily due to the utilization of net
operating loss carryforwards. At December 31, 1998, the Company had federal net
operating loss carryforwards of approximately $6.0 million available to reduce
future federal taxable income and $1.7 million available to reduce state taxable
income. The Company's net operating loss carryforwards expire from 2005 to 2011.

COMPARISON OF FISCAL YEARS ENDED DECEMBER 31, 1997 AND 1996

REVENUES. Revenues increased by 257% to $56.4 million in 1997 from $15.8
million in 1996. The increase in 1997 revenues is attributable to increased
sales of the CTX 5000 system, reflecting a 211% increase in unit shipments to 56
units in 1997 from 18 units in 1996 and, to a lesser extent, changes in product
configuration leading to an increase in the average selling price per unit and
sales of add-on products to current customers and the commencement of
significant maintenance related revenues. The Company typically ships against a
backlog of orders for its product. The backlog as of December 31, 1997 decreased
approximately 45% to $32 million from approximately $58 million as of December
31, 1996.

GROSS PROFIT. Gross profit increased by 365% to $28.4 million in 1997
from $6.1 million in 1996. Gross margins were 50.3% in 1997 and 38.5% in 1996.
The increase in gross margins was primarily caused by lower unit costs resulting
from increased manufacturing efficiency and reduced overhead cost per unit due
to increased volume, as well as changes in product configurations leading to an
increase in the average selling price. Increased operating efficiencies
resulting from a larger installed base also reduced the average cost of
maintenance and warranty service.

RESEARCH AND DEVELOPMENT. Total gross research and development
expenditures increased by 106% to $15.9 million in 1997 from $7.7 million in
1996. Of these amounts, $8.5 million and $4.9 million, respectively, were funded
by research and development contracts and grants in 1997 and 1996. As a
percentage of revenues, total research and development expenditures (before
funding offsets) declined to approximately 28.2% in 1997 from 48.7% in 1996. The
increase in absolute dollar expenditures reflects the effects of personnel
additions, costs of prototype development, efforts to increase throughput and
develop systems for more effective airport integration, and conceptual design.
Research and development expense (net of funding) as a percentage of revenues
declined to approximately 13.0% in 1997 from 17.7% in 1996.

SALES AND MARKETING. Sales and marketing expenses increased by 61% to
$6.1 million in 1997 from $3.8 million in 1996. As a percentage of revenues,
sales and marketing expenses declined to 10.8% in 1997 from 24.0% in 1996. The
increased levels of expenditures in absolute dollars for 1997 and 1996 reflect
increased selling costs associated with the higher unit sales, including foreign
travel, trade shows, public relations and commissions.

GENERAL AND ADMINISTRATIVE. General and administrative expenses
increased by 64% to $6.2 million in 1997 from $3.8 million in 1996. As a
percentage of revenues, general and administrative expenses were 11.0% for 1997
and 23.8% for 1996. The increase in absolute dollars in 1997 reflects increased
costs of operating as a public company. In addition, the increases for 1997
reflect additions to support capabilities required by the growth in revenues and
corporate headcount.

ACQUISITION COSTS. The Company incurred one-time costs for professional
fees and costs related to the acquisition of Quantum. The acquisition costs
were $685,000, or 1.2%, of the total revenues.

INTEREST EXPENSE. Interest expense decreased to $428,000 in 1997 from
$1.6 million in 1996. Interest expense during 1997 resulted primarily from
short-term debt outstanding during the period and included $13,000 of warrant
discount. Interest expense in 1996 reflects the effect of $1.3 million of
amortization of the fair market value of warrants issued in connection with a
bridge loan obtained in December 1995.

INTEREST AND OTHER INCOME, NET. The Company recognized net interest and
other income of $242,000 and $187,000 in 1997 and 1996, respectively. The 1997
amount of $242,000 represents interest income of $724,000, offset by a loss of
$402,000 on the sale of Quantum stock prior to the Quantum acquisition and other
expense of $80,000.

INCOME TAXES. The Company's effective tax rate for 1997 was 15.2%. The
Company's effective tax rate for 1997 was lower than statutory tax rates
primarily due to the utilization of net operating loss carryforwards. There were
no provisions for income taxes in 1996 as 1997 was the Company's first year of
taxable income. At December 31, 1997 the Company had federal net operating loss
carryforwards of approximately $13.7 million available to reduce future federal
taxable income. The Company's net operating loss carryforwards expire from 2005
to 2011.

23

NONCASH CHARGES

The Company recorded noncash charges related to grants of stock
options having exercise prices below the fair market value on the date of
grant to employees and directors in the amounts of $68,000, $425,000 and
$489,000 in 1998, 1997 and 1996, respectively.

LIQUIDITY AND CAPITAL RESOURCES

Since inception, the Company has financed its operations primarily
through private sales of $16.5 million of Preferred and Common Stock (of which
$5.6 million represents indebtedness converted to equity), the sale of $9.5
million of Common Stock in the Company's initial public offering in April 1996,
the sale of $21.2 million of Common Stock in the Company's follow-on offering in
May 1997 and short-term borrowings under a working capital line of credit. At
December 31, 1998, the Company had $12.5 million in cash, cash equivalents and
short-term investments, compared to $19.2 million at December 31, 1997. Working
capital was $38.9 million at December 31, 1998 compared to $31.8 million at
December 31, 1997.

Net cash used in operations was $2.6 million in 1998 compared to $1.8
million in 1997. Net cash used in operations in 1998 was primarily due to net
income of $8.0 million plus a $2.3 million increase in accrued liabilities and
the $2.0 million noncash effect of depreciation and amortization which were more
than offset by a $10.1 million increase in accounts receivable due to the timing
of sales in the latter part of the fourth quarter of 1998, a $1.9 million
decrease in deferred revenues, a $1.7 million decrease in accounts payable, a
$1.2 million increase in other current assets and a $1.0 million increase in
inventories. Net cash used in operations in 1997 was primarily due to net income
of $6.6 million plus a $4.9 million increase in accounts payable and accrued
liabilities, and the $ 1.3 million in noncash effect of depreciation and
amortization which were more than offset by a $9.9 million increase in accounts
receivable and a $5.9 million increase in inventories.

Net cash used in investing activities was $13,000 in 1998 compared to
$13.7 million in 1997. Net cash used in investing activities in 1998 was
primarily due to $2.9 million in purchases of new equipment and $0.8 million in
additions to other noncurrent assets related to the capitalization of software
development costs, offset by $3.1 million in proceeds on sales of short-term
investments (net of purchases) and $0.6 million from the release of long-term
restricted cash. Net cash used in investing activities in 1997 was primarily due
to $6.3 million in purchases of property and equipment, $5.1 million in proceeds
on sales of short-term investments (net of purchases) and $2.4 million in
additions to long-term restricted cash. At December 31, 1998, the Company had no
material commitments for the purchase of capital equipment.

Net cash used in financing activities was $1.0 million in 1998 compared
to $27.2 million provided by financing activities in 1997. Net cash used in
financing activities in 1998 was primarily due to $1.2 million in net repayments
of short-term debt financing (principally, short-term borrowings under the lines
of credit) and $0.9 million for the repurchase of 115,000 shares of the
Company's Common Stock at prevailing market prices, partially offset by $0.8
million in proceeds from sales under the employee stock purchase plan and
exercises of incentive stock options, and $0.3 million in proceeds from
long-term debt financing. Future repurchases of the Company's Common Stock would
be based on market conditions and evaluated on a case by case basis. Net cash
provided by financing activities in 1997 was due primarily to $21.2 million in
proceeds from the issuance of Common Stock primarily associated with the
Company's follow-on public offering in May 1997 and $4.4 million in proceeds
from debt financing, net of repayments.

The Company has two one-year revolving line of credit agreements with
Silicon Valley Bank. The first agreement provides for maximum borrowings in an
amount up to the lower of 80% of domestic eligible accounts receivable or $4.5
million. The second agreement is partially guaranteed by the Export-Import Bank
of the United States and provides for maximum borrowings in an amount up to the
lower of the sum of 90% of eligible export accounts receivable plus 70% of
eligible raw materials and work-in-process inventory designated for export
customers or $4.5 million. Borrowings under both agreements bear interest at the
bank's prime rate (7.75% at December 31, 1998) and are secured by all of the
Company's assets other than its intellectual property. The agreements require
that the Company maintain certain financial ratios and levels of tangible net
worth and profitability and also prohibit the Company from paying dividends.
Proceeds of loans under both lines of credit may be used for general corporate
purposes. At December 31, 1998, the Company had outstanding borrowings of $2.9
million under the lines of credit and guarantees through issuance of letters of
credit to customers secured by the lines of credit totaling $1.6 million. The
remaining available borrowing capacity under the lines of credit was $1.2
million at December 31, 1998 based on eligible accounts receivable and
inventories as of that date. The agreements expire in April 1999 and the Company
is in the process of renewing the revolving line of credit agreements with
Silicon Valley Bank.

