##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
 FORM 10-Q (Mark One) x
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the quarterly period ended September 26, 2004
 or o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the transition period from      to
 Commission File Number: 0-28236 INVISION TECHNOLOGIES, INC.  Delaware
(State or other jurisdiction of incorporation or organization) 94-3123544
(I.R.S. Employer Identification No.) 7151 Gateway Boulevard, Newark, CA 94560
(Address of principal executive offices, including zip code) (510) 739-2400
(Registrants telephone number, including area code) Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes  x  No  o Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes  x  No  o On October 25, 2004, there were 17,702,889 shares of the registrants
common stock outstanding.




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InVision Technologies, Inc.
Form 10-Q
INDEX PART I. FINANCIAL INFORMATION
    
    
    3Item1. Financial Statements
    
    
    3a. Condensed Consolidated Balance Sheets (Unaudited)  September 26, 2004 and December 31, 2003
    
    
    3b. Condensed Consolidated Statements of Operations (Unaudited)  Three and nine months ended
September 26, 2004 and September 28, 2003
    
    
    4c. Condensed Consolidated Statements of Cash Flows (Unaudited)  Nine months ended September
26, 2004 and September 28, 2003
    
    
    5d. Notes to Condensed Consolidated Financial Statements (Unaudited)
    
    
    62. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    183. Quantitative and Qualitative Disclosures about Market Risk
    
    
    434. Controls and Procedures
    
    
    45PART II. OTHER INFORMATION
    
    
    45Item1. Legal Proceedings
    
    
    456. Exhibits
    
    
    47Signature Page
    
    
    48EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32.1
  InVision, Quantum Magnetics, Yxlon, HAPEG, CTX, CTX 1000, CTX 5500 DS, CTX
9000 DSi and QScan, among others, are trademarks of InVision Technologies, Inc.
or one of its subsidiaries in the United States and other countries. InVision,
Quantum Magnetics, Yxlon and QScan, among others, are registered trademarks of
InVision Technologies, Inc. or one of its subsidiaries in the United States.




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##### Table of Contents



PART I. FINANCIAL INFORMATION 
 Item 1. Financial Statements InVision Technologies, Inc. 
 Condensed Consolidated Balance Sheets
 (In thousands, except share data)
(Unaudited)
 September 26,
    
    December 31,2004
    
    2003AssetsCurrent assets:Cash and cash equivalents
    
    $
    122,263
    
    
    $
    182,382Short-term investments
    
    
    221,301
    
    
    
    94,557Restricted cash
    
    
    5,635
    
    
    
    Accounts receivable, net
    
    
    50,908
    
    
    
    56,951Inventories
    
    
    87,754
    
    
    
    78,894Deferred income taxes
    
    
    11,562
    
    
    
    14,283Other current assets
    
    
    5,665
    
    
    
    5,666Total current assets
    
    
    505,088
    
    
    
    432,733Property and equipment, net
    
    
    10,077
    
    
    
    11,605Goodwill
    
    
    19,509
    
    
    
    21,474Intangible assets, net
    
    
    12,349
    
    
    
    13,978Other assets
    
    
    8,263
    
    
    
    6,278Total assets
    
    $
    555,286
    
    
    $
    486,068Liabilities and stockholders equityCurrent liabilities:Accounts payable
    
    $
    23,342
    
    
    $
    13,761Accrued liabilities
    
    
    41,693
    
    
    
    35,058Deferred revenue
    
    
    34,806
    
    
    
    13,277Short-term debt
    
    
    1,807
    
    
    
    5,581Current maturities of long-term obligations
    
    
    256
    
    
    
    263Total current liabilities
    
    
    101,904
    
    
    
    67,940Long-term obligations
    
    
    126,842
    
    
    
    127,244Deferred income taxes
    
    
    
    
    
    
    203Total liabilities
    
    
    228,746
    
    
    
    195,387Commitments
and contingencies (Note 8)Stockholders equity:Preferred stock, $0.001 par value, 5,000,000 shares authorized;
no shares issued and outstanding
    
    
    
    
    
    
    Common stock, $0.001 par value, 60,000,000 shares authorized;
18,387,000 and 17,782,000 shares issued; 17,700,000 and
17,095,000 shares outstanding
    
    
    18
    
    
    
    18Additional paid-in capital
    
    
    190,178
    
    
    
    173,968Deferred stock compensation expense
    
    
    (169
    )
    
    
    (271
    )Accumulated other comprehensive loss
    
    
    (922
    )
    
    
    (125
    )Retained earnings
    
    
    152,126
    
    
    
    131,782Treasury stock, at cost (687,000 shares)
    
    
    (14,691
    )
    
    
    (14,691
    )Total stockholders equity
    
    
    326,540
    
    
    
    290,681Total liabilities and stockholders equity
    
    $
    555,286
    
    
    $
    486,068
 The accompanying notes are an integral part of these condensed consolidated financial statements. 3




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##### Table of Contents



InVision Technologies, Inc. 
 Condensed Consolidated Statements of Operations
 (In thousands, except per share data)
(Unaudited)
 Three Months Ended
    
    Nine Months EndedSeptember 26,
    
    September 28,
    
    September 26,
    
    September 28,2004
    
    2003
    
    2004
    
    2003Revenues:Product revenues
    
    $
    56,899
    
    
    $
    69,281
    
    
    $
    171,024
    
    
    $
    297,090Service revenues
    
    
    25,992
    
    
    
    13,745
    
    
    
    69,819
    
    
    
    34,167Contract research and development revenues
    
    
    2,425
    
    
    
    3,092
    
    
    
    8,036
    
    
    
    9,456Total revenues
    
    
    85,316
    
    
    
    86,118
    
    
    
    248,879
    
    
    
    340,713Cost of revenues:Product costs
    
    
    33,766
    
    
    
    42,285
    
    
    
    103,690
    
    
    
    171,411Service costs
    
    
    16,481
    
    
    
    8,330
    
    
    
    43,520
    
    
    
    20,497Contract research and development costs
    
    
    1,783
    
    
    
    1,806
    
    
    
    6,114
    
    
    
    5,875Total cost of revenues
    
    
    52,030
    
    
    
    52,421
    
    
    
    153,324
    
    
    
    197,783Gross profit
    
    
    33,286
    
    
    
    33,697
    
    
    
    95,555
    
    
    
    142,930Operating expenses:Research and development
    
    
    6,559
    
    
    
    5,268
    
    
    
    19,856
    
    
    
    20,269Selling, general and administrative
    
    
    14,521
    
    
    
    12,280
    
    
    
    41,290
    
    
    
    31,778In-process research and development (Yxlon)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,300Total operating expenses
    
    
    21,080
    
    
    
    17,548
    
    
    
    61,146
    
    
    
    56,347Income from operations
    
    
    12,206
    
    
    
    16,149
    
    
    
    34,409
    
    
    
    86,583Interest expense
    
    
    (1,328
    )
    
    
    (343
    )
    
    
    (3,918
    )
    
    
    (488
    )Interest and other income, net
    
    
    1,925
    
    
    
    667
    
    
    
    3,179
    
    
    
    2,022Income before provision for income taxes
    
    
    12,803
    
    
    
    16,473
    
    
    
    33,670
    
    
    
    88,117Provision for income taxes
    
    
    4,545
    
    
    
    7,197
    
    
    
    13,326
    
    
    
    37,459Net income
    
    $
    8,258
    
    
    $
    9,276
    
    
    $
    20,344
    
    
    $
    50,658Net income per share:Basic
    
    $
    0.47
    
    
    $
    0.54
    
    
    $
    1.16
    
    
    $
    2.95Diluted (Note 4)
    
    $
    0.38
    
    
    $
    0.50
    
    
    $
    0.96
    
    
    $
    2.75Weighted average shares outstanding:Basic
    
    
    17,656
    
    
    
    17,269
    
    
    
    17,479
    
    
    
    17,182Diluted (Note 4)
    
    
    23,082
    
    
    
    18,450
    
    
    
    22,902
    
    
    
    18,415
 The accompanying notes are an integral part of these condensed consolidated financial statements. 4




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InVision Technologies, Inc. 
 Condensed Consolidated Statements of Cash Flows
 (In thousands)
(Unaudited)
 Nine Months EndedSeptember 26,
    
    September 28,2004
    
    2003Cash flow from operating activities:Net income
    
    $
    20,344
    
    
    $
    50,658Adjustments to reconcile net income to net cash provided by operating activitiesDepreciation and amortization
    
    
    7,969
    
    
    
    4,318Deferred income taxes
    
    
    3,557
    
    
    
    1,311Loss on disposal of fixed assets
    
    
    138
    
    
    
    456Bad debt expense
    
    
    (68
    )
    
    
    156Income tax benefits from employee stock transactions
    
    
    6,026
    
    
    
    1,662Stock compensation expense
    
    
    432
    
    
    
    206In-process research and development (Yxlon)
    
    
    
    
    
    
    4,300Changes in operating assets and liabilities:Accounts receivable
    
    
    4,537
    
    
    
    90,390Inventories
    
    
    (9,477
    )
    
    
    7,593Other assets
    
    
    574
    
    
    
    7,835Accounts payable
    
    
    9,701
    
    
    
    (19,055
    )Accrued liabilities
    
    
    8,469
    
    
    
    (24,046
    )Deferred revenues
    
    
    20,785
    
    
    
    (69,161
    )Other liabilities
    
    
    (157
    )
    
    
    39Net cash provided by operating activities
    
    
    72,830
    
    
    
    56,662Cash flow from investing activities:Change in restricted cash
    
    
    (5,635
    )
    
    
    Purchases of property and equipment
    
    
    (2,097
    )
    
    
    (2,627
    )Proceeds from sales of short-term investments
    
    
    62,868
    
    
    
    Purchases of short-term investments
    
    
    (193,815
    )
    
    
    Purchase of subsidiaries, net of cash acquired
    
    
    
    
    
    
    (45,254
    )Purchase of other long-term investments
    
    
    (510
    )
    
    
    (1,500
    )Net cash used in investing activities
    
    
    (139,189
    )
    
    
    (49,381
    )Cash flow from financing activities:Net proceeds from (repayments of) short-term debt
    
    
    (3,104
    )
    
    
    4,874Proceeds from issuance of long-term debt
    
    
    
    
    
    
    125,000Debt issuance costs
    
    
    (51
    )
    
    
    (4,406
    )Repayments of long-term debt
    
    
    (359
    )
    
    
    (212
    )Repurchase of common stock
    
    
    
    
    
    
    (12,497
    )Proceeds from issuance of common stock, net
    
    
    9,855
    
    
    
    3,248Net cash provided by financing activities
    
    
    6,341
    
    
    
    116,007Effect of exchange rate changes on cash
    
    
    (101
    )
    
    
    (641
    )Net change in cash and cash equivalents for the period
    
    
    (60,119
    )
    
    
    122,647Cash and cash equivalents at beginning of period
    
    
    182,382
    
    
    
    159,736Cash and cash equivalents at end of period
    
    $
    122,263
    
    
    $
    282,383Supplemental disclosures of cash flow information:Interest paid
    
    $
    3,156
    
    
    $
    374Income taxes paid
    
    $
    1,119
    
    
    $
    47,054Supplemental disclosures of noncash investing and financing activities:Financing obligations incurred for the purchase of new equipment
    
    $
    
    
    
    $
    668Financing obligations incurred for insurance policy renewals
    
    $
    
    
    
    $
    1,691
 The accompanying notes are an integral part of these condensed consolidated financial statements. 5




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InVision Technologies, Inc. 
 Notes to Condensed Consolidated Financial Statements
 (Unaudited)
 1.  Summary of Significant Accounting Policies Interim Unaudited Financial Information The accompanying interim unaudited condensed consolidated financial
statements have been prepared in accordance with accounting principles
generally accepted in the United States of America (generally accepted
accounting principles) for interim financial information and in accordance
with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X.
Accordingly, they do not contain all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
In the opinion of management, the accompanying unaudited condensed consolidated
financial statements reflect all adjustments (consisting only of normal
recurring adjustments) considered necessary for a fair presentation. These
financial statements should be read in conjunction with the audited
consolidated financial statements of InVision Technologies, Inc. and its
subsidiaries (the Company) as of December 31, 2003 and 2002 and for each of
the three years in the period ended December 31, 2003, including the notes
thereto, included in the Companys Annual Report on Form 10-K filed on March
15, 2004. Operating results for the three and nine-month periods ended September 26,
2004 may not necessarily be indicative of the results that may be expected for
the year ended December 31, 2004 or any other future period. Cash and Cash Equivalents The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents. Short-Term Investments Short-term investments consist primarily of U.S. government, international
government, corporate and municipal notes and bonds and are classified as
available-for-sale. Such short-term investments are carried at fair value with
unrealized gains or losses reported as a separate component of accumulated
other comprehensive income, net of tax. The following table summarizes the Companys short-term investments as of
September 26, 2004 (in thousands): Gross
    
    GrossAmortized
    
    Unrealized
    
    Unrealized
    
    FairCost
    
    Gains
    
    Losses
    
    ValueU.S. government notes and bonds
    
    $
    38,422
    
    
    $
    7
    
    
    $
    (374
    )
    
    $
    38,055International government notes and bonds
    
    
    4,751
    
    
    
    
    
    
    
    (25
    )
    
    
    4,726Corporate notes and bonds
    
    
    172,670
    
    
    
    198
    
    
    
    (1,255
    )
    
    
    171,613Municipal notes and bonds
    
    
    6,913
    
    
    
    
    
    
    
    (6
    )
    
    
    6,907Total
    
    $
    222,756
    
    
    $
    205
    
    
    $
    (1,660
    )
    
    $
    221,301
 6




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##### Table of Contents



The following table summarizes the maturities of the Companys short-term
investments at September 26, 2004 (in thousands): Amortized
    
    FairCost
    
    ValueDue between 91 - 365 days
    
    $
    109,532
    
    
    $
    109,161Due between 1 - 2 years
    
    
    82,415
    
    
    
    81,590Due between 2 - 3 years
    
    
    30,809
    
    
    
