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**UNITEDSTATESSECURITIES AND EXCHANGE COMMISSION****Washington, DC  20549**

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**FORM 10–Q**

 

**(Mark One)**

| ý | **QUARTERLY REPORT PURSUANT TO SECTION 13 OR  15 (****d****) OF THE SECURITIES** |
|--------|----------------------------------------------------------------------------------|
|   | **EXCHANGE ACT OF 1934**                                                         |

**For the quarterly period ended July 1,2001 or**

**or**

| o      | **TRANSITION REPORT PURSUANT TO SECTION 13 OR  15(****d****) OF THE SECURITIES** |
|--------|----------------------------------------------------------------------------------|
|   | **EXCHANGE ACT OF 1934**                                                         |

**For the transition period from ________to ________**

**Commission File Number: 0-28236**

**INVISIONTECHNOLOGIES, INC.**(Exact name ofregistrant as specified in its charter)

| **Delaware******                                                | **94-3123544******                    |
|-----------------------------------------------------------------|---------------------------------------|
| (State  or other jurisdiction of incorporation or organization) | (I.R.S.  Employer Identification No.) |
|                                                            |                                  |
| **7151 Gateway Boulevard, Newark, CA******                      | **94560******                         |
| (Address  of principal executive offices)                       | (zip  code)                           |
|                                                            |                                  |
| **(510) 739-2400******                                          |
| (Registrant's  telephone 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

On July 29, 2001, there were 13,015,405shares of the Registrant's Common Stock outstanding.

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**InVision Technologies, Inc.Form 10-QINDEX**

** **

| **Part   I:  FINANCIAL INFORMATION** |                                                                                                   |
|------------------------------------------------|--------------------------------------------------------------------------------------------------------|
|                                           |                                                                                                   |
| **Item**                                       |                                                                                                   |   |
|                                           |                                                                                                   |   |
| 1.                                             | Financial Statements  (unaudited)                                                                      |   |
|                                           |                                                                                                   |   |
|                                           | a.                                                                                                     | Consolidated Balance  Sheets – July 1, 2001 and December 31, 2000 * |   |
|                                           |                                                                                                   |   |   |
|                                           | b.                                                                                                     | Consolidated  Statements of Operations – Three months and six months ended July 1, 2001 and  July 2, 2000 |   |
|                                           |                                                                                                   |   |   |
|                                           | c.                                                                                                     | Consolidated  Statements of Cash Flows – Six months ended July 1, 2001 and July 2, 2000 |   |
|                                           |                                                                                                   |   |   |
|                                           | d.                                                                                                     | Notes  to Consolidated Financial Statements |   |
|                                           |                                                                                                   |   |   |
| 2.                                             | Management’s  Discussion  and Analysis of Financial Condition and Results of Operations |   |
|                                           |                                                                                                   |   |
| 3.                                             | Quantitative  and Qualitative Disclosures about Market Risk                                            |   |
|                                           |                                                                                                   |   |
|                                           |                                                                                                   |   |
| **Part   II.  OTHER INFORMATION**    |                                                                                                   |
|                                           |                                                                                                   |
| **Item**                                       |                                                                                                   |   |
|                                           |                                                                                                   |   |
| 1.                                             | Legal Proceedings                                                                                      |   |
|                                           |                                                                                                   |   |   |
| 2.                                             | Changes  in Securities and Use of Proceeds                                                             |   |
|                                           |                                                                                                   |   |   |
| 3.                                             | Defaults  Upon Senior Securities                                                                       |   |
|                                           |                                                                                                   |   |   |
| 4.                                             | Submission  of Matters to a Vote of Securities Holders                                                 |   |
|                                           |                                                                                                   |   |   |
| 5.                                             | Other Information                                                                                      |   |
|                                           |                                                                                                   |   |   |
| 6.                                             | Exhibits  and Reports on Form 8-K                                                                      |   |
|                                           |                                                                                                   |   |
| Signature Page                                 |                                                                                                   |
|                                                |                                                                                                        |  |  |  |  |

 

 

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| *****December 31, 2000 consolidated balance sheet is derived from the  audited financial statements included within the Company’s Form 10-K filed on  March 29, 2001. |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

**PART I.FINANCIAL INFORMATION**

**Item1.  Financial Statements**

** **

**InVision Technologies, Inc.Consolidated Balance Sheets********(Inthousands, except per share data)(Unaudited)**

** **

|                                                                                      | **July 1,**                                                                                                            |    | **December 31,** |
|-------------------------------------------------------------------------------------------|------------------------------------------------------------------------------------------------------------------------|---------|------------------|
|                                                                                      | **2001**                                                                                                               |    | **2000**         |
|                                                                                      | ****                                                                                                                   |    | ****             |
|                                                                                      | **(Unaudited)**                                                                                                        |    |             |
| **Assets**                                                                                |                                                                                                                   |    |             |   |   |
|                                                                                      |                                                                                                                   |    |             |   |   |
| Current assets:                                                                           |                                                                                                                   |    |             |   |   |
|                                                                                      | Cash and cash equivalents                                                                                              | $       | 8,981            |   |   | $ | 11,908 |   |
|                                                                                      | Accounts receivable, net                                                                                               | 25,347  |             |   | 22,547 |   |
|                                                                                      | Inventories                                                                                                            | 24,144  |             |   | 20,207 |   |
|                                                                                      | Other current assets                                                                                                   | 3,411   |             |   | 2,977 |   |
|                                                                                      |                                                                                                                        |    |                  |
|                                                                                      | Total current assets                                                                                                   | 61,883  |             |   | 57,639 |   |
|                                                                                      |                                                                                                                   |    |             |   |   |
| Property and  equipment, net                                                              | 6,363                                                                                                                  |    |             | 6,741 |   |
| Intangible assets, net                                                                    | 4,037                                                                                                                  |    |             | 4,412 |   |
| Other assets                                                                              | 567                                                                                                                    |    |             | 540 |   |
|                                                                                      |                                                                                                                        |    |                  |
|                                                                                      | Total assets                                                                                                           | $       | 72,850           |   |   | $ | 69,332 |   |
|                                                                                      |                                                                                                                        |    |                  |
|                                                                                      |                                                                                                                   |    |             |   |   |
| **Liabilities and stockholders' equity**                                                  |                                                                                                                   |    |             |   |   |
|                                                                                      |                                                                                                                   |    |             |   |   |
| Current liabilities:                                                                      |                                                                                                                   |    |             |   |   |
|                                                                                      | Accounts payable                                                                                                       | $       | 5,859            |   |   | $ | 5,353 |   |
|                                                                                      | Accrued liabilities                                                                                                    | 10,804  |             |   | 11,213 |   |
|                                                                                      | Deferred revenue                                                                                                       | 1,574   |             |   | 2,107 |   |
|                                                                                      | Short-term debt                                                                                                        | 4,730   |             |   | 890 |   |
|                                                                                      | Current maturities of long-term obligations                                                                            | 284     |             |   | 404 |   |
|                                                                                      |                                                                                                                        |    |                  |
|                                                                                      | Total current liabilities                                                                                              | 23,251  |             |   | 19,967 |   |
|                                                                                      |                                                                                                                        |    |                  |
|                                                                                      |                                                                                                                   |    |             |   |   |
| Long-term obligations                                                                     | 782                                                                                                                    |    |             | 1,861 |   |
|                                                                                      |                                                                                                                        |    |                  |
|                                                                                      |                                                                                                                   |    |             |   |   |
| Commitments and  contingencies                                                            |                                                                                                                   |    |             |   |   |
|                                                                                      |                                                                                                                   |    |             |   |   |
| Stockholders' equity:                                                                     |                                                                                                                   |    |             |   |   |
|                                                                                      | Preferred stock, no par value, 5,000,000 shares  authorized; no shares issued and outstanding                          | -       |             |   | - |   |
|                                                                                      | Common stock, $0.001 par value, 20,000,000 shares  authorized; 13,015,000 and 12,613,000 shares issued and outstanding | 13      |             |   | 13 |   |
|                                                                                      | Additional paid-in capital                                                                                             | 60,751  |             |   | 59,671 |   |
|                                                                                      | Accumulated deficit                                                                                                    | (10,748 | )                |   | (10,981 | ) |
|                                                                                      | Treasury stock, at cost (201,000 shares)                                                                               | (1,199  | )                |   | (1,199 | ) |
|                                                                                      |                                                                                                                        |    |                  |
|                                                                                      | Total stockholders' equity                                                                                             | 48,817  |             |   | 47,504 |   |
|                                                                                      |                                                                                                                        |    |                  |
|                                                                                      | Total liabilities and stockholders' equity                                                                             | $       | 72,850           |   |   | $ | 69,332 |   |
|                                                                                      |                                                                                                                        |    |                  |
|                                                                                      |                                                                                                                   |    |             |   |   |
|                                                                                      |                                                                                                                   |    |             |   |   |
| The  accompanying notes are an integral part of these consolidated financial  statements. |
|                                                                                           |                                                                                                                        |         |                  |  |  |  |  |  |  |  |  |  |

 