The Company has a committed equipment line of credit agreement with
Silicon Valley Bank that transforms into a term loan after drawdown. The
agreement provides for borrowings up to $1.75 million. Borrowings under this
agreement bear interest at the bank's prime rate (7.75% at December 31, 1998)
plus 1.00% or a fixed rate equal to 4.25% above the

24

yield of 36 or 60 month Treasury Notes based on the assets purchased or
financed (Treasury Note rates at December 31, 1998: 36 months - 4.67%; 60
months -4.54%). Borrowings are secured by the assets purchased or financed.
At December 31, 1998, the Company had outstanding borrowings of $1.2 million
and remaining borrowing capacity of $0.5 million under the line of credit.
The agreement expires in April 1999 and the Company is in the process of
renewing the committed equipment line of credit agreement with Silicon Valley
Bank.

The Company believes that cash, cash equivalents and short-term
investments together with available borrowing under its lines of credit and
funds expected to be generated from operations will be sufficient to finance its
working capital and capital expenditure requirements for at least the next 12
months.

INTEREST RATE RISK

The Company's exposure to market risk for changes in interest rates
relates primarily to the increase or decrease in the amount of interest income
the Company can earn on its investment portfolio and on the increase or decrease
in the amount of interest expense the Company must pay with respect to its
various outstanding debt instruments with interest rates which are tied to
market rates. The Company does not use derivative financial instruments in its
investment portfolio. The Company ensures the safety and preservation of its
invested principal funds by limiting default risks, market risk and reinvestment
risk. The Company mitigates default risk by investing in high-credit quality
securities.

FOREIGN EXCHANGE RISK AND IMPACT OF INFLATION

The Company's international system sales and maintenance contracts are
generally denominated in U.S. dollars. Purchases of raw materials and other
inventory components are primarily denominated in U.S dollars, however, when
denominated in foreign currencies, are generally made on an as needed basis. The
Company generally does not have material advance purchase commitments in foreign
currencies.

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 very significant, however, the
Company expects they will increase as the Company's installed base increases.
The Company does not hedge foreign currency risks.

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

YEAR 2000 COMPLIANCE

DEFINITION. The Year 2000 issue is the result of a common computer
programming convention that represents years in two digits (e.g. "98" for
"1998"). Beginning in the year 2000, these date code fields may need to
accept four digit entries to distinguish 21st century dates from 20th century
dates. When the millennium date change occurs, these date sensitive systems
and products may recognize the year 2000 as the year 1900, or not at all.
This inability to recognize or properly treat the year 2000 may result in
system failure or cause systems to process critical operational or financial
information incorrectly.

Since the market for explosive detection systems certified by the FAA
is the Company's largest market and the FAA is the Company's largest
customer, the Company has determined to apply the FAA definition of Year 2000
compliance as stated in the FAA's Year 2000 Certificate of Compliance to all
of its products and operations:

Year 2000 compliant means information technology that accurately
processes date/time data (including, but not limited to, calculating,
comparing, and sequencing) from, into, and between the twentieth and
twenty-first centuries, and the years 1998, 1999, 2000, and leap year
calculations. Furthermore, year 2000 compliant information technology,
when used in combination with other information technology, shall
accurately process date/time data if the other information technology
properly exchanges date and time data with it.

METHODOLOGY: ACHIEVING YEAR 2000 READINESS. In 1997, the Company began
Year 2000 product assessment and planning to identify and remediate any
compliance issues regarding product operation. In December 1998, the Company
instituted a more comprehensive Year 2000 project designed to identify and
assess the risks associated with its operations and infrastructure, information
systems, suppliers and customers that were not Year 2000 compliant, and to
develop, implement, and test remediation and contingency plans to mitigate these
risks. The project, which is still in process, comprises four phases: (1)
identification of risks; (2) assessment of risks; (3) development of remediation
and contingency plans; and (4) implementation and testing.

THE STATUS OF THE COMPANY'S PRODUCTS

CTX 5500 SYSTEM AND UPGRADE KITS. The FAA has tested and certified
that the current version of the CTX 5500 and the CTX 5500 upgrade kit are
compliant with its Year 2000 compliance definition. This testing and
certification was performed using the FAA Year 2000 (Y2K) Repair Process and
Standards Handbook, as managed by a third-party contracted by the FAA. All
CTX 5500 systems shipped beginning in 1999 are compliant. All CTX 5500
systems purchased by the FAA and shipped prior to January 1, 1999, have been
upgraded to compliance. Other CTX 5500 systems shipped prior to January 1,

25

1999 are not compliant but will CTX 5500 systems shipped prior to January 1,
1999 are not compliant but will be upgraded to compliance with the FAA
standard by InVision at no charge to the customer if under an InVision
warranty or service contract.

CTX 5000 SYSTEM. Identification and assessment of risks and
establishment of fixes and upgrades have been completed for all released product
software. With respect to hardware the Company has recently completed a
component review for embedded chips, clocks and supplier testing of Year 2000
compliance and found no material compliance issues. Although it will not be
tested by the FAA, the fix for the CTX 5000 is being designed to meet the FAA
Year 2000 compliance definition and the Company plans to use a test plan on the
CTX 5000 similar to the one used by the FAA in certifying compliance of the CTX
5500. The CTX 5000 Year 2000 fix is planned to be released by the end of the
second quarter of 1999. However, this schedule is dependent on investigation and
testing of older configurations using older revision components that is not yet
complete. Customers under warranty or service contract will receive this fix at
no charge. Alternatively, CTX 5000 customers may purchase a CTX 5500 upgrade kit
which provides the compliance certified by the FAA (and also offers other
operational benefits). This upgrade kit has been purchased and installed on all
CTX 5000 systems previously purchased by the FAA.

COMPANY INFRASTRUCTURE. With respect to the Company's internal
computerized systems in its manufacturing, information, facilities and financial
and administrative areas, the Company has completed phases one and two
(identification and assessment of risks) and is the early stage of phase three
(development of remediation and contingency plans). Outside consultants have
been engaged to assist the Director of Quality Assurance and the Executive Staff
under the direction of the Chief Operating Officer to complete this process,
including the implementation of any necessary solutions and the design of any
necessary contingency plans. At this point in its review, the company is not
currently aware of any Year 2000 problems relating to systems operated by the
Company which cannot be resolved which could have a material adverse effect on
the Company's business, results of operations or financial condition. The
Company expects to have all phases of this portion of the project completed by
the end of the second quarter of 1999.

SUPPLIERS AND CUSTOMERS. The Company has submitted a survey to all
current suppliers of products and services and is in the process of receiving
and evaluating their responses. However, the early phase of this stage of the
project means that the Company cannot yet predict whether significant problems
will be identified and cannot yet determine the extent of any contingency
planning that may be required. Even when completed, where the information
provided is not subject to verification by internal testing, the Company is
vulnerable to any failure by its major suppliers, service providers and
customers (including airports and airlines which are the end-users of its
products) to identify the full extent of and successfully remedy their own
internal Year 2000 issues. This failure could have a material adverse effect on
the Company's supplies, orders or installation schedules. The Company is unable
to estimate the nature or extent of any potential adverse impact resulting from
the failure of third parties to achieve Year 2000 compliance. Moreover, such
third parties, even if Year 2000 compliant, could experience difficulties
resulting from Year 2000 issues that may affect their suppliers, service
providers and customers. As a result, although the Company does not currently
anticipate that it will experience any material shipment delays from its major
product suppliers or any material sales delays from its major customers due to
Year 2000 issues based on information developed through the current stage of its
year 2000 project, these third parties may nonetheless experience Year 2000
problems. Any such problems could have a material adverse effect on the
Company's results of operations and financial condition.

COSTS OF COMPLIANCE. Based on the status of the Company's efforts to
date to prepare for the Year 2000, the Company believes that the costs of
compliance with respect to both its products and its infrastructure, including
third party suppliers, will not exceed $500,000. As of December 31, 1998
approximately $43,000 had already been incurred.

RISKS OF NON-COMPLIANCE. The Company has not yet completed its
assessments, developed remediation or contingency plans for all problems, or
completely implemented or tested any of its remediation plans other than for the
CTX 5500 system and CTX 5500 upgrade. As the Year 2000 project continues, the
Company may discover additional Year 2000 problems, may not be able to develop,
implement, or test remediation and contingency plans, or may find that the costs
of these activities exceed current estimates of not more than $500,000. To the
extent the Company does not identify any material non-compliant systems operated
by the Company or by third parties, such as the Company's suppliers, service
providers or customers, the most reasonably likely worst-case scenario is a
systemic failure beyond the control of the Company, such as a prolonged
telecommunications or electrical failure, or a general disruption in the United
States or global business activities that could result in a significant
downturn. The Company believes that the primary business risks, in the event of
such failure or other disruption, would include but not be limited to, loss of
customers or orders, delays in installation, increased operating costs,
inability to obtain inventory on a timely basis, disruptions in product
shipments, or other business interruptions of a material nature, as well as
claims of mismanagement, misrepresentation, or breach of contract, any of which
could have a material adverse effect on the Company's business, results of
operations and financial condition.

