**UNITED STATES****SECURITIESAND EXCHANGE COMMISSION**

**Washington,D.C.  20549**

 

**FORM 10-Q**

 

**(MarkOne)**

 

| **ý** |   | **QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE  SECURITIES EXCHANGE ACT OF 1934**                                                                   |
|------------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------|
|       |   |                                                                                                                                                           |
|       |   | **For  the quarterly period ended March 30, 2003**                                                                                                             |
|       |   |                                                                                                                                                           |
| **or**     |
|       |   |                                                                                                                                                           |
| **o**      |   | **TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE  SECURITIES EXCHANGE ACT OF 1934**                                                                  |
|       |   |                                                                                                                                                           |
|       |   | **For  the transition period  from          to          ** |

 

**CommissionFile Number: 0-28236**

 

**INVISION TECHNOLOGIES, INC.**

(Exact name ofregistrant as specified in its charter)

 

**Delaware**

(State or otherjurisdiction of incorporation or organization)

 

**94-3123544**

(I.R.S. EmployerIdentification No.)

 

**7151Gateway Boulevard, Newark, CA 94560**

(Address ofprincipal executive offices, including zip code)

 

**(510)739-2400**

(Registrant’stelephone number, including area code)

 

Indicate by check mark whether the registrant: (1) hasfiled all reports required to be filed by Section 13 or 15(d) of the SecuritiesExchange Act of 1934 during the preceding 12 months (or for such shorter periodthat the registrant was required to file such reports), and (2) has beensubject to such filing requirements for the past 90 days.  Yes  ý  No  o

 

Indicate by check mark whether the registrant is anaccelerated filer (as defined in Rule 12b-2 of the Exchange Act).

Yes  ý  No  o

 

On May 1, 2003, there were 17,161,886 shares of the registrant’scommon stock outstanding.

 

 

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**InVisionTechnologies, Inc.**

**Form10-Q**

**INDEX**

 
| **PART  I.   FINANCIAL INFORMATION** |
|------------------------------------------------|
|                                           |
| **Item**                                       |
|                                           |
| 1.                                             | Financial Statements |
|                                           |
|                                           | a.  Condensed Consolidated Balance Sheets –  March 30, 2003 and December 31, 2002 |
|                                           |
|                                           | b.  Condensed Consolidated Statements of  Operations – Three months ended March 30, 2003 and March 31, 2002 |
|                                           |
|                                           | c.  Condensed Consolidated Statements of Cash  Flows – Three months ended March 30, 2003 and March 31, 2002 |
|                                           |
|                                           | d.  Notes to Condensed Consolidated Financial  Statements |
|                                           |
| 2.                                             | Management’s  Discussion and Analysis of Financial Condition and Results of Operations |
|                                           |
| 3.                                             | Quantitative  and Qualitative Disclosures about Market Risk |
|                                           |
| 4.                                             | Controls and  Procedures |
|                                           |
| **PART  II.   OTHER INFORMATION**    |
|                                           |
| **Item**                                       |
|                                           |
| 1.                                             | Legal Proceedings |
|                                           |
| 5.                                             | Other Information |
|                                           |
| 6.                                             | Exhibits and  Reports on Form 8-K |
|                                           |
| Signature Page                                 |
|                                           |
| Certification of Sergio Magistri               |
|                                           |
| Certification of  Ross Mulholland              |

 

InVision, QScan, Quantum Magnetics, Yxlon, CTX, CTX1000, CTX 2500, CTX 5500 DS, CTX 9000 DSi, WoodVision, *i*-Portal, *i*-Portal100, XES 3000 and XES 3500, among others, are trademarks of InVisionTechnologies, Inc. or one of its subsidiaries in the United States and othercountries.  InVision, QScan and QuantumMagnetics, among others, are registered trademarks marks of InVisionTechnologies, Inc. or one of its subsidiaries in the United States.

 

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**PART I.  FINANCIAL INFORMATION**

**Item 1.  Financial Statements**

**InVisionTechnologies, Inc.Condensed Consolidated BalanceSheets(In thousands, except share data)(Unaudited)**

 
|                                                                                                                                                    |   | **March 30,  2003** |    | **December 31,  2002** |   |
|---------------------------------------------------------------------------------------------------------------------------------------------------------|--------|---------------------|---------|------------------------|--------|
| **Assets**                                                                                                                                              |   |                |    |                   |   |
|                                                                                                                                                    |   |                |    |                   |   |
| Current  assets:                                                                                                                                        |   |                |    |                   |   |
| Cash  and cash equivalents                                                                                                                              |   | $                   | 124,751 |                   | $      | 159,736 |   |
| Accounts  receivable, net                                                                                                                               |   | 172,890             |    | 146,295                |   |
| Inventories                                                                                                                                             |   | 59,080              |    | 64,764                 |   |
| Deferred  income taxes                                                                                                                                  |   | 22,767              |    | 20,889                 |   |
| Other  current assets                                                                                                                                   |   | 11,045              |    | 15,811                 |   |
| Total  current assets                                                                                                                                   |   | 390,533             |    | 407,495                |   |
|                                                                                                                                                    |   |                |    |                   |   |
| Property  and equipment, net                                                                                                                            |   | 7,623               |    | 7,225                  |   |
| Deferred  income taxes                                                                                                                                  |   | 804                 |    | 1,050                  |   |
| Intangible  assets, net                                                                                                                                 |   | 1,548               |    | 1,603                  |   |
| Other  assets                                                                                                                                           |   | 2,092               |    | 414                    |   |
| Total  assets                                                                                                                                           |   | $                   | 402,600 |                   | $      | 417,787 |   |
|                                                                                                                                                    |   |                |    |                   |   |
| **Liabilities  and stockholders’ equity**                                                                                                          |   |                |    |                   |   |
|                                                                                                                                                    |   |                |    |                   |   |
| Current  liabilities:                                                                                                                                   |   |                |    |                   |   |
| Accounts  payable                                                                                                                                       |   | $                   | 29,014  |                   | $      | 28,477 |   |
| Accrued  liabilities                                                                                                                                    |   | 76,807              |    | 65,364                 |   |
| Deferred  revenue                                                                                                                                       |   | 22,917              |    | 86,284                 |   |
| Short-term  debt                                                                                                                                        |   | 432                 |    | 184                    |   |
| Current  maturities of long-term obligations                                                                                                            |   | 278                 |    | 112                    |   |
| Total  current liabilities                                                                                                                              |   | 129,448             |    | 180,421                |   |
|                                                                                                                                                    |   |                |    |                   |   |
| Long-term  obligations                                                                                                                                  |   | 1,029               |    | 653                    |   |
|                                                                                                                                                    |   |                |    |                   |   |
| Commitments  and contingencies                                                                                                                          |   |                |    |                   |   |
|                                                                                                                                                    |   |                |    |                   |   |
| Stockholders’  equity:                                                                                                                             |   |                |    |                   |   |
| Preferred  stock, $0.001 par value, 5,000,000 shares authorized;   no shares issued and outstanding                                                     |   | —              |    | —                 |   |
| Common  stock, $0.001 par value, 60,000,000 shares authorized;   17,383,000 and 17,243,000 shares issued; 17,148,000 and 17,008,000 shares  outstanding |   | 17                  |    | 17                     |   |
| Additional  paid-in capital                                                                                                                             |   | 167,599             |    | 166,243                |   |
| Deferred  stock compensation expense                                                                                                                    |   | (373                | )       | (406                   | )      |
| Accumulated  other comprehensive loss                                                                                                                   |   | (2,169              | )       | (1,783                 | )      |
| Retained  earnings                                                                                                                                      |   | 109,243             |    | 74,836                 |   |
| Treasury  stock, at cost (235,000 and 235,000 shares)                                                                                                   |   | (2,194              | )       | (2,194                 | )      |
| Total  stockholders’ equity                                                                                                                        |   | 272,123             |    | 236,713                |   |
|                                                                                                                                                    |   |                |    |                   |   |
| Total  liabilities and stockholders’ equity                                                                                                        |   | $                   | 402,600 |                   | $      | 417,787 |   |

 

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

 

1

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**InVision Technologies, Inc.Condensed Consolidated Statementsof Operations(In thousands, except per share data)(Unaudited)**

 
|                                        |   | **Three Months Ended** |    |
|---------------------------------------------|--------|------------------------|---------|
|                                        |   | **March 30,  2003**    |    | **March 31,  2002** |   |
|                                        |   |                   |    |   |   |
| Revenues:                                   |   |                   |    |   |   |
| Product  revenues                           |   | $                      | 152,814 |   | $ | 26,095 |   |
| Service  revenues                           |   | 8,909                  |    | 3,466 |   |
| Contract  research and development revenues |   | 3,445                  |    | 3,637 |   |
| Total  revenues                             |   | 165,168                |    | 33,198 |   |
|                                        |   |                   |    |   |   |
| Cost  of revenues:                          |   |                   |    |   |   |
| Product  costs                              |   | 84,674                 |    | 14,917 |   |
| Service  costs                              |   | 5,000                  |    | 2,314 |   |
| Contract  research and development costs    |   | 2,136                  |    | 2,543 |   |
| Total  cost of revenues                     |   | 91,810                 |    | 19,774 |   |
|                                        |   |                   |    |   |   |
| Gross  profit                               |   | 73,358                 |    | 13,424 |   |
|                                        |   |                   |    |   |   |
| Operating  expenses:                        |   |                   |    |   |   |
| Research  and development                   |   | 7,355                  |    | 3,312 |   |
| Selling,  general and administrative        |   | 9,062                  |    | 5,379 |   |
| Total  operating expenses                   |   | 16,417                 |    | 8,691 |   |
|                                        |   |                   |    |   |   |
| Income  from operations                     |   | 56,941                 |    | 4,733 |   |
| Interest  expense                           |   | (42                    | )       | (94 | ) |
| Interest  and other income, net             |   | 685                    |    | 130 |   |
| Income  before provision for income taxes   |   | 57,584                 |    | 4,769 |   |
|                                        |   |                   |    |   |   |
| Provision  for income taxes                 |   | 23,177                 |    | 1,951 |   |
|                                        |   |                   |    |   |   |
| Net  income                                 |   | $                      | 34,407  |   | $ | 2,818 |   |
|                                        |   |                   |    |   |   |
| Net  income per share:                      |   |                   |    |   |   |
| Basic                                       |   | $                      | 2.02    |   | $ | 0.21 |   |
| Diluted                                     |   | $                      | 1.87    |   | $ | 0.17 |   |
|                                        |   |                   |    |   |   |
| Weighted  average shares outstanding:       |   |                   |    |   |   |
| Basic                                       |   | 17,067                 |    | 13,684 |   |
| Diluted                                     |   | 18,379                 |    | 16,110 |   |

 

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

 

2

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**InVision Technologies, Inc.Condensed Consolidated Statementsof Cash Flow(In thousands)(Unaudited)**

 
|                                                                           |   | **Three Months Ended** |    |
|--------------------------------------------------------------------------------|--------|------------------------|---------|
|                                                                           |   | **March 30,  2003**    |    | **March 31,  2002** |   |
| **Cash  flows from operating activities:**                                     |   |                   |    |   |   |
| Net  income                                                                    |   | $                      | 34,407  |   | $ | 2,818 |   |
| Adjustments  to reconcile net income to net cash used in operating activities: |   |                   |    |   |   |
| Depreciation  and amortization                                                 |   | 780                    |    | 855 |   |
| Deferred  income taxes                                                         |   | (1,632                 | )       | — |   |
| Loss  on disposal of fixed assets                                              |   | 526                    |    | 4 |   |
| Bad  debt expense                                                              |   | 25                     |    | 11 |   |
| Income  tax benefit from employee stock transactions                           |   | 274                    |    | — |   |
| Stock  compensation expense                                                    |   | 33                     |    | 279 |   |
|                                                                           |   |                   |    |   |   |
| Changes  in operating assets and liabilities:                                  |   |                   |    |   |   |
| Accounts  receivable                                                           |   | (26,954                | )       | (5,348 | ) |
| Inventories                                                                    |   | 5,684                  |    | (13,908 | ) |
| Other  assets                                                                  |   | 3,286                  |    | (2,104 | ) |
| Accounts  payable                                                              |   | 537                    |    | 8,152 |   |
| Accrued  liabilities                                                           |   | 11,159                 |    | 368 |   |
| Deferred  revenue                                                              |   | (63,367                | )       | 8,048 |   |
| Other  liabilities                                                             |   | (1                     | )       | 4 |   |
| **Net  cash used in operating activities**                                     |   | (35,243                | )       | (821 | ) |
|                                                                           |   |                   |    |   |   |
| **Cash  flows from investing activities:**                                     |   |                   |    |   |   |
| Purchases  of property and equipment                                           |   | (1,038                 | )       | (762 | ) |
| Proceeds  from short-term investments                                          |   | —                 |    | 1,992 |   |
| **Net  cash provided by (used in) investing activities**                       |   | (1,038                 | )       | 1,230 |   |
|                                                                           |   |                   |    |   |   |
| **Cash  flows from financing activities:**                                     |   |                   |    |   |   |
| Net  proceeds from (repayments of) short-term debt                             |   | 248                    |    | (916 | ) |
| Repayments  of long-term debt                                                  |   | (34                    | )       | (54 | ) |
| Proceeds  from issuance of common stock, net                                   |   | 1,082                  |    | 930 |   |
| **Net  cash provided by (used in) financing activities**                       |   | 1,296                  |    | (40 | ) |
|                                                                           |   |                   |    |   |   |
| Net  change in cash and cash equivalents for the period                        |   | (34,985                | )       | 369 |   |
| Cash  and cash equivalents at beginning of period                              |   | 159,736                |    | 11,386 |   |
| **Cash  and cash equivalents at end of period**                                |   | $                      | 124,751 |   | $ | 11,755 |   |
|                                                                           |   |                   |    |   |   |
| **Supplemental  disclosures of cash flow information:**                        |   |                   |    |   |   |
| Interest  paid                                                                 |   | $                      | 97      |   | $ | 208 |   |
| Income  taxes paid                                                             |   | $                      | 19,508  |   | $ | 2 |   |
|                                                                           |   |                   |    |   |   |
| **Supplemental  disclosures of noncash investing and financing activities:**   |   |                   |    |   |   |
| Financing  obligations incurred for the purchase of new equipment              |   | $                      | 577     |   | $ | 41 |   |
| Issuance  of common stock in connection with consulting agreement              |   | $                      | —  |   | $ | 56 |   |