**InVision Technologies, Inc.Consolidated Statements ofOperations********(In thousands, except per share data)(Unaudited)**

|                                                                                       | **Three Months Ended**              |   | **Six Months Ended** |
|--------------------------------------------------------------------------------------------|-------------------------------------|--------|----------------------|
|                                                                                       | ****                                |   |                      |
|                                                                                       | **July 1,**                         |   | **July 2,**          |   | **July 1,** |   | **July 2,** |
|                                                                                       | **2001**                            |   | **2000**             |   | **2001** |   | **2000** |
|                                                                                       |                                     |   |                      |   |  |   |  |
| Revenues:                                                                                  |                                |   |                 |   |   |   |   |   |   |   |   |
|                                                                                       | Product revenues                    | $      | 10,587               |   |   | $ | 11,674 |   |   | $ | 21,808 |   |   | $ | 25,788 |   |
|                                                                                       | Service revenues                    | 2,847  |                 |   | 2,596 |   |   | 5,404 |   |   | 4,996 |   |
|                                                                                       | Government contract revenues        | 3,966  |                 |   | 2,712 |   |   | 7,685 |   |   | 4,877 |   |
|                                                                                       |                                     |   |                      |   |  |   |  |
|                                                                                       | Total revenues                      | 17,400 |                 |   | 16,982 |   |   | 34,897 |   |   | 35,661 |   |
|                                                                                       |                                     |   |                      |   |  |   |  |
|                                                                                       |                                |   |                 |   |   |   |   |   |   |   |   |
| Cost of revenues:                                                                          |                                |   |                 |   |   |   |   |   |   |   |   |
|                                                                                       | Product costs                       | 6,941  |                 |   | 8,044 |   |   | 13,356 |   |   | 17,716 |   |
|                                                                                       | Service costs                       | 1,866  |                 |   | 1,808 |   |   | 3,699 |   |   | 3,485 |   |
|                                                                                       | Government contract costs           | 3,256  |                 |   | 1,908 |   |   | 6,077 |   |   | 3,479 |   |
|                                                                                       |                                     |   |                      |   |  |   |  |
|                                                                                       | Total cost of revenues              | 12,063 |                 |   | 11,760 |   |   | 23,132 |   |   | 24,680 |   |
|                                                                                       |                                     |   |                      |   |  |   |  |
|                                                                                       |                                |   |                 |   |   |   |   |   |   |   |   |
|                                                                                       | Gross profit                        | 5,337  |                 |   | 5,222 |   |   | 11,765 |   |   | 10,981 |   |
|                                                                                       |                                     |   |                      |   |  |   |  |
|                                                                                       |                                |   |                 |   |   |   |   |   |   |   |   |
| Operating expenses:                                                                        |                                |   |                 |   |   |   |   |   |   |   |   |
|                                                                                       | Research and development            | 1,907  |                 |   | 2,563 |   |   | 4,757 |   |   | 4,945 |   |
|                                                                                       | Selling, general and administrative | 3,141  |                 |   | 4,386 |   |   | 6,611 |   |   | 8,758 |   |
|                                                                                       |                                     |   |                      |   |  |   |  |
|                                                                                       | Total operating expenses            | 5,048  |                 |   | 6,949 |   |   | 11,368 |   |   | 13,703 |   |
|                                                                                       |                                     |   |                      |   |  |   |  |
|                                                                                       |                                |   |                 |   |   |   |   |   |   |   |   |
| Income (loss) from  operations                                                             | 289                                 |   |                 | (1,727 | ) |   | 397 |   |   | (2,722 | ) |
| Interest expense                                                                           | (83                                 | )      |                 | (39 | ) |   | (148 | ) |   | (88 | ) |
| Interest and other  income, net                                                            | -                                   |   |                 | 101 |   |   | 105 |   |   | 485 |   |
|                                                                                       |                                     |   |                      |   |  |   |  |
| Income (loss) before  provision for income taxes                                           | 206                                 |   |                 | (1,665 | ) |   | 354 |   |   | (2,325 | ) |
|                                                                                       |                                |   |                 |   |   |   |   |   |   |   |   |
| Provision for income  taxes                                                                | 62                                  |   |                 | - |   |   | 121 |   |   | - |   |
|                                                                                       |                                     |   |                      |   |  |   |  |
|                                                                                       |                                |   |                 |   |   |   |   |   |   |   |   |
| Net income (loss)                                                                          | $                                   | 144    |                 |   | $ | (1,665 | ) |   | $ | 233 |   |   | $ | (2,325 | ) |
|                                                                                       |                                     |   |                      |   |  |   |  |
|                                                                                       |                                |   |                 |   |   |   |   |
| Net Income (loss) per  share:                                                              |                                |   |                 |   |   |   |   |   |   |   |   |
|                                                                                       | Basic                               | $      | 0.01                 |   |   | $ | (0.14 | ) |   | $ | 0.02 |   |   | $ | (0.19 | ) |
|                                                                                       |                                |        |                 |  |   |  |   |  |
|                                                                                       | Diluted                             | $      | 0.01                 |   |   | $ | (0.14 | ) |   | $ | 0.02 |   |   | $ | (0.19 | ) |
|                                                                                       |                                     |   |                      |   |  |   |  |
|                                                                                       |                                |   |                 |   |   |   |   |   |   |   |   |
| Weighted average  shares outstanding:                                                      |                                |   |                 |   |   |   |   |   |   |   |   |
|                                                                                       | Basic                               | 12,932 |                 |   | 12,290 |   |   | 12,784 |   |   | 12,249 |   |
|                                                                                       | Diluted                             | 13,835 |                 |   | 12,290 |   |   | 13,789 |   |   | 12,249 |   |
|                                                                                       |                                |   |                 |   |   |   |   |   |   |   |   |
| The  accompanying notes are an intergral part of these consolidated financial  statements. |
|                                                                                            |                                     |        |                      |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

**InVision Technologies, Inc.Consolidated Statements of Cash Flow********(In thousands)********(Unaudited)**

** **

|                                                                                      |                                                                                 |       |   |             |       |
|-------------------------------------------------------------------------------------------|--------------------------------------------------------------------------------------|------------|--------|------------------|------------|
|                                                                                      |                                                                                 |       |   |             |       |
|                                                                                      | **Six Months Ended**                                                                 |
|                                                                                      | ****                                                                                 |
|                                                                                      | **July 1, 2001**                                                                     | ** ** |   | **July 2, 2000** | ** ** |
|                                                                                      | ****                                                                                 |       | ****   |
|                                                                                      |                                                                                 | ** ** |   |             | ** ** |
| **Cash flow from operating activities:**                                                  |                                                                                 | ** ** |   |             | ** ** |
|                                                                                      | Net income (loss)                                                                    | $          | 233    |             |       | $ | (2,325 | ) |
|                                                                                      | Adjustments to reconcile net income (loss) to net cash  used in operating activities |       |   |             |       |   |
|                                                                                      | Depreciation and amortization                                                        | 1,407      |   |             | 1,433      |   |
|                                                                                      | Amortization of capitalized software development costs                               | 70         |   |             | 80         |   |
|                                                                                      | Amortization of  intangible assets                                                   | 383        |   |             | 207        |   |
|                                                                                      | Loss (gain) on disposal of fixed assets                                              | (7         | )      |             | 3          |   |
|                                                                                      | Bad debt expense                                                                     | 45         |   |             | 108        |   |
|                                                                                      | Stock compensation expense                                                           | -          |   |             | 31         |   |
|                                                                                      |                                                                                 |       |   |             |       |
| Changes in operating  assets and liabilities:                                             |                                                                                 |       |   |             |       |
|                                                                                      | Accounts receivable                                                                  | (2,845     | )      |             | (1,963     | ) |
|                                                                                      | Inventories                                                                          | (3,937     | )      |             | (5,840     | ) |
|                                                                                      | Other current assets                                                                 | (534       | )      |             | 704        |   |
|                                                                                      | Other noncurrent assets                                                              | (21        | )      |             | (15        | ) |
|                                                                                      | Accounts payable                                                                     | 506        |   |             | (412       | ) |
|                                                                                      | Accrued liabilities                                                                  | (225       | )      |             | 1,955      |   |
|                                                                                      | Deferred revenues                                                                    | (531       | )      |             | (639       | ) |
|                                                                                      | Other long-term obligations                                                          | 31         |   |             | 55         |   |
|                                                                                      |                                                                                      |       |        |
|                                                                                      | **Net cash used in  operating activities**                                           | $          | (5,425 | )                |       | $ | (6,618 | ) |
|                                                                                      |                                                                                      |       |        |
|                                                                                      |                                                                                 |       |   |             |       |
| **Cash flow from investing activities:**                                                  |                                                                                 |       |   |             |       |
|                                                                                      | Purchases of property and equipment                                                  | (1,006     | )      |             | (818       | ) |
|                                                                                      | Proceeds from sale of short-term investments, net                                    | -          |   |             | 5,887      |   |
|                                                                                      | Purchase of subsidiary, net of cash acquired                                         | (267       | )      |             | (1,510     | ) |
|                                                                                      |                                                                                      |       |        |
|                                                                                      | **Net cash  provided by (used in) investing activities**                             | (1,273     | )      |             | 3,559      |   |
|                                                                                      |                                                                                      |       |        |
|                                                                                      |                                                                                 |       |   |             |       |
| **Cash flow from financing activities:**                                                  |                                                                                 |       |   |             |       |
|                                                                                      | Proceeds from short-term debt, net                                                   | 3,840      |   |             | -          |   |
|                                                                                      | Repayments of long-term debt                                                         | (216       | )      |             | (216       | ) |
|                                                                                      | Proceeds from issuance of common stock                                               | 147        |   |             | 501        |   |
|                                                                                      |                                                                                      |       |        |
|                                                                                      | **Net cash  provided by financing activities**                                       | 3,771      |   |             | 285        |   |
|                                                                                      |                                                                                      |       |        |
|                                                                                      |                                                                                 |       |   |             |       |
| Net change in cash and  cash equivalents for the period                                   | (2,927                                                                               | )          |   | (2,774           | )          |
| Cash and cash  equivalents at beginning of period                                         | 11,908                                                                               |       |   | 18,282           |       |
|                                                                                      |                                                                                      |       |        |
| **Cash and cash equivalents at end of period**                                            | $                                                                                    | 8,981      |   |             | $          | 15,508 |   |
|                                                                                      |                                                                                      |       |        |
|                                                                                      |                                                                                 |       |   |             |       |
|                                                                                      |                                                                                 |       |   |             |       |
| **Supplemental disclosures of cash flow information:**                                    |                                                                                 |       |   |             |       |
|                                                                                      | Interest paid                                                                        | $          | 104    |             |       | $ | 66 |   |
|                                                                                      | Income taxes paid                                                                    | $          | 442    |             |       | $ | 185 |   |
|                                                                                      |                                                                                 |       |   |             |       |
| **Supplemental disclosures of noncash investing and financing  activities:**              |                                                                                 |       |   |             |       |
|                                                                                      | Issuance of common stock in connection with acquisition  of subsidiary               | $          | 933    |             |       | $ | - |   |
|                                                                                      | Liabilities assumed in acquisition of subsidiary                                     | $          | -      |             |       | $ | 2,881 |   |
|                                                                                      | Stock payable in connection with acquisition of  subsidiary                          | $          | -      |             |       | $ | 2,775 |   |
|                                                                                      |                                                                                 |       |   |             |       |
| The  accompanying notes are an integral part of these consolidated financial  statements. |
|                                                                                           |                                                                                      |            |        |                  |            |  |  |  |  |  |  |  |

**InVision Technologies, Inc.Notes to Consolidated FinancialStatements(Unaudited)**

**1.          Summary ofSignificant Accounting Policies**

             **InterimUnaudited Financial Information**

             Theaccompanying interim unaudited consolidated financial statements have beenprepared in accordance with accounting principles generally accepted in theUnited States of America (“generally accepted accounting principles”) and withthe instructions to Form 10–Q and Rule 10–01 ofRegulation S–X.  Accordingly, theydo not contain all of the information and footnotes required by generallyaccepted accounting principles for complete financial statements.  In the opinion of management, theaccompanying unaudited consolidated financial statements reflect alladjustments (consisting only of normal recurring adjustments) considerednecessary for a fair presentation. These financial statements should be read in conjunction with theaudited consolidated financial statements of InVision Technologies, Inc. andits subsidiaries (the “Company”) as of December 31, 2000 and 1999 and for eachof the three years in the period ended December 31, 2000, including the notesthereto, included in the Company’s Annual Report on Form 10-K. 