26

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The Company's Consolidated Financial Statements and Notes thereto appear on
pages F-1 to F-19 of this Annual Report on Form 10-K.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

None.

PART III.

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The information required by Item 10 is incorporated by reference to the
Proxy Statement to be filed no later than April 30, 1999 in connection with the
solicitation of proxies for the Company's Annual Meeting of Stockholders to be
held May 27, 1999 (the "Proxy Statement") under the caption "Proposal No.
1-Election of Directors-Nominees." For the information required as to Executive
Officers, see "Item 1. Business-Executive Officers", Part I.

ITEM 11. EXECUTIVE COMPENSATION

The information required by Item 11 is incorporated by reference to the
Proxy Statement under the captions "Proposal No. 1-Election of Directors" and
"Executive Compensation."

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

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

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The information required by Item 13 is incorporated by reference to the
Proxy Statement under the captions "Proposal No. 1-Election of Directors" and
"Certain Transactions."

PART IV.

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

(a)(1) Financial Statements

The consolidated financial statements required by this item are
submitted in a separate section beginning on page F-1 of this
report.

Report of PricewaterhouseCoopers LLP, Independent Accountants...................... F-1

Consolidated Balance Sheets as of December 31, 1998 and 1997....................... F-2

Consolidated Statements of Operations for the Years Ended
December 31, 1998, 1997 and 1996................................................... F-3

Consolidated Statements of Cash Flows for the Years Ended
December 31, 1998, 1997 and 1996................................................... F-4

Consolidated Statements of Stockholders' Equity (Deficit) for the
Years Ended December 31, 1998, 1997 and 1996....................................... F-5

Notes to Consolidated Financial Statements......................................... F-6

(a)(2) FINANCIAL STATEMENT SCHEDULES

All schedules are omitted because they are not applicable or the
required information is shown in the Consolidated Financial
Statements or in the notes thereto.

(a)(3) EXHIBITS

EXHIBIT
NUMBER DESCRIPTION
- ------ -----------

3.1 Amended and Restated Certificate of Incorporation of the Registrant. (1)
3.2 Bylaws of Registrant, as amended. (2)
4.1 Reference is made to Exhibits 3.1 and 3.2.
10.1 Technology License Agreement, dated September 11, 1990, by and between
the Registrant and Imatron, Inc. (1)

27

10.3 Representative's Warrant Agreement. (1)
10.4 Registrant's Equity Incentive Plan, as amended through
August 8, 1997. (3)(5)
10.5 Registrant's 1996 Employee Stock Purchase Plan, dated
March 9, 1996.(1) (5)
10.10 Investor Rights Agreement, dated as of December 29, 1995, by and
between the Registrant and Kay's Corporation.(1)
10.12 Lease, dated as of February 11, 1997, between the Registrant and WHLNF
Real Estate L.P. (4)
10.13 Purchase Agreement, dated as of December 24, 1996, between the
Registrant and the U.S. Federal Aviation Administration. (4)
10.15 Stock Purchase Agreement, dated as of November 12, 1996, between the
Registrant and EG&G International, Ltd. (4)
10.17 Loan and Security Agreement, dated as of February 20, 1997, between the
Registrant and Silicon Valley Bank. (4)
10.18 Revolving Promissory Note, dated February 20, 1997, between the Registrant
and Silicon Valley Bank. (4)
10.19 Export-Import Bank Loan and Security Agreement, dated as of February 20,
1997, between the Registrant and Silicon Valley Bank. (4)
10.20 Intellectual Property Security Agreement, dated as of February 20,
1997, between the Registrant and Silicon Valley Bank. (4)
10.21 Key Employee Agreement, dated April 21, 1994, between the Registrant
and Curtis P. DiSibio. (4)(5)
10.22 Key Employee Agreement, dated April 22, 1994, between the registrant
and Sergio Magistri, and amendment thereto, dated October 16, 1995.
(4)(5)
10.23 Key Employee Agreement, dated March 1, 1996, between the Registrant
and David M. Pillor. (4)(5)
10.24 Key Employee Agreement, dated January 1, 1998, between the Registrant
and Horst Bruening. (4)(5)
10.25 Loan Modification Agreement, dated April 15, 1998, to the Domestic
Loan and Security Agreement, dated February 20, 1997, and the
Export-Import Bank Loan and Security Agreement, dated February 20,
1997, between the Registrant and Silicon Valley Bank. (2)
10.26 Release of Security Agreement, dated April 15, 1998, for the release
of security interest in the Registrant's trademarked works set forth
in the Intellectual Property Security Agreement, dated February 20,
1997, between the Registrant and Silicon Valley Bank. (2)
10.27 Release of Security Agreement dated April 15, 1998, for the release of
security interest in the Registrant's patented works set forth in the
Intellectual Property Security Agreement, dated February 20, 1997,
between the Registrant and Silicon Valley Bank. (2)
10.28 Negative Pledge Agreement, dated April 15, 1998, covering all of the
Registrant's Intellectual Property between the Registrant and Silicon
Valley Bank. (2)
10.29 Consent Letter, dated June 1, 1998, from Silicon Valley Bank for the
Registrant's Stock Repurchase Program in connection with the Loan and
Security Agreements, dated February 20, 1997, and as amended by the
Modification Agreement dated April 15, 1998, between the Registrant
and Silicon Valley Bank. (2)
10.30 Key Employee Agreement, dated October 23, 1998, between the Registrant
and Tim Black. (5)
23.1 Consent of PricewaterhouseCoopers LLP.
27.1 Financial Data Schedule for Fiscal Year 1998.

NOTES TO EXHIBITS

(1) Filed as an exhibit to Registrant's Registration Statement on Form S-1
(No. 333-380) or amendments thereto and incorporated herein by
reference.

(2) Filed as an exhibit to Registrant's Quarterly Report on Form 10-Q for
the quarterly period ended June 30, 1998 and incorporated herein by
reference.

28

(3) Filed as an exhibit to Registrant's Quarterly Report on Form 10-Q for
the quarterly period ended June 30,1997 and incorporated herein by
reference.

(4) Filed as an exhibit to Registrant's Registration Statement on Form S-1
(No. 333-23413) and incorporated herein by reference.

(5) Items that are management contracts or compensatory
plans or arrangements required to be filed as exhibits
pursuant to item 14(c) of Form 10-K.

(6) Filed as an appendix to the Company's Notice and Proxy Statement for
the Annual Meeting of Stockholders held May 28, 1998.

(b) REPORTS ON FORM 8-K

The Registrant filed no reports on Form 8-K for the year ended
December 31, 1998.

(c) See Exhibits listed under Item 14(a)(3).

(d) The financial statement schedules required by the Item are
listed under Item 14(a)(2).

29

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Annual Report on Form
10-K to be signed on its behalf by the undersigned, thereunto duly authorized,
on the 30th day of March 1999.

INVISION TECHNOLOGIES, INC.

By: /s/ SERGIO MAGISTRI
------------------------------------
Sergio Magistri
President and Chief Executive Officer

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

SIGNATURE TITLE DATE

/s/ SERGIO MAGISTRI President, Chief Executive Officer and Director March 30, 1999
- ------------------------------------------- (PRINCIPAL EXECUTIVE OFFICER)
Sergio Magistri

/s/ TIM BLACK Chief Operating Officer and
- ------------------------------------------- Acting Chief Financial Officer March 30, 1999
Tim Black (PRINCIPAL FINANCIAL OFFICER)

/s/ JIM B. ROBBINS Corporate Controller March 30, 1999
- ------------------------------------------- (PRINCIPAL ACCOUNTING OFFICER)
Jim B. Robbins

/s/ GIOVANNI LANZARA Chairman of the Board of Directors March 30, 1999
- -------------------------------------------
Giovanni Lanzara

/s/ DOUGLAS P. BOYD Director March 30, 1999
- -------------------------------------------
Douglas P. Boyd

/s/ BRUNO TREZZA Director March 30, 1999
- -------------------------------------------
Bruno Trezza

/s/ MORRIS BUSBY Director March 30, 1999
- -------------------------------------------
Morris Busby

30

REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and Stockholders of
InVision Technologies, Inc.

In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of operations, of cash flows and of changes in
stockholders' equity (deficit) present fairly, in all material respects, the
financial position of InVision Technologies, Inc. and its subsidiaries at
December 31, 1998 and 1997, and the results of their operations and their cash
flows for each of the three years in the period ended December 31, 1998, in
conformity with generally accepted accounting principles. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.