 

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

 

3

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**InVisionTechnologies, Inc.**

**Notesto Condensed Consolidated Financial Statements**

**(Unaudited)**

 

**1.****                                      Summaryof Significant Accounting Policies**

 

**InterimUnaudited Financial Information**

 

The accompanying interim unaudited condensedconsolidated financial statements have been prepared in accordance withaccounting principles generally accepted in the United States of America(“generally accepted accounting principles”) for interim financial informationand in accordance with the instructions to Form 10-Q and Rule 10-01of Regulation S-X.  Accordingly, they donot contain all of the information and footnotes required by generally acceptedaccounting principles for complete financial statements.  In the opinion of management, theaccompanying unaudited condensed consolidated financial statements reflect alladjustments (consisting only of normal recurring adjustments) considerednecessary for a fair presentation.  Thesefinancial statements should be read in conjunction with the auditedconsolidated financial statements of InVision Technologies, Inc. and itssubsidiaries (the “Company”) as of December 31, 2002 and 2001 and for each ofthe three years in the period ended December 31, 2002, including the notesthereto, included in the Company’s Annual Report on Form 10-K filed on March28, 2003.

 

Operating results for the three month period endedMarch 30, 2003 may not necessarily be indicative of the results that may beexpected for the year ended December 31, 2003 or any other future period.

 

**BusinessCombinations and Goodwill and Other Intangible Assets**

 

On January 1, 2002, the Company adopted Statement ofFinancial Accounting Standards (“SFAS”) No. 142, “Goodwill and OtherIntangible Assets.”   SFAS 142 addressesthe initial recognition and measurement of intangible assets acquired outsideof a business combination and the accounting for goodwill and other intangibleassets subsequent to their acquisition. SFAS 142 provides that intangible assets with finite useful lives beamortized and that goodwill and intangible assets with indefinite lives not beamortized, but will rather be tested at least annually for impairment.  Since adopting SFAS 142, the Company ceasedamortization of the carrying value of goodwill of $2.5 million or acquiredworkforce of $331,000 at January 1, 2002, resulting in a reduction in annualamortization expense of $426,000.  Thenet carrying amount of acquired workforce was also reclassified togoodwill.  In the fourth quarter of2002, the Company performed the annual impairment test required by thestandard, and recorded a $2.1 million impairment of goodwill, relating to theInovec reporting unit.

 

**Accounting for Costs Associated with Exit or DisposalActivities**

 

On January 1, 2003, the Company adopted SFAS No. 146,“Accounting for Costs Associated with Exit or Disposal Activities,” whichaddresses accounting for restructuring and similar costs.  SFAS 146supersedes previous accounting guidance, principally Emerging Issues Task ForceIssue No. 94-3.  SFAS 146 requires that the liability for costs associatedwith an exit or disposal activity be recognized when the liability isincurred.  Under Issue No. 94-3, a liability for exit costs wasrecognized at the date of the Company’s commitment to an exit plan. SFAS 146 also establishes that the liability should initially be measuredand recorded at fair value.  Accordingly, SFAS 146 may affect the timingof recognizing future restructuring costs as well as the amounts recognized.

 

4

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**Accounting for Stock-Based Compensation**

 

In December 2002, the Financial Accounting StandardsBoard issued SFAS No. 148, “Accounting for Stock-Based Compensation – Transitionand Disclosure – an Amendment of FASB Statement 123,” which providesalternative methods of transition for a voluntary change to the fair valuebased method of accounting for stock-based employee compensation.  Inaddition, SFAS 148 amends the disclosure requirements of SFAS 123 to requireprominent disclosures in both annual and interim financial statements about themethod of accounting for stock-based employee compensation and the effect ofthe method used on reported results.  The amended disclosure requirementsof SFAS 148 are effective for years ending after December 15, 2002.

 

The Company grants stock options for a fixed number ofshares to employees with an exercise price equal to the fair value of theshares at the date of grant. The Company accounts for employee stock-basedcompensation in accordance with Accounting Principles Board Opinion No. 25(“APB 25”), “Accounting for Stock Issued to Employees.” The Company accountsfor stock-based awards to non-employees in accordance with Statement of FinancialAccounting Standards No. 123 (“SFAS 123”), “Accounting forStock-Based Compensation” and Emerging Issues Task Force Issue No. 96-18,“Accounting for Equity Instruments That Are Issued to Other Than Employees forAcquiring, or in Conjunction with Selling, Goods or Services.”  TheCompany’s disclosures are in accordance with Statement of Financial AccountingStandards No. 148 (“SFAS 148”), “Accounting for Stock-Based Compensationand Disclosure—An Amendment of FASB Statement No. 123.”

 

Had compensation cost for options granted and sharesissued in 2003 and 2002 under the Company’s stock option plans (the “EquityPlans”) and employee stock purchase plans (the “Purchase Plans”) beendetermined based on the fair value at the grant and issue dates, as prescribedin SFAS 123 and SFAS 148, the Company’s net income and pro forma netincome per share would have been as follows (in thousands, except per sharedata):

 
|                                                                                 |   | **Three  Months Ended** |   |
|--------------------------------------------------------------------------------------|--------|-------------------------|--------|
|                                                                                 |   | **Mar.  30, 2003**      |   | **Mar.  31, 2002** |   |
| Net  income:                                                                         |   |                    |   |   |   |
| As  reported                                                                         |   | $                       | 34,407 |   | $ | 2,818 |   |
| add:  stock compensation as reported, net of tax effects                             |   | $                       | 20     |   | 20 |   |
| less:  stock compensation determined using the fair value method, net of tax effects |   | (1,877                  | )      | (1,052 | ) |
| Pro  forma                                                                           |   | $                       | 32,550 |   | $ | 1,786 |   |
| Pro  forma net income per share:                                                     |   |                    |   |   |   |
| Basic:                                                                               |   |                    |   |   |   |
| As  reported                                                                         |   | $                       | 2.02   |   | $ | 0.21 |   |
| Pro  forma                                                                           |   | $                       | 1.91   |   | $ | 0.13 |   |
| Diluted:                                                                             |   |                    |   |   |   |
| As  reported                                                                         |   | $                       | 1.87   |   | $ | 0.17 |   |
| Pro  forma                                                                           |   | $                       | 1.77   |   | $ | 0.11 |   |

 

The fair value of each option grant is estimated onthe date of grant using the Black-Scholes option pricing model with thefollowing assumptions used for grants during the applicable period:

 
|                                   |   | **2003**  |   | **2002**  |   |
|----------------------------------------|--------|-----------|--------|-----------|--------|
| Option  Grants:                        |   |      |   |      |   |
| Average  risk free rate of return      |   | 2.30-3.00 | %      | 3.50-4.39 | %      |
| Weighted  average expected option life |   | 4.2 years |   | 4.0 years |   |
| Volatility  rate                       |   | 83        | %      | 83        | %      |
| Dividend  yield                        |   | 0         | %      | 0         | %      |

 

5

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**Accounting and Disclosure Requirements for Guarantees**

 

In December 2002, the Company adopted FASBInterpretation No. 45 (“FIN 45”), “Guarantor’s Accounting and DisclosureRequirement for Guarantees, Including Indirect Guarantees of Indebtedness ofOthers.”  FIN 45 requires that upon issuance of a guarantee, the guarantormust recognize a liability for the fair value of the obligation it assumes underthat guarantee.  The provisions for initial recognition and measurementare effective on a prospective basis for guarantees that are issued or modifiedafter December 31, 2002, irrespective of a guarantor’s year-end.

 

**Accrued Warranty**

 

Estimated warranty costs are recorded on productrevenues and adjusted periodically based on historical and anticipatedexperience. The Company accrues the estimated cost of product warranties at thetime revenues are recognized. Although the Company engages in extensive productquality programs and processes, including actively monitoring and evaluatingthe quality of component suppliers, the warranty obligation is affected byactual warranty costs, including usage of material and labor and servicedelivery costs incurred in correcting a product failure.

 

Information regarding the changes in the Company’swarranty liabilities was as follows for the three months ended March 30,2003:

 
| **Balance at  beginning  of period** |   | **Accruals for  warranties issued** |   | **Reduction for  payments made** |   | **Changes in  accruals related  to pre-existing  warranties** |   | **Balance at  end of  period** |   |
|--------------------------------------|--------|-------------------------------------|--------|----------------------------------|--------|---------------------------------------------------------------|--------|--------------------------------|--------|
|                                 |   |                                |   |                             |   |                                                          |   |                           |   |
| $                                    | 19,890 |                                | $      | 8,671                            |   | $                                                             | (6,197 | )                              | $      | 120 |   | $ | 22,484 |   |
|                                      |        |                                     |        |                                  |        |                                                               |        |                                |        |  |  |  |  |  |

 

**Revenue Arrangements with Multiple Deliverables**

 

In November 2002, the EITF reached a consensus onIssue No. 00-21, “Revenue Arrangements with Multiple Deliverables” (“EITF00-21”). EITF 00-21 addresses certain aspects of the accounting by a vendor forarrangements under which the vendor will perform multiple revenue generatingactivities.  EITF 00-21 will be effective for fiscal periods beginningafter June 15, 2003.  The Company has not yet determined the impact of theadoption of EITF 00-21 on the Company’s results of operations or financialposition.

 

**Derivative Instruments and Hedging Activities**

 

In May 2002, the Company designated certain foreigncurrency forward contracts as cash flow hedges of foreign exchange risk forinternational sales contracts and began applying hedge accounting as defined bySFAS 133.  As of March 30, 2003, the Company has recorded $2,169,000 ofother comprehensive loss, net of income taxes of $1,461,000, representing thenet change in the fair value of the foreign currency forward contracts thatwere designated as and qualified for hedge accounting.  The amountsdeferred in other comprehensive loss are reclassified to earnings upon therecognition of the hedged contract as revenue.  During the three monthsended March 30, 2003, the Company also recorded $272,000 as the ineffectivenessunder hedge accounting.  At March 30, 2003, some of the changes in fairvalue of certain forward contracts were offset by the measurement of associatedaccounts receivable amounts.  The maturity of foreign exchange forwardcontracts as of March 30, 2003 is consistent with the contractual or expectedtiming of the transactions being hedged, principally receipt of customerpayments.  These foreign exchange forward contracts all mature withintwelve months.  As of March 30, 2003, the Company anticipatesreclassifying the full amount included within other comprehensive loss toearnings within the next twelve months.

 

The Company does not enter into market risk sensitiveinstruments for trading purposes. During the three months ended March 30, 2003,the Company’s derivatives consisted only of foreign exchange forwardcontracts.  The Company had aggregate foreign currency forward contractswith notional amounts of $28.7 million at

 

6

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March 30, 2003. The fair value of these instruments, included inthe consolidated balance sheets, represented a liability of $3.5 million atMarch 30, 2003.