             Operatingresults for the three and six month periods ended July 1, 2001 may notnecessarily be indicative of the results that may be expected for the yearended December 31, 2001 or any other future period.

             Certainprior period amounts have been reclassified to conform to the current periodpresentation.

**             Net Income(Loss) Per Share**

             Basicearnings per share is computed by dividing income available to commonstockholders by the weighted-average common shares outstanding for theperiod.  Diluted earnings per sharereflects the weighted-average common shares outstanding plus the potentialeffect of dilutive securities or contracts which are convertible to commonshares such as options, warrants, convertible debt and preferred stock (usingthe treasury stock method) and shares issuable in future periods.

             Thefollowing is a reconciliation between the components of the basic and dilutednet income (loss) per share calculations for the periods presented below (inthousands, except per share data):

|                                  | **Three Months Ended**                                                   |   | **Six Months Ended** |
|---------------------------------------|--------------------------------------------------------------------------|--------|----------------------|
|                                  | ****                                                                     |   | ****                 |
|                                  | **July 1, 2001**                                                         |   | **July 2, 2000**     |   | **July 1, 2001** |   | **July 2, 2000** |
|                                  | ****                                                                     |   | ****                 |   | **** |   | **** |
|                                  |                                                                     |   |                 |   | **Per** |   |   |   |   |   | **Per** |   |   |   |   |   | **Per** |   |   |   |   |   | **Per** |
|                                  | **Income**                                                               |   |                 |   | **Share** |   | **Income** |   |   |   | **Share** |   | **Income** |   |   |   | **Share** |   | **Income** |   |   |   | **Share** |
|                                  | **(Loss)**                                                               |   | **Shares**           |   | **Amount** |   | **(Loss)** |   | **Shares** |   | **Amount** |   | **(Loss)** |   | **Shares** |   | **Amount** |   | **(Loss)** |   | **Shares** |   | **Amount** |
|                                  | ****                                                                     |   | ****                 |   | **** |   | **** |   | **** |   | **** |   | **** |   | **** |   | **** |   | **** |   | **** |   | **** |
| Basic  net income (loss) per share:   |                                                                     |   |                 |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                  | Income (loss) available to  common  stockholders                    | $      | 144                  |   |   | 12,932 |   |   | $ | 0.01 |   |   | $ | (1,665 | ) |   | 12,290 |   |   | $ | (0.14 | ) |   | $ | 233 |   |   | 12,784 |   |   | $ | 0.02 |   |   | $ | (2,325 | ) |   | 12,249 |   |   | $ | (0.19 | ) |
| Effect  of dilutive securities:       |                                                                     |   |                 |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                  | Options                                                                  | -      |                 |   | 639 |   |   | - |   |   | - |   |   | - |   |   | - |   |   | - |   |   | 548 |   |   | - |   |   | - |   |   | - |   |   | - |   |
|                                  | Stock payable in connection with  acquisition of subsidiary              | -      |                 |   | 264 |   |   | - |   |   | - |   |   | - |   |   | - |   |   | - |   |   | 457 |   |   | - |   |   | - |   |   | - |   |   | - |   |
|                                  |                                                                          |   |                      |   |  |   |  |   |  |   |  |   |  |   |  |   |  |   |  |   |  |   |  |
| Diluted  net income (loss) per share: |                                                                     |   |                 |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                  | Income (loss) available to common stockholders plus assumed  conversions | $      | 144                  |   |   | 13,835 |   |   | $ | 0.01 |   |   | $ | (1,665 | ) |   | 12,290 |   |   | $ | (0.14 | ) |   | $ | 233 |   |   | 13,789 |   |   | $ | 0.02 |   |   | $ | (2,325 | ) |   | 12,249 |   |   | $ | (0.19 | ) |
|                                  |                                                                          |   |                      |   |  |   |  |   |  |   |  |   |  |   |  |   |  |   |  |   |  |   |  |
|                                       |                                                                          |        |                      |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

             Thecomputation of diluted net loss per share for the three month and six monthperiods ended July 2, 2000 do not include shares issuable upon exercise ofoptions of 1,587,825 and 1,418,481, respectively, and issuance of common stockrelated to the acquisition of Inovec payable April 2001 and 2002 based onaverage share prices prior to the scheduled payment dates, because their effectwould have been anti-dilutive.

**             Derivative Instruments andHedging Activities**

             OnJanuary 1, 2001, the Company adopted Statement of Financial AccountingStandards (“SFAS”) No. 133, “Accounting for Derivative Instruments and HedgingActivities.”  SFAS 133 was amended bySFAS 137, which modified the effective date of SFAS 133 to all fiscal quartersof all fiscal years beginning after June 15, 2000.  In June 2000, SFAS 138, “Accounting for Certain DerivativeInstruments and Certain Hedging Activities,” further amended SFAS 133.  SFAS 133, as amended, requires that everyderivative instrument, including certain derivative instruments embedded inother contracts, be recorded on the balance sheet at its fair value.  Changes in the fair value of derivatives arerecorded each period in current earnings or other comprehensive income,depending on whether a derivative is designated as part of a hedge transactionand, if it is, the type of hedge transaction. SFAS 133, as amended, requires that the Company formally document,designate, and assess the effectiveness of transactions that receive hedgeaccounting.  The Company adopted SFAS133, as amended, on January 1, 2001 and did not elect hedge accounting.  The adoption of this statement did not havea material impact on the financial position or results of operations of theCompany.

             Duringthe six months ended July 1, 2001 the Company’s derivative contracts consistedonly of foreign exchange forward contracts to mitigate certain exposures tofuture foreign currency rate movements on receivables from international salescontracts.  The change in the value ofthese derivative contracts did not have a material impact on the financialposition at July 1, 2001 or results of operations for the six month period thenended.

**             BusinessCombinations and Goodwill and Other Intangible Assets**

             InJune 2001, the Financial Accounting Standards Board issued Statement ofFinancial Accounting Standards (SFAS) No. 141, “Business Combinations” and SFASNo. 142, “Goodwill and Other Intangible Assets.”  SFAS No. 141 requires that all business combinations initiatedafter June 30, 2001 be accounted for under the purchase method and addressesthe initial recognition and measurement of goodwill and other intangible assetsacquired in a business combination. SFAS No. 142 addresses the initial recognition and measurement ofintangible assets acquired outside of a business combination and the accountingfor goodwill and other intangible assets subsequent to their acquisition.  SFAS No. 142 provides that intangible assetswith finite useful lives be amortized and that goodwill and intangible assetswith indefinite lives will not be amortized, but will rather be tested at leastannually for impairment.  The Companywill adopt SFAS No. 142 for its fiscal year beginning January 1, 2002.  Upon the adoption of SFAS Nos. 141 and 142,the Company will no longer amortize goodwill of $2.5 million or acquiredworkforce of $0.7 million, resulting in a reduction in the annual amortizationexpense of $0.4 million.  The Companyhas not yet performed the impairment tests required by the standard.

**2.          Inventories**

             Thecomponents of inventory consist of the following (in thousands):

 
|         | **July 1,**                           |   | **December 31,** |
|--------------|---------------------------------------|--------|------------------|
|         | **2001**                              |   | **2000**         |
|         | ****                                  |   | ****             |
| Inventories: |                                  |   |             |   |   |
|         | Raw material and purchased components | $      | 8,190            |   |   | $ | 9,270 |   |
|         | Field service spare parts             | 8,577  |             |   | 6,240 |   |
|         | Work-in-process                       | 6,413  |             |   | 4,162 |   |
|         | Finished goods                        | 964    |             |   | 535 |   |
|         |                                       |   |                  |
|         | Total                                 | $      | 24,144           |   |   | $ | 20,207 |   |
|         |                                       |   |                  |
|              |                                       |        |                  |  |  |  |  |  |  |

 

 

**3.          AccruedLiabilities**

             Thecomponents of accrued liabilities consist of the following (in thousands):

|                 | **July 1,**                   |   | **December 31,** |
|----------------------|-------------------------------|--------|------------------|
|                 | **2001**                      |   | **2000**         |
|                 | ****                          |   | ****             |
| Accrued liabilities: |                          |   |             |   |   |
|                 | Warranty and other reserves   | $      | 4,208            |   |   | $ | 4,352 |   |
|                 | Accrued employee compensation | 2,861  |             |   | 3,172 |   |
|                 | Income taxes                  | 957    |             |   | 1,302 |   |
|                 | Other                         | 2,778  |             |   | 2,387 |   |
|                 |                          |        |             |  |
|                 | Total                         | $      | 10,804           |   |   | $ | 11,213 |   |
|                 |                          |        |             |  |
|                      |                               |        |                  |  |  |  |  |  |  |

 

**4.          Acquisitionof Inovec, Inc.**

             EffectiveJanuary 1, 2000, the Company acquired Inovec, Inc. (“Inovec”), a manufacturerof advanced optimization equipment for increasing the yield of the forestproducts industry, for $5.2 million in cash and stock.  The Company paid $2.4 million in cash andissued 249,000 shares of common stock to former shareholders of Inovec in 2000as the first two installments of the purchase price and issued 229,000 sharesof common stock in April 2001 for the third installment. The remainingobligation payable of $1.0 million is payable in stock in April 2002 and isbased on average share prices prior to the scheduled payment dates.   In addition, the Company is contingentlyliable under the purchase agreement in the event Inovec achieves certainoperating milestones during the years ended December 31, 2000 and 2001.  At December 31, 2000, Inovec had achievedcertain of these milestones and an additional $0.5 million was recorded asadditional purchase price and was paid in cash and issuance of 91,000 shares ofcommon stock in April 2001.  Anadditional $0.7 million may be payable upon the achievement of certainperformance milestones at the end of 2001.  The transaction was accounted for as a purchase.