    30,550Total
    
    $
    222,756
    
    
    $
    221,301
 Business Combinations and Goodwill and Other Intangible Assets On January 1, 2002, the Company adopted Statement of Financial Accounting
Standards (SFAS) No. 142, Goodwill and Other Intangible Assets (SFAS
142). SFAS 142 addresses the initial recognition and measurement of
intangible assets acquired outside of a business combination and the accounting
for goodwill and other intangible assets subsequent to their acquisition. SFAS
142 provides that intangible assets with finite useful lives be amortized and
that goodwill and intangible assets with indefinite lives not be amortized, but
will rather be tested at least annually for impairment. Since adopting SFAS
142 on January 1, 2002, the Company ceased amortization of the carrying value
of goodwill of $2.5 million and acquired workforce of $331,000 at January 1,
2002, resulting in a reduction in annual amortization expense of $426,000. The
net carrying amount of acquired workforce was also reclassified to goodwill.
In the fourth quarter of 2002, the Company performed the annual impairment test
required by SFAS 142 and recorded a $2.1 million impairment of goodwill
relating to the Inovec reporting unit. The Company performed the 2003 annual
impairment test as of the end of the fourth quarter of 2003 resulting in no
impairment assessed on the goodwill related to the Inovec reporting unit. The Company performed the 2004 annual impairment test for the goodwill
related to the Yxlon reporting unit at the end of the second quarter of 2004,
resulting in no impairment assessed on the goodwill related to the Yxlon
reporting unit. Accounting for Costs Associated with Exit or Disposal Activities On January 1, 2003, the Company adopted SFAS No. 146, Accounting for
Costs Associated with Exit or Disposal Activities (SFAS 146), which
addresses accounting for restructuring and similar costs. SFAS 146 supersedes
previous accounting guidance, principally Emerging Issues Task Force (EITF)
Issue No. 94-3 (EITF 94-3). SFAS 146 requires that the liability for costs
associated with an exit or disposal activity be recognized when the liability
is incurred. Under EITF 94-3, a liability for exit costs was recognized at the
date of the Companys commitment to an exit plan. SFAS 146 also establishes
that the liability should initially be measured and recorded at fair value.
Accordingly, SFAS 146 may affect the timing of recognizing future restructuring
costs as well as the amounts recognized. There was no impact on the Companys
financial statements from the adoption of SFAS 146. Accounting for Stock-Based Compensation In December 2002, the Financial Accounting Standards Board (FASB) issued
SFAS No. 148, Accounting for Stock-Based Compensation  Transition and
Disclosure  an Amendment of FASB Statement 123 (SFAS 148), which provides
alternative methods of transition for a voluntary change to the fair value
based method of accounting for stock-based employee compensation. In addition,
SFAS 148 amends the disclosure requirements of SFAS No. 123, Accounting for
Stock-Based Compensation (SFAS 123) to require prominent disclosures in both
annual and interim financial statements about the method of accounting for
stock-based employee compensation and the effect of the method used on reported
results. The amended disclosure requirements of SFAS 148 are effective for
years ending after December 15, 2002. The Company grants stock options for a fixed number of shares to employees
with an exercise price equal to the fair value of the shares at the date of
grant. The Company accounts for employee stock-based compensation in accordance
with Accounting Principles Board Opinion No. 25, Accounting for Stock Issued
to Employees 7




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(APB 25). The Company accounts for stock-based awards to non-employees
in accordance with SFAS 123 and EITF Issue No. 96-18, Accounting for Equity
Instruments That Are Issued to Other Than Employees for Acquiring, or in
Conjunction with Selling, Goods or Services. Had compensation cost for options granted and shares issued in 2004 and
2003 under the Companys stock option plans and employee stock purchase plan
been determined based on the fair value at the grant and issue dates, as
prescribed in SFAS 123, the Companys net income and pro forma net income per
share would have been as follows (in thousands, except per share data): Three Months Ended
    
    Nine Months EndedSept. 26, 2004
    
    Sept. 28, 2003
    
    Sept. 26, 2004
    
    Sept. 28, 2003Net income:As reported
    
    $
    8,258
    
    
    $
    9,276
    
    
    $
    20,344
    
    
    $
    50,658add: stock
compensation
as reported,
net of tax
effects
    
    
    42
    
    
    
    56
    
    
    
    256
    
    
    
    120less: stock
compensation
determined
using the
fair value
method, net
of tax
effects
    
    
    (4,279
    )
    
    
    (2,249
    )
    
    
    (12,533
    )
    
    
    (6,335
    )Pro forma
    
    $
    4,021
    
    
    $
    7,083
    
    
    $
    8,067
    
    
    $
    44,443Net income per share:Basic:As reported
    
    $
    0.47
    
    
    $
    0.54
    
    
    $
    1.16
    
    
    $
    2.95Pro forma
    
    $
    0.23
    
    
    $
    0.41
    
    
    $
    0.46
    
    
    $
    2.59Diluted:As reported
    
    $
    0.38
    
    
    $
    0.50
    
    
    $
    0.96
    
    
    $
    2.75Pro forma
    
    $
    0.20
    
    
    $
    0.38
    
    
    $
    0.43
    
    
    $
    2.41
 Under the intrinsic value method, when the exercise price of the Companys
employee stock options equals or exceeds the market price of the underlying
stock on the date of grant, no compensation expense is recognized. The pro
forma information regarding the results of operations and net income per share
above is determined as if the Company had accounted for its employee stock
options using the fair value method. Under this method, the fair value of each
option granted is estimated on the date of grant using the Black-Scholes option
valuation model. Option valuation models such as Black-Scholes were developed for use in
estimating the fair value of traded options that have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions, including the expected life of the
option. In managements opinion, the existing models do not necessarily provide
a reliable single measure of the fair value of the Companys employee stock
options because the Companys employee stock options have characteristics
significantly different from those of traded options and because changes in the
subjective assumptions required by these models can materially affect the fair
value estimates. The fair value of each option grant and share granted is estimated on the
date of grant using the following assumptions used for grants during the
applicable period: 2004
    
    2003Option Grants:Average risk free rate of return
    
    
    2.55-3.55
    %
    
    
    2.31-3.00
    %Weighted average expected option life
    
    
    4.0 years
    
    
    
    4.1 yearsVolatility rate
    
    
    89-92
    %
    
    
    74-83
    %Dividend yield
    
    
    0
    %
    
    
    0
    %
 8




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2004
    
    2003Purchase Plan Shares Granted:Average risk free rate of return
    
    
    .90-.96
    %
    
    
    1.15-1.19
    %Weighted average expected life
    
    
    3.0 months
    
    
    
    3.0 monthsVolatility rate
    
    
    6-77
    %
    
    
    17-30
    %Dividend yield
    
    
    0
    %
    
    
    0
    %
 Accounting and Disclosure Requirements for Guarantees In December 2002, the Company adopted FASB Interpretation No. 45,
Guarantors Accounting and Disclosure Requirement for Guarantees, Including
Indirect Guarantees of Indebtedness of Others (FIN 45). FIN 45 requires
that, upon issuance of a guarantee, the guarantor must recognize a liability
for the fair value of the obligation it assumes under that guarantee. The
provisions for initial recognition and measurement are effective on a
prospective basis for guarantees that are issued or modified after December 31,
2002, irrespective of a guarantors year-end. Accrued Warranty Estimated warranty costs are recorded on product revenues and adjusted
periodically based on historical and anticipated experience. The Company
accrues the estimated cost of product warranties at the time revenues are
recognized. Although the Company engages in extensive product quality programs
and processes, including actively monitoring and evaluating the quality of
component suppliers, the warranty obligation is affected by actual warranty
costs, including usage of material and labor and service delivery costs
incurred in correcting a product failure. Information regarding the changes in the Companys warranty liabilities
was as follows for the nine months ended September 26, 2004: Changes inBalance at
    
    
    
    
    
    
    
    
    
    Accruals Related
    
    Balance atDecember 31,
    
    Accruals for
    
    Reduction for
    
    to Pre-Existing
    
    September 26,2003
    
    Warranties Issued
    
    Payments Made
    
    Warranties
    
    2004$14,259
    
    $
    9,082
    
    
    $
    (6,677
    )
    
    $
    (1,748
    )
    
    $
    14,916
 Information regarding the changes in the Companys warranty liabilities
was as follows for the nine months ended September 28, 2003: Changes inBalance at
    
    
    
    
    
    
    
    
    
    Increase Resulting
    
    Accruals Related
    
    Balance atDecember 31,
    
    Accruals for
    
    Reduction for
    
    from Yxlon Acquisition
    
    to Pre-Existing
    
    September 28,2002
    
    Warranties Issued
    
    Payments Made
    
    on March 31, 2003
    
    Warranties
    
    2003$19,890
    
    $
    16,693
    
    
    $
    (20,001
    )
    
    $
    925
    
    
    $
    334
    
    
    $
    17,841
 Revenue Arrangements with Multiple Deliverables In November 2002, the EITF reached a consensus on Issue No. 00-21,
Revenue Arrangements with Multiple Deliverables (EITF 00-21). EITF 00-21
addresses certain aspects of the accounting by a vendor for arrangements under
which the vendor will perform multiple revenue generating activities. EITF
00-21 is effective for fiscal periods beginning after June 15, 2003. There was
no impact from the adoption of EITF 00-21 on the Companys financial
statements. Derivative Instruments and Hedging Activities The Company is exposed to foreign currency exchange rate risk inherent in
its sales commitments, anticipated sales, anticipated purchases and assets and
liabilities denominated in currencies other than the U.S. dollar. The 9




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Company
utilizes foreign exchange forward options and contracts to limit its exposure
to foreign currency rate fluctuation. The maturity of foreign exchange forward
contracts as of September 26, 2004 is consistent with the contractual or
expected timing of the transactions being hedged, principally receipt of
customer payments. These foreign exchange forward options and contracts all
mature within twelve months. The Company does not enter into market risk
sensitive instruments for trading purposes. During the nine months ended
September 26, 2004, the Companys derivatives consisted of foreign exchange
forward options and contracts. The Company had aggregate foreign exchange
forward options and contracts with notional amounts of $20.1 million at
September 26, 2004. The fair value of these instruments, included in the
condensed consolidated balance sheet, represented a net liability of $151,000
at September 26, 2004. In May 2002, the Company began applying hedge accounting as defined by
SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities
(SFAS 133) and designated certain foreign exchange forward options and
contracts as cash flow hedges of foreign exchange risk for international sales
contracts. As of September 26, 2004, the Company has recorded $1.3 million of
other comprehensive loss, net of income taxes of $826,000, representing the net
change in the fair value of the foreign exchange forward contracts that were
designated as and qualified for hedge accounting. The amounts deferred in
other comprehensive loss are reclassified to earnings upon the recognition of
the hedged contract as revenue. As of September 26, 2004, the Company
anticipates reclassifying the full amount included within other comprehensive
loss to earnings within the next twelve months. During the nine months ended
September 26, 2004, the Company also recorded $32,000 as foreign exchange
transaction loss related to ineffectiveness under hedge accounting. For the
nine-month period ended September 26, 2004, primarily all of the changes in the
fair value of foreign exchange forward contracts not designated for hedge
accounting were offset by the re-measurement of associated accounts receivable. In April 2003, the FASB issued SFAS No. 149, Amendment of Statement 133
on Derivative Instruments and Hedging Activities (SFAS 149). SFAS 149
amends and clarifies the accounting for derivative instruments, including
certain derivative instruments embedded in other contracts and for hedging
activities under SFAS 133. SFAS 149 is generally effective for contracts
entered into or modified after June 30, 2003 and for hedging relationships
designated after June 30, 2003. There was no impact from the adoption of SFAS
149 on the Companys financial statements. Financial Instruments with Characteristics of Both Liabilities and Equity In May 2003, the FASB issued SFAS No. 150, Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity
(SFAS 150). SFAS 150 requires that certain financial instruments, which
under previous guidance were accounted for as equity, must now be accounted for
as liabilities. The financial instruments affected include mandatorily
redeemable stock, certain financial instruments that require or may require the
issuer to buy back some of its shares in exchange for cash or other assets and
certain obligations that can be settled with shares of stock. SFAS 150 is
effective for interim periods beginning after June 15, 2003. In November 2003,
the FASB issued FASB Staff Position No. 150-3, Effective Date, Disclosures,
and Transition for Mandatorily Redeemable Financial Instruments of Certain
Nonpublic Entities and Certain Mandatorily Redeemable Noncontrolling Interests
under SFAS No. 150 (FSP 150-3), which defers the effective date for various
provisions of SFAS 150. The adoption of SFAS 150, as modified by FSP 150-3, did
not have a material impact on the Companys financial statements. 2. Business Combinations In accordance with Statement of Financial Accounting Standards No. 141,
Business Combinations (SFAS 141) the Company allocates the purchase price
of its acquisitions to the tangible assets, liabilities and intangible assets
acquired, as well as in-process research and development, based on their
estimated fair values. The excess purchase price over those fair values is
recorded as goodwill. The fair value assigned to intangible assets acquired is
based on valuations prepared by independent third party appraisal firms using
estimates and assumptions provided by the Companys management. In accordance
with SFAS 142, goodwill and purchased intangibles with indefinite
lives acquired after June 30, 2001 are not amortized but will be reviewed
periodically for impairment. Purchased intangibles with finite lives will be
amortized on a straight-line basis over their estimated useful lives. 10




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Yxlon International Holding GmbH On March 31, 2003, the Company completed its acquisition of Yxlon, a
company based in Hamburg, Germany. Yxlon develops, manufactures, markets and
supports X-ray based non-destructive testing (NDT) systems for a wide range
of industrial applications, and systems that use X-ray based diffraction
(XRD) technology for explosives detection. The Company acquired Yxlon for
38.6 million in cash, or $41.7 million, incurred additional acquisition
costs of $2.1 million, and paid a subsequent purchase price adjustment of
$483,000 in December 2003 for a total purchase price of $44.3 million. Under
the terms of the amended purchase agreement, the Company was required to make
an additional payment of 5.0 million if Yxlons XRD system was certified
for explosives detection by the Transportation Security Administration (TSA)
by June 30, 2004. As of June 30, 2004, the XRD system had not been certified
for explosives detection by the TSA, but remained in certification trials. The
Company is currently considering whether the certification requirement has been
or will be met, and has not yet determined what portion, if any, of the up to
5.0 million potentially payable upon timely certification of the XRD system
will actually be paid by the Company. The Company would record the payment of
any such additional consideration as goodwill. An independent valuation to determine the allocation of the fair value of
the net assets acquired was completed in September 2003. The total purchase
price of $44.3 million has been allocated as follows (in thousands): Cash and cash equivalents
    
    $
    1,946Current assets
    
    
    29,101Other non-current assets
    
    
    1,726Amortizable intangible assets:Developed and core technology
    
    
    8,700Other
    
    
    1,480Intangible assets with indefinite lives:Goodwill
    
    
    18,736Trademark
    
    
    2,780Current liabilities
    
    
    (22,866
    )Other non-current liabilities
    
    
    (1,644
    )In-process research and development
    
    
    4,300Total purchase price
    
    $
    44,259
 Amortizable Intangible Assets Of the total purchase price, $10.2 million has been allocated to
amortizable intangible assets, including maintenance contracts and renewals,
contract backlog, direct customer relationships, supplier agreements and
developed and core technology. The maintenance contracts and renewals represent
a value assigned to the revenue stream estimated from existing maintenance
contracts as of the acquisition date with an assumed renewal rate. Contract
backlog represents the gross contract backlog to be recognized over the
twelve-month period following the close of the acquisition. Direct customer
relationships represent the sale of products and services by Yxlons internal
sales and marketing force. Supplier agreements represent the value in material
supplier agreements where Yxlon receives below market rates on inventory
component purchases. The Company is amortizing the fair value of these assets
on a straight-line basis over estimated useful lives ranging from twelve months
to six years. Developed and core technology, which consists of products that have
reached technological feasibility, includes Yxlons XRD system and NDT system
products. The Company is amortizing the fair value of the developed and core
technology on a straight-line basis over an estimated useful life of seven
years. 11