 

**2.****                                      ComprehensiveIncome**

 

The components ofcomprehensive income are as follows (in thousands):

 
|                                                        |   | **Three Months Ended** |   |
|-------------------------------------------------------------|--------|------------------------|--------|
|                                                        |   | **Mar. 30  2003**      |   | **Mar. 31  2002** |   |
|                                                        |   |                   |   |   |   |
| Net  income                                                 |   | $                      | 34,407 |   | $ | 2,818 |   |
| Derivatives  classified as cash flow hedges (net of taxes): |   |                   |   |   |   |
| Net  decrease in foreign currency exchange contracts        |   | (386                   | )      | — |   |
| Comprehensive  income                                       |   | $                      | 34,021 |   | $ | 2,818 |   |

 

**3.****                                      NetIncome Per Share**

 

Basic net income per share is computed by dividingincome available to common stockholders by the weighted-average shares ofcommon stock outstanding for the period. Diluted net income per share reflects the weighted-average shares ofcommon stock outstanding plus the potential effect of dilutive securities orcontracts which are convertible to shares of common stock such as options,warrants, convertible debt and preferred stock (using the treasury stockmethod) and shares issuable in future periods, except in cases where the effectwould be anti-dilutive.

 

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

 
|                                                        |   | **Three Months Ended** |   |
|-------------------------------------------------------------|--------|------------------------|--------|
|                                                        |   | **March 30, 2003**     |   | **March 31, 2002** |   |
|                                                        |   | **Income**             |   | **Weighted  Average  Shares** |   | **Per  Share  Amount** |   | **Income** |   | **Weighted  Average  Shares** |   | **Per  Share  Amount** |   |
|                                                        |   |                   |   |   |   |   |   |   |   |   |   |   |   |
| Basic net income per share                                  |   | $                      | 34,407 |   | 17,067 |   | $ | 2.02 |   | $ | 2,818 |   | 13,684 |   | $ | 0.21 |   |
| Effect of dilutive securities:                              |   |                   |   |   |   |   |   |   |   |   |   |   |   |
| Options and warrants                                        |   | —                 |   | 1,312 |   | (0.15 | ) | — |   | 2,396 |   | (0.04 | ) |
| Stock payable in connection with acquisition of  subsidiary |   | —                 |   | — |   | — |   | — |   | 30 |   | — |   |
|                                                        |   |                   |   |   |   |   |   |   |   |   |   |   |   |
| Diluted net income per share                                |   | $                      | 34,407 |   | 18,379 |   | $ | 1.87 |   | $ | 2,818 |   | 16,110 |   | $ | 0.17 |   |

 

**4.****                                      SegmentInformation**

 

The Company has three reportable segments.  The “EDS” segment is comprised of thebusiness unit that is engaged in the development, manufacturing, marketing andsupport of explosives detection systems based on advanced computed tomography(“CT”) technology.  The “Quantum”segment is comprised of the business unit that is engaged in funded researchand the development of technology for inspection, detection and analysis ofexplosives, concealed weapons and other materials based on quadrupole resonancetechnology and passive magnetic sensing.  The “Wood” segment is comprised of those business units that are engagedin the manufacture of systems

 

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using laser-based technologies to improve sawmill yield and theresearch and development of CT and X-ray technology to increase the value ofharvested timber.

 

Financial information by business segment is asfollows (in thousands):

 
|                                        |   | **EDS** |    | **Quantum** |   | **Wood** |   | **Total** |   |
|---------------------------------------------|--------|---------|---------|-------------|--------|----------|--------|-----------|--------|
| **First  quarter 2003**                     |   |    |    |        |   |     |   |      |   |
| Revenues:                                   |   |    |    |        |   |     |   |      |   |
| Product  revenues                           |   | $       | 151,124 |        | $      | 14       |   | $         | 1,676  |   | $ | 152,814 |   |
| Service  revenues                           |   | 8,492   |    | —      |   | 417      |   | 8,909     |   |
| Contract  research and development revenues |   | —  |    | 3,445       |   | —   |   | 3,445     |   |
| Total  revenues                             |   | $       | 159,616 |        | $      | 3,459    |   | $         | 2,093  |   | $ | 165,168 |   |
|                                        |   |    |    |        |   |     |   |      |   |
| Net  income (loss)                          |   | $       | 34,595  |        | $      | 119      |   | $         | (307   | ) | $ | 34,407 |   |
|                                        |   |    |    |        |   |     |   |      |   |
| **March  30, 2003**                         |   |    |    |        |   |     |   |      |   |
| Total  assets                               |   | $       | 392,563 |        | $      | 5,559    |   | $         | 4,478  |   | $ | 402,600 |   |
|                                        |   |    |    |        |   |     |   |      |   |
| **First  quarter 2002**                     |   |    |    |        |   |     |   |      |   |
| Revenues:                                   |   |    |    |        |   |     |   |      |   |
| Product  revenues                           |   | $       | 23,178  |        | $      | 652      |   | $         | 2,265  |   | $ | 26,095 |   |
| Service  revenues                           |   | 3,035   |    | 12          |   | 419      |   | 3,466     |   |
| Contract  research and development revenues |   | —  |    | 3,637       |   | —   |   | 3,637     |   |
| Total  revenues                             |   | $       | 26,213  |        | $      | 4,301    |   | $         | 2,684  |   | $ | 33,198 |   |
|                                        |   |    |    |        |   |     |   |      |   |
| Net  income (loss)                          |   | $       | 3,097   |        | $      | 264      |   | $         | (543   | ) | $ | 2,818 |   |
|                                        |   |    |    |        |   |     |   |      |   |
| **December  31, 2002**                      |   |    |    |        |   |     |   |      |   |
| Total  assets                               |   | $       | 407,886 |        | $      | 4,865    |   | $         | 5,036  |   | $ | 417,787 |   |

 

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

 

**5.****                                      Inventories**

 

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

 
|                                   |   | **March 30,  2003** |   | **December 31,  2002** |   |
|----------------------------------------|--------|---------------------|--------|------------------------|--------|
| Inventories:                           |   |                |   |                   |   |
| Raw  material and purchased components |   | $                   | 14,248 |                   | $      | 22,696 |   |
| Field  service spare parts             |   | 18,606              |   | 16,145                 |   |
| Work-in-process                        |   | 20,094              |   | 21,927                 |   |
| Finished  goods                        |   | 6,132               |   | 3,996                  |   |
| Total                                  |   | $                   | 59,080 |                   | $      | 64,764 |   |

 

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**6.****                                      AccruedLiabilities**

 

The components of accrued liabilities consist of thefollowing (in thousands):

 
|                                   |   | **March 30,  2003** |   | **December 31,  2002** |   |
|----------------------------------------|--------|---------------------|--------|------------------------|--------|
| Accrued  liabilities:                  |   |                |   |                   |   |
| Warranty  and other reserves           |   | $                   | 22,484 |                   | $      | 19,890 |   |
| Accrued  employee compensation         |   | 8,218               |   | 7,540                  |   |
| Income  taxes                          |   | 22,714              |   | 17,919                 |   |
| Foreign  currency forward contracts    |   | 3,486               |   | 4,948                  |   |
| Material  cost reduction reimbursement |   | 10,307              |   | 8,259                  |   |
| Other                                  |   | 9,598               |   | 6,808                  |   |
| Total                                  |   | $                   | 76,807 |                   | $      | 65,364 |   |

 

**7.****                                      Litigation**

 

The Company is involved in routine civil litigationarising in the ordinary course of business. Management believes that collectively these proceedings will not have amaterial effect on the Company’s business, financial condition or results ofoperations.

 

**8.****                                      SubsequentEvent**

 

On March 31, 2003, the Company completed itsacquisition of Yxlon International Holding GmbH, a leader in X-ray diffractionand non-destructive testing based in Hamburg, Germany.  The Company acquired Yxlon for 38.6 millioneuros in cash, or $41.7 million dollars. The Company would be required to make an additional payment of 10.0million euros if Yxlon’s XES 3000 or XES 3500 X-ray diffraction product iscertified for explosives detection by the TSA by December 31, 2003.

 

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

 

**Cautionsabout Forward-Looking Statements**

 

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

 

**Overview**

 

We are organized under three segments.  Our explosives detection systems, or EDS,business manufactures computed tomography, or CT, based detection products usedby the aviation industry to screen baggage for explosives.  Our wholly-owned subsidiary Quantum utilizesquadrupole resonance, or QR, and magnetic sensing technologies for theinspection, detection and analysis of explosives, concealed weapons and othermaterials.  Our Wood division consistsof Inovec, which manufactures systems using laser-based technologies to improvesawmill yield, and WoodVision, which is developing our CT and X-ray technologyto increase the value of harvested timber.

 

Our revenues are primarily comprised of:

 

•                                          EDSproduct revenues, which include revenues from sales of CTX systems,accessories, and related installation and configuration, and EDS servicerevenues, which include revenues from maintenance contracts related to productsupport, integration and other services, including those complex integrationsand configurations that are separate from product revenues;

 

•                                          Quantumcontract research and development revenues, which include revenues primarilyfrom development contracts utilizing QR and magnetic sensing technologies withgovernment agencies and private entities; and

 

•                                          Woodproduct revenues from the sales of control and automation systems for timberprocessing equipment and related accessories, installation and configuration,and service revenues from maintenance contracts related to product supportrepairs and other services.

 

We market our products and services directly throughinternal sales personnel and indirectly through authorized agents, distributorsand system integrators.  In the UnitedStates, we market our products and services primarily through direct salespersonnel.  Internationally, we use adirect sales force and authorized representatives to sell our products.  International sales represented 15.8% oftotal revenues in the first quarter of 2003 and 32.8% of total revenues in thefirst quarter of 2002.

 

*EDS*.  In any given fiscalquarter or year, our EDS product revenues are derived from orders of multipleunits of our products from a limited number of customers.  For example, in the first quarter in 2003,eight customers accounted for all of our EDS units sold during the quarter, andfor the fiscal year 2002, ten customers accounted for all of our EDS units soldduring the year.  The number of ourcustomers does not vary widely from period to period, and we are dependent onmultiple orders from a small number of customers for a substantial portion ofour revenues.  Therefore, a cancellationor delay of an order from a customer could have a significant negative impacton our operations in a given period. For the first quarter in 2003, wegenerated $127.1 million from EDS sales to our largest customer, the TransportationSecurity Administration, or TSA, representing 77.0% of total revenues.  For the first quarter in 2002, we generated$14.3 million from EDS sales to the Federal Aviation Administration, or FAA,and

 

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following the formation of the TSA, the TSA, representing 43.0% oftotal revenues.  There were no other EDScustomers who accounted for more than 10% of total revenues in the firstquarters of 2003 and 2002.

 

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

 

•                                          amountsto cover the bill of materials when materials are received from suppliers,typically 30% to 40% of the total system price;

 

•                                          anadditional amount upon factory acceptance or shipment ranging from 30% to 60%;and

 

•                                          thebalance upon installation and site acceptance, ranging from 5% to 30%.

 

These payment terms effectively provide the necessaryworking capital for acquisition of materials and funding inventory during themanufacturing cycle.  We anticipate thatpotential future orders from the TSA will continue to provide payment termswhich provide the necessary working capital for us and our suppliers, even ifproduction volumes were to rapidly increase. If future orders from the TSA contain different payment terms, a majorincrease in production rates may require substantial additional workingcapital.

 

Payment terms for TSA invoices are net 30 days, whileterms for international invoices vary from amounts due upon receipt of invoiceto 90 days.

 

We consider research and development to be a vitalpart of our operations and continue to dedicate substantial resources toresearch to enhance the performance, functionality and reliability of our CTXsystems, as well as development of new products.  Gross research and development expenses for EDS were $6.3 millionin the first quarter of 2003, compared to $2.9 million in the first quarter of2002.

 

*Quantum*. Our Quantum revenues are substantially derived from developmentactivities funded by various U.S. government contract agencies.  The government contract revenues are fromcontracts which are typically in the form of cost-plus-fixed-fee orfirm-fixed-price awards.

 

We also perform independent research and developmentactivities at Quantum which are not directly funded through U.S. governmentcontracts or grants.  Many of theseactivities explore ways to utilize those technologies which are developed orimproved under directly funded government contracts.  Internal research and development activity levels can fluctuatewith the level of identified internal research and development projects andwith the resource requirements of funded government contracts and grants.

 

*Wood*. Our Wood product and service revenues are primarily derived fromInovec’s sales of control and automation systems for timber processingequipment and related service.  We haveinstalled laser scanners in over 300 sawmills worldwide.