 

**5.          SegmentInformation**

             Underthe provisions of Statement of Financial Accounting Standards No. 131 (“ SFAS131”), “Disclosures about Segments of an Enterprise and Related Information,”the Company is reporting segment information in the same format regularlyreviewed by the Company’s management in deciding how to allocate resources andassess performance.   The Company hasthree reportable segments based on types of technology and applications.   The “EDS” segment is comprised of the businessunit that is engaged in the development, manufacturing, marketing and supportof explosive detection systems based on advanced CT technology.  The “Quantum” segment is comprised of thebusiness unit that is engaged in the development of technology for inspection,detection and analysis of explosives, primarily landmine detection, and othermaterials based on quadrupole resonance technology and passive magneticsensing.   The “Wood” segment iscomprised of those business units that are engaged in the development oftechnology to optimize the value and yield of harvested timber based ondifferent types of scanning technologies, including CT technology.

             Financialinformation by business segment is as follows (in thousands):

|   |                    |                          | **EDS** |   | **Quantum** |   | **Wood** |   | **Total** |
|--------|-------------------------|-------------------------------|---------|--------|-------------|--------|----------|--------|-----------|
|   |                    |                          |         |   |             |   |          |   |           |
|   |                    |                          |    |   |        |   |     |   |      |   |   |   |   |
|   | **Second quarter 2001** |                          |    |   |        |   |     |   |      |   |   |   |
|   | Revenues:               |                          |    |   |        |   |     |   |      |   |   |   |
|   |                    | Product revenues              | $       | 7,346  |        |   | $        | 54     |      |   | $ | 3,187 |   |   | $ | 10,587 |   |
|   |                    | Service revenues              | 2,466   |   |        | 26     |     |   | 355       |   |   | 2,847 |   |
|   |                    | Government contract  revenues | -       |   |        | 3,966  |     |   | -         |   |   | 3,966 |   |
|   |                    |                          |         |   |             |   |          |   |           |
|   | Total revenues          | $                             | 9,812   |   |        | $      | 4,046    |   |      | $ | 3,542 |   |   | $ | 17,400 |   |
|   |                    |                          |    |   |        |   |     |   |      |   |   |   |   |
|   | Net income (loss)       | $                             | 390     |   |        | $      | 189      |   |      | $ | (435 | ) |   | $ | 144 |   |
|   |                    |                          |    |   |        |   |     |   |      |   |   |   |   |
|   | **July 1, 2001**        |                          |    |   |        |   |     |   |      |   |   |   |
|   | Total assets            | $                             | 61,884  |   |        | $      | 3,979    |   |      | $ | 6,987 |   |   | $ | 72,850 |   |
|   |                    |                          |    |   |        |   |     |   |      |   |   |   |   |
|   |                         |
|   |                    |                          |    |   |        |   |     |   |      |   |   |   |   |
|   | **Second quarter 2000** |                          |    |   |        |   |     |   |      |   |   |   |
|   | Revenues:               |                          |    |   |        |   |     |   |      |   |   |   |
|   |                    | Product revenues              | $       | 7,813  |        |   | $        | -      |      |   | $ | 3,861 |   |   | $ | 11,674 |   |
|   |                    | Service revenues              | 2,139   |   |        | -      |     |   | 457       |   |   | 2,596 |   |
|   |                    | Government contract  revenues | -       |   |        | 2,712  |     |   | -         |   |   | 2,712 |   |
|   |                    |                          |         |   |             |   |          |   |           |
|   | Total revenues          | $                             | 9,952   |   |        | $      | 2,712    |   |      | $ | 4,318 |   |   | $ | 16,982 |   |
|   |                    |                          |    |   |        |   |     |   |      |   |   |   |   |
|   | Net income (loss)       | $                             | (1,328  | )      |        | $      | 16       |   |      | $ | (353 | ) |   | $ | (1,665 | ) |
|   |                    |                          |    |   |        |   |     |   |      |   |   |   |   |
|   | **December 31, 2000**   |                          |    |   |        |   |     |   |      |   |   |   |
|   | Total assets            | $                             | 57,261  |   |        | $      | 4,056    |   |      | $ | 8,015 |   |   | $ | 69,332 |   |
|   |                    |                          |    |   |        |   |     |   |      |   |   |   |   |
|   |                         |
|   |                    |                          |    |   |        |   |     |   |      |   |   |   |   |
|   | **Six months 2001**     |                          |    |   |        |   |     |   |      |   |   |   |
|   | Revenues:               |                          |    |   |        |   |     |   |      |   |   |   |
|   |                    | Product revenues              | $       | 16,740 |        |   | $        | 54     |      |   | $ | 5,014 |   |   | $ | 21,808 |   |
|   |                    | Service revenues              | 4,616   |   |        | 26     |     |   | 762       |   |   | 5,404 |   |
|   |                    | Government contract  revenues | -       |   |        | 7,685  |     |   | -         |   |   | 7,685 |   |
|   |                    |                          |         |   |             |   |          |   |           |
|   | Total revenues          | $                             | 21,356  |   |        | $      | 7,765    |   |      | $ | 5,776 |   |   | $ | 34,897 |   |
|   |                    |                          |    |   |        |   |     |   |      |   |   |   |   |
|   | Net income (loss)       | $                             | 1,185   |   |        | $      | 267      |   |      | $ | (1,219 | ) |   | $ | 233 |   |
|   |                    |                          |    |   |        |   |     |   |      |   |   |   |   |
|   |                         |
|   |                    |                          |    |   |        |   |     |   |      |   |   |   |   |
|   | **Six months 2000**     |                          |    |   |        |   |     |   |      |   |   |   |
|   | Revenues:               |                          |    |   |        |   |     |   |      |   |   |   |
|   |                    | Product revenues              | $       | 19,580 |        |   | $        | -      |      |   | $ | 6,208 |   |   | $ | 25,788 |   |
|   |                    | Service revenues              | 4,194   |   |        | -      |     |   | 802       |   |   | 4,996 |   |
|   |                    | Government contract  revenues | -       |   |        | 4,877  |     |   | -         |   |   | 4,877 |   |
|   |                    |                          |         |   |             |   |          |   |           |
|   | Total revenues          | $                             | 23,774  |   |        | $      | 4,877    |   |      | $ | 7,010 |   |   | $ | 35,661 |   |
|   |                    |                          |    |   |        |   |     |   |      |   |   |   |   |
|   | Net income (loss)       | $                             | (1,545  | )      |        | $      | (161     | )      |      | $ | (619 | ) |   | $ | (2,325 | ) |
|   |                    |                          |    |   |        |   |     |   |      |   |   |   |   |
|   |                    |                          |    |   |        |   |     |   |      |   |   |   |   |

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

 

**6.          Litigation**

             TheCompany is involved in routine administrative proceedings arising in theordinary course of business.  Managementbelieves that collectively these proceedings will not have a material effect onthe Company’s business, financial condition or results of operations.

**Item 2.  Management's Discussion and Analysis ofFinancial Condition and Results of Operations**

*The discussion below containsforward-looking statements which involve risks and uncertainties. When used inthis discussion, the words “anticipate,“ “believe,” “estimate,” and “expect”and similar expressions identify such forward-looking statements. The Company’sactual results, performance, or achievements could differ materially from theresults expressed in, or implied by, these forward-looking statements. Factorsthat could cause or contribute to such differences include:*
| • | *risks related to market acceptance of the Company's  products;*                                                                              |
|--------|-----------------------------------------------------------------------------------------------------------------------------------------------|
| • | *fluctuations in the Company's quarterly and annual  operating results;*                                                                      |
| • | *the loss of orders for the Company's products or the  failure to obtain additional orders;*                                                  |
| • | *loss of any of the Company's major suppliers;*                                                                                               |
| • | *intense competition;*                                                                                                                        |
| • | *reliance on few customers and large orders;*                                                                                                 |
| • | *risks related to the lengthy sales cycles for the  Company’s products;*                                                                 |
| • | *budgeting limitations of the Company’s customers and  prospective customers;*                                                           |
| • | *risks inherent to the development and production of new  products and new applications and the certification of certain of these  products;* |
| • | *risk of certification of competitors’ products;*                                                                                        |
| • | *risk of orders in backlog being canceled; and*                                                                                               |
| • | *those factors discussed in “Business Risks” below.*                                                                                |

**Overview**

             InVision Technologies, Inc. (the“Company”) brings to market advanced detection and inspection products byadapting various medical and laboratory technologies for government andcommercial uses, such as security, defense and process control.   The Company reports its financialinformation in three segments, Explosive Detection Systems (“EDS”), Quantum andWood, based on types of technology and applications.

             *EDS.* The Company develops, manufactures, markets and supports explosivedetection systems for civil aviation security based on advanced computedtomography (“CT”) technology.  TheCompany’s products were the first automated explosive detection systems to becertified by the Federal Aviation Administration (“FAA”) as meeting itsstringent requirements.  The Company hassold 247 systems to the FAA, foreign aviation security agencies and domesticand foreign airports and airlines through July 1, 2001.

             *Quantum.* The Company, through its wholly-owned subsidiary Quantum Magnetics,Inc., (“Quantum”) develops for commercialization patented and proprietarytechnology for inspection, detection and analysis of explosives and othermaterials.  Quantum’s products are basedon passive magnetic sensing technology and quadrupole resonance (“QR”)technology, a form of magnetic resonance. Quantum receives grants from a variety of US government agencies forresearch and development of landmine detection, carry-on luggage screening,concealed weapon detection, drug detection, and in-process materialsinspection.

             *Wood.* In February 2000, the Company announced the formation of its WoodVisiondivision (“WoodVision”) to develop the Company’s CT technology to optimize thevalue and yield of harvested timber. Previous studies indicated that CT technology can be applied to seeinside a log before it is sawn.  TheCompany believes that a market for a product that does this exists.  In connection with the formation ofWoodVision, the Company acquired, as a wholly-owned subsidiary, Inovec, Inc.(“Inovec”), effective as of January 1, 2000. Inovec manufactures, markets and supports advanced optimizationequipment for sawmills based on laser scanning and other optimizationtechnologies.  Since inception, Inovechas installed over 600 laser scanners and other optimization systems in over300 sawmills worldwide.  The transactionhas been accounted for as a purchase.