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Intangible Assets With Indefinite Lives The estimated fair value of intangible assets with indefinite lives was
$18.7 million for goodwill and $2.8 million for the Yxlon trade name. These
intangible assets will not be amortized because the assets have indefinite
useful lives based on many factors and considerations, including the length of
time that the Yxlon name has been in use, the Yxlon brand awareness and market
position and the plans for continued use of the Yxlon brand within a portion of
the Companys overall product portfolio.
In the third quarter of 2004, the Company determined that it was more
likely than not that some deferred income tax assets for which
valuation allowances were established at the date of acquisition
would be realized and, accordingly, eliminated such valuation
allowances and reduced goodwill by $2.0 million. In-Process Research and Development Of the total purchase price, $4.3 million has been allocated to in-process
research and development (IPR&D) and was expensed in the second quarter of
fiscal 2003. There were two projects expected to be completed between 2004 and
2007. Projects that qualify as IPR&D represent those that have not yet reached
technological feasibility. Technological feasibility is defined as being
equivalent to a beta-phase working prototype in which there is lower remaining
risk relating to the development. The value assigned to IPR&D was determined by considering the importance
of each project to the overall development plan, estimating costs to develop
the purchased IPR&D into commercially viable products, estimating the resulting
net cash flows from the projects when completed and discounting the net cash
flows to their present value. The revenue estimates used to value the purchased
IPR&D were based on estimates of the relevant market sizes and growth factors,
expected trends in technology and the nature and expected timing of new product
introductions by Yxlon. The rates utilized to discount the net cash flows to their present values
are based on Yxlons weighted average cost of capital of 25%. The weighted
average cost of capital was adjusted to reflect the difficulties and
uncertainties in completing each project and thereby achieving technological
feasibility, the percentage of completion of each project, anticipated market
acceptance and penetration, market growth rates and risks related to the impact
of potential changes in future target markets. Pro Forma Results (Unaudited) The unaudited pro forma financial information presented below combine the
actual results of operations of the Company and the historical results of
operations of Yxlon for the respective years as if the acquisition of Yxlon had
occurred at the beginning of each of the years presented. Adjustments of
$285,000 and $6.2 million have been made to the combined results of operations
for the years ended December 31, 2003 and 2002, respectively, reflecting
amortization of purchased intangibles, net of tax, timing of
acquisition-related in-process research and development expense recognition,
and bank settlement fees for debt as a result of acquisition, net of tax, as if
the acquisition had occurred at the beginning of each of the years presented.
The unaudited pro forma financial information is not intended to represent or
be indicative of the consolidated results of operations or financial condition
of the Company that would have been reported had the acquisition been completed
as of the dates presented, and should not be taken as representative of the
future consolidated results of operations or financial condition of the
Company. 2003
    
    2002(in thousands, except per share amounts)Revenues
    
    $
    432,697
    
    
    $
    492,728Net income
    
    $
    57,169
    
    
    $
    65,686Basic
    
    $
    3.34
    
    
    $
    4.11Diluted
    
    $
    3.11
    
    
    $
    3.69Basic weighted average shares outstanding
    
    
    17,132
    
    
    
    15,987Diluted shares
    
    
    18,368
    
    
    
    17,803
 Hattinger Pruf- und Entwicklungs- GmbH Effective August 1, 2003, Yxlon International X-Ray GmbH, a wholly owned
subsidiary of the Company, acquired Hattinger Pruf- und Entwicklungs- GmbH
(Hapeg), a private engineering and systems company that 12




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provides industrial testing and evaluation solutions utilizing computed
tomography, or CT, technology for approximately 2.9 million or $3.4
million. The acquisition was accounted for using the purchase method of
accounting. The excess purchase price over the fair value of the underlying net
assets of $2.3 million was allocated to goodwill and other intangible assets
and property based upon an independent valuation of fair values. Amortization
expense of $122,000 was recorded during the fiscal year ended 2003. Unaudited
pro forma results were not provided as they were not deemed to be material. 3. Comprehensive Income The components of comprehensive income are as follows (in thousands): Three Months Ended
    
    Nine Months EndedSeptember 26,
    
    September 28,
    
    September 26,
    
    September 28,2004
    
    2003
    
    2004
    
    2003Net income
    
    $
    8,258
    
    
    $
    9,276
    
    
    $
    20,344
    
    
    $
    50,658Derivatives classified as cash flow hedges (net of taxes):Unrealized gain (loss) on cash flow hedges
    
    
    30
    
    
    
    123
    
    
    
    
    
    
    
    (279
    )Less: reclassification of loss on cash flow hedges
    
    
    126
    
    
    
    175
    
    
    
    662
    
    
    
    377Unrealized gain (loss) on short-term investments
    
    
    344
    
    
    
    6
    
    
    
    (833
    )
    
    
    9Translation adjustment
    
    
    90
    
    
    
    48
    
    
    
    (626
    )
    
    
    577Comprehensive income
    
    $
    8,848
    
    
    $
    9,628
    
    
    $
    19,547
    
    
    $
    51,342
 4. Net Income Per Share Basic net income per share is computed by dividing net income by the
weighted-average shares of common stock outstanding for the period. Diluted
net income per share reflects the weighted-average shares of common stock
outstanding plus the potential effect of dilutive securities or contracts which
are convertible to shares of common stock such as options, warrants,
convertible debt and preferred stock (using the treasury stock method) and
shares issuable in future periods, except in cases where the effect would be
anti-dilutive. Specifically, the computations of diluted net income per share
for the three-month and nine-month periods ended September 26,
2004 include the impact of the contingent conversion provision related to the
Companys 3% convertible senior notes due 2023. Diluted shares include
3,906,250 shares as if the notes had been converted at the beginning of each
period, and diluted net income excludes $604,000 of avoided interest expense
for the three months ended September 26, 2004 and $1.7 million of avoided
interest expense for the nine months ended September 26, 2004, net of tax. The following is a reconciliation between the components of the basic and
diluted net income per share calculations for the periods presented below (in
thousands, except per share data): Three Months Ended
    
    Nine Months EndedSeptember 26, 2004
    
    September 28, 2003
    
    September 26, 2004
    
    September 28, 2003Per
    
    
    
    
    
    
    
    
    
    Per
    
    
    
    
    
    
    
    
    
    Per
    
    
    
    
    
    
    
    
    
    PerShare
    
    
    
    
    
    
    
    
    
    Share
    
    
    
    
    
    
    
    
    
    Share
    
    
    
    
    
    
    
    
    
    ShareIncome
    
    Shares
    
    Amount
    
    Income
    
    Shares
    
    Amount
    
    Income
    
    Shares
    
    Amount
    
    Income
    
    Shares
    
    AmountBasic net income per share
    
    $
    8,258
    
    
    
    17,656
    
    
    $
    0.47
    
    
    $
    9,276
    
    
    
    17,269
    
    
    $
    0.54
    
    
    $
    20,344
    
    
    
    17,479
    
    
    $
    1.16
    
    
    $
    50,658
    
    
    
    17,182
    
    
    $
    2.95Effect of dilutive securities:Options and warrants
    
    
    
    
    
    
    1,520
    
    
    
    (0.04
    )
    
    
    
    
    
    
    1,181
    
    
    
    (0.04
    )
    
    
    
    
    
    
    1,517
    
    
    
    (0.09
    )
    
    
    
    
    
    
    1,233
    
    
    
    (0.20
    )Converted debt shares
    
    
    604
    
    
    
    3,906
    
    
    
    (0.05
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,694
    
    
    
    3,906
    
    
    
    (0.11
    )
    
    
    
    
    
    
    
    
    
    
    Diluted net income per share
    
    $
    8,862
    
    
    
    23,082
    
    
    $
    0.38
    
    
    $
    9,276
    
    
    
    18,450
    
    
    $
    0.50
    
    
    $
    22,038
    
    
    
    22,902
    
    
    $
    0.96
    
    
    $
    50,658
    
    
    
    18,415
    
    
    $
    2.75
 13




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5. Segment Information The Company determines its segments based on how its Chief Executive
Officer and its Chief Operating Officer assess performance and allocate
resources. Through the first quarter of 2003, the Company presented segment
information based on three reportable segments: EDS, Quantum and Wood. As a
result of the acquisition of Yxlon, the Company now has two reportable
segments: EDS and NDT. The EDS segment is comprised of the business unit that
is engaged in the development, manufacturing, marketing and support of
explosives detection systems based on advanced CT technology. The NDT segment
is comprised of the Yxlon business unit that is engaged in the development,
manufacturing, marketing and support of non-destructive testing systems for a
wide range of industrial applications. Other segments, including Quantum, Wood
and XRD, are aggregated to form an All Other category as they do not meet the
threshold for a reportable segment. Segment financial data for the nine-month period ended September 28, 2003
has been restated to reflect the change in reportable segments. As of the
second quarter of 2003, a reportable segment line item also has been changed
from net income (loss) to income (loss) from operations. Financial information
by segment is as follows (in thousands): ConsolidatingEDS
    
    NDT
    
    Other
    
    Eliminations
    
    TotalThird quarter 2004Revenues:Product revenues
    
    $
    36,895
    
    
    $
    16,007
    
    
    $
    3,997
    
    
    $
    
    
    
    $
    56,899Service revenues
    
    
    21,957
    
    
    
    3,179
    
    
    
    856
    
    
    
    
    
    
    
    25,992Contract research and development revenues
    
    
    
    
    
    
    
    
    
    
    2,425
    
    
    
    
    
    
    
    2,425Total revenues
    
    $
    58,852
    
    
    $
    19,186
    
    
    $
    7,278
    
    
    $
    
    
    
    $
    85,316Income from operations
    
    $
    10,855
    
    
    $
    1,240
    
    
    $
    111
    
    
    $
    
    
    
    $
    12,206September 26, 2004Total assets
    
    $
    498,528
    
    
    $
    56,307
    
    
    $
    30,647
    
    
    $
    (30,196
    )
    
    $
    555,286Third quarter 2003Revenues:Product revenues
    
    $
    48,467
    
    
    $
    14,955
    
    
    $
    5,859
    
    
    $
    
    
    
    $
    69,281Service revenues
    
    
    10,098
    
    
    
    3,082
    
    
    
    565
    
    
    
    
    
    
    
    13,745Contract research and development revenues
    
    
    
    
    
    
    
    
    
    
    3,092
    
    
    
    
    
    
    
    3,092Intercompany revenues
    
    
    3
    
    
    
    
    
    
    
    16
    
    
    
    (19
    )
    
    
    Total revenues
    
    $
    58,568
    
    
    $
    18,037
    
    
    $
    9,532
    
    
    $
    (19
    )
    
    $
    86,118Income (loss) from operations
    
    $
    16,443
    
    
    $
    185
    
    
    $
    (479
    )
    
    $
    
    
    
    $
    16,149December 31, 2003Total assets
    
    $
    436,914
    
    
    $
    57,809
    
    
    $
    18,757
    
    
    $
    (27,412
    )
    
    $
    486,068Nine months 2004Revenues:Product revenues
    
    $
    120,274
    
    
    $
    41,603
    
    
    $
    9,147
    
    
    $
    
    
    
    $
    171,024Service revenues
    
    
    57,773
    
    
    
    9,551
    
    
    
    2,495
    
    
    
    
    
    
    
    69,819Contract research and development revenues
    
    
    
    
    
    
    
    
    
    
    8,036
    
    
    
    
    
    
    
    8,036Intercompany revenues
    
    
    144
    
    
    
    
    
    
    
    
    
    
    
    (144
    )
    
    
    Total revenues
    
    $
    178,191
    
    
    $
    51,154
    
    
    $
    19,678
    
    
    $
    (144
    )
    
    $
    248,879Income (loss) from operations
    
    $
    34,343
    
    
    $
    912
    
    
    $
    (846
    )
    
    $
    
    
    
    $
    34,409
 14




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##### Table of Contents



ConsolidatingEDS
    
    NDT
    
    Other
    
    Eliminations
    
    TotalNine months 2003Revenues:Product revenues
    
    $
    263,382
    
    
    $
    24,273
    
    
    $
    9,435
    
    
    $
    
    
    
    $
    297,090Service revenues
    
    
    27,179
    
    
    
    5,550
    
    
    
    1,438
    
    
    
    
    
    
    
    34,167Contract research and development revenues
    
    
    
    
    
    
    
    
    
    
    9,456
    
    
    
    
    
    
    
    9,456Intercompany revenues
    
    
    29
    
    
    
    
    
    
    
    1,302
    
    
    
    (1,331
    )
    
    
    Total revenues
    
    $
    290,590
    
    
    $
    29,823
    
    
    $
    21,631
    
    
    $
    (1,331
    )
    
    $
    340,713Income (loss) from operations
    
    $
    93,411
    
    
    $
    (716
    )
    
    $
    (6,112
    )
    
    $
    
    
    
    $
    86,583
 Substantially all of the Companys long-lived assets are located in the
United States. 6. Inventories The components of inventory consist of the following (in thousands): September 26,
    
    December 31,2004
    
    2003Inventories:Raw material and purchased components
    
    $
    17,865
    
    
    $
    22,821Field service spare parts
    
    
    32,718
    
    
    
    27,805Work-in-process
    
    
    13,390
    
    
    
    10,123Finished goods
    
    
    23,781
    
    
    
    18,145Total
    
    $
    87,754
    
    
    $
    78,894
 7. Accrued Liabilities The components of accrued liabilities consist of the following (in
thousands): September 26,
    
    December 31,2004
    
    2003Accrued liabilities:Warranty and other reserves
    
    $
    14,916
    
    
    $
    14,259Accrued employee compensation
    
    
    10,800
    
    
    
    10,409Income taxes
    
    
    3,100
    
    
    
    255Other
    
    
    12,877
    
    
    
    10,135Total
    
    $
    41,693
    
    
    $
    35,058
 8. Litigation InVision and its subsidiary, Quantum Magnetics, together with many other
entities, were named as defendants in approximately 156 products liability
lawsuits by individual plaintiffs seeking damages for wrongful death in
connection with the terrorist acts of September 11, 2001. The litigation was
consolidated in In re: September 11 Litigation, 21 MC 97 (AKH), United States
District Court for the Southern District of New York. InVision and Quantum
Magnetics have been served with 103 complaints. Each complaint with which
InVision and Quantum Magnetics have been served alleges that defendants have
breached a duty to airplane passengers and others by failing to properly screen
passengers and carry-on baggage for dangerous weapons. InVision believes that
the plaintiffs claims lack merit, especially in light of the fact that
InVision and Quantum Magnetics did not, as of September 11, 2001, have any
passenger or carry-on baggage screening equipment at security checkpoints in
any of the airports from which the hijacked airplanes departed. By court
order, the plaintiffs were required to file and serve Amended Master Complaints
and Appendices by March 31, 2004 to reflect all defendants and causes of action
in the In re: September 11 Litigationthat had been added since their original
Master Complaints were filed. InVision and Quantum Magnetics were not included
in the plaintiffs Amended Master Complaints and their Appendices. Since 15