 

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**ResultsOf Operations**

 

The following table sets forth certain income andexpenditure items from our consolidated statements of operations expressed as apercentage of total revenues for the periods indicated.

 
|                                        |   | **Three Months Ended** |   |
|---------------------------------------------|--------|------------------------|--------|
|                                        |   | **March 30,  2003**    |   | **March 31,  2002** |   |
|                                        |   |                   |   |   |   |
| Revenues:                                   |   |                   |   |   |   |
| Product revenues                            |   | 92.5                   | %      | 78.6 | % |
| Service revenues                            |   | 5.4                    |   | 10.4 |   |
| Contract  research and development revenues |   | 2.1                    |   | 11.0 |   |
| Total revenues                              |   | 100.0                  |   | 100.0 |   |
|                                        |   |                   |   |   |   |
| Cost of  revenues:                          |   |                   |   |   |   |
| Product costs                               |   | 51.3                   |   | 44.9 |   |
| Service costs                               |   | 3.0                    |   | 7.0 |   |
| Contract  research and development costs    |   | 1.3                    |   | 7.7 |   |
| Total cost of  revenues                     |   | 55.6                   |   | 59.6 |   |
|                                        |   |                   |   |   |   |
| Gross margin                                |   | 44.4                   |   | 40.4 |   |
|                                        |   |                   |   |   |   |
| Operating  expenses:                        |   |                   |   |   |   |
| Research and  development                   |   | 4.4                    |   | 9.9 |   |
| Selling, general  and administrative        |   | 5.5                    |   | 16.2 |   |
| Total operating  expenses                   |   | 9.9                    |   | 26.1 |   |
|                                        |   |                   |   |   |   |
| Income from  operations                     |   | 34.5                   |   | 14.3 |   |
| Interest expense                            |   | (0.0                   | )      | (0.3 | ) |
| Interest and  other income, net             |   | 0.4                    |   | 0.4 |   |
| Income before  provision for income taxes   |   | 34.9                   |   | 14.4 |   |
|                                        |   |                   |   |   |   |
| Provision for  income taxes                 |   | 14.1                   |   | 5.9 |   |
|                                        |   |                   |   |   |   |
| Net income                                  |   | 20.8                   | %      | 8.5 | % |

 

**Comparisonof the Three Months Ended March 30, 2003 to the Three Months Ended March 31,2002**

 

*Revenues*.EDS product revenues were $151.1 million in the first quarter of 2003, anincrease of 552% from $23.2 million in the first quarter of 2002.  This increase in system sales and relatedaccessories reflects the orders received from the FAA and TSA, as well asinternational customers, resulting from the increased focus on aviationsecurity due to the terrorist attacks of September 11, 2001.  EDS service revenues were $8.5 million forthe first quarter of 2003, an increase of 180% from $3.0 million in the firstquarter of 2002.  The increase inservice revenue is a result of signing a contract with Siemens to service ourEDS units owned by the FAA and TSA in the United States and its territories andservice contracts revenues from international customers for new support andmaintenance agreements for CTX systems for which warranty periods expired.  We anticipate that service revenues willincrease in 2003 compared to 2002 due to the agreement with Siemens and alarger installed based of EDS coming off of warranty.  As of March 30, 2003, we had in backlog EDS equipment orders andservice agreements of $119.0 million, primarily consisting of orders from theTSA for multiple CTX 9000 DSi and CTX 5500 DS systems.

 

Quantum’s contract research and development revenuesdecreased slightly to $3.4 million for the first quarter of 2003 from $3.6million in the first quarter of 2002. Contract research and development revenues from the U.S. government forthe development of landmine technologies was $2.1 million in the first quarterof 2003, representing 51.4% of Quantum’s revenues, and $2.7 million in thefirst quarter of 2002, representing 62.8% of Quantum’s revenues.  The decrease in contract research anddevelopment revenues was primarily due to a reduced

 

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need for subcontract support for the landmines contracts, as outsourcedmilestones were completed.   As of March30, 2003, we had Quantum contract research and development backlog ofapproximately $9.1 million, primarily for the development of landmine detectiontechnologies.  In April 2003, wereceived an additional grant of $11.4 million from the U.S. government for thedevelopment of landmine technologies. Quantum’s product revenues decreased to $14,000 in the first quarter of2003 from $652,000 in the first quarter of 2002.  The decrease is due to the absence of any commercial productdeliveries by Quantum in the first quarter of 2003.

 

Wood product revenues were $1.7 million in the firstquarter of 2003, a decrease of 26.0% from $2.3 million in the first quarter of2002.  The decrease in Wood productrevenues is primarily due to fewer system and machinery equipment sales, bothreflecting softness in the wood products industry.  Wood service revenues decreased slightly to $417,000 in the firstquarter of 2003 from $419,000 in the first quarter of 2002.  As of March 30, 2003, we had in backlogInovec equipment orders and service agreements of $959,000.

 

*GrossProfit*.  Cost of EDSproduct revenues primarily consists of purchased materials procured for use inthe assembly of our products, as well as manufacturing labor and overhead,contract manufacturing services, installation, training and warranty.  Cost of EDS service revenues primarilyconsists of direct labor and materials and customer support overhead.  In any given period, our gross profit forproducts and services may be affected by several factors, including productmix, volume of systems manufactured in the period, product configuration,location of the installation and complexity of integration into variousenvironments.

 

Gross profit for EDS products was $67.7 million in thefirst quarter of 2003, an increase of 297% from $10.4 million in the firstquarter of 2002.  Gross marginpercentages for EDS products were 44.8% in the first quarter of 2003 and 2002.  The increase in gross profit for EDSproducts is primarily due to increased revenues.  Product gross margin percentages remained the same as a result ofimproved manufacturing overhead per unit, offset by decreases in sales price asa result of volume orders from the TSA.

 

Gross profit for EDS services were $3.7 million in thefirst quarter of 2003, an increase of 297% from $931,000 in the first quarterof 2002. Gross margin percentages for EDS services were 43.3% in the firstquarter of 2003 and 30.7% in the first quarter of 2002.  The increase in gross profit for EDSservices is primarily due to increased EDS service revenues from the growinginstalled base of domestic systems covered by the Siemens contract, which callsfor extended 24 hour coverage over and above normal warranty coverage, andinternational sales for our CTX systems that went off of warranty.  Gross margin percentage improved primarilyas the result of service overhead costs being spread over a larger base ofinstalled units.  In addition, in thefirst quarter of 2002, we incurred costs associated with the build-up of ourcustomer support staff in anticipation of an increase in EDS services as moreunits were sold.

 

Cost of Quantum contract research and developmentrevenues primarily consist of direct labor, purchased materials, subcontractlabor and the applicable overhead required to support government fundedactivities. Gross profit for contract research and development was $1.3 millionin the first quarter of 2003, a 19.7% increase from $1.1 million in the firstquarter of 2002.  Gross marginpercentages were 38.0% in the first quarter of 2003 and 30.1% in the firstquarter of 2002.  The increase in grossprofit and the improvements in gross margin percentages for contract researchand development sales was primarily due to fewer outside engineering servicesbeing required on a landmines contract, which services typically carry aslightly lower margin, in the first quarter of 2003 compared to the same perioda year ago.

 

Cost of Wood products revenues primarily consists ofpurchased materials procured for use in the assembly of our products, as wellas manufacturing labor and overhead, installation, training and warranty.  Cost of Wood service revenues primarilyconsists of direct labor and materials and customer support overhead.  Gross profit for Wood products was $457,000in the first quarter of 2003, a decrease of 18.0% from $557,000 in the firstquarter of 2002.  Gross marginpercentages were 27.3% in the first quarter of 2003 and 24.6% in the firstquarter of 2002.  The decrease in grossprofit for Wood products is primarily due to a decrease in revenues.  The increase in gross margin percentages forWood products was primarily due to a lower portion of revenues attributable tomachinery equipment, which typically carry a lower margin than system revenues,in the first quarter of 2003 compared to the same period a year ago.

 

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*Researchand Development*. Research and development expenses consist primarily of compensation paidto personnel engaged in research and development activities, amounts paid foroutside services and costs of materials utilized in the development of hardwareproducts, including prototype units. Research and development expenditures are partially offset by amounts reimbursedby the FAA and other government agencies and private entities under researchand development contracts and grants. These services are provided and reimbursed on a cost basis.

 

Gross research and development expenses for EDS were$6.3 million in the first quarter of 2003, an increase of 116% from $2.9million in the first quarter of 2002. There was no funding from research and development contracts and grantsfrom the FAA and other government agencies in the first three months of 2003,but there was funding of  $489,000 forour gross research and development expenses for EDS in the first quarter of2002. Net research and development expenses for EDS were $6.3 million in thefirst quarter of 2003, an increase of 160% from $2.4 million in the first quarterof 2002.  Net research and developmentexpenses for EDS as a percentage of EDS revenues were 3.9% in the first quarterof 2003 and 9.2% in the first quarter of 2002.   The increase in gross research and development expenses for EDSwas primarily due to an increased focus on several initiatives to support ourgrowth.  With the goal of 100% checkedbaggage screening in U.S. airports, we expect that our EDS machines will beoperated at or near capacity for extended periods.  We are investing in sustaining engineering efforts to ensure thatour products achieve high levels of serviceability and reliability whenoperating at capacity.  We arecontinuing our development of the ARGUS program, an FAA-sponsored program designedto develop a smaller, low-cost EDS product to scan checked baggage in smallairports and low-traffic stations within larger airports.  We are also continuing to develop productenhancements for our existing line of EDS machines, and, in addition, we arecontinuing to fund research at Quantum Magnetics to develop systems whichemploy both CT and QR technology.  Thedecrease of gross and net research and development expenses for EDS as apercentage of revenues was primarily due to the increase in revenue.

 

Research and development expenses for Quantum were$741,000 in the first quarter of 2003, an increase of 78.1% from $416,000 inthe first quarter of 2002.  Research anddevelopment expenses for Quantum as a percentage of Quantum revenues were 21.4%in the first quarter of 2003 and 9.7% in the first quarter of 2002.  The increase in expenses was primarily dueto more internal costs incurred for the development of an upgrade to the CTXfamily of explosives detection systems over and above the work funded by EDSnoted above, and for the development and commercialization of other products inthe first quarter of 2003 compared to the same period a year ago.

 

Research and development expenses for Wood were$322,000 in the first quarter of 2003, a decrease of 32.4% from $476,000 in thefirst quarter of 2002.  Research anddevelopment expenses for Wood as a percentage of Wood revenues were 15.4% inthe first quarter of 2003 and 17.7% in the first quarter of 2002.  The decrease in research and developmentexpenses for Wood was primarily due to reduced efforts in the development of alog scanning system based on CT technology to optimize the value of harvestedtimber.

 

*Selling,general and administrative*. Selling, general and administrative expenses consist primarily ofcompensation paid to direct and indirect sales and marketing personnel,administrative personnel, including directors, consultant fees, professionalservice fees, insurance costs, travel, selling and distribution costs, andother general expenses.

 

Selling, general and administrative expenses for EDSwere $7.9 million in the first quarter of 2003, an increase of 104% from $3.9million in the first quarter of 2002. Selling, general and administrative expenses for EDS as a percentage ofEDS revenues were 5.0% in the first quarter of 2003 and 14.9% in the firstquarter of 2002.  The increase inselling, general and administrative expenses for EDS in absolute dollars wasprimarily due to an increase in headcount and employee related expenses of $2.1million, higher sales commissions of $603,000 resulting from higher EDSrevenues in the first quarter 2003, professional fees, such as investor andpublic relations, of $523,000, all related to the growth of our businessresulting from the increase in orders received from the FAA, TSA and internationalcustomers, in the first quarter of 2003 compared to the same period a year ago.

 

Selling, general and administrative expenses forQuantum were $438,000 in the first quarter of 2003, a decrease of 32.2% from$646,000 in the first quarter of 2002. Selling, general and administrative expenses for Quantum as a percentageof Quantum revenues were 12.7% in the first quarter of 2003 and 15.0% in thefirst quarter

 

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of 2002.  The decrease inselling, general and administrative expenses for Quantum was primarily theresult of an effort to reduce overall expenses.

 

Selling, general and administrative expenses for Woodwere $677,000 in the first quarter of 2003, a decrease of 19.0% from $836,000in the first quarter of 2002.  Selling,general and administrative expenses for Wood as a percentage of Wood revenueswere 32.3% in the first quarter of 2003 and 31.1% in the first quarter of2002.  The decrease in expenses wasprimarily due to efforts to reduce overall expenses.

 

*InterestExpense*.  Interestexpense was $42,000 in the first quarter of 2003 and $94,000 in the firstquarter of 2002. Interest expense resulted primarily from fees associated withour working capital lines of credit, equipment term loans, capital leases andfinancing for insurance premiums.  Thedecrease in interest expense was primarily due to decreased activities withinour lines of credit, such as standby letters of credit issued to secureguarantees to customers, in the first quarter of 2003 compared to the sameperiod a year ago.

 

*Interestand Other Income, Net*. Interest and other income, net, was $685,000 in the first quarter of2003 and $130,000 in the first quarter of 2002. The amount for the firstquarter of 2003 consisted primarily of interest income on cash, cashequivalents and short-term investments of $439,000, and other income (net) of$246,000, primarily consisting of foreign exchange gains on outstanding foreignexchange forward contracts at March 30, 2003. The amount for the first quarter of 2002 consisted primarily of interestincome on cash, cash equivalents and short-term investments of $57,000 andother income (net) of $73,000, primarily foreign exchange gains on outstandingforeign exchange forward contracts at March 31, 2002. The increase in theinterest portion of interest and other income, net was primarily due to largeraverage cash balances in the first quarter of 2003 compared to the firstquarter of 2002.