             *Research and development.*** **The Company considers researchand development to be a vital part of its operating discipline and continues todedicate substantial resources to research and development.  At July 1, 2001, the Company had 140full-time employees engaged in research and development, and productdevelopment activities, 51 for EDS, 56 for Quantum and 33 for Wood.  The Company was also using the services of21 specialized contract employees and consultants in this area.  During the six month periods ended July 1,2001 and July 2, 2000, the Company spent $6.9 million and $5.2 million, respectively,on research and development activities, of which $2.1 million and $210,000,respectively, were funded by the FAA and other agencies under developmentcontracts and grants.  To the extentthat research and development contracts and grant receipts decline in thefuture, the Company would attempt to manage research and developmentexpenditures to mitigate the impact on its results of operations.  At July 1, 2001, the Company had in backloggrants of $1.9 million for EDS research and development, primarily for thedevelopment of ARGUS, an FAA-sponsored program designed to develop a low-cost,automated explosive detection system to scan checked baggage in small airportsand low-traffic stations within larger airports.  The Company has also expended significant efforts in thedevelopment of new wood scanning products and expects to continue investing inthe development of these products in the future.

             *Revenues.*  The Company's EDS product revenues haveprincipally consisted, and the Company believes will continue to consist, oforders of multiple units from a limited number of customers. While the numberof individual customers may vary from period to period, the Company isnevertheless dependent upon these multiple orders for a substantial portion ofits revenues. The Company cannot assure that it will obtain such multipleorders on a consistent basis.   For thesix month periods ended July 1, 2001 and July 2, 2000, $12.3 million and $9.6million, respectively, were generated from EDS sales to the Company's largestcustomer, the FAA, representing 35.2% and 27.0%, respectively, of the Company'stotal revenues.  There were no othersignificant customers who accounted for more than 10% of the Company’s totalrevenues in the first six months of 2001 and 2000.

             The Company markets its productsand services both directly through internal sales personnel and indirectlythrough authorized agents, distributors and systems integrators.  In the United States, the Company marketsits products and services primarily through direct sales personnel.  Internationally, the Company utilizes both adirect sales force and authorized representatives to sell its products. For thesix month periods ended July 1, 2001 and July 2, 2000, international salesrepresented 23.6% and 32.8%, respectively, of the Company's total revenues.

**Results of Operations**

             The following table sets forthcertain income and expenditure items from the Company’s consolidated statementsof operations expressed as a percentage of total revenues for the periodsindicated.

|                                             | **Three Months Ended**              |   | **Six Months Ended** |
|--------------------------------------------------|-------------------------------------|--------|----------------------|
|                                             |                                     |   |                      |
|                                             | **July 1,**                         |   | **July 2,**          |   | **July 1,** |   | **July 2,** |
|                                             | **2001**                            |   | **2000**             |   | **2001** |   | **2000** |
|                                             |                                     |   |                      |   |  |   |  |
|                                             |                                |   |                 |   |   |   |   |   |   |   |   |
| Revenues:                                        |                                |   |                 |   |   |   |   |   |   |   |   |
|                                             | Product revenue                     | 60.8   | %                    |   | 68.7 | % |   | 62.5 | % |   | 72.3 | % |
|                                             | Service revenue                     | 16.4   |                 |   | 15.3 |   |   | 15.5 |   |   | 14.0 |   |
|                                             | Government contract revenue         | 22.8   |                 |   | 16.0 |   |   | 22.0 |   |   | 13.7 |   |
|                                             |                                     |   |                      |   |  |   |  |
|                                             | Total revenues                      | 100.0  |                 |   | 100.0 |   |   | 100.0 |   |   | 100.0 |   |
|                                             |                                     |   |                      |   |  |   |  |
|                                             |                                |   |                 |   |   |   |   |   |   |   |   |
| Cost of revenues:                                |                                |   |                 |   |   |   |   |   |   |   |   |
|                                             | Product costs                       | 39.9   |                 |   | 47.4 |   |   | 38.3 |   |   | 49.7 |   |
|                                             | Service costs                       | 10.7   |                 |   | 10.6 |   |   | 10.6 |   |   | 9.8 |   |
|                                             | Government contract costs           | 18.7   |                 |   | 11.2 |   |   | 17.4 |   |   | 9.8 |   |
|                                             |                                     |   |                      |   |  |   |  |
|                                             | Total cost of revenues              | 69.3   |                 |   | 69.2 |   |   | 66.3 |   |   | 69.3 |   |
|                                             |                                     |   |                      |   |  |   |  |
|                                             |                                |   |                 |   |   |   |   |   |   |   |   |
|                                             | Gross profit                        | 30.7   |                 |   | 30.8 |   |   | 33.7 |   |   | 30.7 |   |
|                                             |                                     |   |                      |   |  |   |  |
|                                             |                                |   |                 |   |   |   |   |   |   |   |   |
| Operating expenses:                              |                                |   |                 |   |   |   |   |   |   |   |   |
|                                             | Research and development            | 11.0   |                 |   | 15.1 |   |   | 13.6 |   |   | 13.9 |   |
|                                             | Selling, general and administrative | 18.1   |                 |   | 25.8 |   |   | 18.9 |   |   | 24.6 |   |
|                                             |                                     |   |                      |   |  |   |  |
|                                             | Total operating expenses            | 29.1   |                 |   | 40.9 |   |   | 32.5 |   |   | 38.5 |   |
|                                             |                                     |   |                      |   |  |   |  |
|                                             |                                |   |                 |   |   |   |   |   |   |   |   |
| Income (loss) from  operations                   | 1.6                                 |   |                 | (10.1 | ) |   | 1.2 |   |   | (7.8 | ) |
| Interest expense                                 | (0.5                                | )      |                 | (0.2 | ) |   | (0.4 | ) |   | (0.2 | ) |
| Interest and other  income, net                  | -                                   |   |                 | 0.6 |   |   | 0.3 |   |   | 1.4 |   |
|                                             |                                     |   |                      |   |  |   |  |
| Income (loss) before  provision for income taxes | 1.1                                 |   |                 | (9.7 | ) |   | 1.1 |   |   | (6.6 | ) |
|                                             |                                |   |                 |   |   |   |   |   |   |   |   |
| Provision for income  taxes                      | 0.4                                 |   |                 | - |   |   | 0.3 |   |   | - |   |
|                                             |                                     |   |                      |   |  |   |  |
|                                             |                                |   |                 |   |   |   |   |   |   |   |   |
| Net income (loss)                                | 0.7                                 | %      |                 | (9.7 | )% |   | 0.8 | % |   | (6.6 | )% |
|                                             |                                     |   |                      |   |  |   |  |
|                                                  |                                     |        |                      |  |  |  |  |  |  |  |  |  |  |

 

**Comparison of the Three MonthsEnded July 1, 2001 to July 2, 2000**

             *Revenues.*   The Company's revenues are primarily comprised of: (i) EDSproduct revenues, which include revenues from sales of CTX systems and relatedaccessories, and installation and configuration***,*** and EDS service revenues, which includerevenues from maintenance contracts related to product support, repairs,integration and other services, including those complex installations andconfigurations that are separate from product revenues; (ii) Quantum governmentcontract revenues, which include revenues primarily from research anddevelopment contracts utilizing QR and passive magnetic technologies withgovernment agencies and private entities; and (iii) Wood product revenues fromthe sales of control and automation systems for material processing equipment,primarily in the wood products industry and related accessories, installationand configuration, and Wood service revenues from maintenance contracts relatedto product support, repairs, integration and other services.

             EDSproduct revenues were $7.3 million for the second quarter of 2001, a decreaseof 6.0% from the $7.8 million in the second quarter of 2000.  This decrease was primarily attributable todecreased system revenue, primarily due to variations in product mix,reflecting more CTX 2500 systems and fewer CTX 5500 systems sold in the secondquarter of 2001 compared to the same period a year ago.  The decreased system revenue is partiallyoffset by increased accessories revenue in the second quarter of 2001 comparedto the same period a year ago.   EDSservice revenues were $2.5 million for the second quarter of 2001, an increaseof 15.3% from the $2.1 million in the second quarter of 2000.  The increase in service revenues isprimarily due to more services provided on a greater installed base of systemscompared to the same period a year ago. The Company typically ships against a backlog of orders for itsproducts.  As of July 1, 2001, theCompany had in backlog EDS equipment orders and service agreements of $10.6million, primarily consisting of service agreements.  Additionally, subsequent to July 1, 2001, the Company enteredinto a multi-year contract with an international customer for multiple CTX 2500systems, accessories and service.  TheCompany has received delivery orders against this contract and another orderfrom an international customer for CTX systems, totaling $2.5 million.

             Quantum’s government contractrevenues were $4.0 million for the second quarter of 2001, an increase of 46.2%from the $2.7 million in the second quarter of 2000.  The increase in government contract revenues is primarily due toan increase in efforts in the development of landmine technologies, inaccordance with expected milestones of the contracts and grants, partiallyoffset by decreases in other types of development efforts as those government contractsand grants were completed during the last twelve months.  As of July 1, 2001, the Company had Quantumgovernment contract backlog of approximately $18.8 million, primarily fordevelopment of landmine detection technologies.

             Woodproduct and service revenues were $3.5 million in the second quarter of 2001, adecrease of 18.0% from the $4.3 million in the second quarter of 2000.   The decrease in wood revenues is primarilydue to fewer machinery equipment sales and lower parts revenues, reflecting a softness in the wood productsindustry in the second quarter of 2001 compared to the same period a yearago.  As of July 1, 2001, the Companyhad in backlog Inovec equipment orders and service agreements of $2.0 million.  The Company is still developing the CT basedlog scanner and had no related revenues or backlog as of July 1, 2001.

             *Gross Profit.*  Cost of EDS product revenues primarily consists of purchasedmaterials procured for use in the assembly of the Company's products, as wellas manufacturing labor and overhead, and warranty.  Cost of EDS service revenues primarily consists of direct laborand materials and customer support overhead. In any given period the Company's gross profit for products and servicesmay be affected by several factors, including revenue mix, volume of systemsmanufactured in a given period, product configuration, location of theinstallation and complexity of integration into various environments.

             Gross profit for EDS products was$2.6 million in the second quarter of 2001, a decrease of 5.7% from the $2.7million in the second quarter of 2000. Gross margins for EDS products in the second quarter of 2001 and 2000were relatively constant at 35.2% and 35.1%, respectively.   Margins were adversely impacted in thesecond quarter of 2001 due to additional warranty provisions recorded toupgrade certain previously sold CTX 9000 systems to current manufacturingstandards.  Margins were adverselyimpacted in the second quarter of 2000 due to lower margins on the sale of CTX9000 systems, resulting from competitive pricing factors with internationalcustomers and higher manufacturing costs. Gross profit for EDS products decreased due to slightly lower revenuesin the second quarter of 2001 compared to the same period a year ago.   Gross profit for EDS services was $0.8million in the second quarter of 2001, an increase of 23.7% from $0.6 millionin the second quarter of 2000.  Grossmargins for EDS services were 31.1% and 28.9% in the second quarter of 2001 and2000, respectively.  The increase ingross profit and gross margins for EDS services is primarily due to increasedservice revenues and continued efforts to maintain constant overhead costs withan increased installed base of CTX systems.