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##### Table of Contents



these Amended Master Complaints are controlling over the individual
complaints filed by the plaintiffs, all plaintiffs in the In re: September 11
Litigationhave effectively dismissed their claims against InVision and Quantum
Magnetics. Notices of dismissals or dismissal orders have been received in all
of the individual complaints. In September 2004, new complaints alleging
personal injury and property damages were filed in the In re: September 11
Litigation. None of these complaints name InVision and Quantum Magnetics as
defendants. As a result of the filing of these new complaints, the new
deadline for the named defendants to assert cross-claims and third party claims
is March 31, 2005. On March 19, 2004, two alleged holders of InVision common stock filed
purported class action lawsuits in California Superior Court for the County of
Alameda. The complaints name as defendants each of InVisions directors as well
as InVision. The complaints allege that, in pursuing the transaction with
General Electric Company (GE) and approving the merger agreement, the
directors violated their fiduciary duties to the holders of InVision common
stock by, among other things, failing to obtain the highest price reasonably
available, tailoring the terms of the transaction to meet GEs needs, engaging
in self-dealing and obtaining personal financial benefits not shared equally by
the plaintiffs and other stockholders. The complaints also allege that the
merger agreement resulted from a flawed process designed to ensure a sale to
one buyer. The lawsuits have been consolidated by stipulation of the parties
under one lead case, Waltman, et al. v. InVision Technologies, Inc., et al.,
Lead Case No. RG04146722. On May 3, 2004, InVision and three directors filed a
demurrer to the consolidated complaint on the grounds that the plaintiffs
failed to allege sufficient facts to state a cause of action. The remaining
five directors filed a motion to quash the service of summons because they are
not California residents, and, therefore, the court lacks jurisdiction over
them. On May 25, 2004, in response to the demurrer, the plaintiffs filed a
consolidated amended class action complaint asserting similar causes of action,
thereby rendering the demurrer moot. The plaintiffs served initial written
discovery requests and following the May 26, 2004 Initial Complex Case
Management Conference, the plaintiffs were permitted limited expedited
discovery for the purpose of a bringing a motion for a preliminary injunction.
On June 17, 2004, prior to the filing of any motion for a preliminary
injunction, the parties entered into a memorandum of understanding to settle
the consolidated class action suit. Under the terms of the memorandum, InVision
and the plaintiffs to the consolidated action have agreed, subject to approval
by the court, to enter into a settlement with respect to all claims raised by
the plaintiffs to the consolidated action. The terms of the settlement
contemplated by the memorandum required that additional disclosures be made
concerning the merger. Those disclosures were made available in the June 18,
2004 joint press release issued by GE Infrastructure and InVision. The parties
also agreed that the plaintiffs may seek attorneys fees and costs in the
amount of $450,000 that InVision will pay, if the attorneys fees and costs are
granted by the court. There will be no other settlement payment by InVision, GE
or any of the members of InVisions board of directors, who were also named as
defendants in the lawsuits. On September 16, 2004, the Court permitted
plaintiffs to file a second amended complaint. The second amended complaint
added a purported derivative claim against the individual defendants and
alleged that they had permitted, or failed to prevent, the activities that gave
rise to the internal investigation into possible offers of improper payments by
InVisions distributors in connection with foreign sales activities. By
agreement of the parties and order of the Court, no responsive pleading is due
pending the Courts consideration of the proposed settlement. If the court
approves the settlement contemplated in the memorandum, the lawsuits, as
amended, will be dismissed. However, there can be no assurance that the court
will approve the proposed settlement or that any ultimate settlement will be
under terms substantially similar to those contemplated by the memorandum. On July 30, 2004, the Company announced that it had met with the
Department of Justice and the Securities and Exchange Commission concerning its
voluntary disclosure of an internal investigation of possible offers of
improper payments by its distributors in connection with foreign sales
activities. The Company is continuing to cooperate fully with any
investigation of these matters by the Department of Justice and/or the
Securities and Exchange Commission. On August 4, 2004, an alleged holder of InVision common stock filed a
purported class action lawsuit in the United States District Court for the
Northern District of California, captioned Engelken, Individually and On Behalf
of All Others Similarly Situated, v. InVision Technologies, Inc., et al. The
complaint names as defendants Giovanni Lanzara, the Chairman of InVisions
Board of Directors, Sergio Magistri, InVisions Chief Executive Officer and a
director, and Ross Mulholland, Senior Vice President and Chief Financial
Officer of InVision, as well as InVision. The complaint alleges that InVision
and the individual defendants failed to disclose that our foreign distributors
had made improper payments in connection with foreign sales activities, that
InVision had improperly accounted for 16




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such payments, that InVisions improper accounting for such payments
allowed it to enter into a definitive merger agreement with GE, that InVision
and the individual defendants made related misrepresentations, and that these
alleged nondisclosures and misrepresentations violated Section 10(b) of the
Exchange Act and Rule 10b-5.
A substantially identical lawsuit was filed on August 9, 2004. On
October 13, 2004, the Court granted a motion by The Glazer Funds to
consolidate the actions and to be appointed lead plaintiff. On October
29, 2004 the parties submitted a proposed scheduling order to the
Court that contemplates the filing of a consolidated amended
complaint on or before December 9, 2004, and a hearing on any motions
to dismiss on March 29, 2005. The disposition of the proposed
scheduling order is uncertain. The Company also is involved in legal proceedings, claims and litigation
arising in the ordinary course of business. While
the outcome of the matters arising in the ordinary course of business
is currently not determinable, the Company does not believe that the
ultimate resolution of those matters will have a material adverse
effect on the Companys consolidated financial condition,
results of operations or cash flows. With respect to the other
matters, the outcome is currently not determinable, and the Company
is unable at this time to predict the financial impact of these
matters on its consolidated financial condition, results of
operations or cash flows. 9. Subsequent Event On November 1, 2004, the Company announced that it and GE have entered
into a waiver letter under which, subject to specified conditions and
undertakings, among other things:  
    
    the Company and GE waived until December 27, 2004 the rights that
either party may have to terminate the Agreement and Plan of Merger
dated as of March 15, 2004 among the Company, GE and Jet Acquisition
Sub, Inc. because the merger was not completed by October 31, 2004;  
    
    GE and Jet Acquisition Sub waived various closing conditions with
respect to the matters disclosed to the Department of Justice;  
    
    the Company and GE agreed that, unless otherwise agreed to by it
and GE, the acquisition of the Company by GE would not be completed
until there has been a resolution (including through an acceptable
settlement) with the Department of Justice of the matters disclosed to
the Department of Justice, and the Company agreed not to enter into
such a resolution without the consent of GE, which consent would not be
unreasonably withheld or delayed; and  
    
    the Company agreed to use its reasonable best efforts to reach a
resolution with the Department of Justice, and GE agreed to cooperate
with the Company in this regard. The foregoing description of the waiver letter is qualified in its
entirety by reference to the full text of the waiver letter, which was filed on
November 1, 2004 as an exhibit to an InVision Current Report on Form 8-K. 17




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Item 2. Managements Discussion and Analysis of Financial Condition and
Results of Operations Cautions about Forward-Looking Statements Throughout this Form 10-Q, we make forward-looking statements, or
statements about events or circumstances that have not yet occurred. In some
cases, we identify these statements by forward-looking words such as may,
will, should, plans, believes, predicts, intends or continue, and
other similar terms. These forward-looking statements involve risks and
uncertainties, and our actual results could differ materially. We cannot
guarantee future results or that current expectations will be accurate, and we
will not update information in this Form 10-Q if any forward-looking statement
later turns out to be inaccurate. Important factors that could cause our
results to differ are discussed under the section Risk Factors. Readers
should read this Item 2 in conjunction with the condensed consolidated
financial statements and related notes in Part I, Item 1 of this Form 10-Q, as
well as Managements Discussion and Analysis of Financial Condition and
Results of Operations and the consolidated financial statements and related
notes in our Form 10-K for the fiscal year ended December 31, 2003. We
encourage readers to read these sections carefully. Overview We are the leading provider of Transportation Security Administration, or
TSA certified explosives detection systems, or EDS, used at airports for
screening checked passenger baggage. On March 15, 2004, we entered into an Agreement and Plan of Merger with
General Electric Company, or GE, and its wholly owned subsidiary Jet
acquisition Sub, Inc. under which GE would acquire us through the merger of a
wholly owned subsidiary of GE with and into InVision, and each outstanding
share of our common stock would be converted into the right to receive $50.00
in cash. On June 25, 2004, our stockholders voted to adopt the merger
agreement with GE. Completion of the merger remains subject to the closing
conditions in the merger agreement, as discussed below. On September 15, 2004,
we announced that the U.S. Federal Trade Commission accepted a consent
agreement and granted early termination of the waiting period under the
Hart-Scott-Rodino Antitrust Improvements Acts of 1976. The consent agreement
provides that the merged company will dispose of the non-destructive testing,
or NDT, segment of our business. However, the consent agreement does not
require completion of the disposition of the NDT business prior to completion
of the acquisition. The merger agreement contains covenants that restrict our
operations unless we obtain GEs written consent. While GE has agreed to not
withhold or delay its consent unreasonably, these operational covenants limit
our flexibility during the term of the merger agreement. The merger agreement
provides that if the merger was not completed by October 31, 2004, either
InVision or GE could, under specified circumstances, terminate the merger
agreement. On July 30, 2004, we announced that we met with the Department of Justice
and the Securities and Exchange Commission to voluntarily disclose an internal
investigation concerning certain activities that could constitute possible
violations of the Foreign Corrupt Practices Act, or the FCPA, and that we
intended to cooperate fully with any governmental investigation of these
activities. At that time, we also announced that the internal investigation
and any related investigation by the Department of Justice and/or the
Securities and Exchange Commission may not be completed by October 31, 2004. On November 1, 2004, we announced that we and GE have entered into a
waiver letter under which, subject to specified conditions and undertakings,
among other things:  
    
    we and GE waived until December 27, 2004 the rights that either
party may have to terminate the merger agreement because the merger was
not completed by October 31, 2004;  
    
    GE and Jet Acquisition Sub waived various closing conditions with
respect to the matters disclosed to the Department of Justice;  
    
    the Company and GE agreed that, unless otherwise agreed to by it
and GE, the acquisition of the Company by GE would not be completed
until there has been a resolution (including through an acceptable 18




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settlement) with the Department of Justice of the matters disclosed to
the Department of Justice, and the Company agreed not to enter into such
a resolution without the consent of GE, which consent would not be
unreasonably withheld or delayed; and
    
    the Company agreed to use its reasonable best efforts to reach a
resolution with the Department of Justice, and GE agreed to cooperate
with the Company in this regard. The foregoing descriptions of provisions of the merger agreement and the
waiver letter are qualified in their entirety by reference to the full text of
the merger agreement and the waiver letter. The Agreement and Plan of Merger
is attached as Exhibit 2.2 to our annual report on Form 10-K for the year ended
December 31, 2003, and the waiver letter is attached as Exhibit 99.1 to our
current report on Form 8-K filed on November 1, 2004. In September 2003, we completed a private offering of $125.0 million
aggregate principal amount of our 3% convertible senior notes due 2023. The
notes are convertible into our common stock, under certain circumstances, at an
initial conversion rate of 31.25 shares per $1,000 principal amount of notes,
subject to adjustment. At the initial conversion rate, the notes will be
convertible into common stock at a conversion price of $32.00 per share. The
notes will be redeemable for cash at our option beginning on October 1, 2008.
Holders of the notes have the option to require us to purchase the notes in
cash, in whole or in part, on October 1 in each of 2008, 2013 and 2018. The
holders of the notes will also have the ability to require us to purchase the
notes in the event that we undergo a change in control. In each such case, the
redemption or purchase price would be at 100% of the principal amount of the
notes, plus accrued and unpaid interest to, but excluding the redemption or
purchase date, as the case may be. On March 31, 2003, we completed our acquisition of Yxlon International
Holding GmbH, a company based in Hamburg, Germany. Yxlon develops,
manufactures, markets and supports X-ray based non-destructive testing, or NDT,
systems for a wide range of industrial applications, and systems that use X-ray
based diffraction, or XRD, technology for explosives detection. We acquired
Yxlon for 38.6 million in cash, or $41.7 million, incurred additional
acquisition costs of $2.1 million, and paid a subsequent purchase price
adjustment of $483,000 in December 2003 for a total purchase price of $44.3
million. Under the terms of the amended purchase agreement, we were required to
make an additional payment of 5.0 million if Yxlons XRD system was
certified for explosives detection by the TSA by June 30, 2004. As of June 30,
2004, the XRD system had not been certified for explosives detection by the
TSA, but remained in certification trials. We are currently considering
whether the certification requirement has been, or will be met, and have not
yet determined what portion, if any, of the up to 5.0 million potentially
payable upon timely certification of the XRD system will actually be paid by
us. We would record the payment of any such additional consideration as
goodwill. On August 1, 2003, we completed the acquisition of Hattinger Pruf- und
Entwicklungs- GmbH, or Hapeg, an engineering and systems company that provides
industrial testing and evaluation solutions utilizing computed tomography, or
CT, technology for 2.9 million or $3.4 million in cash, calculated at the
then effective conversion rate for the euro. We determine our segments based on how our Chief Executive Officer and
Chief Operating Officer assess performance and allocate resources. Through the
first quarter of 2003, we presented segment information based on three
reportable segments: EDS, Quantum, and Wood. As a result of the acquisition
of Yxlon, we now have two reportable segments, EDS and NDT. The EDS segment
is comprised of the business unit that is engaged in the development,
manufacturing, marketing and support of explosive detection systems based on
advanced CT technology. The NDT segment is comprised of the Yxlon business
unit that is engaged in the development, manufacturing, marketing and support
of non-destructive testing systems for a wide range of industrial applications.
Other segments including Quantum, Wood and XRD were aggregated to form an All
Other category as they did not meet the threshold for a reportable segment. As a result of the completion of the initial deployment following the
September 11, 2001 terrorist attacks and the time it takes to construct
modifications to retrofit airports to accommodate in-line EDS equipment, the
market for many of our products is in a period of transition. The demand for a
significant portion of our products is also subject to the budgetary process of
the federal government. We anticipate a decline in EDS revenues for the year
ending December 31, 2004, compared to EDS revenues during the year ended
December 31, 2003. As a result, we 19




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have implemented cost-reduction programs. Our ability to reduce costs will be critical to maintaining our gross
margins and desired level of earnings. Due to a number of factors including
the timing, size and mix of orders from our relatively small number of
customers, particularly the TSA, our revenues have varied significantly from
time to time. We expect that trend to continue. In addition, substantial
components of our quarterly and annual operating expenses are, and will
continue to be, relatively fixed in nature. This means that revenue
fluctuations will cause our quarterly and annual operating results to vary
substantially. Our ability to increase our operating efficiency, further
reduce the costs of components and otherwise control costs during a period of
further declining sales in a business already characterized by significant
fluctuations in volume is difficult to predict. Our revenues are primarily comprised of:  
    
    EDS product revenues, which include revenues from sales of CTX
systems, accessories and related installation and configuration, and
EDS service revenues, which include revenues from maintenance contracts
related to product support, integration and other services, including
those complex integrations and configurations that are separate from
product revenues; and  
    
    NDT product revenues, which include revenues from the design,
assembly and installation of X-ray systems and associated components
for industrial NDT, and NDT service revenues, which include revenues
from maintenance contracts related to product support. We market our products and services directly through internal sales
personnel and indirectly through authorized agents, distributors and system
integrators. In the United States, we market our products and services
primarily through direct sales personnel. Internationally, we use a direct
sales force and authorized representatives to sell our products. International
sales represented 38.2% of total revenues in the first nine months of 2004 and
26.1% of total revenues in the first nine months of 2003. EDS. In any given fiscal quarter or year, our EDS product revenues are
derived from orders of multiple units of our products from a limited number of
customers. For example, in the third quarter of 2004 three customers accounted
for all of our EDS products sold during the quarter, in the first nine months
of 2004 ten customers accounted for all of our EDS products sold during the
period, and for the fiscal year 2003 eighteen customers accounted for all of
our EDS products sold during the year. The number of our customers does not
vary widely from period to period. Therefore, a cancellation or delay of an
order from a customer could have a significant negative impact on our
operations in a given period. Including revenues from the Boeing and Siemens
subcontracts to provide maintenance service for TSA-owned EDS units, EDS sales
to the TSA accounted for 71.0% of our EDS revenues in the nine months ended
September 26, 2004 and 77.9% of our EDS revenues in the year ended December 31,
2003. For the first nine months of 2004, we generated $126.4 million from EDS
sales to our largest customer, the TSA, representing 50.8% of total revenues.
For the first nine months of 2003, we generated $232.2 million from EDS sales
to the TSA, representing 68.2% of total revenues. The Canadian Air Transport
Security Authority accounted for approximately 11.2% of total EDS revenues in
the first nine months of 2004. There were no other EDS customers who accounted
for more than 10% of total revenues in the first nine months of 2004 or the
year ended December 31, 2003. We typically bill our customers in three stages, as generally provided
in our contracts with our customers:  
    
    amounts to cover the bill of materials when materials are received
from suppliers, typically 30% to 40% of the total system price;  
    
    an additional amount upon factory acceptance or shipment ranging from 30% to 60%; and  
    
    the balance upon installation and site acceptance, ranging from 5% to 30%. These payment terms generally provide the necessary working capital for
acquisition of materials and funding inventory during the manufacturing cycle.
We anticipate that potential future orders from the TSA will continue to 20