 

*Provisionfor Income Taxes*.  Theprovision for income taxes was $23.2 million in the first quarter of 2003 and$2.0 million in the first quarter of 2002.  Our effective tax rate was 40.25% in the first quarter of 2003 and 40.9%in the first quarter of 2002.  Oureffective tax rate was different than statutory tax rates primarily due tocertain permanent differences between book and taxable income.  At December 31, 2002, we had federal andstate net operating loss carryforwards of approximately $1.8 million and$321,000 available to reduce future federal and state taxable income,respectively.  Our federal net operating loss carryforwards begin toexpire in 2010 and our state net operating loss carryforwards expire in2011.  The tax benefit of the net operating loss carryforwards may belimited due to the impact of the Tax Reform Act of 1986.  Events which maycause the tax benefit to be limited include, but are not limited to, acumulative stock ownership change of more than 50% over a three-year period andthe timing of utilization of various tax benefits carried forward.

 

**LiquidityAnd Capital Resources**

 

At March 30, 2003, we had $124.8 million in cash andcash equivalents, compared to $159.7 million at December 31, 2002.

 

Net cash used in operating activities was $35.2million in the first quarter of 2003, despite net income of $34.4 million forthe quarter.  The cash used in operatingactivities in the first quarter of 2003 despite the net income was a resultprimarily of a lower level of collections from customers relative to revenuerecognized for the quarter.  The lowerlevel of collections was mainly due to a temporary delay in TSA remittances asa result of a transition in federal budget appropriation codes.  This delay is responsible for a $27.0million increase in accounts receivable. In addition, there was a $63.4 million decrease in deferred revenue,primarily due to the shipment of units to the TSA for which deposits had beenreceived in prior periods for long lead-items. These items, which resulted in a use of cash, were partially offset bychanges in other operating assets and liabilities, such as an $11.2 millionincrease in accrued liabilities and a $5.7 million decrease in inventories.

 

Net cash used in operating activities in the firstquarter of 2002 was $821,000, despite net income of $2.8 million for thequarter.  The cash used in operatingactivities in the first quarter of 2002 despite the net income was a resultprimarily of a $13.9 million increase in inventories, a $5.3 million increasein accounts receivable and a $2.1 million increase in other current andnon-current assets, partially offset by an $8.5 million increase in accountspayable and accrued liabilities, an $8.0 million increase in deferred revenuesand the $855,000 non-cash effect of depreciation and amortization.

 

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Net cash used in investing activities was $1.0 millionin the first quarter of 2003, compared to $1.2 million provided by investingactivities in the first quarter of 2002.  Net cash used in investing activities in the first quarter of 2003resulted from $1.0 million in acquisitions of capital equipment. Net cashprovided by investing activities in the first quarter of 2002 resulted fromproceeds from the sale of short-term investments of $2.0 million, partiallyoffset by $762,000 in acquisitions of capital equipment.

 

Net cash provided by financing activities was $1.3million in the first quarter of 2003, compared to $40,000 used in financingactivities in the first quarter of 2002. Net cash provided by financing activities in the first quarter of 2003was primarily due to $1.1 million in net proceeds from the sale of common stockunder our employee stock purchase plan and exercises of stock options. Net cashused in financing activities in the first quarter of 2002 primarily resultedfrom $916,000 in repayments of short-term debt and $54,000 in repayments oflong-term debt, partially offset by $930,000 in proceeds from exercises ofincentive stock options and sales under our employee stock purchase plan.

 

We have two primary sources of financing frombanks.  The first agreement is a line of credit that provides for maximumborrowings in an amount up to $25.0 million.  The second agreement is aline of credit partially guaranteed by the Export-Import Bank of the UnitedStates and provides for maximum borrowings in an amount up to the lowerof:  (a) the sum of 70% to 90% of eligible EDS export accounts receivableplus the lower of: (1) 70% of eligible raw materials and work-in-processinventory designated for export customers, or (2) 60% of outstanding loansunder this agreement, or (b) $10.0 million.  Borrowings under theseagreements bear interest at the bank’s prime rate minus 0.5%, which was 3.75%at March 30, 2003.  The agreements expire in July 2004 and require thatthe EDS segment maintain certain levels of tangible net worth.  We may useproceeds of loans under both lines of credit for general corporatepurposes.  At March 30, 2003, we had no borrowings outstanding under theseagreements.  However, at March 30, 2003, we had outstanding guarantees tocustomers through the issuance of letters of credit for which a partial reserveof $11.4 million is secured by the lines of credit, and foreign exchangecontracts for which a 10% reserve of $2.9million is secured by the lines ofcredit.  We had remaining available borrowing capacity under the lines ofcredit of $20.7 million at March 30, 2003 based on eligible EDS accountsreceivable and inventories as of that date.

 

We believe that existing cash and cash equivalents,available borrowings under our lines of credits and funds expected to begenerated from operations will be sufficient to finance our working capital andcapital expenditure requirements for at least the next twelve months. However, if we fail to meet required financial covenants in our creditagreements, or our receivables do not support the upper limits of these creditagreements, then we may not be able to have access to further funds under theseagreements.  In addition, if we are unable to deliver EDS units in atimely manner under our recent orders from the TSA or if we fail to adhere tothe terms of the licensing agreement with the TSA, the TSA may cancel itsorders or not place additional orders.  If any of these events occur, ourcapital resources would be significantly impaired.

 

**RiskFactors**

 

**RisksRelated to Our Business**

 

**A numberof factors that affect our revenues make our future results difficult topredict, and therefore we may not meet expectations for a particular period.**

 

We believe that our revenues have the potential tovary significantly from time to time. We believe that these variations mayresult from many factors, including:

 

•                                          thetiming, size and mix of orders from our major customers, including mostprominently, the TSA, and agencies of other governments;

 

•                                          legislativeor other government actions leading to fluctuations in demand for aviationsecurity products and services;

 

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•                                          delaysin product shipments caused by the inability of airports to install orintegrate our products in a timely fashion;

 

•                                          theavailability and cost of key components;

 

•                                          theacceptance and timing of enhancements to our existing products;

 

•                                          theintroduction and acceptance of new products offered by us or our competitors;

 

•                                          changesin pricing policies by us, our competitors or our suppliers, including possibledecreases in average selling prices of our products caused by customer volumeorders or in response to competitive pressures; and

 

•                                          oursales mix to domestic and international customers.

 

A significant portion of our quarterly and annualoperating expenses is, and will continue to be, relatively fixed in nature.This means that revenue fluctuations will cause our quarterly and annualoperating results to vary substantially. We also may choose to increasespending to pursue new market opportunities, which may negatively affect ourfinancial results.

 

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

 

**Governmentalagencies, the primary customers for our EDS and other products, are subject tobudget processes which could limit the demand for these products.**

 

Substantially all of the customers for our EDSproducts and our other products under development to date have been publicagencies or quasi-public agencies, such as the FAA, the TSA and airportauthorities. Public agencies are subject to budgetary processes and expenditureconstraints. In the past, many domestic and foreign government agencies haveexperienced budget deficits that have led to decreased capital expenditures incertain areas.

 

The funding of government programs is subject tolegislative appropriation. Budgetary allocations for explosives detectionsystems depend, in part, upon governmental policies, which fluctuate from timeto time in response to political and other factors, including the public’s perceptionof the threat of commercial airline bombings. For example, the terroristattacks of September 11, 2001 resulted in the passage of the Aviation andTransportation Security Act, mandating a small surcharge on each airline ticketpurchase to fund airline security. We cannot assure investors that these fundswill be used to purchase our EDS products. In February 2003, an OmnibusSpending Bill containing funding for the TSA, including $174.5 millionearmarked for security equipment, was signed into law.  Additional funding of $665 million for TSAoperations was included in a supplemental appropriation in April 2003.  No specific earmark for security equipmentwas a part of the supplemental appropriation. As of May 12, 2003, we have received no orders for our EDS products fromthe TSA as a result of the Omnibus Spending Bill or the supplementalappropriation.  We cannot assureinvestors that funds will continue to be appropriated by Congress or allocatedby the TSA or other agencies for the purchase of EDS products.

 

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**Governmentalagencies have special contracting requirements, which create additional risks.**

 

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

 

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

 

•                                          suspendor prevent us for a set period of time from receiving new contracts orextending existing contracts based on violations or suspected violations oflaws or regulations;

 

•                                          terminateour existing contracts;

 

•                                          reducethe scope and value of our existing contracts;

 

•                                          auditand object to our contract-related costs and fees, including allocated indirectcosts;

 

•                                          controland potentially prohibit the export of our products; and

 

•                                          changecertain terms and conditions in our contracts.

 

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

 

In addition, U.S. government contracts are conditionedupon the continuing availability of Congressional appropriations. Congressusually appropriates funds for a given program on a September 30 fiscalyear-end basis, even though contract performance may take years. Consequently,our contracts with the TSA may only be partially funded at the outset, andadditional monies are normally committed to the contract by the TSA only asappropriations are made by Congress for future periods. The government’sfailure to fully fund one or more of the contracts for our EDS products or ourother products under development would harm our business.

 

As a government contractor, we are subject to periodicaudits and reviews. Based on the results of its audits, the U.S. government mayadjust our contract-related costs and fees, including allocated indirect costs.Although adjustments arising from government audits and reviews have notseriously harmed our business, future audits and reviews could cause adverseeffects. In addition, under U.S. government purchasing regulations, some of ourcosts, including most financing costs, amortization of intangible assets,portions of our research and development costs, and some marketing expenses maynot be reimbursable or allowed in our negotiation of fixed-price contracts.Further, as a U.S. government contractor, we are subject to an increased riskof investigations, criminal prosecution, civil fraud, whistleblower lawsuitsand other legal actions and liabilities to which purely private sectorcompanies are not.

 

In addition, public agency contracts are frequentlyawarded only after formal competitive bidding processes, which are oftenprotracted and typically contain provisions that permit cancellation in theevent that funds are unavailable to the public agency. We may not be awardedany of the contracts for which our products are bid. Even if we are awardedcontracts, substantial delays or cancellations of purchases could result from protestsinitiated by losing bidders.

 

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**Legislativeactions could lead to fluctuations in demand for aviation security products andservices.**

 

In addition to the Congressional budgetary process,other legislation could be introduced that would impact demand for aviationsecurity products and services. In response to public pressure, fluctuation inconcern on the part of voters about aviation security, or for other reasons,the plans for deployment of EDS to screen baggage could be changed. Thebudgetary debates and delays could result in fewer EDS being sold to the TSAand elected officials who support the EDS program could fail to maintain theiroffices, any of which events could cause a decrease in the demand for our EDSproducts.

 

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

 

Key components used in our products, including thepower supply, gantry, X-ray tubes and X-ray detectors, have been designed by usto our specifications and are currently available only from one or a limitednumber of suppliers. We currently do not have long-term agreements with thesesuppliers. In addition, some of the suppliers of the key components used in ourproducts are our competitors, and they may be motivated not to supply us withthe components we need.  Our inabilityto develop alternative sources for single or sole source components, to findalternative third party manufacturers or sub-assemblers, or to obtainsufficient quantities of these components, could result in delays orinterruptions in product shipments, which could cause current or potential customersto seek other suppliers of EDS products. In view of the high cost of many ofthese components, we strive to avoid excess supplies. If our suppliersexperience financial, operational, production or quality assurancedifficulties, or our sole source suppliers are acquired or otherwise influencedby our competitors, the supply of components to us would be reduced orinterrupted. In the event that a supplier ceases operations, discontinues aproduct or withholds or interrupts supply for any reason, we may be unable toacquire the product from alternative sources within a reasonable period oftime.

 

**Our major customer, the TSA, is a part of the Department ofHomeland Security, a newly created agency that has experienced, and maycontinue to experience, delays in its operations, which may cause delays in ourreceiving orders from the TSA.**

 

The TSA is a relatively new agency that was created inNovember 2001 by the Aviation and Transportation Security Act.  As a result, it has experienced, and maycontinue to experience, delays in fulfilling its mandate as a result of delaysin establishing the necessary infrastructure to operate in an efficientmanner.  For example, Congress is stillin the process of organizing subcommittees for the TSA.  This may result in delays in our receivingorders for our EDS products.  Further,the TSA is now a part of the Department of Homeland Security, which was createdsubsequent to the creation of the TSA and is therefore in an earlier stage offormation, which may further create delays in our receiving orders as thisagency is organized.