PricewaterhouseCoopers LLP
San Jose, California
February 19, 1999

F-1

INVISION TECHNOLOGIES, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)

December 31,
-------------------------
ASSETS 1998 1997
--------- ---------

Current assets:

Cash and cash equivalents $10,462 $14,111
Short-term investments 1,995 5,079
Restricted cash 1,056 1,556
Accounts receivable 26,933 16,847
Inventories 11,825 10,781
Other current assets 1,731 531
------- -------
Total current assets 54,002 48,905

Long-term restricted cash 200 800
Property and equipment, net 8,035 7,180
Other assets 1,249 366
------- -------
$63,486 $57,251
------- -------
------- -------
LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
Accounts payable $ 3,402 $ 5,097
Accrued liabilities 6,331 4,032
Short-term debt 2,967 4,168
Deferred revenue 1,496 3,376
Current maturities of long-term obligations 895 426
------- -------
Total current liabilities 15,091 17,099
------- -------
Long-term obligations 1,565 1,336
------- -------
Commitments and contingencies (Notes 9, 12 and 13)

Stockholders' equity:
Preferred stock, no par value, 5,000,000 shares authorized;
no shares issued and outstanding
Common stock, $0.001 par value, 20,000,000 shares 12 12
authorized; 12,067,000 and 11,932,000 issued and outstanding
Additional paid-in capital 57,372 56,602
Deferred stock compensation expense (131) (199)
Accumulated deficit (9,558) (17,599)
Treasury stock, at cost (115,000 shares in 1998) (865) -
------- -------
Total stockholders' equity 46,830 38,816
------- -------
$63,486 $57,251
------- -------
------- -------

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

F-2

INVISION TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)

Year Ended December 31,
--------------------------------------
1998 1997 1996
-------- -------- --------

Revenues $ 63,284 $ 56,427 $ 15,841
Cost of revenues 34,946 28,027 9,736
-------- -------- --------
Gross profit 28,338 28,400 6,105
-------- -------- --------
Operating expenses:
Research and development 6,511 7,375 2,801
Sales and marketing 6,296 6,130 3,800
General and administrative 6,701 6,193 3,768
Acquisition costs - 685 -
-------- -------- --------
Total operating expenses 19,508 20,383 10,369
-------- -------- --------

Income (loss) from operations 8,830 8,017 (4,264)
Interest expense (390) (428) (1,599)
Interest and other income, net 697 242 187
-------- -------- --------
Income (loss) before provision for income taxes 9,137 7,831 (5,676)

Provision for income taxes 1,096 1,192 -
-------- -------- --------

Net income (loss) $ 8,041 $ 6,639 $ (5,676)
-------- -------- --------
-------- -------- --------
Net income (loss) per share:
Basic $ 0.67 $ 0.60 $ (0.90)
-------- -------- --------
-------- -------- --------
Diluted $ 0.63 $ 0.55 $ (0.90)
-------- -------- --------
-------- -------- --------
Weighted average shares outstanding:
Basic 12,046 11,141 6,338
Diluted 12,827 12,166 6,338

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

F-3

INVISION TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)

YEAR ENDED DECEMBER 31,
---------------------------------------
1998 1997 1996

CASH FLOWS FROM OPERATING ACTIVITIES:

Net income (loss) $ 8,041 $ 6,639 $ (5,676)
Adjustments to reconcile net income (loss) to net cash used in operating
activities:

Depreciation and amortization 1,989 1,288 543
Loss on disposal of fixed assets 50 - -
Stock compensation expense 68 425 667
Amortization of warrant expense - - 1,330
Write-off of purchased in-process research and development - 230 -
Changes in assets and liabilities:
Restricted cash 500 - -
Accounts receivable (10,086) (9,865) (5,779)
Inventories (1,044) (5,882) (1,467)
Other current assets (1,200) (369) (160)
Other noncurrent assets (80) - -
Accounts payable (1,695) 2,036 (382)
Accrued liabilities 2,299 2,850 (153)
Deferred revenue (1,880) 701 (587)
Other long term obligations 395 107 -
-------- -------- --------
Net cash used in operating activities (2,643) (1,840) (11,664)
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Long-term restricted cash 600 (2,356) -
Proceeds from (purchases of) short-term investments, net 3,084 (5,079) -
Purchases of property and equipment (2,894) (6,299) (1,290)
Capitalized software development costs (803) - -
-------- -------- --------
Net cash used in investing activities (13) (13,734) (1,290)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from (repayments of) short-term debt, net (1,201) 2,996 (2,262)
Proceeds from long-term debt 652 1,491 -
Repayments of long-term debt (349) (94) -
Proceeds from issuance of common stock, net 770 22,821 13,972
Repurchase of common stock (865) - -
-------- -------- --------
Net cash provided by (used in) financing activities (993) 27,214 11,710
-------- -------- --------
Net increase (decrease) in cash equivalents for the period (3,649) 11,640 (1,244)
Cash and equivalents at beginning of period 14,111 2,471 3,715
-------- -------- --------
Cash and equivalents at end of period $ 10,462 $ 14,111 $ 2,471
-------- -------- --------
-------- -------- --------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Interest paid $ 343 $ 215 $ 287
Taxes paid $ 842 $ 284 $ -

SUPPLEMENTAL DISCLOSURES OF NONCASH FINANCING AND INVESTING ACTIVITIES:
Sale of fixed assets in exchange for note receivable $ - $ 100 $ -
Purchase of intangibles and fixed assets for note payable $ - $ 330 $ -
Warrants issued in connection with financing agreements $ - $ 56 $ 590
Issuance of common stock as compensation $ - $ 240 $ 418
Issuance of stock upon conversion of debt $ - $ - $ 323
Issuance of common stock in connection with acquisition of subsidiary $ - $ - $ 85

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

F-4

INVISION, TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(IN THOUSANDS)

Preferred Stock Common Stock Additional
--------------------- -------------------- Paid-In
Shares Amount Shares Amount Capital
--------- --------- ------- -------- ----------

Balance At December 31, 1995 2,619 $ 12,212 514 $ 1 $ 5,451
Issuance of common stock pursuant to initial public offering,
net of expenses - - 2,070 2 9,530
Conversion of preferred stock upon completion of initial
public offering (2,619) (12,212) 6,106 6 12,206
Shares issued in exchange for bank debt and accrued interest - - 176 - 822
Stock compensation - - 7 - 182
Amortization of deferred stock compensation - - - - -
Issuance of warrants - - - - 590
Exercise of common stock options and warrants - - 660 1 2,552
Issuance of common stock pursuant to EG&G agreement - - 184 - 1,974
Issuance of common stock primarily pursuant to acquisition
of subsidiary - - 24 - 180
Net loss - - - - -
--------- --------- ------- -------- ----------
Balance at December 31, 1996 - - 9,741 10 33,487

Issuance of common stock pursuant to secondary public
offering, net - - 1,918 2 21,187
Issuance of common stock - - 25 - 686
Deferred stock compensation - - - - 240
Issuance of warrant - - - - 56
Exercise of common stock options and warrants - - 225 - 761
Shares issued under the employee stock purchase plan - - 23 - 185
Net income - - - - -
--------- --------- ------- -------- ----------
Balance at December 31, 1997 - - 11,932 12 56,602

Issuance of common stock - - 18 - -
Amortization of deferred stock compensation - - - - -
Exercise of common stock options - - 145 - 192
Shares issued under the employee stock purchase plan - - 87 - 578
Repurchase of common stock - - - - -
Net income - - - - -
--------- --------- ------- -------- ----------
Balance at December 31, 1998 - $ - 12,182 $ 12 $57,372
--------- --------- ------- -------- ----------
--------- --------- ------- -------- ----------

Deferred Total
Stock Treasury Stock Stockholders
Compensation Accumulated ------------------- Equity
Expense Deficit Shares Amount (Deficit)
------------ ------------ -------- -------- ------------

Balance At December 31, 1995 $ (721) $ (18,562) - $ - $ (1,619)
Issuance of common stock pursuant to initial public offering,
net of expenses - - - - 9,532
Conversion of preferred stock upon completion of initial
public offering - - - - -
Shares issued in exchange for bank debt and accrued interest - - - - 822
Stock compensation (152) - - - 30
Amortization of deferred stock compensation 489 - - - 489
Issuance of warrants - - - - 590
Exercise of common stock options and warrants - - - - 2,553
Issuance of common stock pursuant to EG&G agreement - - - - 1,974
Issuance of common stock primarily pursuant to acquisition
of subsidiary - - - - 180
Net loss - (5,676) - - (5,676)
------------ ------------ -------- -------- ------------
Balance at December 31, 1996 (384) (24,238) - - 8,875

Issuance of common stock pursuant to secondary public
offering, net - - - - 21,189
Issuance of common stock - - - - 686
Deferred stock compensation 185 - - - 425
Issuance of warrant - - - - 56
Exercise of common stock options and warrants - - - - 761
Shares issued under the employee stock purchase plan - - - - 185
Net income - 6,639 - - 6,639
------------ ------------ -------- -------- ------------
Balance at December 31, 1997 (199) (17,599) - - 38,816

Issuance of common stock - - - - -
Amortization of deferred stock compensation 68 - - - 68
Exercise of common stock options - - - - 192
Shares issued under the employee stock purchase plan - - - - 578
Repurchase of common stock - - (115) (865) (865)
Net income - 8,041 - - 8,041
------------ ------------ -------- -------- ------------
Balance at December 31, 1998 $ (131) $ (9,558) (115) $ (865) $ 46,830
------------ ------------ -------- -------- ------------
------------ ------------ -------- -------- ------------

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

F-5

INVISION TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1. THE COMPANY

InVision Technologies, Inc. ("InVision" or together with its
subsidiaries, the "Company") is the worldwide leader in explosive detection
technology. The Company develops, manufactures, markets and supports explosive
detection systems ("EDS") for civil aviation security based on advanced computed
tomography ("CT") technology. InVision's wholly-owned subsidiary, Quantum
Magnetics, Inc. ("Quantum"), develops and commercializes patented and
proprietary technologies, including key quadrupole resonance ("QR") patents
licensed from the Naval Research Laboratory, that are based on a
state-of-the-art, low-cost version of magnetic resonance adapted for explosive
detection. The Company's principal facilities are located in Newark, California
and San Diego, California, and the corporate office and manufacturing facility
are located in Newark, California.

