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<