 

**Futuresales of our EDS products will depend on the ability of airports to securefunding to build baggage handling systems and to integrate our EDS units intosuch systems, which they may not be able to do.**

 

Future sales will depend, in part, on installing ourEDS products into airport lobbies or integrating them into existing baggagehandling systems. If an airport is not configured for these systems, deploymentof our EDS products may require changes in the airport infrastructure, such asreinforced airport lobby floors and baggage platforms. If our EDS productscannot easily be installed in airport lobbies or integrated into existingbaggage handling systems, we may experience reduced sales of our EDS productsor these sales may be delayed. In addition, installations and integrations arecurrently partially funded by the TSA in the United States.  Recent legislation established a “letter ofintent” program under which an airport can present a request to the TSA forreimbursement of costs incurred by the airport in improving baggage handlingsystems to increase security. There can be no assurance that the governmentwill continue to fund installations, integrations and reimbursements at the currentlevel or at all. If there is a reduction in funding, we may experience reducedsales of our EDS products or these sales may be delayed.

 

We believe that a substantial opportunity exists forour CTX 9000 DSi model to be integrated into baggage handling systems. Ifairports determine, in conjunction with governmental authorities, that theywill be unable or unwilling to modify or finance such in-line baggage handlingsystems, this opportunity may be limited.

 

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**As aresult of the Aviation and Transportation Security Act, our EDS products areundergoing substantially increased usage per day, which could cause unforeseenproblems with their ability to sustain this increased usage.**

 

As required by the Aviation and TransportationSecurity Act, as of December 31, 2002, 100% of checked baggage mustundergo EDS screening. As a result, our EDS products in operation are beingused more hours per day than before, which places a burden on them notpreviously experienced. This has resulted in an increase in the amount ofmaintenance required to keep them operating, and may result in unforeseenproblems. If this were to occur, our customers could perceive that there arereliability problems with our CTX products, which could reduce the demand forour products. In addition, our CTX 9000 DSi product is a relatively newmodel with which we have limited experience in sustaining extensive usage. As aresult, our CTX 9000 DSi product may experience maintenance needs andincreased down time beyond that experienced by our CTX 2500 and CTX 5500DS products. Further, because the CTX 9000 DSi is designed to beintegrated into an airport’s baggage handling system, it has, in addition tothe detection function and mechanisms, components that integrate it into thebaggage handling system, which also require maintenance and may also contributeto increased maintenance needs and down time. If our CTX 9000 DSi product doesexperience additional maintenance needs beyond that of our CTX 2500 andCTX 5500 DS products, our customers may not purchase this product in favor ofour CTX 2500 and CTX 5500 DS products or the products of our competitors.

 

**We mayseek to grow by acquisition, which subjects us to substantial risks, includingthe failure to successfully integrate an acquired business.**

 

As part of our growth strategy, we may expand ourbusiness by pursuing selected acquisitions of technologies and companies thatoffer complementary products, services, technologies or market access. Our abilityto grow by acquisition depends upon the availability of acquisition candidatesat reasonable prices and our ability to obtain acquisition financing onacceptable terms. We may incur costs in connection with our pursuit ofacquisitions for which we are responsible regardless of whether theacquisitions are actually consummated. Future acquisitions by us could resultin dilutive issuances of equity securities, the incurrence of debt andcontingent liabilities and amortization expenses related to intangible assets,any of which could harm our business. Acquisitions entail numerous risks and wemay not realize the expected benefits of these transactions.  These risks include:

 

•                                          difficultiesin the assimilation of acquired operations, technologies and products;

 

•                                          diversionof management’s attention from other business concerns;

 

•                                          lackof experience operating in the geographic market or industry sector of acquiredcompanies;

 

•                                          exposureto unanticipated contingent liabilities of acquired companies; and

 

•                                          potentialloss of key employees of acquired companies.

 

The process of integrating supply and distributionchannels, computer and accounting systems and other aspects of operations,while managing a larger entity, may present a significant challenge to our management.We may not be able to successfully integrate any businesses, products,technologies or personnel that might be acquired in the future. In such case,we would not fully realize the anticipated benefits of a business combination,and the failure of such efforts would harm our business.  Maintaining uniform standards, controls,procedures and policies may be harder than we anticipate and interfere withefficient administration of the company as a whole.

 

For example, on March 31, 2003, the first day of oursecond quarter of fiscal 2003, we completed the acquisition of YxlonInternational Holding GmbH.  Yxlon isactive in businesses that are new to us and represent a challenge to ourmanagement.  In order to successfullyintegrate Yxlon, we must, among other things, integrate, both from anengineering and a sales and marketing perspective, the acquired products andservices, including Yxlon’s non-destructive testing business and its securitybusiness, into our suite of product offerings. Assimilating Yxlon’s businesses, products and technologies with ours maybe more difficult than we anticipate because the technologies are verycomplex.  As a result, we may takelonger to develop and introduce new products than we anticipate.  In

 

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addition, we do not have experience developing, marketing and sellingproducts in the non-destructive testing business, and we may be not besuccessful competing for customers in industries with which we areunfamiliar.  Further, Yxlon’s businesseshistorically have had lower gross margins than our businesses.  Any products that we develop, market andsell integrating Yxlon’s technologies and products may contribute less toprofitability than our existing products. If we are not successful in managing the integration of Yxlon’sbusinesses, we may incur additional expenses or lose revenue opportunities forYxlon and us, and our business results may suffer.

 

**We maynot be able to grow our service organization quickly enough to support our EDSunits deployed in the field.**

 

We are responsible for supporting the installation of,and providing warranty service for, our EDS units. With the rapid increase inthe number of units being shipped, we are expanding our service organization’scapability. EDS units are relatively complex machines, which employ high-speedconveyors and sophisticated imaging technology. If we are unable to hire andtrain sufficient service personnel supported by an expanded logistical system,the reliability of our machines could suffer. If this were to occur, therecould be a decrease in demand for our products.

 

**If ourEDS products fail to detect explosives, we could be exposed to productliability and related claims for which we may not have adequate insurancecoverage, and we may lose current and potential customers.**

 

Our business exposes us to potential product liabilityrisks, which are inherent in the manufacturing, sale and maintenance of EDSproducts. Our machines are not designed to detect, and FAA/TSA certificationdoes not require 100% detection of, any and all explosives contained in scannedbaggage. For this reason, or if our products malfunction, it is possible thatexplosive material could pass undetected through our products, which would leadto product liability claims. There are also many other factors beyond ourcontrol that could lead to liability claims, such as the reliability andcompetence of the customer’s operators and the training of the operators.

 

If a product liability claim is brought against us,the cost of defending the claim would be significant and any adversedetermination may result in liabilities in excess of our insurance coverage. Wecurrently have product liability and war and terrorism insurance in the amountof $200 million.  However, sinceSeptember 11, 2001, insurance rates have increased dramatically, and wecannot be certain that our current insurance can be maintained, or additionalinsurance coverage could be obtained, on acceptable terms, if at all.

 

In addition, the failure of any EDS product to detectexplosives, even if due to operator error and not to the mechanical failure ofan EDS product, could result in public and customer perception that ourproducts do not work effectively, which may cause potential customers to notplace orders and current customers to cancel orders already placed or to notplace additional orders, any of which would harm our business and financialresults.

 

**Wesubstantially depend on large orders from a limited number of customers. As aresult, order cancellations from any of our customers or the failure of thesecustomers to continue to purchase EDS products could have a material negativeimpact on our business and financial results.**

 

In any given fiscal quarter or year, our revenues arederived from orders of multiple units of our EDS products from a limited numberof customers. Through March 30, 2003, substantially all of our orders from U.S.customers have been funded by the FAA and the TSA, which allocate our productsto airports in the U.S. EDS sales to the FAA, and following the formation ofthe TSA, to the TSA, accounted for 84.2% of our revenues in the quarter endedMarch 30, 2003 and 85.4% of our revenues in the year ended December 31, 2002.In the quarter ended March 30, 2003, eight customers accounted for all ofour EDS units sold during the quarter, and in the year ended December 31, 2002,ten customers accounted for all of our EDS units sold during the year. Thefailure of these customers, particularly the U.S. government, to continue topurchase our EDS products or the cancellation of existing orders would harm ourbusiness.

 

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**We havegranted a royalty-bearing license to the U.S. government to have our productsproduced by other manufacturers and if other manufacturers produce ourproducts, we may lose expected revenue opportunities.**

 

In connection with orders for EDS units, the TSArequired that we grant the TSA a two-year royalty-bearing license, commencingin March 2002, to enable other manufacturers to build for the TSA EDSproducts based on our technology used in these products. With this license, theTSA may purchase EDS products from other manufacturers rather than us, even ifwe have the manufacturing capacity to build those EDS products. If thishappens, the royalty we receive under the license may not fully compensate usfor the lost business opportunity. Further, since licensed manufacturers willbe building substantially the same products as we build, if we fail to timelydeliver EDS products which the TSA has ordered from us, the TSA may not give usthe opportunity to cure the failure to deliver, and it may transfer the orderfrom us to a licensed manufacturer. The TSA has not exercised this license todate.

 

**The U.S.government’s right to use technology developed by us, but funded by the U.S.government, limits our intellectual property rights.**

 

In accordance with Federal Acquisition Regulationsincluded in our development contracts with the FAA, the U.S. government hasrights to use our proprietary technologies developed after the award of thedevelopment contract and funded by the development contract. The U.S.government may use these rights to produce or have produced for the U.S.government competing products using CT technology found in our existing CTXproducts as well as our CTX 1000 model, which has not yet been certified by theTSA. With respect to Quantum, the U.S. government retains the same rights tothe passive magnetic technology found in the i-Portal and the QR technologyfound in the QScan product. In the event that the U.S. government were toexercise these rights, our competitive position in supplying the U.S.government with certified CT-based explosives detection systems and/or theQuantum products would be harmed.

 

**Thesales cycle for our EDS products is lengthy, and we may expend a significantamount of effort in obtaining sales orders and not receive them.**

 

The sales cycle of our EDS products is often lengthydue to the protracted approval process that typically accompanies large capitalexpenditures and the time required to manufacture and install our EDS products.Typically, six to twelve months may elapse between a new customer’s initialevaluation of our systems and the execution of a contract. Another three monthsto a year may elapse prior to shipment of our EDS products as the customer siteis prepared and our EDS products are manufactured. In addition, in the UnitedStates, the creation of the TSA and debate on formation of a Department of HomelandSecurity, as well as budgetary debates in Congress, may result in additionaldelays in the purchase of additional EDS products. During the sales cycle weexpend substantial funds and management resources but recognize no associatedrevenue.

 

**Ourinternational sales subject us to risks that could materially harm ourbusiness.**

 

Sales to countries other than the United Statesaccounted for 15.8% of our revenues in the quarter ended March 30, 2003 and11.7% of our revenues in the year ended December 31, 2002. A number of factorsrelated to our international sales and operations could adversely affect ourbusiness, including:

 

•                                          changesin U.S. and foreign regulatory requirements;

 

•                                          politicalinstability in the countries where we sell products;

 

•                                          possibleforeign currency controls;

 

•                                          fluctuationsin currency exchange rates;

 

•                                          ourability to protect and utilize our intellectual property in foreignjurisdictions;

 

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•                                          tariffs,embargoes or other barriers;

 

•                                          difficultiesin staffing and managing foreign operations;

 

•                                          difficultiesin obtaining and managing distributors; and

 

•                                          potentiallynegative tax consequences.

 

The sale of some of our products outside the UnitedStates is subject to compliance with the U.S. International Traffic in ArmsRegulations and Export Administration Regulations. Our failure to obtain therequisite licenses, meet registration standards or comply with other governmentexport regulations, may affect our ability to generate revenues from the saleof our products outside the United States, which could harm our business. Inparticular, our EDS products and our landmine detection equipment are deemedregulated military devices subject to export restrictions under the U.S.Department of State regulations. Consequently, these regulations may make theseproducts more difficult to sell to a number of countries. Compliance withgovernment regulations may also subject us to additional fees and costs. Theabsence of comparable restrictions on competitors in other countries mayadversely affect our competitive position.

 

**Becauseof the demand for our EDS products by the U.S. government, we may lose othercustomers, which could harm our business.**

 

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

 

**We maynot be selected to provide post-warranty service on our CTX systems.**

 

Once a warranty period on a CTX system has expired, weoffer to our customers the opportunity to buy a service contract from us,including scheduled maintenance, repairs and parts. In January 2003, we enteredinto an agreement with Siemens pursuant to which Siemens subcontracted to usits CTX service obligations to the FAA and the TSA.  The agreement is retroactive to November 2002 and runs through2007.  Commencing in January 2003,Siemens has the option to extend the agreement for a one-year term, with fourannual options to renew.  Siemens hasexercised its option to extend for 2003. We cannot assure investors thatSiemens will renew the agreement in subsequent years. In addition,historically, we have sold service contracts on approximately 90% of eligible CTX systems deployedinternationally, with a renewal rate near 100%. We may not achieve this rate ofservice contract sales in the future.