             Cost of Quantum government contractrevenues primarily consists of direct labor, purchased materials, subcontractlabor and the applicable overhead required to support government fundedactivities.   Gross profit forgovernment contracts was $0.7 million in the second quarter of 2001, an 11.7%decrease from the $0.8 million in the second quarter of 2000.  Gross margins were 17.9% and 29.6% in thesecond quarter of 2001 and 2000, respectively.   The decrease in gross profit and gross margins is primarily dueto increased outside engineering services utilized on the landmines contract,which services typically carry lower margins, in the second quarter of 2001compared to the same quarter a year ago.

             Gross profit for Wood products andservices were $1.2 million in the second quarter of 2001, an increase of 14.1%from the $1.1 million in the second quarter of 2000.  Gross margins were 34.0% and 24.5% in the second quarter of 2001and 2000, respectively.  The increase ingross profit and gross margins is primarily due to a smaller portion of revenuesattributable to machinery equipment, which typically carry a lower margin thansystem revenues, in the second quarter of 2001 compared to the same period ayear ago.

             *Research and Development.*  Research and development expenses consistprimarily of compensation paid to personnel engaged in research and developmentactivities, amounts paid for outside services, and costs of materials utilizedin the development of hardware products, including prototype units.  Research and development expenditures by theCompany are partially offset by amounts reimbursed by the FAA and othergovernment agencies and private entities under research and developmentcontracts and grants.  These servicesare provided on a cost basis.

             Gross research and developmentexpenses were $3.4 million in the second quarter of 2001, an increase of 30.0%from the $2.6 million in the second quarter of 2000.  Of these amounts, in the second quarter of 2001 and 2000, $1.5million and $55,000, respectively, were funded by research and developmentcontracts and grants from the FAA and other government agencies and privateentities.  Net research and developmentexpenses were $1.9 million in the second quarter of 2001, a decrease of 25.6%compared to the $2.6 million in the second quarter of 2000.  As a percentage of revenues, net research anddevelopment expenses were 11.0% and 15.1% in the second quarter of 2001 and2000, respectively.   The increase ingross research and development expenses is primarily due costs incurred for thedevelopment of ARGUS and also due to engineering services, materials and laborcosts incurred for the development of WoodVision products in the second quarterof 2001 compared to the same period a year ago.   The decrease in net research and development expenses is primarilydue to the focused efforts in the ARGUS development, funded through researchand development grants, partially offset by the increased expenditures on thedevelopment of WoodVision products in the second quarter of 2001 compared tothe same period a year ago.  As of July1, 2001, the Company had in backlog research and development contracts andgrants of $1.9 million.

             *Selling, general and administrative.*  Selling, general and administrative expensesconsist primarily of compensation paid to direct and indirect sales andmarketing personnel, administrative personnel, including directors, consultantfees, professional service fees, insurance, travel, selling and distributioncosts, and other general expenses.

             Selling,general and administrative expenses were $3.1 million in the second quarter of2001, a decrease of 28.4% from the $4.4 million in the second quarter of2000.  As a percentage of totalrevenues, selling, general and administrative expenses were 18.1% and 25.8% inthe second quarter of 2001 and 2000, respectively.  The decrease in selling, general and administrative expenses isprimarily due to lower commissions, a result of lower product revenues in thecurrent quarter and also due to higher commissions paid to an outside sales representative in the secondquarter of 2000 compared to the second quarter of 2001.  The decrease in selling, general andadministrative expenses is also due the recovery of expenses related to theARGUS grant and the Company’s continued efforts to reduce selling, general andadministrative spending levels in the second quarter of 2001 compared to thesame period a year ago.

             *Interest Expense.*  Interest expense increased to $83,000 in thesecond quarter of 2001 from $39,000 in the second quarter of 2000. Interestexpense resulted primarily from debt financing associated with the Company’sworking capital lines of credit, equipment term loans and capital leases.  The increase is primarily due to higheraverage debt balances in the second quarter of 2001 compared to the same perioda year ago.

              *Interest and Other Income, Net.*  Interest and other income, net, was $0 in the second quarter of2001 and $101,000 in the second quarter of 2000.  The 2001 amount consists primarily of interest income on cashequivalents and short-term investments of $80,000, offset by other expense(net) of $80,000, primarily foreign exchange losses.  The 2000 amount consists primarily of interest income on cashequivalents and short-term investments of $161,000, partially offset by otherexpense (net) of $60,000.  The decreasein interest income is primarily due to lower average cash balances in thesecond quarter of 2001 compared to the same period a year ago.

             *Provision for Income Taxes.*  The Company recorded a provision for incometaxes of $62,000 in the second quarter of 2001.  At December 31, 2000, the Company had federal net operating losscarryforwards of approximately $4.6 million available to reduce future federaltaxable income.  The Company’s netoperating loss carryforwards, primarily from the Quantum Magnetics subsidiary,expire from 2010 to 2012 and tax credit carryforwards expire from 2005 to 2018.

 

**Comparison of the Six MonthsEnded July 1, 2001 to July 2, 2000**

             *Revenues.*   EDS product revenues were $16.7 million for the first six monthsof 2001, a decrease of 14.5% from the $20.0 million in the first six months of2000.  This decrease was primarilyattributable to fewer system sales and variations in product mix, reflectingmore CTX 2500 systems and fewer CTX 5500 systems sold in the first six monthsof 2001 compared to the same period a year ago.  The decrease is also due to fewer upgrade revenues, partiallyoffset by increased accessory revenues in the first six months of 2001 comparedto the same period a year ago.  EDSservice revenues were $4.6 million for the first six months of 2001, anincrease of 10.1% from the $4.2 million in the first six months of 2000.  The increase in service revenues isprimarily due to increased service contract revenue for new support andmaintenance agreements for CTX systems for which warranty periods expiredduring the past twelve months, primarily in international locations, and moreservices provided on a greater installed base of systems during the first sixmonths of 2001 compared to the same period a year ago.

             Quantum’sgovernment contract revenues were $7.7 million for the first six months of2001, an increase of 57.6% from the $4.9 million in the first six months of2000.  The increase in governmentcontract revenues is primarily due to an increase in efforts in the developmentof landmine technologies, in accordance with expected milestones in thecontracts, partially offset by decreases in other types of development effortsas those government contracts and grants were completed during the last twelvemonths.

             Wood product and service revenueswere $5.8 million in the first six months of 2001, a decrease of 17.6% from the$7.0 million in the first six months of 2000.  The decrease in wood revenues is primarily due to fewer system andmachinery equipment  sales in the firstsix months of 2001 compared to the same period a year ago, primarily due to asoftness in the wood products industry.

             *Gross Profit.*Gross profit for EDSproducts was $6.7 million in the first six months of 2001, an increase of 6.1%from the $6.3 million in the first six months of 2000.  Gross margins for EDS products in the firstsix months of 2001 and 2000 were 40.2% and 32.4%, respectively.   The increase in gross margins is primarilydue to improvements in the costs of the CTX 9000 system, which was firstintroduced in late 1999, and due to variations in product types and accessoriessold in the first six months of 2001 compared to the same period a yearago.   The increase is also due to lowermargins in the first six months of 2000 as a result of competitive pricingfactors with an international customer. These increases are partially offset by additional warranty provisonsrecorded during the first six months of 2001 to upgrade certain previously soldCTX 9000 systems to current manufacturing standards.  Gross profit for EDS services was $1.3 million in the first sixmonths of 2001, an increase of 14.9% from the $1.1 million in the first sixmonths of 2000.  Gross margins for EDSservices were 28.1% and 26.9% in the first six months of 2001 and 2000,respectively.  The increase in grossprofit and gross margins is primarily due to increased service revenues andcontinued efforts to maintain constant overhead costs with a greater installedbase of CTX systems.

             Gross profit for governmentcontracts was $1.6 million in the first six months of 2001, a 15.0% increasefrom the $1.4 million in the first six months of 2000.  Gross margins were 20.9% and 28.7%,respectively.   The increase in grossprofit is primarily due to higher revenues in the first six months of 2001compared to the same period a year ago. The decrease in gross margins is primarily due to increased outsideengineering services utilized on the landmines contract, which servicestypically carry lower margins, in the first six months of 2001 compared to thesame period  a year ago.

             Gross profit for Wood products andservices were constant at $2.1 million in the first six months of 2001 and2000.  Gross margins were 35.8% and30.1% in the first six months of 2001 and 2000, respectively.   The increase in gross margins is primarilydue to fewer machinery equipment sales, which typically carry lower margins,and variations in system product mix, in the first six months of 2001 comparedto the first six months of 2000.

             *Research and Development.*  Gross research and development expenses were$6.9 million in the first six months of 2001, an increase of 33.8% from the $5.2 million in the first six monthsof 2000.  Of these amounts, in the firstsix months of 2001 and 2000, $2.1 million and $210,000, respectively, werefunded by research and development contracts and grants from the FAA and othergovernment agencies and private entities. Net research and development expenses were relatively constant at $4.8million in the first six months of 2001 and $4.9 million in the first sixmonths of 2000.  As a percentage ofrevenues, net research and development expenses were 13.6% and 13.9% in thefirst six months of 2001 and 2000, respectively.   The increase in gross research and development expenses isprimarily due to costs incurred for the development of ARGUS and also due toengineering services, materials and labor costs incurred for the development ofWoodVision products in the first six months of 2001 compared to the first sixmonths of 2000.   The decrease in netresearch and development expenses is primarily due to the focused efforts inthe ARGUS development, funded through research and development grants,partially offset by the increased expenditures on the development of theWoodVision products in the first six months of 2001 compared to the same perioda year ago.

             *Selling, general and administrative.*Selling, general and administrative expenses were $6.6 million in the first sixmonths of 2001, a decrease of 24.5% from the $8.8 million in the first sixmonths of 2000.  As a percentage oftotal revenues, selling, general and administrative expenses were 18.9% and24.6% in the first six months of 2001 and 2000, respectively.  The decrease in selling, general and administrativeexpenses is primarily due to lower commissions, a result of lower productrevenues in the first six months of 2001, and due to higher commissions paid toan outside sales representative in the first six months of 2000.   The decrease in selling, general andadministrative expenses is also due to the recovery of expenses related to theARGUS grant in the first six months of 2001, higher costs incurred in the firstsix months of 2000 relating to the start-up and business development costs ofthe newly formed WoodVision division, and the Company’s continued efforts toreduce selling, general and administrative spending levels in 2001.