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provide payment terms which provide the necessary working capital for us and
our suppliers, even if production volumes were to rapidly increase. If future
orders from the TSA contain different payment terms, a major increase in
production rates may require substantial additional working capital. Payment terms for TSA invoices are net 30 days, while terms for
international invoices vary from amounts due upon receipt of invoice to 160
days. NDT. Our NDT product and service revenues are primarily derived from
sales of X-ray based NDT products primarily to the automotive and aerospace
industries. There were no NDT customers who accounted for more than 10% of
total revenues since the acquisition of Yxlon on March 31, 2003. Results of Operations The following table sets forth certain income and expenditure items from
our condensed consolidated statements of operations expressed as a percentage
of total revenues for the periods indicated. Three Months Ended
    
    Nine Months EndedSept. 26,
    
    Sept. 28,
    
    Sept. 26,
    
    Sept. 28,2004
    
    2003
    
    2004
    
    2003Revenues:Product revenues
    
    
    66.7
    %
    
    
    80.4
    %
    
    
    68.7
    %
    
    
    87.2
    %Service revenues
    
    
    30.5
    
    
    
    16.0
    
    
    
    28.1
    
    
    
    10.0Contract research and development revenues
    
    
    2.8
    
    
    
    3.6
    
    
    
    3.2
    
    
    
    2.8Total revenues
    
    
    100.0
    
    
    
    100.0
    
    
    
    100.0
    
    
    
    100.0Cost of revenues:Product costs
    
    
    39.6
    
    
    
    49.1
    
    
    
    41.6
    
    
    
    50.3Service costs
    
    
    19.3
    
    
    
    9.7
    
    
    
    17.5
    
    
    
    6.0Contract research and development costs
    
    
    2.1
    
    
    
    2.1
    
    
    
    2.5
    
    
    
    1.7Total cost of revenues
    
    
    61.0
    
    
    
    60.9
    
    
    
    61.6
    
    
    
    58.0Gross margin
    
    
    39.0
    
    
    
    39.1
    
    
    
    38.4
    
    
    
    42.0Operating expenses:Research and development
    
    
    7.7
    
    
    
    6.1
    
    
    
    8.0
    
    
    
    5.9Selling, general and administrative
    
    
    17.0
    
    
    
    14.3
    
    
    
    16.6
    
    
    
    9.3In-process research and development
(Yxlon)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1.2Total operating expenses
    
    
    24.7
    
    
    
    20.4
    
    
    
    24.6
    
    
    
    16.5Income from operations
    
    
    14.3
    
    
    
    18.7
    
    
    
    13.8
    
    
    
    25.5Interest expense
    
    
    (1.6
    )
    
    
    (0.4
    )
    
    
    (1.6
    )
    
    
    (0.1
    )Interest and other income, net
    
    
    2.3
    
    
    
    0.8
    
    
    
    1.3
    
    
    
    0.6Income before provision for income taxes
    
    
    15.0
    
    
    
    19.1
    
    
    
    13.5
    
    
    
    26.0Provision for income taxes
    
    
    5.3
    
    
    
    8.4
    
    
    
    5.3
    
    
    
    11.0Net income
    
    
    9.7
    %
    
    
    10.7
    %
    
    
    8.2
    %
    
    
    15.0
    %
 21




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On March 31, 2003, the first day of our second quarter of 2003, we
acquired Yxlon. Accordingly, Yxlons results have been included in our results
since the acquisition date, and the operating results for the NDT segment also
have been included only beginning with the second quarter of 2003. Revenues EDS product revenues were $36.9 million in the third quarter of 2004, a
decrease of 23.9% from $48.5 million in the third quarter of 2003. EDS product
revenues were $120.3 million in the first nine months of 2004, a decrease of
54.3% from $263.4 million in the first nine months of 2003. The revenue
decrease in the third quarter and the first nine months of 2004 is primarily
due to decreased EDS shipments to the TSA relative to the same periods in 2003.
The first nine months of 2003 revenues reflected the large continued
deployment of EDS units that had begun in 2002 after the increased focus on
aviation security due to the terrorist attacks of September 11, 2001. During
the first nine months of 2004, we recognized approximately $4.4 million of
revenue from one customer who accepted and took title to the EDS equipment and
agreed to standard payment terms, but requested that we store the equipment
until predetermined shipment dates. At September 26, 2004, we were storing all
$4.4 million of such equipment. EDS service revenues were $22.0 million for the third quarter of 2004, an
increase of 117.4% from $10.1 million in the third quarter of 2003. EDS
service revenues were $57.8 million for the first nine months of 2004, an
increase of 112.6% from $27.2 million in the first nine months of 2003. The
revenue increase for the third quarter and the first nine months of 2004 is
primarily due to an increased number of units coming off of warranty and into
contractual service agreements. We anticipate that service revenues will
continue to rise in the near future compared to 2003 as this trend continues.
As of September 26, 2004, we had in backlog EDS equipment orders and service
agreements of $119.5 million, primarily consisting of orders for EDS equipment. NDT product revenues were $16.0 million in the third quarter of 2004, an
increase of 7.0% from $15.0 million in the third quarter of 2003. NDT product
revenues for the first nine months of 2004 were $41.6 million. Because we
acquired the NDT business at the beginning of the second quarter of 2003, there
is no comparable nine-month amount for 2003. The revenue increase for the
third quarter of 2004 compared to the third quarter of 2003 is due mainly to an
increase in orders for standard industrial and custom NDT systems received late
in 2003 and in the first nine months of 2004. We expect that NDT revenues for
the remainder of 2004 will continue to be greater than revenues for comparable
periods in 2003. NDT service revenues were $3.2 million in the third quarter of 2004, an
increase of 3.1% from $3.1 million in the third quarter of 2003. NDT service
revenues for the first nine months of 2004 were $9.6 million. The increase in
service revenues for the third quarter of 2004 compared to the third quarter of
2003 is due mainly to customers upgrading components of standard industrial and
custom NDT systems, as well as an increase in the number of service contracts.
As of September 26, 2004, we had in backlog NDT equipment orders and service
agreements of $28.7 million, primarily consisting of orders for standard
industrial and custom NDT systems. Gross Profit Cost of EDS product revenues primarily consists of purchased materials
procured for use in the assembly of our products, as well as manufacturing
labor and overhead, contract manufacturing services, installation, training and
warranty. Cost of EDS service revenues primarily consists of direct labor and
materials and customer support overhead. In any given period, our gross profit
for products and services may be affected by several factors, including product
mix, volume of systems manufactured in the period, product configuration,
location of the installation and complexity of integration into various
environments. Gross profit for EDS products was $16.1 million in the third quarter of
2004, a decrease of 24.0% from $21.2 million in the third quarter of 2003.
Gross margin percentages for EDS products were 43.8% in the third quarter of
2004 and 2003. Gross profit for EDS products was $53.3 million in the first
nine months of 2004, a decrease of 54.3% from $116.7 million in the first nine
months of 2003. Gross margin percentages for EDS products were 44.3% in the
first nine months of 2004 and 2003. The decrease in gross profit for the third
quarter and first nine months of 2004 is primarily due to decreased revenues.
Gross margin percentages remain the same because of 22




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continued efforts to reduce manufacturing costs, including the bill of
material per system, offset by some decreases in pricing. Gross profit for EDS services was $8.6 million in the third quarter of
2004, an increase of 107.1% from $4.2 million in the third quarter of 2003.
Gross margin percentages for EDS services were 39.3% in the third quarter of
2004 and 41.3% in the third quarter of 2003. Gross profit for EDS services
were $22.9 million in the first nine months of 2004, an increase of 106.9% from
$11.1 million in the first nine months of 2003. Gross margin percentages for
EDS services were 39.7% in the first nine months of 2004 and 40.8% in the first
nine months of 2003. The increase in gross profit for EDS services in the
third quarter and the first nine months of 2004 is primarily due to increased
EDS service revenues from the growing installed base of domestic systems and
service agreements from international customers. Cost of NDT product revenues primarily consists of purchased materials
procured for use in the assembly of our products, as well as manufacturing
labor and overhead, installation, training and warranty. Cost of NDT service
revenues primarily consists of direct labor and materials and customer support
overhead. Gross profit for NDT products was $5.7 million in the third quarter
of 2004, an increase of 37.4% from $4.2 million in the third quarter of 2003.
Gross margin percentages for NDT products were 35.7% in the third quarter of
2004 and 27.8% in the third quarter of 2003. Gross margin for the first nine
months of 2004 was $11.5 million with a gross margin percentage for product of
27.5%. Because we acquired the NDT business at the beginning of the second
quarter of 2003, there is no comparable nine-month amount for 2003. The
increase in gross profit for the third quarter of 2004 compared to the third
quarter of 2003 is primarily due to an increase in revenues. The increase in
gross profit was also due in part to a reduction in product material costs
resulting from cost reduction programs, and also to the sale of a used system
with a low inventory value. We believe the parts cost reduction programs that
we have developed will continue to improve gross margins in the future,
although such anticipated improvements may be reduced due to exchange rate
fluctuations. Gross profit for NDT services was $515,000 in the third quarter of 2004, a
decrease of 57.9% from $1.2 million in the third quarter of 2003. Gross margin
percentages for NDT services were 16.2% in the third quarter of 2004 and 39.7%
in the third quarter of 2003. Gross profit for the first nine months of 2004
was $2.3 million with a gross margin percentage of 23.6%. The decrease in
gross margin percentage for the third quarter of 2004 compared to the third
quarter of 2003 is primarily due to an increase in service costs associated
with an expansion of service capability in the United States. We do not
anticipate meaningful changes in gross profit for NDT services in 2004. Research and Development Research and development expenses consist primarily of compensation paid
to personnel engaged in research and development activities, amounts paid for
outside services and costs of materials utilized in the development of hardware
products, including prototype units. Research and development expenditures are
partially offset by amounts reimbursed by the FAA, TSA and other government
agencies and private entities under research and development contracts and
grants. These services are provided and reimbursed on a cost basis. Net research and development expenses for EDS were $5.3 million in the
third quarter of 2004, an increase of 89.5% from $2.8 million in the third
quarter of 2003. Net research and development expenses for EDS as a percentage
of EDS revenues were 9.1% in the third quarter of 2004 and 4.8% in the third
quarter of 2003. Net research and development expenses for EDS were $16.4
million in the first nine months of 2004, an increase of 11.6% from $14.7
million in the first nine months of 2003. The net numbers reflect
reimbursements by the TSA and other government agencies of $563,000 for the
third quarter of 2004 and $1.8 million for the first nine months
of 2003. The
net numbers for the third quarter of 2003 reflect reimbursements by the TSA and
other government agencies of $2.0 million. There were no such reimbursements
in the prior quarters in 2003. Net research and development for the first nine
months showed an increase as a result of intercompany funding from the EDS
business segment to other subsidiaries for aviation and homeland security
projects. The increase of net research and development expenses for EDS as a
percentage of revenues was primarily due to decreased revenues during the first
nine months of 2004. Research and development expenses for NDT were $891,000 in the third
quarter of 2004, an increase of 16.2% from $767,000 in the third quarter of
2003. Research and development expenses for NDT as a percentage of NDT 23




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revenues were 4.6% in the third quarter of 2004 and 4.3% in the third
quarter of 2003. Research and development expenses for NDT were $2.6 million
and 5.0% of revenue for the first nine months of 2004. Because we acquired the
NDT business at the beginning of the second quarter of 2003, there is no
comparable nine-month amount for 2003. The increase in research and
development expenses for the third quarter of 2004 compared to the third
quarter of 2003 was mainly due to efforts related to new designs for standard
industrial and custom NDT systems. In order to strengthen our role as a
leading supplier of X-ray solutions for NDT applications, we have increased the
research and development expenses for NDT in 2004. Selling, General and Administrative Selling, general and administrative expenses consist primarily of
compensation paid to direct and indirect sales and marketing personnel,
administrative personnel, including directors, consultant fees, professional
service fees, insurance costs, travel, selling and distribution costs, and
other general expenses. Selling, general and administrative expenses for EDS were $8.6 million in
the third quarter of 2004, an increase of 39.4% from $6.1 million in the third
quarter of 2003. Selling, general and administrative expenses for EDS as a
percentage of EDS revenues were 14.6% in the third quarter of 2004 and 10.5% in
the third quarter of 2003. Selling, general and administrative expenses for
EDS were $25.5 million in the first nine months of 2004, an increase of 29.6%
from $19.7 million in the first nine months of 2003. Selling, general and
administrative expenses for EDS as a percentage of EDS revenues were 14.3% in
the first nine months of 2004 and 6.8% in the first nine months of 2003. The
increase in selling, general and administrative expenses for EDS in absolute
dollars for the third quarter was mainly due to expenses incurred in conducting
an internal investigation of possible violations of the FCPA, along with
expenses associated with the pending acquisition of InVision by GE, and
consulting expenses associated with the documentation of our internal controls
in preparation for the assessment of such controls under Section 404 of the
Sarbanes-Oxley Act. The increase in selling, general and administrative
expenses for EDS in absolute dollars year-to-date was mainly due to expenses
associated with the pending acquisition of InVision by GE, together with
expenses associated with conducting an internal investigation of possible
violations of the FCPA, consulting expenses associated with the documentation
of our internal controls in preparation for the assessment of such controls
under Section 404 of the Sarbanes-Oxley Act, and compensation-related expenses
and professional fees, which were partially offset by decreases in
commission-related expenses. The increase in selling, general and
administrative expenses as a percentage of revenue is a result of increased
expenses and decreased revenues. Selling, general and administrative expenses for NDT were $4.1 million in
the third quarter of 2004, a decrease of 7.5% from $4.4 million in the third
quarter of 2003. Selling, general and administrative expenses as a percentage
of NDT revenues were 21.3% in the third quarter of 2004 and 24.5% in the third
quarter of 2003. Selling, general and administrative expenses for NDT were
$10.2 million for the first nine months of 2004. Selling, general and
administrative expenses for NDT as a percentage of NDT revenues were 20.0% for
the first nine months of 2004. Because we acquired the NDT business at the
beginning of the second quarter of 2003, there is no comparable nine-month
amount for 2003. Selling, general and administrative expenses in the third
quarter of 2004 were approximately the same as the third quarter of 2003. The
decrease in selling, general and administrative expenses as a percentage of
revenue is a result of increased revenues. Interest Expense Interest expense was $1.3 million in the third quarter of 2004 and
$343,000 in the third quarter of 2003. Interest expense was $3.9 million in the
first nine months of 2004 and $488,000 in the first nine months of 2003. The
increase in interest expense compared to the third quarter and the first nine
months of 2003 was primarily due to approximately $938,000 and $2.8 million,
respectively, of interest on $125.0 million of convertible senior notes issued
in September 2003, along with fees associated with our working capital lines of
credit, equipment leases, capital leases, financing for insurance premiums,
amortization of debt issuance costs and interest expense associated with
long-term debt. Interest and Other Income, Net Interest and other income, net was $1.9 million in the third quarter of
2004 and $667,000 in the third quarter of 2003. The amount for the third
quarter of 2004 consisted primarily of interest income on cash, cash
equivalents and 24