InVision was formed in 1990 to design and develop an EDS based on CT
technology and exited the development stage in 1995 upon the first commercial
sales of its product, the CTX 5000 system. Today, the Company markets its more
advanced CTX 5500 system and has other products under development. To date, the
Company's CTX 5000 system and the CTX 5500 system (together, the "CTX 5000
Series") are the only EDS certified by the Federal Aviation Administration
("FAA") currently deployed for use in the inspection of checked luggage on
commercial flights. The CTX 5000 Series are sold to airport and regulatory
authorities and airlines throughout the world.

In 1997, InVision acquired Quantum, a privately-held developer of
explosive detection equipment based on QR technology founded in 1987. With the
acquisition of Quantum, InVision added Quantum's portfolio of complementary
detection technologies. Quantum's products, in the prototype stage, include
advanced detection systems for such markets as carry-on luggage screening,
landmine detection, drug detection, postal inspection, and passive magnetic
sensing or detection of concealed weapons. Quantum is also a leading supplier of
research and development services in the area of QR technology to a number of
government agencies.

NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

BASIS OF PRESENTATION

The consolidated financial statements include the financial statements
of InVision and its wholly-owned subsidiaries, after elimination of intercompany
accounts and transactions. The Company's preparation of these consolidated
financial statements in conformity with generally accepted accounting principles
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities, disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.

Certain prior year amounts have been reclassified to conform to the
current year presentation.

STOCK SPLIT

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

CASH EQUIVALENTS

The Company considers all liquid investments purchased with an original
maturity of three months or less to be cash equivalents.

SHORT-TERM INVESTMENTS

Short-term investments consist primarily of commercial paper with
original maturities at date of purchase beyond three months and less than 12
months. Such short-term investments are carried at cost, which approximates fair
market value, due to the short period of time to maturity.

F-6

REVENUE RECOGNITION

Revenue from product sales is recognized upon shipment unless extended
acceptance criteria exist, in which case revenue is recognized upon completion
of such acceptance criteria. Provision for estimated installation, training and
warranty costs is recorded at the time revenue is recognized. Revenue from
maintenance service contracts is recognized ratably over the term of the
contract. Deferred revenue arises from advance payments received from customers
for systems to be delivered within the next year and for maintenance service not
yet performed.

Quantum's research and development contracts and grants were reported
as revenues prior to the acquisition by InVision. All Quantum's research and
development revenues have been classified as a reduction to research and
development expense in accordance with the Company's policy.

INVENTORIES

Inventories are stated at the lower of cost or market; cost is
determined on a first-in, first-out basis, and includes materials, labor and
overhead.

PROPERTY AND EQUIPMENT

Property and equipment are recorded at cost. Depreciation is computed
using the straight-line method based upon the estimated useful lives of the
assets, which range from two to five years, or the lease term of the respective
assets, if applicable.

In 1996, the Company adopted Statement of Financial Accounting Standards
No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed of." Accordingly, the Company evaluates the recoverability
of its assets when events and changes in circumstances indicate that such
amounts may not be recoverable. The Company determines the recoverability of the
carrying amount of each intangible asset by reviewing the following factors: the
undiscounted value of expected operating cash flows in relation to its net
capital investment, the estimated useful or contractual life of the intangible
asset, the contract or product supporting the intangible asset, and in the case
of purchased technology, the Company periodically reviews the recoverability of
the asset value by evaluating its products with respect to technological
advances, competitive products and the long-lived asset impairment losses.

INCOME TAXES

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

RESEARCH AND DEVELOPMENT COSTS

Research and development costs are charged to operations as incurred.
Contractually reimbursable costs for certain research and development activities
are reflected as a reduction to research and development expense in the period
the related costs are incurred.

SOFTWARE DEVELOPMENT COSTS

The Company capitalizes internally generated software development costs
in accordance with Statement of Financial Accounting Standards No. 86 ("SFAS
86"), "Accounting for the Costs of Computer Software to be Sold, Leased or
Otherwise Marketed." SFAS 86 requires capitalization of certain software
development costs after technological feasibility has been established. The
Company capitalized software development costs of $803,000 in 1998 and these
amounts have been included in other noncurrent assets at December 31, 1998. In
prior years, the period between achieving technological feasibility and the
availability for general release of software included in the Company's product
was short and software development costs qualifying for capitalization had been
insignificant. Accordingly, the Company did not capitalize any software
development costs prior to 1998. Amortization of capitalized software
development costs begins when the products are available for general release to
customers, and is computed on a product-by-product basis using the greater of:
(a) the ratio of current gross revenues for a product to the total of current
and anticipated future gross revenues for the product; or (b) the straight-line
method over the remaining estimated economic life of the product. No
amortization expense was recorded in 1998 because the product was not yet
available for general release to customers.

STOCK COMPENSATION

The Company grants stock options for a fixed number of shares to
employees with an exercise price equal to the fair

F-7

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 ("APB 25"), "Accounting for Stock Issued to Employees." Accordingly, no
compensation expense has been recognized in the Company's consolidated
statements of operations.

In January 1996, the Company adopted the disclosure-only requirements of
Statement of Financial Accounting Standards No. 123 ("SFAS 123"), "Accounting
for Stock-Based Compensation" and, accordingly, will continue to account for
stock-based compensation for employees under APB 25.

DEPENDENCE ON SUPPLIERS

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

COMPREHENSIVE INCOME

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

SEGMENT INFORMATION

In June 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 131 ("SFAS 131"),
"Disclosures about Segments of an Enterprise and Related Information." This
Statement establishes standards for the way companies report information
about operating segments in annual financial statements. It also establishes
standards for related disclosures about products and services, geographic
areas and major customers. In accordance with the provisions of SFAS 131,
the Company has determined that it does not have separately reportable
operating segments.

CONCENTRATION OF CREDIT RISK AND FAIR VALUE OF FINANCIAL INSTRUMENTS

Financial instruments that potentially subject the Company to
significant concentrations of credit risk consist primarily of cash and accounts
receivable. The Company limits the amount of credit exposure of cash balances by
maintaining its accounts in high credit quality financial institutions. The
Company has accounts receivable from customers (including research and
development reimbursements from the FAA and other government agencies and
private entities) located in the United States, Europe, Middle East and the
Pacific Rim of $16,543,000, $6,898,000, $2,327,000 and $827,000, respectively.
The Company performs various evaluations of its customers' financial condition
and credit worthiness. To date, the Company has not experienced any material
credit losses, and accordingly, has not recorded an allowance for doubtful
accounts at December 31, 1998 and 1997. At December 31, 1998, three customers
accounted for 38%, 15% and 15% of total accounts receivable.

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

The Company's revenues are denominated in U.S. dollars. Significant
customers which represented 10% or more of revenues for the respective periods
were as follows:

YEAR ENDED DECEMBER 31,
----------------------------------
1998 1997 1996
------ ------ ------

Customer A (FAA) 60% 57% -
Customer B - - 22%
Customer C - - 16%
Customer D - - 13%
Customer E - - 13%
Customer F - - 12%
Customer G - - 12%

The Company markets its products both internationally and
domestically. Product sales by geographic region are as follows (in
thousands):

Year Ended December 31,
----------------------------------
1998 1997 1996
------ ------ ------

Revenues:
United States $41,961 $30,234 $ 3,766
Europe (primarily United Kingdom) 12,907 10,197 7,488
Middle East 5,624 4,821 2,525
Pacific Rim 2,792 11,175 2,062
------- ------- -------
Total $63,284 $56,427 $15,841
------- ------- -------
------- ------- -------

NET INCOME (LOSS) PER SHARE

In 1997, the Company adopted Statement of Financial Accounting Standards
No. 128 ("SFAS 128"), "Earnings Per Share." All historical earnings per share
information has been restated as required by SFAS 128. Basic earnings per share
is computed by dividing income available to common stockholders by the
weighted-average common shares outstanding for

F-8

the period. Diluted earnings per share reflect the weighted-average common
shares outstanding plus the potential effect of dilutive securities or contracts
which are convertible to common shares such as options, warrants, convertible
debt and preferred stock (using the treasury stock method).