 

**Ourfuture EDS products may fail to obtain certification by the TSA.**

 

We plan to continue to develop new models for ourfamily of EDS products, including Yxlon’s XES 3000 and XES 3500 explosivesdetection systems and through our current participation in the ARGUS program,an FAA/TSA-sponsored program designed to develop a smaller, low-cost EDSproduct. However, we cannot be certain that any new product, including Yxlon’sXES 3000 and XES 3500 systems or our CTX 1000 system, will be certified by theTSA. The failure to gain certification for a product would harm our ability tosell the product, and recognize associated revenues.

 

**Ourexisting products may fail to obtain re-certification by the TSA for changes inthe EDS systems.**

 

Our existing EDS products can be required to bere-certified by the TSA. This can happen when a critical component is changed,or we wish to make other changes to the EDS systems. When this happens, theaffected EDS

 

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model requires re-certification by the TSA. The failure or delay ingaining re-certification for an existing EDS product could harm our ability tocontinue to sell the product and recognize associated revenues.

 

**Ourinability to adapt to rapid technological change could impair our ability toremain competitive.**

 

The EDS industry may undergo significant technologicaldevelopment in response to increased demand for aviation security products. Afundamental shift in technology in our product markets could harm us, becausewe derive substantially all of our revenues from sales of EDS products.

 

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

 

•                                          adverselyimpact our competitive position;

 

•                                          requirewrite-downs of obsolete technology;

 

•                                          requireus to discontinue production of obsolete products before we can recover any orall of our related research, development and commercialization expenses; or

 

•                                          requiresignificant capital expenditures beyond those currently contemplated.

 

We cannot assure investors that we will be able toachieve the technological advances to remain competitive and profitable, thatnew products and services will be developed and manufactured on schedule or ona cost-effective basis, that anticipated markets will exist or develop for newproducts or services, or that our existing products and services will notbecome technologically obsolete.

 

**The EDSindustry is highly competitive. Given the anticipated continuing demand forairport security products, competition may increase.**

 

The EDS industry is intensely competitive and we maynot compete successfully with our competitors. As a result of increased demandfor security systems, additional companies may enter the EDS industry. Some ofour competitors, including L-3 Communications Holdings, Inc. and many ofthe potential new entrants into the EDS industry, have financial, technical,production and other resources substantially greater than ours. Our failure tocompete successfully could result in lost sales and could hamper our financialresults.

 

**Wedepend on key management and personnel and may not be able to retain thoseemployees or recruit additional qualified personnel.**

 

We believe that our future success will be due, inpart, to the continued services of our senior management team. We do not havelong-term employment agreements with any of our executive officers. Losing theservices of one or more members of our management team could negatively affectour business and our expansion efforts. We do not maintain key person lifeinsurance policies for members of our management. We could be seriously harmedby the loss of any of our executive officers. In addition, in order to manageour growth, we will need to recruit and retain additional skilled personnel,such as advanced engineering professionals. Our failure to recruit qualifiedemployees in a timely manner and retain them could harm our business and ourability to continue to grow.

 

**Naturaldisasters, including earthquakes, may damage our facilities.**

 

Our corporate and manufacturing facilities inCalifornia are located near major earthquake faults, which have experiencedearthquakes in the past. In the event of a major earthquake or other naturaldisaster, our facilities may sustain significant damage and our operationscould be harmed.

 

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**Ourbusiness could be harmed if we fail to properly protect our intellectualproperty.**

 

Our success depends in part on our ability to protectour intellectual property. Although we attempt to protect our intellectualproperty in the United States and other countries, there can be no assurancethat we will successfully protect our technology or that competitors will notbe able to develop similar technology independently. We cannot assure investorsthat the claims allowed under any patents held by us will be sufficiently broadto protect our technology against competition from third parties with similartechnologies or products. In addition, we cannot assure investors that anypatents issued to us will not be challenged, invalidated or circumvented orthat the rights granted under these patents will provide a competitiveadvantage to us. Moreover, the laws of some foreign countries do not protectintellectual property rights to the same extent as the laws of the UnitedStates, and we could experience various obstacles and high costs in protectingour intellectual property rights in foreign countries. If we are unable toobtain or maintain these protections, we may not be able to prevent thirdparties from using our intellectual property.

 

We also rely on trade secrets, proprietary know-howand continuing technological innovation to remain competitive. We have takenmeasures to protect our trade secrets and know-how, including the use ofconfidentiality agreements with our employees. It is possible that theseagreements may be breached and that the available remedies for any breach willnot be sufficient to compensate us for damages incurred.

 

**Litigationmay be necessary to enforce or defend against claims of intellectual propertyinfringement, which could be expensive and, if we lose, could prevent us fromselling our products.**

 

Litigation may be necessary in the future to enforceour patents and other intellectual property rights, to protect our tradesecrets or to determine the validity and scope of the proprietary rights ofothers. Any litigation, regardless of the outcome, could be costly and requiresignificant time and attention of key members of our management and technicalpersonnel.

 

Our domestic and international competitors, many ofwhom have substantially greater resources and have made substantial investmentsin competing technologies, may have patents that will prevent, limit orinterfere with our ability to manufacture and sell our products. We have notconducted an independent review of patents issued to third parties. Because ofthe perceived market opportunity we face, companies possessing technologyrights that they believe we might be infringing will now be much more motivatedto assert infringement of their rights. These third parties may assertinfringement or invalidity claims against us and litigation may be necessary todefend against these claims. An adverse outcome in the defense of a patent suitcould subject us to significant liabilities to third parties, require disputedrights to be licensed from third parties or require us to cease selling ourproducts. Even successful defenses of patent suits can be costly andtime-consuming.

 

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

 

The U.S. government currently plays an important rolein funding the development of EDS technology and sponsoring its deployment inU.S. airports.  We performedreimbursable research and development for EDS products totaling $886,000 forthe year ended December 31, 2002 from FAA and TSA grants and contracts.  We did not receive any reimbursable researchand development for EDS products in the quarter ended March 30, 2003.  This is a significant reduction from the$8.3 million for reimbursable research and development for EDS products fromFAA grants and contracts in the year ended December 31, 2001. We are also awarethat other competitors in the EDS market have received FAA and TSA developmentgrants. The U.S. government also currently funds almost all of the developmentof Quantum products, including QR and passive magnetic sensing.  We had contract research and developmentrevenues from the U.S. government for the development of Quantum products of$3.4 million for the quarter ended March 30, 2003 and of $12.1 million forthe year ended December 31, 2002. We cannot assure investors that additionalresearch and development funds from the government will become available in thefuture or that we will receive any of these additional funds. If the governmentfails to continue to sponsor our technology, we would have to expend moreresources on product development, which could adversely affect our business. Inaddition, any future grants to our competitors may improve their ability todevelop and market advanced detection products and cause our customers to delayany purchase decisions, which could harm our ability to market our products.

 

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**RisksRelated to Ownership of Our Common Stock**

 

**Theprice of our common stock may fluctuate significantly.**

 

A number of factors could cause the market price ofour common stock to fluctuate significantly, including:

 

•                                          thelevel and evolution of terrorist activity;

 

•                                          legislativeand regulatory developments related to anti-terrorism efforts or aviationsecurity;

 

•                                          ourquarterly operating results or those of other explosives detection companies;

 

•                                          thepublic’s reaction to our press releases, announcements and our filings with theSecurities and Exchange Commission;

 

•                                          changesin earnings estimates or recommendations by research analysts;

 

•                                          changesin our relationships with customers; and

 

•                                          developmentsaffecting our competitors.

 

The market price of our common stock has fluctuateddramatically since the terrorist attacks of September 11, 2001. Forexample, immediately prior September 11, 2001, our common stock closed at$3.11 per share. Since that date, our closing stock price has risen to a highof $48.29 per share on March 12, 2002. On March 28, 2003, the lasttrading day of our first quarter of 2003, our common stock closed at $22.70 pershare. In addition, the stock market has periodically experienced significantprice and volume fluctuations that have particularly affected the market pricesof common stock of technology companies. These changes have often beenunrelated to the operating performance of particular companies. These broadmarket fluctuations may also negatively affect the market price of our commonstock.

 

**Delawarelaw and our charter documents may impede or discourage a takeover, which couldcause the market price of our shares to decline.**

 

We are a Delaware corporation and the anti-takeoverprovisions of Delaware law impose various impediments on the ability of a thirdparty to acquire control of us, even if a change in control would be beneficialto our existing stockholders. Our certificate of incorporation provides for5,000,000 shares of preferred stock which our board of directors may issue withterms determined by them without stockholder approval, a classified board ofdirectors serving staggered three-year terms, restrictions on who may call aspecial meeting of stockholders and a prohibition on stockholder action bywritten consent. These provisions of Delaware law and in our charter documentscould impede a merger, takeover or other business combination involving us ordiscourage a potential acquirer from making a tender offer for our commonstock, which, under certain circumstances, could reduce the market value of ourcommon stock.

 

**We maynot pay cash dividends.**

 

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

 

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**We maybecome subject to costly and time-consuming class action litigation followingsignificant changes in our stock price.**

 

In the past, following periods of volatility in themarket price of a company’s securities, securities class action litigation hasoften been instituted against such a company. Were such litigation to be commencedagainst us, we would incur substantial costs and there would be diversion ofour management’s attention and resources, which could materially harm ourbusiness, results of operations and financial condition.

 

**Item 3.  Quantitative and qualitative disclosures about market risk**

 

Our international system sales and maintenancecontracts are generally denominated in U.S. dollars.   In instances where there are significant international systemsales contracts denominated in a foreign currency, we enter into forwardcontracts to mitigate foreign exchange risk.  We do not enter into market risk sensitive instruments for tradingpurposes.  In the first quarter of 2003,we entered into one new foreign exchange forward contract, and at March 30,2003, we had outstanding contracts with notional values totaling $28.7 millionwith a negative fair value of approximately $3.5 million.

 

Purchases of raw materials and other inventorycomponents are primarily denominated in U.S dollars and, when purchased inforeign currencies, are generally made on an as needed basis. We have someadvance purchase commitments in foreign currencies with a few Europeansuppliers. We currently do not hedge against these purchase commitments, as theforeign exchange rate fluctuations have not had a material adverse impact onthese purchases; however, we will continue to monitor the foreign exchangerates and may enter into forward contracts to mitigate foreign exchange risk asappropriate.

 

Certain costs of providing warranty and maintenanceservices for systems sold to foreign countries are denominated in localcurrencies.  To the extent exchangerates fluctuate, it could become more expensive to provide these services.  To date, these costs have not beensignificant; however, we expect they will increase as our installed baseincreases.

 

We are exposed to foreign currency exchange rate riskinherent in our sales commitments, anticipated sales, anticipated purchases andassets and liabilities denominated in currencies other than the U.S. dollar. Wetransact business in three currencies worldwide, of which the most significantto our operations is the euro. In some situations, we are a net receiver offoreign currencies and therefore benefit from a weaker U.S. dollar and areadversely affected by a stronger U.S. dollar relative to those foreigncurrencies in which we transact significant amounts of business. We haveperformed a sensitivity analysis as of March 30, 2003, using a modelingtechnique that measures the change in the fair values arising from ahypothetical 10% and 15% adverse movement in the levels of foreign currencyexchange rates relative to the U.S. dollar (that is, strengthening of the U.S.dollar) with all other variables held constant. The analysis covers all of ourforeign exchange forward contracts offset by the underlying exposures.

 

The foreign currency exchange rates used were based onmarket rates in effect at March 30, 2003.  The cash flow impacts of thesensitivity analysis are summarized in the following table:

 

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|                                 |   |                 |   |                                 |   | **Cash flow  impact of change in  exchange rates** |   |
|--------------------------------------|--------|----------------------|--------|--------------------------------------|--------|----------------------------------------------------|--------|
| **(in thousands)**                   |   | **Contract  Amount** |   | **Fair Value  as of  Mar. 30, 2003** |   | **10% Change**                                     |   | **15% Change** |   |
|                                 |   |                 |   |                                 |   |                                               |   |   |   |
| Foreign  currency forward contracts  |   | $                    | 28,739 |                                 | $      | (3,486                                             | )      | $ | 3,227 |   | $ | 4,841 |   |
| Accounts  receivable                 |   | 7,976                |   | 8,936                                |   | (894                                               | )      | (1,340 | ) |
| Firm  orders*                        |   | 18,740               |   | 22,073                               |   | (2,207                                             | )      | (3,311 | ) |
| Other  working capital balances, net |   | 373                  |   | 283                                  |   | (28                                                | )      | (42 | ) |
|                                 |   |                 |   |                                 |   |                                               |   |   |   |
| Total                                |   |                 |   |                                 |   | $                                                  | 98     |   | $ | 148 |   |
|                                      |        |                      |        |                                      |        |                                                    |        |  |  |  |  |  |  |

 

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

 

The cash flow impact of changes in exchange rates atMarch 30, 2003 is not significantly different from the cash flow impact ofchanges in exchange rates at December 31, 2002.  We do not expect theimpact of changes in interest rates to have a material impact on ouroperations, cash flow or liquidity.  In addition, the impact of inflationhas not been material on our operations, cash flow or liquidity to date.