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short-term investments of $1.9 million. The amount for the third quarter
of 2003 consisted primarily of interest income on cash, cash equivalents of
$425,000, and other income, net of $242,000. Interest and other income, net, was $3.2 million in the first nine months
of 2004 and $2.0 million in the first nine months of 2003. The amount for the
first nine months of 2004 consisted primarily of interest income on cash, cash
equivalents and short-term investments of $4.1 million. Interest income was
offset by other expenses of approximately $1.0 million, due primarily to a
$600,000 charge arising from ineffectiveness of a foreign exchange forward
contract and an anticipated settlement. The amount for the first nine months
of 2003 consisted primarily of interest income on cash, cash equivalents and
short-term investments of $1.3 million, and other income, net of $759,000
including a net $336,000 foreign exchange gain. Provision for Income Taxes The provision for income taxes was $4.5 million in the third quarter of
2004 and $7.2 million in the third quarter of 2003. Our effective tax rate was
35.5% in the third quarter of 2004 and 43.7% in the third quarter of 2003. The
provision for income taxes was $13.3 million in the first nine months of 2004
and $37.5 million in the first nine months of 2003. Our effective tax rate was
39.6% in the first nine months of 2004 and 42.5% in the first nine months of
2003. The decrease in the effective tax rate in the third quarter of 2004 is
due primarily to favorable adjustments related to filing our 2003 income tax
return in the third quarter of 2004. The decrease in the effective rate for
the first nine months of 2004 relative to the comparable period in the prior
year is due mainly to a $4.3 million expense in 2003 for in-process research
and development associated with the acquisition of Yxlons X-ray diffraction
business, which was not tax deductible, and also to the third quarter 2004
adjustments described above. Offsetting this decrease is additional tax
expense in the third quarter of 2004 related to certain non-deductible costs
arising from the anticipated acquisition of InVision by GE. Our effective tax
rate was different than statutory tax rates primarily due to the adjustments
described above, along with certain other permanent differences between book
and taxable income. At December 31, 2003, we had federal, state and foreign
net operating loss carryforwards of approximately $1.2 million, $321,000 and
$15.8 million available to reduce future federal, state and foreign taxable
income, respectively. Our federal net operating loss carryforwards begin to
expire in 2010 and our state net operating loss carryforwards expire in 2011.
The foreign net operating loss carryforwards may be carried over indefinitely
and will not expire. The tax benefit of the net operating loss carryforwards
may be limited due to the impact of the Tax Reform Act of 1986. Events which
may cause the tax benefit to be limited include, but are not limited to, a
cumulative stock ownership change of more than 50% over a three-year period and
the timing of utilization of various tax benefits carried forward. Liquidity and Capital Resources At September 26, 2004, we had $349.2 million in cash, cash equivalents,
restricted cash and short-term investments, compared to $276.9 million at
December 31, 2003. Net cash provided by operating activities was $72.8 million in the first
nine months of 2004 compared to $56.7 million in the first nine months of 2003.
Cash provided by operating activities in the first nine months of 2004
primarily resulted from net income of $20.3 million, enhanced by the non-cash
effects of $8.0 million of depreciation and amortization expenses, $6.0 million
in tax benefits from employee stock transactions and $3.6 million in deferred
tax. In addition, there was a decrease of $4.5 million in accounts receivable,
$18.2 million increase in accounts payable and accrued liabilities and a $20.8
million increase in deferred revenue. Partially offsetting these increases to
net cash provided by operating activities was a $9.5 million increase in
inventory. Cash provided by operating activities in the first nine months of 2003 of
$56.7 million primarily resulted from significant accounts receivable
collections from the TSA resulting in a $90.4 million decrease in accounts
receivable. Other significant items include net income of $50.7 million,
enhanced by the non-cash effects of $4.3 million of depreciation and
amortization, and the $4.3 million in-process research and development expense
related to the Yxlon acquisition. Partially offsetting these increases to net
cash provided by operating activities was a $69.1 million decrease in deferred
revenue, primarily due to the shipment of units to the TSA for which deposits
had been received in prior periods for long-lead shipments. A $43.1 million
decrease in accounts payable and accrued liabilities also contributed to
decreasing net cash provided by operating activities. 25




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Net cash used in investing activities was $139.2 million in the first nine
months of 2004, compared to $49.4 million in the first nine months of 2003. Net
cash used in investing activities in the first nine months of 2004 resulted
primarily from the purchase of short-term investments of $193.8 million offset
by $62.9 million in proceeds from short-term investments. In addition, other
net cash uses were $2.1 million in acquisition of capital equipment. Net cash
used in investing activities in the first nine months of 2003 resulted
primarily from payments of $41.8 million, net of cash acquired, in connection
with the Yxlon acquisition. In addition, other net cash uses were $2.6 million
in acquisition of capital equipment, a $1.5 million payment for an equity
investment and product distribution rights in SafeView, Inc., a company
developing an advanced personnel screening system, and $3.4 million for the
Hapeg acquisition. Net cash provided by financing activities was $6.3 million in the first
nine months of 2004, compared to $116.0 million in the first nine months of
2003. Net cash provided by financing activities in the first nine months of
2004 primarily resulted from $9.9 million in net proceeds from the sale of
common stock under our employee stock purchase plan and exercises of stock
options. This was partially offset primarily by the repayment by Yxlon of
short-term debt of $3.1 million. Net cash provided by financing activities in
the first nine months of 2003 primarily resulted from the issuance of $125.0
million of convertible senior debt, offset by related debt issuance costs of
$4.4 million and a stock repurchase of $12.5 million. In addition, there was
$4.9 million in net proceeds from increased short-term borrowings and $3.2
million in net proceeds from the sale of common stock under our employee stock
purchase plan and exercises of stock options. As of September 26, 2004, we had a line of credit agreement for our U.S.
operations that provides for maximum borrowings in an amount up to $30.0
million. Borrowings under this agreement bear interest at the banks prime rate
minus 0.5% (4.25% at September 26, 2004). The agreement expires in January 2005
and requires that the EDS segment maintain certain levels of tangible net
worth. We may use proceeds of loans under this line of credit for general
corporate purposes. At September 26, 2004, we had no borrowings outstanding
under this agreement. However, at September 26, 2004, we had outstanding
guarantees to customers through the issuance of letters of credit for which a
partial reserve of $16.2 million is secured by the line of credit, and foreign
exchange forward contracts for which a 10% reserve of $1.5 million is secured
by the line of credit. We had remaining available borrowing capacity under the
line of credit of $12.3 million at September 26, 2004. As September 26, 2004, we had letters of credit totaling $16.2 million as
guarantees primarily to customers for performance and delivery commitments, and
to foreign creditors of Yxlon. In addition, we have one guarantee to an
insurance carrier for premium payment commitments. The guarantees range from
one month to eight years from September 26, 2004 until expiration. As of September 26, 2004, we had two primary sources of financing from
German banks for Yxlon. The first agreement is a line of credit that provides
for maximum borrowings in an amount up to 6.6 million or $8.1 million at
September 26, 2004. The second agreement is also a line of credit that provides
for maximum borrowings in an amount up to 5.2 million, or $6.4 million, at
September 26, 2004. There is currently no expiration date on either of these
agreements. Borrowings under these agreements bear interest at a rate of 5.75%.
At September 26, 2004, we had debt balances of $1.8 million outstanding under
these agreements. In addition, at September 26, 2004, we had outstanding
guarantees to customers through the issuance of letters of credit for which a
reserve of $8.9 million is secured by the line of credit. Therefore, we had
remaining available borrowing capacity under the line of credit of
approximately 3.1 million, or $3.8 million, at September 26, 2004. We believe that existing cash and cash equivalents, available borrowings
under our lines of credit and funds expected to be generated from operations
will be sufficient to finance our working capital and capital expenditure
requirements for at least the next twelve months. However, if we fail to meet
required financial covenants in our credit agreement, or our receivables do not
support the upper limits of the credit agreement, then we may not be able to
have access to further funds under our credit agreement. In addition, if we
are unable to deliver EDS units in a timely manner under orders from the TSA,
the TSA may cancel its orders or not place additional orders. If any of these
events occur, our capital resources would be significantly impaired. 26




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Contractual Obligations and Commitments The following table summarizes our contractual obligations as of September
26, 2004 (in thousands): Payments Due by PeriodLess than
    
    1-3Contractual Obligations
    
    Total
    
    1 year
    
    years
    
    ThereafterLong-term debt
    
    $
    125,000
    
    
    $
    
    
    
    $
    
    
    
    $
    125,000Operating leases
    
    
    23,262
    
    
    
    4,983
    
    
    
    7,960
    
    
    
    10,319Short-term debt
    
    
    1,807
    
    
    
    1,807
    
    
    
    
    
    
    
    Other long-term liabilities
    
    
    1,241
    
    
    
    
    
    
    
    
    
    
    
    1,241Capital lease obligations
    
    
    403
    
    
    
    271
    
    
    
    132
    
    
    
    Total contractual cash obligations
    
    $
    151,713
    
    
    $
    7,061
    
    
    $
    8,092
    
    
    $
    136,560
 Risk Factors Many factors, including those described below, could cause actual results
to differ materially from those discussed in any forward-looking statements. Risks Related to Our Internal Investigation of Possible Offers of Improper
Payments by Distributors in connection with Foreign Sales Activities The Department of Justice and/or the Securities and Exchange Commission may
initiate an investigation, which may delay the acquisition of us by GE or lead
to the termination of the merger agreement. On July 30, 2004, we announced that we met with the Department of Justice
and the Securities and Exchange Commission to voluntarily disclose an internal
investigation concerning activities that could constitute possible violations
of the Foreign Corrupt Practices Act, or the FCPA, and that we intended to
cooperate fully with any governmental investigation of these activities. On
November 1, 2004, we announced that we and GE had signed a waiver letter under
which, among other things, subject to specified conditions and undertakings,
the date after which either we or GE may have a right to terminate the merger
agreement has been extended from October 31, 2004 to December 27, 2004. The Department of Justice and the Securities and Exchange Commission may
require substantial investigation or other information before they are willing
to settle or resolve the matters related to the internal investigation. They
are not obligated to complete their investigations, if any, or settle or
resolve matters such as this on an expedited basis. The internal investigation
and any related investigation by the Department of Justice and/or the
Securities and Exchange Commission may not be completed by the time specified
in the waiver letter. If the acquisition is not completed by the time specified
in the waiver letter, either we or GE may be entitled to terminate the merger
agreement. The foregoing descriptions of provisions of the waiver letter are
qualified in their entirety by reference to the full text of the letter
agreement. The waiver letter is attached as Exhibit 99.1 to our current report
on Form 8-K filed on November 1, 2004. 27




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As a result of any investigation by the Department of Justice and/or the
Securities and Exchange Commission into whether there were possible offers of
improper payments in connection with foreign sales activities and related
issues in violation of the FCPA or other applicable law, the Department of
Justice and/or the Securities and Exchange Commission could seek criminal or
civil sanctions against us and/or some of our employees, and we may be subject
to private lawsuits. If as a result of any investigation by the Department of Justice and/or
the Securities and Exchange Commission, the government determines that unlawful
payments were offered or made, the government could take action against us
and/or some of our employees. These actions could include criminal and civil
fines, penalties, criminal sanctions and limitations on our ability to export
products or enter into future U.S. government contracts, or the
cancellation of existing contracts. Conduct that violates the anti-bribery provisions of the FCPA may also
give rise to a private lawsuit under applicable foreign, federal or state laws,
including securities laws. For example, on August 4, 2004, an alleged holder
of InVision common stock filed a purported class action lawsuit alleging
nondisclosures and misrepresentations by us and the individual defendants
related to the subject of the internal investigation in violation of Section
10(b) of the Exchange Act and Rule 10b-5. In addition, selling, general and
administrative expenses for the third quarter of 2004 increased in part due to
expenses incurred in conducting our internal investigations, and we believe
that our results of operations for the fourth quarter of 2004 may be adversely
affected by costs related to our internal investigations, any related
governmental investigations, defense of private lawsuits and merger-related
activities. Risks Related to the Proposed Acquisition of InVision by GE If the proposed merger with GE is not completed, our business and stock price
may be adversely affected. On March 15, 2004, we entered into an Agreement and Plan of Merger with
General Electric Company, or GE, under which GE would acquire us through the
merger of a wholly-owned subsidiary of GE with and into InVision, and each
outstanding share of our common stock would be converted into the right to
receive $50.00 in cash. The merger is subject to customary closing
conditions. In addition, there are other closing
conditions that may be triggered by any governmental investigation resulting
from our voluntary disclosure to the Department of Justice and the Securities
and Exchange Commission of our internal investigation of possible offers of
improper payments by our distributors in connection with foreign sales
activities. Therefore, there is a risk that the merger will not be completed or
that it will not be completed in the expected time period. If the merger is
not completed or the completion is substantially delayed, we could be subject
to a number of risks that may adversely affect our business and stock price,
including:  
    
    the market price of our common stock could decline following an
announcement that the merger has been abandoned or substantially
delayed, to the extent that the current market price reflects a market
assumption that the merger will be completed;  
    
    the diversion of management attention and the unavoidable
disruption to our relationships with customers and vendors may detract
from our ability to grow revenues and minimize costs;  
    
    we have and will continue to incur significant expenses related to
the merger prior to its closing that may not be recovered; and  
    
    we may be unable to respond effectively to competitive pressures,
industry developments and future opportunities. The inability to complete the merger would also likely result in
litigation, which could be costly and could further divert the attention of
management. 28




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The uncertainty created by the proposed merger could have an adverse effect on
our revenue and results of operations. Prior to the closing of the proposed merger or the termination of the
merger agreement, the proposed merger creates uncertainty about InVisions
future. As a result of this uncertainty, customers may decide to delay, defer,
or cancel purchases of our products pending resolution of the proposed merger.
If these decisions represent a significant portion of our anticipated revenue,
our results of operations and quarterly revenues could be substantially below
the expectations of market analysts. The merger agreement contains many restrictive covenants that limit our
flexibility. The merger agreement contains covenants that restrict our operations
without GEs written consent. For example, we have agreed that, subject to
specified exceptions, without GEs prior written consent, neither we nor any of
our subsidiaries may, among other things:  
    
    enter into, terminate or amend any material contract;  
    
    issue, sell, grant or otherwise dispose of, or redeem, purchase or
otherwise acquire, our equity securities;  
    
    amend or waive any of our rights under, or accelerate the vesting
under, any provision of our stock plans;  
    
    incur any indebtedness for borrowed money or guarantee any
indebtedness, or enter into a keep well or similar agreement;  
    
    sell, transfer, lease, license, mortgage, encumber or otherwise
dispose of (including pursuant to a sale-leaseback transaction or an
asset securitization transaction) any of our properties or assets
(including securities of our subsidiaries) to any person;  
    
    make any capital expenditures, except in the ordinary course of
business consistent with past practice and in an amount not in excess
of $2,000,000 in the aggregate during any three-consecutive month
period;  
    
    make any acquisition (by purchase of securities or assets, merger
or consolidation, or otherwise) of any other entity, business, division
or assets;  
    
    make any investment (by contribution to capital, property
transfers, purchase of securities or otherwise) in, or loan or advance
(other than travel and similar advances to our employees in the
ordinary course of business consistent with past practice) to, any
entity other than a wholly owned subsidiary in the ordinary course of
business consistent with past practice;  
    
    enter into, establish, amend, modify or terminate any employment,
consulting, retention, change in control, collective bargaining, bonus
or other incentive compensation, profit sharing, health or other
welfare, stock option or other equity, pension, retirement, vacation,
severance, deferred compensation or other compensation or benefit plan,
policy, agreement, trust, fund or arrangement with, for or in respect
of, any stockholder, director, officer, other employee, consultant or
affiliate;  
    
    pay, discharge, settle or satisfy any material claims, liabilities
or obligations, other than the payment, discharge, settlement or
satisfaction in the ordinary course of business consistent with past
practice or in accordance with their terms; or  
    
    settle or compromise any litigation or proceeding to the extent
that such settlement or compromise (1) requires that we pay more than
$1,000,000 in the aggregate or (2) does not provide for a full release
of us. While GE has agreed to not withhold or delay its consent unreasonably,
these operational covenants limit our flexibility and agility during the term
of the merger agreement. As a result, we may be unable to react quickly to 29