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

Year Ended December 31,
------------------------------------------------------------------------------------------
1998 1997 1996
------------------------------------------------------------------------------------------
PER PER PER
SHARE SHARE SHARE
INCOME SHARES AMOUNT INCOME SHARES AMOUNT INCOME SHARES AMOUNT
------- ------- ------ ------- ------- ------ ------ ------ -------

Basic net income (loss) per share:
Income (loss) available to
common stockholders $ 8,041 12,046 $ 0.67 $ 6,639 11,141 $ 0.60 $ (5,676) 6,338 $ (0.90)
Effect of dilutive securities:
Options 781 (0.04) 1,025 (0.05) -
------- ------- ------ ------- ------- ------ ------- ------ -------
Diluted net income (loss) per share:
Income (loss) available to common
stockholders plus assumed
conversions $ 8,041 12,827 $ 0.63 $ 6,639 12,166 $ 0.55 $ (5,676) 6,338 $ (0.90)
------- ------- ------ ------- ------- ------ ------- ------ -------
------- ------- ------ ------- ------- ------ ------- ------ -------

NOTE 3. ACQUISITION OF QUANTUM MAGNETICS, INC.

On September 30, 1997, InVision acquired Quantum, a developer of
explosive detection equipment based upon quadrupole resonance technology. The
transaction has been accounted for as a pooling of interests effective
September 30, 1997; therefore, all prior periods have been restated to
include the historical results of Quantum. Non-recurring expenses associated
with the acquisition, comprised primarily of outside accounting and legal
fees, amounted to $685,000 and have been included in acquisition costs in the
statements of operations.

Revenues and net income (loss) for the separate companies through the
date of acquisition included in the Company's consolidated statements of
operations are as follows (in thousands):

Nine Months Year
Ended Ended
September 30, December 31,
1997 1996
--------------- ---------------

Revenues:
InVision $ 38,243 $ 15,841
Quantum - -
--------------- ------------
Total $ 38,243 $ 15,841
--------------- ------------
--------------- ------------

Net income (loss):
InVision $ 4,368 $ (3,572)
Quantum (855) (2,104)
--------------- ------------
Total $ 3,513 $ (5,676)
--------------- ------------
--------------- ------------

F-9

NOTE 4. FEDERAL AVIATION ADMINISTRATION (FAA) CONTRACT

In December 1996, the Company entered into a contract with the FAA to
deliver 54 CTX 5000 systems to various airports in the United States. The
minimum amount due from the FAA under this contract, including all related
products and associated installation and support services, was $52.2 million. In
1998, the Company received modifications to the contract in the amount of $17.3
million for an additional 15 CTX 5500 systems as well as an order to upgrade all
59 CTX 5000 systems previously purchased by the FAA to the Company's
second-generation CTX 5500 system. As of December 31, 1998, the Company had
delivered all of these systems and 32 of the 59 CTX 5500 upgrade kits. In the
first quarter of 1999, the Company received a modification to the contract in
the amount of $18.9 million for an additional 21 CTX 5500 systems.

NOTE 5. RESEARCH AND DEVELOPMENT CONTRACTS AND GRANTS

The Company has been awarded various research and development
contracts and grants by the FAA and other government agencies and private
entities to share in the costs of developing and enhancing the Company's
products. During 1998, 1997 and 1996, the Company was entitled to
reimbursements of $10.8 million, $8.5 million and $4.9 million, respectively,
under research and development contracts and grants. Such reimbursements have
been reflected as a reduction to research and development expense in each
period presented. Billings under such contracts and grants are rendered
monthly on the basis of actual costs incurred. At December 31, 1998 and 1997,
the related receivable balances from these contracts and grants were $4.7
million and $2.4 million, respectively. The Company received an additional
$2.1 million research and development grant at the end of the first quarter
of 1999.

NOTE 6. DEBT

LINE OF CREDIT

In 1997, the Company entered into two one-year revolving line of credit
agreements with Silicon Valley Bank. In April 1998, the agreements were extended
to April 1999 and the Company is in the process of renewing the agreements. The
first agreement provides for maximum borrowings in an amount up to the lower of
80% of eligible domestic accounts receivable or $4.5 million. The second
agreement is partially guaranteed by the Export-Import Bank of the United States
and provides for maximum borrowings in an amount up to the lower of the sum of
90% of eligible export accounts receivable plus 70% of eligible raw materials
and work-in-process inventory designated for export customers or $4.5 million.
Borrowings under both agreements bear interest at the bank's prime rate (7.75%
at December 31, 1998) and are secured by all of the Company's assets other than
intellectual property. The agreements require that the Company maintain certain
financial ratios and levels of tangible net worth and profitability and also
prohibit the Company from paying cash dividends. Proceeds of loans under both
lines of credit may be used for general corporate purposes. At December 31,
1998, the Company had outstanding borrowings of $2.9 million under the lines of
credit and guarantees through issuance of letters of credit to customers secured
by the lines of credit totaling $1.6 million. At December 31, 1997, the Company
had outstanding borrowings of $4.0 million under the lines of credit and
guarantees through issuance of letters of credit to customers secured by the
lines of credit totaling $2.4 million. The remaining available borrowing
capacity under the lines of credit was $1.2 million at December 31, 1998 based
on eligible accounts receivable and inventories as of that date.

In 1997, the Company entered into a committed equipment line of credit
agreement with Silicon Valley Bank that transforms into a term loan after draw
down. In April 1998, the agreement was extended to April 1999 and the Company is
in the process of renewing the agreement. The agreement provides for borrowings
up to $1.75 million. Borrowings under this agreement bear interest at the bank's
prime rate (7.75% at December 31, 1998) plus 1.00% or a fixed rate equal to
4.25% above the yield of 36 or 60 month Treasury Notes based on the assets
purchased or financed (Treasury Note rates at December 31, 1998: 36 months -
4.67%; 60 months - 4.54%). Borrowings under the agreement are secured by the
assets purchased or financed. At December 31, 1998 and 1997, the Company had
outstanding borrowings of $1.2 million and remaining borrowing capacity of $0.5
million under the line of credit.

SUBORDINATED PROMISSORY NOTE

The Company had a note payable outstanding to a third party with a
remaining balance of $168,000 as of December 31, 1997. The outstanding balance
and accrued interest at a rate of 10% were paid in full in January 1998.

BRIDGE LOAN

In December 1995, InVision entered into a $2,000,000 Bridge Loan
Agreement (the "Bridge Loan") with a lender. Under the agreement, InVision
borrowed $1,000,000 in December 1995, and an additional $1,000,000 in February
1996. Principal outstanding under the agreement was secured by all assets of
InVision. The Bridge Loan was repaid in full on May

F-10

1, 1996, in accordance with its terms. In connection with the Bridge Loan,
the lender received Warrants. The aggregate fair value of the Bridge Loan
Warrants, as determined at their respective dates of issuance, was $1,330,000.
Such value represents a discount that was amortized as a financing cost over the
period that the Bridge Loan was outstanding.

NOTE 7. STOCKHOLDERS' EQUITY

COMMON STOCK

During the period April through October 1998, the Company repurchased
115,000 shares of its Common Stock at prevailing market prices for a total of
$865,000.

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

In the second quarter of 1997, the Company sold 1,875,000 shares of
Common Stock in an underwritten public offering at $12.00 per share. The
offering generated net proceeds to the Company of approximately $21.2 million
including proceeds from the underwriters over-allotment option.

In November 1996, the Company issued 183,750 shares of unregistered
Common Stock to EG&G International Ltd. at $10.88 per share, reflecting a 10%
discount from the market price of the Company's Common Stock in connection with
the signing of a Research, Development and License Agreement. Net proceeds
totaled $1,974,000.

In the second quarter of 1996, the Company issued 2,070,000 shares of
Common Stock at $5.50 per share in connection with the Company's initial public
offering ("IPO"). Net proceeds to the Company, totaled $9,532,000 including
proceeds from exercise of the underwriters over-allotment option.

In connection with the Company's IPO, Donald & Co. Securities Inc., the
underwriter, received, under the terms of the underwriting agreement, a
four-year warrant to purchase 180,000 shares of the Company's Common Stock at a
price of $6.60 per share commencing April 23, 1997. As of December 31, 1998, no
shares of the Company's Common Stock had been purchased under the warrant.