 

**Item 4.  Controls and procedures**

 

Within ninety days prior to the date of this Form10-Q, we carried out an evaluation, under the supervision and with theparticipation of Sergio Magistri, our principal executive officer, and RossMulholland, our principal financial officer, of the effectiveness of the designand operation of our disclosure controls and procedures. Based on thisevaluation, Dr. Magistri and Mr. Mulholland concluded that our disclosurecontrols and procedures are effective at recording, processing, summarizing andreporting, within the time periods specified in the SEC’s rules and forms, theinformation included in our periodic SEC reports. It should be noted that acontrol system, no matter how well conceived and operated, can provide onlyreasonable, not absolute, assurance that the objectives of the control systemare met. Further, the design of a control system must reflect the fact thatthere are resource constraints, and the benefits of controls must be consideredrelative to their costs. Additionally, controls can be circumvented by theindividual acts of some persons, by collusion of two or more people or bymanagement override of the control. The design of any system of controls alsois based in part upon certain assumptions about the likelihood of future events,and we cannot assure investors that any design will succeed in achieving itsstated goals under all potential future conditions. Because of the inherentlimitations in a cost-effective control system, misstatements due to error orfraud may occur and not be detected.

 

In addition, there have been no significant changes inour internal controls or in other factors that could significantly affect thosecontrols subsequent to the date of their last evaluation.

 

**PARTII.  OTHER INFORMATION**

 

**Item 1.  Legal Proceedings**

 

We are involved in legal proceedings, claims andlitigation arising in the ordinary course of business.  While the outcome of these matters iscurrently not determinable, management does not believe that the ultimate costto resolve these matters will have a material adverse effect on ourconsolidated financial condition, results of operations or cash flows.

 

**Item 5.  Other Information**

 

Consistent with Section 10A(i)(2) of the SecuritiesExchange Act of 1934, as added by Section 202 of the Sarbanes-Oxley Act of2002, we are responsible for listing the non-audit services approved by ourAudit Committee to be performed by Deloitte & Touche LLP, our externalauditor. Non-audit services are defined as services other than those providedin connection with an audit or a review of our financial statements.  Following the quarterly

 

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period covered by this filing, the Audit Committee approved recurringengagements of Deloitte & Touche LLP for the following non-audit services:

 

•                                          assuranceservices, which includes (1) filing work performed in connection with thefiling of registration statements, and (2) the issuance of various consents;

 

•                                          taxservices, which includes consulting related to (1) federal, state and local taxissues, (2) international tax issues, and (3) value added tax issues performedin certain foreign countries;

 

•                                          consultingservices, which includes the review of our business processes; and

 

•                                          mergerand acquisition services, which includes (1) due diligence services, and (2)consulting related to the structuring of mergers and acquisitions.

 

**Item 6.****           Exhibits and Reports onForm 8-K**

 
| (a)    | Exhibits |
|--------|----------|
|   |
|   | 2.1      | Share and Purchase  Transfer Agreement dated as of February 21, 2003 among the registrant, Yxlon  Beteiligungs-Verwaltung GmbH, NDT International Holdings A.S, Yxlon  International Holding GmbH, Yxlon International X-Ray GmbH, Joseph  Kosanetzky, Reinhard Bonisch and Botts & Company Ltd.  Certain schedules have been omitted. The  registrant agrees to furnish supplementally a copy of any omitted schedule to  the Commission upon request. |
|   | 3.1      | Amended and Restated  Certificate of Incorporation of the registrant. (1) |
|   | 3.2      | Bylaws of the  registrant, as amended.  (2) |
|   | 3.3      | Amendment to Amended  and Restated Certificate of Incorporation of the registrant (3) |
|   | 4.1      | Reference is made to  Exhibits 3.1 through 3.3. |
|   | 10.1     | Vice President Key  Employee Agreement dated as of May 1, 2002 between the registrant and Andrew  Siegel.+ |
|   | 99.1     | Certificate of Chief  Executive Officer and Chief Financial Officer. |

 

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| (1)                                                                  | Filed as an exhibit to  the registrant’s Registration Statement on Form S-1 (No. 333-05517) and  incorporated herein by reference.                                        |
|----------------------------------------------------------------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                                 |
| (2)                                                                  | Filed as an exhibit to  the registrant’s Amendment No. 1 to Annual Report on Form 10-K/A for the year  ended December 31, 2001 and incorporated herein by reference. |
|                                                                 |                                                                                                                                                                           |
| (3)                                                                  | Filed as an exhibit to  the registrant’s Annual Report on Form 10-K for the year ended  December 31, 2001 and incorporated herein by reference.                      |
|                                                                 |                                                                                                                                                                           |
| +Management contract or  compensatory plan, contract or arrangement. |
|                                                                 |
| (b)                                                                  | Report on Form 8-K  filed during the fiscal quarter ended March 30, 2003:  None.                                                                                     |   |
|                                                                      |                                                                                                                                                                                |  |  |

 

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**SIGNATURES**

 

Pursuant to the requirements of the Securities ExchangeAct of 1934, the registrant has duly caused this report to be signed on itsbehalf by the undersigned thereunto duly authorized.

 

 
|               | **INVISION  TECHNOLOGIES, INC.**                   |
|--------------------|----------------------------------------------------|
|               |                                               |
|               |                                               |
| Date: May 12, 2003 | /s/ Sergio Magistri                                |   |
|               | Dr. Sergio Magistri                                |
|               | President and Chief Executive  Officer             |
|               | *(Authorized  Officer)*                            |
|               |                                               |
|               |                                               |
| Date: May 12, 2003 | /s/ Ross Mulholland                                |   |
|               | Ross Mulholland                                    |
|               | Senior Vice President  and Chief Financial Officer |
|               | *(Principal  Financial and Accounting Officer)*    |

 

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**CERTIFICATION**

 

I, Sergio Magistri,certify that:

 

1.                                       Ihave reviewed this quarterly report on Form 10-Q of InVision Technologies,Inc.;

 

2.                                       Basedon my knowledge, this quarterly report does not contain any untrue statement ofa material fact or omit to state a material fact necessary to make thestatements made, in light of the circumstances under which such statements weremade, not misleading with respect to the period covered by this quarterlyreport;

 

3.                                       Basedon my knowledge, the financial statements, and other financial informationincluded in this quarterly report, fairly present in all material respects thefinancial condition, results of operations and cash flows of the registrant asof, and for, the periods presented in this quarterly report;

 

4.                                       Theregistrant’s other certifying officer and I are responsible for establishingand maintaining disclosure controls and procedures (as defined in Exchange ActRules 13a-14 and 15d-14) for the registrant and we have:

 

(a)                                  designedsuch disclosure controls and procedures to ensure that material informationrelating to the registrant, including its consolidated subsidiaries, is madeknown to us by others within those entities, particularly during the period inwhich this quarterly report is being prepared;

 

(b)                                 evaluatedthe effectiveness of the registrant’s disclosure controls and procedures as ofa date within 90 days prior to the filing date of this quarterly report (the“Evaluation Date”); and

 

(c)                                  presentedin this quarterly report our conclusions about the effectiveness of thedisclosure controls and procedures based on our evaluation as of the EvaluationDate;

 

5.                                       Theregistrant’s other certifying officer and I have disclosed, based on our mostrecent evaluation, to the registrant’s auditors and the audit committee ofregistrant’s board of directors (or persons performing the equivalentfunction):

 

(a)                                  allsignificant deficiencies in the design or operation of internal controls whichcould adversely affect the registrant’s ability to record, process, summarizeand report financial data and have identified for the registrant’s auditors anymaterial weaknesses in internal controls; and

 

(b)                                 anyfraud, whether or not material, that involves management or other employees whohave a significant role in the registrant’s internal controls; and

 

6.                                       Theregistrant’s other certifying officer and I have indicated in this quarterlyreport whether or not there were significant changes in internal controls or inother factors that could significantly affect internal controls subsequent tothe date of our most recent evaluation, including any corrective actions withregard to significant deficiencies and material weaknesses.

 

Date: May 12, 2003

 
|   | /s/ Sergio Magistri                    |   |
|--------|----------------------------------------|--------|
|   | Sergio Magistri                        |
|   | President and Chief  Executive Officer |
|   | (Principal Executive  Officer)         |

 

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**CERTIFICATION**

 

I, Ross Mulholland,certify that:

 

1.                                       Ihave reviewed this quarterly report on Form 10-Q of InVision Technologies,Inc.;

 

2.                                       Basedon my knowledge, this quarterly report does not contain any untrue statement ofa material fact or omit to state a material fact necessary to make thestatements made, in light of the circumstances under which such statements weremade, not misleading with respect to the period covered by this quarterlyreport;

 

3.                                       Basedon my knowledge, the financial statements, and other financial informationincluded in this quarterly report, fairly present in all material respects thefinancial condition, results of operations and cash flows of the registrant asof, and for, the periods presented in this quarterly report;

 

4.                                       Theregistrant’s other certifying officer and I are responsible for establishingand maintaining disclosure controls and procedures (as defined in Exchange ActRules 13a-14 and 15d-14) for the registrant and we have:

 

(a)                                  designedsuch disclosure controls and procedures to ensure that material informationrelating to the registrant, including its consolidated subsidiaries, is madeknown to us by others within those entities, particularly during the period inwhich this quarterly report is being prepared;

 

(b)                                 evaluatedthe effectiveness of the registrant’s disclosure controls and procedures as ofa date within 90 days prior to the filing date of this quarterly report (the“Evaluation Date”); and

 

(c)                                  presentedin this quarterly report our conclusions about the effectiveness of thedisclosure controls and procedures based on our evaluation as of the EvaluationDate;

 

5.                                       Theregistrant’s other certifying officer and I have disclosed, based on our mostrecent evaluation, to the registrant’s auditors and the audit committee ofregistrant’s board of directors (or persons performing the equivalentfunction):

 

(a)                                  allsignificant deficiencies in the design or operation of internal controls whichcould adversely affect the registrant’s ability to record, process, summarizeand report financial data and have identified for the registrant’s auditors anymaterial weaknesses in internal controls; and

 

(b)                                 anyfraud, whether or not material, that involves management or other employees whohave a significant role in the registrant’s internal controls; and

 

6.                                       Theregistrant’s other certifying officer and I have indicated in this quarterlyreport whether or not there were significant changes in internal controls or inother factors that could significantly affect internal controls subsequent tothe date of our most recent evaluation, including any corrective actions withregard to significant deficiencies and material weaknesses.

 

Date: May 12, 2003

 

 
|   | /s/ Ross Mulholland            |   |
|--------|--------------------------------|--------|
|   | Ross Mulholland                |
|   | Chief Financial Officer        |
|   | (Principal Financial  Officer) |

 

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**EXHIBIT INDEX**

 
| **Exhibit No.** |   | **Description**                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
|-----------------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|            |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| 2.1             |   | Share and Purchase  Transfer Agreement dated as of February 21, 2003 among the registrant, Yxlon  Beteiligungs-Verwaltung GmbH, NDT International Holdings A.S, Yxlon  International Holding GmbH, Yxlon International X-Ray GmbH, Joseph  Kosanetzky, Reinhard Bonisch and Botts & Company Ltd.  Certain schedules have been omitted. The  registrant agrees to furnish supplementally a copy of any omitted schedule to  the Commission upon request. |
| 3.1             |   | Amended and Restated  Certificate of Incorporation of the registrant. (1)                                                                                                                                                                                                                                                                                                                                                                                        |
| 3.2             |   | Bylaws of the  registrant, as amended.  (2)                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 3.3             |   | Amendment to Amended  and Restated Certificate of Incorporation of the registrant (3)                                                                                                                                                                                                                                                                                                                                                                            |
| 4.1             |   | Reference is made to  Exhibits 3.1 through 3.3.                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 10.1            |   | Vice President Key  Employee Agreement dated as of May 1, 2002 between the registrant and Andrew  Siegel.+                                                                                                                                                                                                                                                                                                                                                       |
| 99.1            |   | Certificate of Chief  Executive Officer and Chief Financial Officer.                                                                                                                                                                                                                                                                                                                                                                                             |

 

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

 

(2)             Filedas an exhibit to the registrant’s Amendment No. 1 to Annual Report on Form10-K/A for the year ended December 31, 2001 and incorporated herein byreference.

 

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

 

+Management contract orcompensatory plan, contract or arrangement.

 

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