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changing circumstances or to accomplish a smooth transition to independent
operation if the merger agreement is terminated. Risks Related to Our Business If we are unable to complete our assessment as to the adequacy of our internal
control over financial reporting as of December 31, 2004
as required by Section 404 of the Sarbanes-Oxley Act of 2002, investors could
lose confidence in the reliability of our financial statements, which could
result in a decrease in the value of our common stock. As directed by Section 404 of the Sarbanes-Oxley Act of 2002, the
Securities and Exchange Commission adopted rules requiring public companies to
include a report of management on the companys internal control over financial
reporting in their annual reports on Form 10-K. This report is required to
contain an assessment by management of the effectiveness of such companys
internal controls over financial reporting. In addition, the public accounting
firm auditing a public companys financial statements must attest to and report
on managements assessment of the effectiveness of the companys internal
controls over financial reporting.
Further, our efforts at compliance with Section 404 are occurring
while we have pending the acquisition of InVision by General Electric
and the disposition of our NDT business as required to comply with anti-trust
regulatory requirements.
While we are expending significant resources
in developing the necessary documentation and testing procedures required by
Section 404, there is a significant risk that we will not comply with all of
the requirements imposed by Section 404. If we fail to implement required new
or improved controls, we may be unable to comply with the requirements of
Section 404 in a timely manner. This could result in a negative reaction in
the financial markets due to a loss of confidence in the reliability of our
financial statements, which could cause the market price of our common stock to
decline. A number of factors that affect our revenues make our future results difficult
to predict, and therefore we may not meet expectations for a particular period. We believe that our revenues have the potential to vary significantly from
time to time. For example, our total revenues were $248.9 million for the
first nine months of 2004, $340.7 million for the first nine months of 2003 and
$218.7 million for the first nine months of 2002, and were $416.5 million for
fiscal 2003, $439.1 million for 2002 and $74.3 million for 2001. We believe
that these variations may result from many factors, including:  
    
    the timing, size and mix of orders from our major customers, including in particular, the TSA and agencies of other
governments;  
    
    legislative or other government actions driven, in part, by the publics perception of the threats facing commercial
aviation, leading to fluctuations in demand for aviation security products and services;  
    
    delays in product shipments caused by the inability of airports to install or integrate our products in a timely fashion;  
    
    the availability and cost of key components;  
    
    the timing of completion of acceptance testing for some of our products;  
    
    the introduction and acceptance, including certification by the TSA, of new products or enhancements to existing products
offered by us or our competitors;  
    
    changes in pricing policies by us, our competitors or our suppliers, including possible decreases in average selling prices
of our products caused by customer volume orders or in response to competitive pressures;  
    
    our sales mix to domestic and international customers; and  
    
    fluctuations in currency exchange rates, particularly the exchange rate
of the U.S. dollar against the euro. 30




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Further, we depend on a small number of customers for a substantial
portion of our revenues. In the past, the number of orders placed by these
customers has changed significantly from period to period, and we expect that
this may continue in the future. A significant portion of our quarterly and annual operating expenses is,
and will continue to be, relatively fixed in nature. This means that revenue
fluctuations will cause our quarterly and annual operating results to vary
substantially. We also may choose to increase spending to pursue new market
opportunities, which may negatively affect our financial results. Accordingly, we believe that period-to-period comparisons of our results
of operations cannot be relied upon as indicators of future performance.
Because of all of the foregoing factors, our operating results have from time
to time in the past been, and may again in the future be, different from
expectations of public market analysts and investors. Failure to meet market
expectations has in the past resulted, and may again in the future result, in
fluctuations in the trading price of our common stock. We are anticipating decreased EDS revenues in 2004 and increased difficulty in
predicting future gross margins, which may cause our stock price to decline. We anticipate a decline in EDS revenues for 2004 compared to 2003 and, as
a result, we have implemented cost-reduction programs. However, our ability to
control costs during a period of further declining sales is difficult to
predict. This difficulty is a result of factors such as our ability to
increase our operating efficiency and further reduce the costs of components.
We may be unable to reduce costs as much as we anticipate. As a consequence,
the gross margins for our products and services may vary significantly from our
anticipated gross margins and the gross margins of our products and services in
recent periods. If, as a result of these uncertainties, our gross margins,
operating results or earnings per share are below the expectations of market
analysts and investors, the trading price of our common stock may decline. Governmental agencies, the primary customers for our EDS and other products,
are subject to budget processes which could limit the demand for these
products. Substantially all of the customers for our EDS products and our other
products under development to date have been public agencies or quasi-public
agencies, such as the TSA and airport authorities. Public agencies are subject
to budgetary processes and expenditure constraints. In the past, many domestic
and foreign government agencies have experienced budget deficits that have led
to decreased capital expenditures in certain areas. The funding of government programs is subject to legislative
appropriation. Budgetary allocations for EDS depend, in part, upon
governmental policies, which fluctuate from time to time in response to
political and other factors, including the publics perception of the threat of
commercial airline bombings. For example, the terrorist attacks of September
11, 2001 resulted in the passage of the Aviation and Transportation Security
Act of 2001, or Transportation Security Act, mandating a small surcharge on
each airline ticket purchase to fund airline security. This surcharge was
suspended from June 1, 2003 to September 30, 2003. We cannot assure investors
that the surcharge will not again be suspended or that the funds generated by
these surcharges will be used to purchase our EDS products. We cannot assure
investors that funds will continue to be appropriated by Congress or allocated
by the TSA or other agencies for the purchase of EDS products. Legislative actions could lead to fluctuations in demand for aviation security
products and services. In addition to the Congressional budgetary process, other legislation
could be introduced that would impact demand for aviation security products and
services. In response to fluctuation in concern on the part of voters about
aviation security and competing homeland security demands, or for other
reasons, the plans for deployment of EDS to screen baggage could be changed.
Budgetary debates and delays could result in fewer EDS being sold to the TSA
and elected officials who support the EDS program could fail to maintain their
offices, any of which events could cause a decrease in the demand for our EDS
products. 31




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Governmental agencies have special contracting requirements, which create
additional risks. In contracting with public agencies, we are subject to public agency
contract requirements that vary from jurisdiction to jurisdiction. Future
sales to public agencies will depend, in part, on our ability to meet public
agency contract requirements, certain of which may be onerous or even
impossible for us to satisfy. Government contracts typically contain termination provisions unfavorable
to us and are subject to audit and modification by the government at its sole
discretion, which subject us to additional risks. These risks include the
ability of the U.S. government to unilaterally:  
    
    suspend or prevent us for a set period of time from receiving new contracts or extending existing contracts based on
violations or suspected violations of laws or regulations, including
the FCPA;  
    
    terminate our existing contracts;  
    
    reduce the scope and value of our existing contracts;  
    
    audit and object to our contract-related costs and fees, including allocated indirect costs;  
    
    control and potentially prohibit the export of our products; and  
    
    change certain terms and conditions in our contracts. The U.S. government can terminate any of its contracts with us either for
its convenience or if we default by failing to perform in accordance with the
contract schedule and terms. Termination for convenience provisions generally
enable us to recover only our costs incurred or committed, and settlement
expenses and profit on the work completed prior to termination. Termination
for default provisions do not permit these recoveries and make us liable for
excess costs incurred by the U.S. government in procuring undelivered items
from another source. Our contracts with foreign governments may contain
similar provisions. Consequently, our backlog is not necessarily indicative of
future revenues. The governments termination of one or more of the contracts
for our EDS products or our other products under development would harm our
business. In addition, U.S. government contracts are conditioned upon the continuing
availability of Congressional appropriations. Congress usually appropriates
funds annually for a given program on a September 30 fiscal year-end basis,
even though contract performance may take years. Consequently, our contracts
with the TSA may only be partially funded at the outset, and additional monies
are normally committed to the contract by the TSA only as appropriations are
made by Congress for future periods. The governments failure to fully fund
one or more of the contracts for our EDS products or our other products under
development would harm our business. Under our three-year agreement with the TSA announced on August 12, 2003,
the TSA has the right to purchase system options and accessories, engineering
and installation support and 550 CTX units, principally our CTX 9000 DSi
systems, over the three-year term. While the TSA has placed delivery orders
totaling $162.8 million under the agreement, the TSA has no obligation to place
additional delivery orders or purchase additional engineering and installation
support under the agreement. We cannot assure you that the TSA will make any
additional delivery orders under the agreement or will not cancel its existing
orders. The agreement is subject to all of the limitations and restrictions
that apply to U.S. government contracts, including those described above. Because we contract with the U.S. government, we are subject to periodic
audits and reviews. Based on the results of its audits, the U.S. government
may adjust our contract-related costs and fees, including allocated indirect
costs. In the future, government audits and reviews could result in
adjustments to our revenues and cause other adverse effects, particularly to
our relationship with the TSA. In addition, under U.S. government purchasing
regulations, some of our costs, including most financing costs, amortization of
intangible assets, portions of our research and development costs, and some
marketing expenses may not be reimbursable or allowed in our negotiation of
fixed-price contracts. Further, because we contract with the U.S. government,
we are subject to an 32




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increased risk of investigations, criminal prosecution, civil fraud,
whistleblower lawsuits and other legal actions and liabilities to which purely
private sector companies are not. In addition, public agency contracts are frequently awarded only after
formal competitive bidding processes, which are often protracted and typically
contain provisions that permit cancellation in the event that funds are
unavailable to the public agency. We may not be awarded any of the contracts
for which our products are bid. Even if we are awarded contracts, substantial
delays or cancellations of purchases could result from protests initiated by
losing bidders. Our growth depends on our introduction of new products and services, which may
be costly to develop and may not achieve market acceptance. As part of our strategy for growth, we intend to develop products to
address additional aviation security opportunities, such as passenger, carry-on
baggage and air cargo screening. We also intend to address homeland security
requirements beyond aviation, such as screening at border checkpoints,
government offices and transportation terminals and ports. We will be required
to spend significant funds to develop or acquire technologies and products for
these initiatives, and these initiatives may divert our development and
management resources away from our core EDS products. In addition, we have
acquired, rather than developed internally, some of our technologies in
connection with our acquisitions of companies and businesses, and these
technologies may not perform as we expect. The development of new products may
require greater time and financial resources than we currently anticipate and,
despite significant investments in research and development, may not yield
commercially successful products. The development of our products for explosives and weapons detection is
highly complex. Successful product development and market acceptance of any
new products and services that we develop depend on a number of factors,
including:  
    
    our timely completion and introduction of new products;  
    
    our accurate prediction of the demand for homeland security products and the changing requirements of the homeland security
industry, including certification or other required performance standards;  
    
    the availability of key components of our products;  
    
    the quality, price and operating performance of our products and those of our competitors;  
    
    our customer service capabilities and responsiveness; and  
    
    the success of our relationships with existing and potential customers. Finally, new products for aviation security applications may require
certification or approval by the TSA, and we believe that the TSA does not
currently have standards for the certification of aviation security products
other than bulk explosives detection systems and explosives trace detectors.
Other products, such as metal detectors, are subject to TSA testing prior to
approval. Market acceptance of new products may be limited if the TSA has not
developed standards for certification or approval of such products, and even if
it does develop such standards, we may be unable to obtain any such
certification or approval, which could materially limit market acceptance of
such products. If we fail to timely introduce new products or if these
products fail to gain market acceptance, our results of operations would be
harmed. In addition, even if successful in the United States, new products that we
develop may not achieve market acceptance outside of the United States. Unlike
the U.S. government, foreign governments may be unwilling to commit financial
resources to purchase our new products, which would reduce our potential
revenues and harm our business. 33




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We depend upon a limited number of suppliers for components of our products,
and if we are unable to obtain parts from these suppliers on a timely basis,
then we may not be able to deliver our products as required. Key components used in our products have been designed by us to our
specifications and are currently available only from one or a limited number of
suppliers. We currently do not have long-term agreements with many of these
suppliers. In addition, some of the suppliers of the key components used in
our products are our competitors, and they may be motivated not to supply us
with the components we need. Our inability to develop alternative sources for
single or sole source components, to find alternative third party manufacturers
or sub-assemblers, or to obtain sufficient quantities of these components,
could result in delays or interruptions in product shipments, which could cause
current or potential customers to seek other suppliers of our products. In
view of the high cost of many of these components, we strive to avoid excess
supplies. If our suppliers experience financial, operational, production or
quality assurance difficulties, or our sole source suppliers are acquired or
otherwise influenced by our competitors, the supply of components to us would
be reduced or interrupted. In the event that a supplier ceases operations,
discontinues a product or withholds or interrupts supply for any reason, we may
be unable to acquire the product from alternative sources within a reasonable
period of time. Our future EDS products
may fail to obtain certification by the TSA, and even if the products
are certified they may fail in the marketplace. We
plan to continue to develop new models for our family of EDS
products. However, we cannot be certain that any new EDS product will
be certified by the TSA. The failure to gain certification for an EDS
product would harm our ability to sell the product and recognize
associated revenues. Even if we gain certification for new EDS
products, we may not achieve success with these products in the market
for EDS technologies. Our existing EDS products may fail to obtain re-certification by the TSA for
changes in the EDS systems. Our existing EDS products can be required to be re-certified by the TSA.
This can happen when a critical component is changed, or we wish to make other
changes to the EDS products. When this happens, the affected EDS model
requires re-certification by the TSA. The failure or delay in gaining
re-certification for an existing EDS product could harm our ability to continue
to sell the product and recognize associated revenues. Future sales of our EDS products will depend on the ability of airports to
secure funding to build baggage handling systems and to integrate our EDS
products into such systems, which they may not be able to do. Future sales will depend, in part, on installing our EDS products into
airport lobbies or integrating them into existing baggage handling systems. If
an airport is not configured for these systems, deployment of our EDS products
may require changes in the airport infrastructure, such as reinforced airport
lobby floors and baggage platforms. If our EDS products cannot easily be
installed in airport lobbies or integrated into existing baggage handling
systems, we may experience reduced sales of our EDS products or these sales may
be delayed. In addition, installations and integrations are currently
partially funded by the TSA in the United States. Legislation established a
letter of intent program under which an airport can present a request to the
TSA for reimbursement of a certain percentage (currently 75% under the
Department of Homeland Security Appropriations Act of 2005) of costs incurred
by the airport in improving baggage handling systems to increase security.
There can be no assurance that the government will continue to fund
installations, integrations and reimbursements at the current level or at all.
If there is a reduction in funding, we may experience reduced sales of our EDS
products or these sales may be delayed. We believe that a substantial opportunity exists for our CTX 9000 DSi
model to be integrated into baggage handling systems. If airports determine,
in conjunction with governmental authorities, that they will be unable or
unwilling to modify or finance such in-line baggage handling systems, this
opportunity may be limited. As a result of the Transportation Security Act, our EDS products are undergoing
substantially increased usage per day, which could cause unforeseen problems
with their ability to sustain this increased usage. As a result of the 100% checked baggage screening requirement under the
Transportation Security Act, our EDS products in operation are being used more
hours per day than prior to 2003. This increased operation for an extended
period places a heavier burden on our EDS products than previously experienced,
resulting in an increase 34