PREFERRED STOCK

In conjunction with the Company's IPO, all outstanding Convertible
Preferred Stock converted to Common Stock. As of December 31, 1998, there were
5,000,000 shares of Preferred Stock authorized and no shares were issued and
outstanding. The Board of Directors is authorized to issue Preferred Stock in
one or more series and to fix the rights, preferences, privileges and
restrictions thereof, including dividend rights, dividend rates, conversion
rights, voting rights, terms of redemption, redemption prices, liquidation
preferences, and number of shares constituting any series or the designation of
such series, without further action or vote by the Company's stockholders.

NOTE 8. EMPLOYEE STOCK AND BENEFIT PLANS

EQUITY INCENTIVE PLAN

In March 1996, the Board of Directors approved the amended and restated
1991 Stock Option Plan, which was renamed the Equity Incentive Plan (the "Option
Plan"). The Option Plan provides for the granting of incentive stock options and
non-qualified stock options for the purchase of up to an aggregate of 2,621,818
shares of the Company's Common Stock by officers, employees, consultants and
directors of the Company. The Board of Directors is responsible for
administration of the Option Plan. The Board of Directors determines the term of
each option, option exercise price, number of shares for which each option is
granted and the rate at which each option is exercisable. Options granted under
the Option Plan generally vest over a four year period.

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

In late October 1998, the Company offered employees and consultants the
opportunity to participate in an option

F-11

repricing program. Under the program, each employee and consultant could
elect on or before November 9th that his or her existing option issued under
the Company's Option Plan be converted into a repriced option. The per share
exercise price of each repriced option would be equal to the greater of the
fair market value of the Company's Common Stock on the conversion date
(November 9, 1998) or $6.93. In return for the lower exercise price, the
repriced options issued would be subject to a blackout period whereby no
options could be exercised between November 9, 1998 and May 8, 1999. The
number of shares vested under the converted option would vest immediately
under the repriced option. All remaining shares subject to the repriced
option will vest over a period that is equivalent to the vesting period
remaining under the converted option. On November 9, 1998, the fair market
value of the Company's Common Stock was $6.50 and options for a total of
313,986 shares were repriced at $6.93 per share. No officers of the Company
repriced options under the program. The weighted average per share exercise
price of the outstanding shares subject to the options prior to conversion
was $10.55 and the range of exercise prices was $7.69 - $14.56.

In connection with grants of stock options to employees and
directors, the Company recorded $240,000 and $152,000 of deferred
compensation representing the difference between the deemed fair value of the
Company's Common Stock and the exercise price at the date of grant in 1997
and 1996, respectively. No such deferred stock compensation was recorded in
1998. Amortization of deferred stock compensation was $68,000, $425,000 and
$489,000 in 1998, 1997 and 1996, respectively. The remaining deferred stock
compensation balance of $131,000 is being amortized over the remaining
vesting period of the related options.

The activity under the Option Plan was as follows (in thousands, except
per share data):

Year Ended December 31,
-----------------------------------------------------------------------
1998 1997 1996
----------------------- -------------------- ---------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
------- ------- ------- ------ ------ ------

Outstanding at beginning of period 1,737 $ 4.44 1,152 $ 1.93 1,158 $ 0.82
Granted 635 6.89 735 7.96 154 9.04
Exercised (145) 1.34 (109) 1.05 (122) 0.69
Canceled (un-vested) (357) 9.82 (41) 6.09 (30) 0.93
Expired (vested) (111) 10.85 - 3.33 (8) 0.56
------- ------- ------- ------ ------ ------
Outstanding at end of period 1,759 $ 4.09 1,737 $ 4.44 1,152 $ 1.93
------- ------- ------- ------ ------ ------
------- ------- ------- ------ ------ ------

Options exercisable at period end 1,094 $ 2.70 853 $ 1.17 643 $ 0.80
------- ------- ------- ------ ------ ------
------- ------- ------- ------ ------ ------

Weighted average grant date fair value of
options granted during the year $ 3.68 $ 4.34 $ 4.04
------- ------ ------
------- ------ ------
Weighted average grant date fair value of
options granted during the year at exercise
prices above market prices $ 6.93 $ - $ -
------- ------ ------
------- ------ ------
Weighted average grant date fair value of
options granted during the year at exercise
prices below market prices $ - $ 7.30 $ -
------- ------ ------
------- ------ ------

F-12

Information relating to stock options outstanding under the Option Plan
at December 31, 1998 is as follows (in thousands, except per share data):

Options Outstanding Options Exercisable
--------------------------------------------------- --------------------------------
Weighted
Average Weighted Weighted
Range of Number Remaining Average Number Average
Exercise Price Outstanding Contractual Life Exercise Price Exercisable Exercise Price
----------------- ----------- ---------------- -------------- ----------- --------------

$0.55 - 0.55 375 6.0 $ 0.55 372 $ 0.55
$0.97 - 1.38 369 6.8 1.10 367 1.10
$3.30 - 4.40 149 9.1 4.03 36 3.59
$5.50 - 6.94 857 8.9 6.87 317 6.91
$8.75 - 12.13 9 8.9 9.61 2 9.94
----------- ---------------- -------------- ----------- --------------
1,759 7.9 $ 4.09 1,094 $ 2.70
----------- ---------------- -------------- ----------- --------------
----------- ---------------- -------------- ----------- --------------

1996 EMPLOYEE STOCK PURCHASE PLAN

The Company's 1996 Employee Stock Purchase Plan (the "Purchase Plan")
was adopted in March 1996. A total of 300,000 shares of Common Stock has been
reserved for issuance under the Purchase Plan. As of December 31, 1998, 110,000
shares have been issued under the Purchase Plan.

FAIR VALUE DISCLOSURES

Had compensation cost for options granted in 1998, 1997 and 1996 under
the Company's Option Plan been determined based on the fair value at the grant
dates, as prescribed in SFAS 123, the Company's net income (loss) and pro forma
net income (loss) per share would have been as follows (in thousands, except per
share data):

Year Ended December 31,
---------------------------------------
1998 1997 1996
------- ------- ---------

Net income (loss):
As reported $ 8,041 $ 6,639 $ (5,676)
Pro forma $ 6,481 $ 6,233 $ (5,765)

Pro forma net income (loss) per share:
Basic:
As reported $ 0.67 $ 0.60 $ (0.90)
Pro forma $ 0.54 $ 0.56 $ (0.91)
Diluted:
As reported $ 0.63 $ 0.55 $ (0.90)
Pro forma $ 0.51 $ 0.51 $ (0.91)

The fair value of each option grant is estimated on the date of grant
using the minimum value method with the following assumptions used for grants
during the applicable period:

1998 1997 1996
-------------- -------------- ---------------

Risk free rate of return 4.43 - 4.79% 5.74 - 6.29% 5.19 - 6.38%
Weighted average expected option term 3.8 years 4.3 years 5 years
Volatility rate 72 % 70 % 65 %
Dividend yield 0% 0% 0%

F-13

1997 EMPLOYEE 401(k) PLAN

The InVision Technologies, Inc. 401(k) Plan (the "401(k) Plan") was
established in 1992 to provide retirement and incidental benefits for its
employees. As allowed under Section 401(k) of the Internal Revenue Code, the
401(k) Plan provides tax-deferred salary deductions for eligible employees.
Employees may contribute up to 20% of their annual compensation to the 401(k)
Plan, limited to a maximum amount as set periodically by the Internal Revenue
Service. Beginning in July 1997, the Company began matching employee
contributions at the rate of $0.50 on the dollar up to a maximum of 6% of gross
compensation. All matching contributions vest immediately. Company matching
contributions to the 401(k) Plan totaled $294,000 and $170,000 in 1998 and 1997,
respectively. No Company matching contributions were made to the 401(k) Plan in
1996.

NOTE 9. COMMITMENTS

The Company leases facilities and equipment under non-cancelable leases
expiring at various times through 2007. Future minimum lease payments under
these leases at December 31, 1998 are as follows (in thousands):

Operating Capital
Year Ending December 31, Lease Lease
- --------------------------------------------------- ---------- ---------

1999 $ 1,396 $ 190
2000 1,428 106
2001 1,474 73
2002 1,332 34
2003 1,240 -
Years thereafter 4,904 -
-------- --------
$ 11,774 403
--------
--------

Less: amount representing interest (66)
--------
Present value of net minimum lease payments 337
Less: current portion of capital lease obligations (148)
--------

Long-term capital lease obligations $ 189
--------
--------

Rent expense for 1998, 1997 and 1996 was $1,357,000, $1,105,000 and
$527,000, respectively.