             *Interest Expense.*  Interest expense increased to $148,000 inthe first six months of 2001 from $88,000 in the first six months of 2000.   The increase is primarily due to higheraverage debt balances in the first six months of 2001 compared to the sameperiod a year ago.

              *Interest and Other Income, Net.*  Interest and other income, net, decreased to$105,000 in the first six months of 2001 from $485,000 in the first six monthsof 2000.  The 2001 amount consistsprimarily of interest income on cash equivalents and short-term investments of$194,000, partially offset by other expense (net) of $89,000, primarily foreignexchange losses.  The 2000 amountconsists primarily of interest income on cash equivalents and short-terminvestments of $567,000, partially offset by other expense (net) of$82,000.  The decrease in interestincome is primarily due to lower average cash balances in the first six monthsof 2001 compared to the first six months of 2000.

             *Provision for Income Taxes.*  The Company recorded a provision for incometaxes of $121,000 in the first six months of 2001.

**Liquidity and Capital Resources**

             At July 1, 2001, the Company had$9.0 million in cash and cash equivalents, compared to $11.9 million atDecember 31, 2000.  Working capital was$38.6 million at July 1, 2001 compared to $37.7 million at December 31, 2000.

             Net cash used in operatingactivities was $5.4 million in the first six months of 2001, compared to $6.6million in the first six months of 2000. Cash used in operating activities in the first six months of 2001primarily resulted from a $3.9 million increase in inventories, a $2.8 millionincrease in accounts receivable, and a $0.5 million decrease in deferredrevenues, partially offset by net income of $233,000 and the $1.9 millionnon-cash effect of depreciation and amortization.  Cash used in operating activities in the first six months of 2000primarily resulted from a net loss of $2.3 million, a $5.8 million increase ininventories, a $2.0 million increase in accounts receivable, and a $0.6 milliondecrease in deferred revenue, partially offset by a $2.0 million increase inaccrued liabilities and the $1.7 million noncash effect of depreciation andamortization.

             Net cash used in investingactivities was $1.3 million in the first six months of 2001, compared to $3.6million provided by investing activities in the first six months of 2000.  Net cash used in investing activities in thefirst six months of 2001 resulted from $1.0 million in acquisitions of capitalequipment and $267,000 for the payment of an earn-out to the formershareholders of Inovec in accordance with terms in the purchase agreement.  Net cash provided by investing activities inthe first six months of 2000 primarily resulted from $5.9 million in sales ofshort-term investments (net of purchases), partially offset by the cash paymentof $1.5 million for the purchase of Inovec, net of cash acquired, and $0.8million in acquisitions of capital equipment.

             Net cash provided by financingactivities was $3.8 million in the first six months of 2001, compared to$285,000 in the first six months of 2000. Net cash provided by financingactivities in the first six months of 2001 was primarily due to $3.8 million in proceeds from borrowings ofshort-term debt, net of payments, and $147,000 in proceeds from sales under theemployee stock purchase plan and exercises of incentive stock options, partiallyoffset by $216,000 in repayments of long-term debt.  Net cash provided by financing activities in the first six monthsof 2000 was primarily due to $501,000 in proceeds from sales under the employeestock purchase plan and exercises of incentive stock options, partially offsetby $216,000 in repayments of long-term debt.

             In November 2000, the Companyrenewed its two line of credit agreements with a bank.  The first agreement provides for maximumborrowings in an amount up to the lower of 80% of eligible domestic EDSreceivables or $5.0 million.  The secondagreement is partially guaranteed by the Export–Import Bank (“EXIM”) ofthe United States and provides for maximum borrowings in an amount up to thelower of:  (a) the sum of 80% ofeligible EDS export accounts receivable plus the lower of: (i) 70% of eligibleraw materials and work–in–process inventory designated for exportcustomers; (ii) 60% of outstanding loans under this agreement, or; (iii) $2.0million, or; (b) $5.0 million. Borrowings under both agreements bear interest at the bank’s prime rateplus 1.5% (6.75% at July 1, 2001) and are secured by EDS assets. The agreementsexpire in October 2001 and require that the EDS segment maintain certain levelsof tangible net worth and intercompany balances from its wholly-ownedsubsidiaries, and also prohibit the Company from paying cash dividends.  Proceeds of loans under both lines of creditmay be used for general corporate purposes. At July 1, 2001, the Company had borrowings outstanding of $1.9 millionunder the domestic EDS agreement and $2.5 million under the EXIMagreement.  Additionally, the Companyhad outstanding guarantees to customers through issuance of letters of creditsecured by the lines of credit totaling $1.9 million and foreign exchangecontracts for which a 10% reserve of $357,000 is secured by the lines ofcredit.   The remaining availableborrowing capacity under the lines of credit was $2.8 million at July 1, 2001,based on eligible EDS accounts receivable and inventories as of that date.

             The Company previously borrowedagainst a committed equipment line of credit agreement with a bank, whichconverted into a term loan after draw down. Borrowings are secured by the assets purchased or financed.  At July 1, 2001, the Company had anoutstanding $265,000 term loan due June 2003 and a $89,000 term loan dueNovember 2001.  The term loans bearinterest at the bank’s prime rate plus 1.5% (6.75% at July 1, 2001).

             The Company believes that existingcash, cash equivalents and short-term investments together with availableborrowings under its lines of credits and funds expected to be generated fromoperations will be sufficient to finance its working capital and capitalexpenditure requirements for at least the next 12 months.

 

**Business Risks**

*             History ofLosses; No Assurance of Continued Profitability.*  TheCompany commenced operations in September 1990, remained in the developmentstage through 1994 and received its first revenues from product sales in thefirst nine months of 1995.  The Companyexperienced net losses for each year from inception through December 31, 1996.The year ended December 31, 1997 was the Company’s first year ofprofitability.  As of July 1, 2001, theCompany had an accumulated deficit of approximately $10.7 million.  Although the Company was profitable on anannual basis for the years 1997, 1998 and 1999, profitability in 1999 was belowthat of the prior two years and the Company was not profitable in 2000. Therecan be no assurance that the Company will attain annual profitability for 2001or in the future. See "Management's Discussion and Analysis of FinancialCondition and Results of Operations - Liquidity and Capital Resources."

*             Fluctuationsin Operating Results.*  The Company's past operating results havebeen, and its future operating results will be, subject to fluctuationsresulting from a number of factors. These factors include:

|   | • | the  timing and size of orders from, and shipments to, major customers;                                                                                                                                  |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   | • | budgeting  and purchasing cycles of its customers;                                                                                                                                                       |
|   | • | delays  in product shipments caused by custom requirements of customers or ability of  the customer to accept shipment;                                                                                  |
|   | • | the  acceptance and timing of enhancements to the Company’s products                                                                                                                                |
|   | • | the  introduction and acceptance of new products by the Company or its  competitors;                                                                                                                     |
|   | • | changes  in pricing policies by the Company, its competitors or suppliers, including  possible decreases in average selling prices of the Company’s products in  response to competitive pressures; |
|   | • | the  proportion of revenues derived from competitive bid processes;                                                                                                                                      |
|   | • | the  mix between sales to domestic and international customers and the mix between  sales of the Company’s various   products;                                                                 |
|   | • | the  availability and cost of key components; and fluctuations in general economic  conditions.                                                                                                          |

             TheCompany may also choose to reduce prices or to increase spending in response tocompetition or to pursue new market opportunities, all of which may have amaterial adverse effect on the Company’s business, financial condition orresults of operations.  The Company'ssystems revenues in any period are derived from sales of multiple CTX Seriessystems to a limited number of customers and are recognized upon shipment.  The high sales price of units in the CTXSeries means that minor variations in the number of orders, or in the timing ofshipments, substantially affects the Company's quarterly revenues. Asignificant portion of the Company's quarterly operating expenses are, and willcontinue to be, relatively fixed in nature. This means that revenue fluctuations will cause the Company's quarterlyand annual operating results to vary substantially. Accordingly, the Companybelieves that period-to-period comparisons of its results of operations are notmeaningful and cannot be relied upon as indicators of future performance.Because of all of the foregoing factors, the Company's operating results havefrom time to time in the past been and may again in the future be below theexpectations of public market analysts and investors.  This failure to meet market expectations has in the past and mayagain in the future result in a decline in the trading price of the commonstock.

*             Dependenceon Few Customers.*  In any given fiscal year, the Company's EDSproduct and service revenues have principally consisted, and the Companybelieves will continue to consist, of orders of multiple units from a limitednumber of customers. While the number of individual customers may vary fromperiod to period, the Company is nevertheless dependent upon these multipleorders for a substantial portion of its revenues. There can be no assurancethat the Company will obtain such multiple orders on a consistent basis. In2000 and 2001, the Company entered into several contracts with customers topurchase CTX Series systems over a period of several years.  These contracts have a minimum and maximumnumber of units the customer can order, however, there can be no assurance thatthe customer will order more than the minimum number of units in accordancewith the terms in the contract.   TheCompany's inability to obtain sufficient multiple orders would have a materialadverse effect on the Company's business, financial condition or results ofoperations.

*             Sales toFAA.* To date, all orders for CTX Series systemsfrom United States customers have been entirely funded by the FAA.  The Company's largest sales contract todate, for 105 CTX Series systems, all of which have been shipped, was with theFAA.  The failure of the FAA to continuesuch purchases or funding would have a material adverse effect on the Company'sbusiness, financial condition or results of operations.

*             PublicAgency Contract and Budget Considerations.* Substantially all of the Company’s EDS customers and a high percentageof Quantum’s research and development customers to date have been publicagencies or quasi-public agencies.  Incontracting with public agencies, the Company is subject to public agencycontract requirements which vary from jurisdiction to jurisdiction and which aresubject to budgetary processes and expenditure constraints.  Budgetary allocations for explosivedetection systems are dependent, in part, upon governmental policies whichfluctuate from time to time in response to political and other factors,including the public's perception of the threat of commercial airlinebombings.  In addition, public agencybidding processes have been and may continue to be protracted, and typicallycontain provisions that permit cancellation in the event that funds are unavailableto the public agency.