NOTE 10. INCOME TAXES

As a result of the losses generated during 1996 the Company recorded no
provision for income taxes for that year and reconciliation of the federal
statutory rate to the effective rate is not meaningful. For 1998 and 1997, the
provision for income taxes consists of the following (in thousands):

Year Ended December 31,
------------------------
1998 1997
------- -------
Current:

Federal $ 756 $ 927
State 200 200
Foreign 140 65
------- -------
1,096 1,192

Deferred:

Federal - -
------- -------
Total provision $ 1,096 $ 1,192
------- -------
------- -------

F-14

The Company's actual effective tax rate for 1998 and 1997 differs from
the U.S. statutory income tax rate as follows:

1998 1997
--------- ---------
U.S. federal statutory rate 35.0 % 35.0 %
State taxes, net of federal tax benefit 0.9 2.6
Acquisition related tax benefit - 3.8
Utilization of operating loss carryovers (23.5) (25.3)
Other (0.4) (0.9)
--------- ---------
Effective tax rate 12.0 % 15.2 %
--------- ---------
--------- ---------

December 31,
------------------------
1998 1997
--------- ---------

Assets:

Net operating loss carry forward $ 2,345 $ 4,909
Research and development credits 941 1,025
Reserves 1,670 1,077
Other 159 745
--------- ---------
5,115 7,756
Liabilities:

Other (339) (70)
--------- ---------
Valuation allowance (4,776) (7,686)
--------- ---------
Net deferred tax assets (liabilities) $ - $ -
--------- ---------
--------- ---------

The Company provides a valuation allowance for deferred tax assets when
it is more likely than not, based upon currently available evidence including
its prior history of losses, that some portion or all of the deferred tax assets
will not be realized.

At December 31, 1998 the Company had federal net operating loss
carryforwards of approximately $6.0 million available to reduce future federal
taxable income and $1.7 million available to reduce state taxable income. The
Company's net operating loss carryforwards expire from 2005 to 2011. The tax
benefit of the net operating loss and credit 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%, as defined, over a three year period and the timing of
utilization of various tax benefits carried forward.

F-15

NOTE 11. RELATED PARTY TRANSACTIONS

In 1998, 1997 and 1996, the Company recorded professional and consulting
fees of $205,000, $165,000 and $264,000, respectively, as compensation to the
Company's directors for services provided as members of the Board of Directors
as well as consulting services rendered to the Company not in connection with
their services as directors.

In August 1996, the Company entered into a consulting agreement with
BGI, Inc. ("BGI") a Virginia-based international consulting firm engaged to
assist the Company with enhancing its methods, strategies and contacts to
support the marketing of the CTX 5000 to the U.S. Government. In March 1998,
Ambassador Busby, a controlling shareholder of BGI, was elected to the Company's
Board of Directors. The Company paid consulting fees of $240,000 and $240,000 in
1998 and 1997, respectively, for BGI consulting services. BGI also received, in
August 1996, an option for 6,586 shares of the Company's Common Stock with
vesting of these shares based on the achievement of certain milestones. Based on
these milestones 2,684 and 3,902 shares vested in 1998 and 1997, respectively.

F-16

NOTE 12. LICENSE AGREEMENTS

In November 1996, the Company entered into a Research, Development and
License Agreement with EG&G Astrophysics, an affiliate of EG&G International
Ltd. Under the terms of this agreement, the Company and EG&G Astrophysics agreed
to participate in a cost sharing research and development effort to develop an
explosive detection system with enhanced capability for reliable detection of
explosives at higher rates of through-put than the Company's existing system.
The agreement terminated in May 1998. The difference in costs incurred by each
party was not material.

In October 1994, Quantum entered into a twelve-year license agreement
with a third party. As amended in May 1997, the agreement provides Quantum with
a non-exclusive, irrevocable license to certain in-process detection technology
(the "Superconductor Technology"), as well as equipment with a fair value of
$100,000 in exchange for a $330,000 note payable due in unequal quarterly
payments plus 11% interest. The fair value of the technology license of $230,000
was charged to operations in May 1997. The balance of the note payable was paid
in full in January 1998.

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

In March 1995, Quantum executed a ten-year exclusive license agreement
with a third party. Quantum is subject to royalty payments based on a percentage
of the net sales price of certain products made, used or sold. Minimum annual
royalties of $20,000 are due beginning in calendar year 1997 through the
remaining term of the agreement. Quantum did not incur royalty expense under
this agreement in 1995 or 1996, and paid the minimum royalty of $20,000 in 1997
and 1998. In January 1999, Quantum and the licensor agreed to modify the license
by expanding the field of use, increasing the minimum annual royalty to $70,000
and extending the term until January 2009. Quantum paid a one-time fee of
$50,000 to obtain such modification and extension.

In June 1995, Quantum entered into an exclusive license agreement with a
third party. Per the agreement terms, Quantum is subject to royalty payments
based on a percentage of the net sales price of certain products sold.
Additionally, within the first three years of the agreement, Quantum is required
to spend a minimum of $300,000 for the development of certain related
technology. In 1998 Quantum determined not to pursue this technology
commercially and the license was terminated. As of the date of termination,
Quantum had incurred costs of approximately $150,000. The consideration amount
paid by Quantum to terminate the rights and obligations of the license agreement
was not material.

In recognition of development costs incurred by Quantum Design, Inc.
("QD") prior to the spin-out of Quantum, Quantum agreed to pay QD a royalty rate
of 4% of net sales of certain products, whether sold by Quantum or any licensee,
for a period of six years from the effective date of the agreement, April 15,
1994. The agreement also established minimum royalty payments of $50,000 in
years 1997 and 1998, which were applied against royalties that become due to QD
in the respective fiscal years.

NOTE 13. LITIGATION

On January 7, 1999, Vivid Technologies, Inc. ("Vivid") filed a summons
and complaint (the "Complaint") in Superior Court of the State of California for
the County of San Diego against InVision, Quantum, ESI International, Inc.
("ESI"), Robert Price and Sandra Price (collectively, "Defendants"). The
Complaint asserts causes of action for (1) misappropriation of trade secrets;
(2) inducing breach of contract; (3) interference with contractual relations;
(4) statutory unfair competition; (5) common law unfair competition; (6)
interference with prospective economic advantage; (7) defamation; and (8)
declaratory relief (declaring that Vivid has not misappropriated trade secrets
from Quantum). On February 8, 1999, defendants InVision and Quantum filed an
answer in which they denied all material allegations of the complaint and
asserted various affirmative defenses. Discovery has only recently commenced. No
specific amount of damages has been requested.

This complaint was filed by Vivid following efforts by Quantum and
ESI, a private investigator hired by Quantum, to investigate the alleged
theft of intellectual property from Quantum by a former key employee hired by
Vivid and to bring

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certain evidence to the attention of the Federal Bureau of Investigation
("FBI") and the United States Attorney for the Southern District of
California. The allegation of the Vivid complaint relating to the alleged
misappropriation of its trade secrets appears to stem from the efforts to
collect evidence of the alleged theft from Quantum, while the other
allegations, including the allegation relating to Quantum's alleged
defamation of Vivid, appear to relate to Quantum's alleged statements to the
FAA describing the alleged theft. The U.S. Attorney for the Southern District
of California has opened a grand jury investigation into the alleged theft of
intellectual property from Quantum and two subpoenas and a search warrant
were issued and executed. To the best of the Company's knowledge, this
investigation remains open. On February 10, 1999, defendants InVision and
Quantum filed a motion for a temporary stay of all civil proceedings,
including discovery, for a period of 90 days. On March 5, 1999, the court
granted the motion and ordered the entire case, including discovery, stayed
for 90 days. A status conference has been set for June 11, 1999. Management
believes that the outcome of this matter, even if adverse, will not have a
material adverse effect on the Company's business, financial condition or
results of operations.

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

NOTE 14. BALANCE SHEET COMPONENTS (IN THOUSANDS)

December 31,
--------------------------
1998 1997
------------ ------------

Accounts receivable:
Billed $ 20,412 $ 10,979
Unbilled 6,183 5,838
Other receivables 338 30
------------ ------------
Total $ 26,933 $ 16,847
------------ ------------
------------ ------------

Inventories:
Raw material and purchased components $ 6,272 $ 6,481
Work-in-process 4,365 3,626
Finished goods 1,188 674
------------ ------------
Total $ 11,825 $ 10,781
------------ ------------
------------ ------------

Property and equipment:
Machinery and equipment $ 4,705 $ 3,626
Self constructed assets 3,697 2,249
Furniture and fixtures 1,078 976
Leasehold improvements 2,939 2,872
------------ ------------
Subtotal 12,419 9,723
Less: accumulated depreciation and amortization (4,384) (2,543)
------------ ------------
Total $ 8,035 $ 7,180
------------ ------------
------------ ------------

Self-constructed assets are manufactured by the Company for use in
system testing and support, and include the cost of parts and materials, and an
overhead allocation. The Company depreciates self-constructed assets over their
respective estimated useful lives which range from three to five years.

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At December 31, 1998 and 1997 the Company had $614,000 and $625,000,
respectively, of capitalized lease equipment and related accumulated
amortization of $273,000 and $254,000, respectively.

December 31,
--------------------------
1998 1997
------------ ------------

Accrued liabilities:

Warranty and other reserves $ 2,426 $ 1,837
Accrued employee compensation 1,425 1,025
Income taxes 1,377 908
Other 1,103 262
------------ ------------
Total $ 6,331 $ 4,032
------------ ------------
------------ ------------

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