*             ExportControl.* The Company is subject to risks associatedwith regulations relating to the export of defense articles.  In particular, the Company’s landminedetection systems are deemed to be regulated defense articles subject to exportcontrol by the U.S. Department of State. Exports may be prohibited or limitedto a small number of countries, even for purposes of demonstration and furtherdata collection and development.

*             WoodIndustry Purchasing Cycle.*  The Company’s Wood revenues will be subjectto the ability and willingness of customers in the wood industry to purchasecapital equipment to improve productivity, yield and finished productvalue.  The factors that affect thedecision to purchase such capital equipment include the demand for woodproducts, market prices for logs and finished wood products, labor costs,interest rates and other general economic factors.  In addition, the revenues related to the Company’s CT scannersfor the wood industry will be subject to the acceptance of new technology bycustomers in the wood industry.  Thereare no assurances that market conditions in the wood industry will be favorablefor the sale of capital equipment, or that the Company’s new products will beaccepted by the industry in any particular time, or at all.

**Item 3.  Quantitative and Qualitative DisclosuresAbout Market Risk**

*Foreign Exchange Risk and Impact of Inflation*

             The Company's international systemsales and maintenance contracts are generally denominated in U.S. dollars.   In instances where there are significantinternational system sales contracts denominated in a foreign currency, theCompany enters into forward exchange contracts to mitigate foreign exchangerisk.   In the first six months of 2001,the Company entered into forward exchange contracts with notional values ofapproximately $4.6 million to hedge against foreign exchange risk for contractswith international customers, and at July 1, 2001, had outstanding contractswith notional values totaling $3.6 million with a fair value of approximately $98,000.   Purchases of raw materials and otherinventory components are primarily denominated in U.S dollars and whenpurchased in foreign currencies, are generally made on an as needed basis.  The Company has some advance purchasecommitments in foreign currencies with a few European suppliers.   The Company currently does not hedgeagainst these purchase commitments, as the foreign exchange rate fluctuationshave not had a material adverse impact on these purchases; however, the Companywill continue to monitor the foreign exchange rates and enter into forwardexchange contracts to mitigate foreign exchange risk as appropriate.

             OnJanuary 1, 2001, the Company adopted SFAS 133, as amended.  This statement requires that everyderivative instrument, including certain derivative instruments embedded inother contracts, be recorded on the balance sheet at its fair value.  Changes in the fair value of derivatives arerecorded each period in current earnings or other comprehensive income,depending on whether a derivative is designated as part of a hedge transactionand, if it is, the type of hedge transaction. SFAS 133, as amended, requires that the Company formally document,designate, and assess the effectiveness of transactions that receive hedgeaccounting.  The Company adopted SFAS133, as amended, on January 1, 2001 and did not elect hedge accounting.  The adoption of this statement did not havea material impact on the financial position or results of operations of theCompany.

             During the six month period endedJuly 1, 2001, the Company’s derivative contracts consisted only of foreignexchange forward contracts to mitigate certain exposures to future foreigncurrency rate movements on receivables from international sales contracts.  The change in value of these derivativecontracts did not have a material impact on the financial position at July 1,2001 or results of operations for the quarter then ended.

             Certaincosts of providing warranty and maintenance services for systems sold toforeign countries are denominated in local currencies. To the extent exchangerates fluctuate, it could become more expensive to provide these services. Todate, these costs have not been significant, however, the Company expects theywill increase as the Company's installed base increases.

             The impact of inflation has notbeen material on the Company’s operations or liquidity to date.

**Part II.  OTHER INFORMATION**

 

**Item1.  Legal Proceedings**

             TheCompany is involved in routine administrative proceedings arising in theordinary course of business.  Managementbelieves that collectively these proceedings will not have a material adverseeffect on the Company’s business, financial condition or results of operations.

**Item 2. Changes in Securities and Use of Proceeds**

             OnApril 20, 2001, the Company issued the following amounts of unregisteredsecurities as partial consideration for the its acquisition of Inovec, Inc. in2000:

(1)179,611 shares of common stock to Andrew Nowak (2) 69,572 shares of common stock to Alan Bazzaz(3) 35,556 shares of common stock to Jeff Franklin(4) 36,166 shares of common stock to Kerry Wilson

The shares were issued in reliance on Regulation Dpromulgated under Section 4(2) of the Securities Act of 1933, in that therecipients of the shares were former shareholders of Inovec, Inc., who wereeither accredited investors or had an appointed purchaser’s representative who,with the former shareholders, had the financial sophistication and knowledgerequired under Regulation D.

**Item 3.****DefaultsUpon Senior Securities**

             Notapplicable.

**Item 4. Submission of Matters to a Vote of Securities Holders**

             The2001 Annual Meeting of  Stockholders washeld June 21, 2001.  Matters voted atthat meeting were:
|   | (i)   | The  election of two directors to hold office until the 2004 Annual Meeting of  Stockholders and until their successors are elected and qualified.                                                           |
|--------|-------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   | (ii)  | The  amendment of the Company’s Employee Stock Purchase Plan, to increase the  aggregate number of shares of Common Stock authorized for issuance under such  plan by 150,000 shares to 600,000 shares. |
|   | (iii) | The  ratification of the selection of Deloitte & Touche LLP as independent  auditors of the Company for its fiscal year ending December 31, 2001                                                         |

             Tabulationsfor each proposal were as follows:
|   | Proposal I.   Election of two directors to hold office until the 2004 Annual Meeting  of Stockholders |
|--------|------------------------------------------------------------------------------------------------------------|
|   |                                                                                                       |
|   | Director                                                                                                   | For |   | Withheld |   |
|   | Dr. Giovanni Lanzara                                                                                       | 8,630,576 |   | 88,602 |   |
|   | Ambassador Morris D.  Busby                                                                                | 8,629,874 |   | 89,304 |   |
|   |                                                                                                       |   |   |   |   |
|   | Proposal II.   Amendment of the Company’s Employee Stock Purchase Plan                           |
|   |                                                                                                       |   |   |   |   |
|   | For                                                                                                        | Against | Abstain |   |
|   | 8,395,561                                                                                                  | 262,780 | 60,837 |   |
|   |                                                                                                       |   |   |   |
|   | Proposal  III.  Ratification of the selection of  Deloitte & Touche LLP                           |
|   |                                                                                                       |   |   |   |
|   | For                                                                                                        | Against | Abstain |   |
|   | 8,649,453                                                                                                  | 42,478 | 27,247 |   |
|        |                                                                                                            |  |  |  |  |  |  |  |  |  |

 

             ContinuingDirectors:

             Dr.Sergio Magistri, Mr. David M. Pillor and Mr. Stephen Blum, continued asdirectors following the meeting, to serve in office until the Annual Meeting ofStockholders to be held in 2003.

             Dr.Bruno Trezza and Dr. Douglas Boyd, continued as directors following the meeting,to serve in office until the Annual Meeting of Stockholders to be held in 2002.

 

**Item 5. Other Information**

             OnAugust 9, 2001 the Company announced that it has named Louis A. Turpen,President and Chief Executive Officer of the Greater Toronto AirportsAuthority, to its board of directors. The appointment of Turpen, 57, increasesthe Company's number of directors to eight.

             Mr.Turpen, who has more than 25 years of airport management experience, joined theToronto airport in 1995 after serving as chief executive officer of SanFrancisco International Airport for 14 years. During his tenure at SanFrancisco, Turpen led a complete redevelopment of the airport's terminalcomplex, including the planning, design, financing and initial construction ofthe airport's new two-million square foot International Terminal. He alsodeveloped the first ever counter-terrorism plan at any airport in the U.S.Since joining the Toronto airport, he has overseen the transfer of airportoperations from the Canadian government to the Greater Toronto AirportsAuthority (GTAA) and the planning and design and initial construction of a $4.4billion terminal development program, which is by now 30% complete.

 

**Item 6. Exhibits and Reports on Form 8-K**

| (a)    | Exhibits                                                                             |
|--------|--------------------------------------------------------------------------------------|
|   |                                                                                 |
|   | 2.1                                                                                  |   | Agreement  and Plan of Merger and Reorganization dated as of February 23, 2000, among  InVision Technologies, Inc., a Delaware corporation, InVision Acquisition  Corporation, a Delaware corporation, and Inovec, Inc., an Oregon Corporation  (1) |
|   | 2.2                                                                                  |   | Form  of Escrow Agreement between InVision, Merger Sub, the Shareholders and  Greater Bay Trust Company, dated February 23, 2000 (1) |
|   | 3.1                                                                                  |   | Amended  and Restated Certificate of Incorporation of the Registrant. (2) |
|   | 3.2                                                                                  |   | Bylaws  of Registrant, as amended. (3) |
|   | 4.1                                                                                  |   | Reference  is made to Exhibits 3.1 and 3.2. |
|   |                                                                                 |   |   |   |
|   |                                                                                 |   | (1) | Filed  as the like - numbered exhibit to Registrant's Current Report on Form 8-K  filed May 18, 2000. |
|   |                                                                                 |   |   |   |
|   |                                                                                 |   | (2) | Filed  as an exhibit to Registrant's Registration Statement on Form S-1 (No.  333-380) or amendments thereto and incorporated herein by reference. |
|   |                                                                                 |   |   |   |
|   |                                                                                 |   | (3) | Filed  as an exhibit to Registrant's Quarterly Report on Form 10-Q for the quarterly  period ended June 30, 1998 and incorporated herein by reference. |
|   |                                                                                 |   |   |   |
|   |                                                                                 |   |   |   |
| (b)    | The  Registrant filed no Reports on Form 8-K during the quarter ended July 1,  2001. |

**SIGNATURES**

 

             Pursuant to the requirements of theSecurities Exchange Act of 1934, the Registrant has duly caused this report tobe signed on its behalf by the undersigned thereunto duly authorized.

 

 

|                   | **INVISION  TECHNOLOGIES, INC.**                   |
|------------------------|----------------------------------------------------|
|                   |                                               |
| Date:  August 15, 2001 | /s/  *Sergio  Magistri*                            |
|                   |                                                    |
|                   | Dr.  Sergio Magistri                               |
|                   | President  and Chief Executive Officer             |
|                   | *(Principal  Executive Officer)*                   |
|                   |                                               |
| Date:  August 15, 2001 | */s/  Ross Mulholland*                             |
|                   | **                                                 |
|                   | Ross  Mulholland                                   |
|                   | Senior  Vice President and Chief Financial Officer |
|                   | *(Principal  Financial and Accounting Officer)*    |