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in the amount of maintenance required to keep them operating. If unforeseen
problems were to occur as a result, our customers could perceive that there are
reliability problems with our EDS products, which could reduce the demand for
our products. In addition, our CTX 9000 DSi product is a relatively new model
with which we are still gaining experience in sustaining extensive usage. Our
CTX 9000 DSi product may experience maintenance needs and increased down time
beyond that experienced by our other EDS products, particularly because it has
components that integrate it into an airports baggage handling system not
found in other EDS products. These additional components require maintenance
and may also contribute to increased maintenance needs and down time. If our
CTX 9000 DSi product experiences additional maintenance needs beyond that of
our other products, our customers may favor of our other products or the
products of our competitors. We may seek to grow by acquisition, which subjects us to substantial risks,
including the failure to successfully integrate an acquired business. As part of our growth strategy, we may expand our business by pursuing
selected acquisitions of technologies and companies that offer complementary
products, services, technologies or market access. Our ability to grow by
acquisition depends upon the availability of acquisition candidates at
acceptable prices. We may incur costs in connection with our pursuit of
acquisitions for which we are responsible regardless of whether the
acquisitions are actually consummated. Future acquisitions by us could result
in dilutive issuances of equity securities, the incurrence of debt and
contingent liabilities and expenses related to acquired operations and assets,
any of which could harm our business and our operating results. Acquisitions
entail numerous risks and we may not realize the expected benefits of these
transactions. These risks include:  
    
    difficulties in the assimilation of acquired operations, technologies and products;  
    
    diversion of managements attention from other business concerns;  
    
    lack of experience operating in the geographic market or industry sector of acquired companies;  
    
    exposure to unanticipated contingent liabilities of acquired companies; and  
    
    potential loss of key employees of acquired companies. The process of integrating supply and distribution channels, computer and
accounting systems and other aspects of operations, while managing a larger
entity, may present a significant challenge to our management. We may not be
able to successfully integrate any businesses, products, technologies or
personnel that might be acquired in the future. In such case, we would not
fully realize the anticipated benefits of a business combination, and the
failure of such efforts would harm our business. Maintaining uniform
standards, controls, procedures and policies may be harder than we anticipate
and interfere with efficient administration of the company as a whole. For example, on March 31, 2003, we completed the acquisition of Yxlon
International Holding GmbH. Yxlon is active in businesses that are new to us
and present a challenge to our management. In order to successfully integrate
Yxlons security technologies and products, we must, among other things,
integrate these into our suite of products, both from an engineering and a
sales and marketing perspective. As a result, we may take longer to develop
and introduce new products than we anticipate. In addition, we do not have
experience developing, marketing and selling products in the non-destructive
testing business, and we may not be successful competing for customers in
industries with which we are unfamiliar. The difficulties of integration of
Yxlon may be further complicated by the geographic distance between our U.S.
offices and Yxlons headquarters, which are located in Germany. If we are not
successful in integrating Yxlons security technologies into our product line,
or in managing Yxlons non-destructive testing business, we may incur
additional expenses or lose revenue opportunities for Yxlon and us, and our
business results may suffer. 35




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Our strategic investments may not provide any of the benefits we anticipate,
and as a result, we may incur economic losses or be required to write-down
these investments. From time to time, we consider strategic investments in development-stage
companies that we believe provide strategic opportunities for us, such as our
investment in SafeView, Inc., which is developing portal systems for passenger
screening. Although we intend that these investments will provide access to
new technologies and emerging markets, we cannot assure you that these
investments will create opportunities for us to increase our sales. If these
companies are unsuccessful in their product development efforts or are unable
to obtain additional private financing, we may be required to write-down these
investments or we may lose some or all of these investments, which would harm
our results. If our EDS products fail to detect explosives, we could be exposed to product
liability and related claims for which we may not have adequate insurance
coverage, and we may lose current and potential customers. Our business exposes us to potential product liability risks, which are
inherent in the manufacturing, sale and maintenance of EDS products. Our
machines are not designed to detect, and TSA certification does not require,
100% detection of any and all explosives contained in scanned baggage. For
this reason, or if our products malfunction, it is possible that explosive
material could pass undetected through our products, which could lead to
product liability claims. There are also many other factors beyond our control
that could lead to liability claims, such as the reliability and competence of
the customers operators and the training of the operators. For example, InVision and our subsidiary, Quantum Magnetics, were named as
defendants in a number of lawsuits relating to the terrorist acts of September
11, 2001, even though InVision and Quantum Magnetics did not, as of September
11, 2001, have any passenger or carry-on baggage screening equipment at
security checkpoints in any of the airports from which the hijacked airplanes
departed. Amended Master Complaints controlling over the individual complaints
filed by plaintiffs in the In re: September 11 Litigationhave effectively
dismissed these claims against InVision and Quantum Magnetics. However, In
September 2004, new complaints alleging personal injury and property damages
were filed in the In re: September 11 Litigation. None of these complaints
name InVision and Quantum Magnetics as defendants. As a result of the filing
of these new complaints, the new deadline for the named defendants to assert
cross-claims and third party claims is March 31, 2005. The cost of defending product liability claims such as these, and other
product liability claims, brought against us could be significant and any
adverse determination may result in liabilities in excess of our insurance
coverage. We currently have product liability insurance in the amount of
$200.0 million. We also have war and terrorism insurance in the amount of
$200.0 million, including up to $50.0 million under our product liability
insurance. We cannot be certain that our current insurance can be maintained,
or additional insurance coverage could be obtained, on acceptable terms, if at
all. In addition, the failure of any EDS product to detect explosives, even if
due to operator error and not to the mechanical failure of an EDS product,
could result in public and customer perception that our products do not work
effectively, which may cause potential customers to not place orders and
current customers to cancel orders already placed or to not place additional
orders, any of which would harm our business and financial results. We substantially depend on large orders from a limited number of customers. As
a result, order cancellations from any of our customers or the failure of these
customers to continue to purchase EDS products could have a material negative
impact on our business and financial results. In any given fiscal quarter or year, our revenues are derived from orders
of multiple units of our EDS products from a limited number of customers.
Through September 26, 2004, substantially all of our orders in the United
States have been funded by the FAA and the TSA, which allocate our products to
airports in the United States. EDS product and service sales to the TSA
accounted for 50.8% of our total revenues in the nine months ended September
26, 2004 and 68.2% of our total revenues in the nine months ended September 28,
2003. In the nine months ended September 26, 2004, 10 customers accounted for
all of our EDS units sold during the period, and in the nine months ended
September 28, 2003, 15 customers accounted for all of our EDS products sold
during the period. The failure of these customers, particularly the U.S.
government, to continue to purchase our EDS products or the cancellation of
existing orders would harm our business. 36




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The U.S. governments right to use technology developed by us, but funded by
the U.S. government, limits our intellectual property rights. In accordance with Federal Acquisition Regulations included in our
development contracts with the FAA and TSA, the U.S. government has rights to
use our proprietary technologies developed after the award of the development
contract and funded by the development contract. The U.S. government may use
these rights to produce or have produced for the U.S. government competing
products using CT technology found in our existing EDS products, including our
CTX 1000 model. With respect to Quantum Magnetics, the U.S. government retains
the same rights to the passive magnetic technology found in the quadrupole
resonance, or QR, technology. In the event that the U.S. government were to
exercise these rights, our competitive position in supplying the U.S.
government with certified CT-based explosives detection systems and/or the
Quantum products would be harmed. The sales cycle for our EDS products is lengthy, and we may expend a
significant amount of effort in obtaining sales orders and not receive them. The sales cycle of our EDS products is often lengthy due to the protracted
approval process that typically accompanies large capital expenditures and the
time required to manufacture and install our EDS products. Typically, six to
twelve months may elapse between a new customers initial evaluation of our
systems and the execution of a contract. Another three months to a year may
elapse prior to shipment of our EDS products as the customer site is prepared
and our EDS products are manufactured. In addition, in the United States,
budgetary debates in Congress, may result in additional delays in the purchase
of additional EDS products. During the sales cycle we expend substantial funds
and management resources but recognize no associated revenue. Our backlog is not necessarily indicative of future revenues. We measure our backlog of product revenues as orders for systems and
upgrades for which contracts or purchase orders have been signed, but which
have not yet been shipped. We measure our backlog of service revenues as
orders for maintenance related to product support for which contracts have been
signed, but maintenance service has not yet been performed. We typically ship
our products within three to twelve months after receiving an order. However,
such shipments may be affected by delays which occur in the delivery of
components to us or our readiness to accept delivery of components for reasons
of site preparation or otherwise. In some instances, shipments may be made
more quickly depending on our ability to build machines to order and our
customers demand for immediate delivery. Quantum Magnetics contract research and development backlog includes
funded and unfunded awards from government agencies for which services have not
yet been performed. At September 26, 2004, Quantum Magnetics contract
research and development backlog was $13.0 million, $4.6 million of which was
funded. Any failure by us to meet an agreed upon schedule could lead to the
cancellation of the related order. Variations in the size, complexity and
delivery requirements of the customer order may result in substantial
fluctuations in backlog from period to period. In addition, all orders are
subject to cancellation or delay by the customer and, accordingly, we cannot
assure investors that our backlog will eventually result in revenues. For
these reasons, we believe that backlog cannot be considered a meaningful
indicator of our performance on an annual or quarterly basis. Our international sales subject us to risks that could materially harm our
business. Sales to countries other than the United States accounted for 38.2% of our
total revenues in the nine months ended September 26, 2004 and 26.1% of total
revenues in the nine months ended September 28, 2003. It is part of our growth
strategy to increase our international operations. A number of factors related
to our international sales and operations could adversely affect our business,
including:  
    
    changes in domestic and foreign regulatory requirements;  
    
    political instability in the countries where we sell products; 37




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
    
    possible foreign currency controls;  
    
    fluctuations in currency exchange rates;  
    
    our ability to protect and utilize our intellectual property in foreign jurisdictions;  
    
    tariffs, embargoes or other barriers;  
    
    difficulties in staffing and managing foreign operations;  
    
    difficulties in obtaining and managing distributors; and  
    
    potentially negative tax consequences. Further, the sale of some of our products outside the United States is
subject to compliance with the U.S. International Traffic in Arms Regulations
and Export Administration Regulations. Our failure to obtain the requisite
licenses, meet registration standards or comply with other government export
regulations, may affect our ability to generate revenues from the sale of our
products outside the United States, which could harm our business. In
particular, some of our landmine detection equipment are deemed regulated
military devices subject to export restrictions under the U.S. Department of
State regulations. Consequently, these regulations may make these products
more difficult to sell to a number of countries. Compliance with government
regulations may also subject us to additional fees and costs. The absence of
comparable restrictions on competitors in other countries may adversely affect
our competitive position. Like other companies operating or selling internationally, we are subject
to the FCPA and other laws which prohibit improper payments or offers of
payments to foreign governments and their officials and political parties by
U.S. and other business entities for the purpose of obtaining or retaining
business. We make sales in countries known to experience corruption. Our sales
activities in such countries create the risk of an unauthorized payments or
offers of payments by one of our employees, consultants, sales agents or
distributors which could be in violation of various laws including the FCPA,
even though such parties are not always subject to our control. We have
attempted to implement safeguards to prevent losses from such practices and to
discourage such practices by our employees, consultants, sales agents and
distributors. We are in the process of improving such safeguards. However,
our existing safeguards and any improvements may prove to be less than
effective and our employees, consultants, sales agents or distributors may
engage in conduct for which we might be held responsible. Violations of the
FCPA may result in severe criminal or civil sanctions, and we may be subject to
other liabilities, which could negatively affect our business, financial
condition and results of operations. Exchange rate fluctuations could cause a decline in our financial condition and
results of operations. In 2003, the cost of certain international currencies has increased due to
fluctuations in the exchange rate of the U.S. dollar against the euro. As a
result of our international operations and recently acquired Yxlon operations,
we generate a significant portion of our net sales and incur a significant
portion of our expenses in currencies other than the U.S. dollar, primarily the
euro. Future fluctuations in this exchange rate could adversely affect our
results because we pay our non-U.S. employees and certain suppliers in local
currencies, and, in some cases, our sales contracts are denominated in local
currencies. From time to time, as and when we determine it is appropriate and
advisable to do so, we will seek to mitigate the effect of exchange rate
fluctuations through the use of derivative financial instruments. We cannot
assure you, however, that we will continue this practice or be successful in
these efforts. Yxlon generally transacts business in euros. Consequently, its financial
condition and results of operations are reported in euros and then translated
into U.S. dollars at the applicable exchange rate for inclusion in our
consolidated financial statements. As a result, appreciation of the U.S.
dollar against the euro will have a negative impact on our reported revenues
and operating profit while depreciation of the U.S. dollar against the euro
will have a positive effect on reported revenues and operating profit.
However, Yxlons customer contracts that are denominated in U.S. dollars will
be adversely affected by the depreciation of the U.S. dollar. 38




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We may have warranty claims that exceed our reserves. Our EDS products are typically sold with one-year warranties. We have
established reserves for the liability associated with product warranties based
on historical experience with warranty claims. However, our actual warranty
costs, including actual material usage or service delivery costs, may exceed
our reserves, which could have an adverse effect on our operating results. We may not be selected to provide post-warranty service on our CTX products,
and if we are selected to provide post-warranty services, these services may
not be profitable for us. We offer to our customers the opportunity to buy a service contract from
us, which provides for scheduled maintenance, repairs and parts once a warranty
period on a CTX product has expired (which is typically a one-year period). If
we are not selected to provide post-warranty service, this would harm our
business. Some of our post-warranty service contracts contain fixed pricing
terms. If our actual costs, including actual material usage or service
delivery costs, exceed our revenues under these service agreements, our
operating results could be adversely affected. We are currently in
negotiations for the renewal of our agreement to provide service to our CTX
products owned by the TSA. We cannot assure investors that the agreement will
be renewed, or will be renewed on financially advantageous terms. In addition,
historically, we have sold service contracts on most eligible CTX products
deployed internationally. We may not achieve this level of service contract
sales in the future. Our inability to adapt to rapid technological change could impair our ability
to remain competitive. The EDS industry may undergo significant technological development in
response to increased demand for aviation security products. A fundamental
shift in technology in our product markets could harm us, because we derive
substantially all of our revenues from sales of EDS products and services. We anticipate that we will incur significant expenses in the design and
initial manufacturing and marketing of new products and services. Our
competitors may implement new technologies before we are able to, allowing them
to provide more effective products at more competitive prices. Future
technological developments could:  
    
    adversely impact our competitive position;  
    
    require write-downs of obsolete technology;  
    
    require us to discontinue production of obsolete products before we can recover any or all of our related research,
development and commercialization expenses; or  
    
    require significant capital expenditures beyond those currently contemplated. We cannot assure investors that we will be able to achieve the
technological advances to remain competitive and profitable, that new products
and services will be developed and manufactured on schedule or on a
cost-effective basis, that anticipated markets will exist or develop for new
products or services, or that our existing products and services will not
become technologically obsolete. The EDS industry is highly competitive. Given the anticipated continuing
demand for airport security products, competition may increase. The EDS industry is intensely competitive and we may not compete
successfully. As a result of increased demand for security systems, additional
companies may enter the EDS industry. Some of our competitors, including potential new entrants into the
EDS industry, have financial, technical, production and other resources
substantially greater than ours. We believe that some of our competitors have
EDS products undergoing TSA certification. Our failure to compete successfully
could result in lost sales and could hamper our financial results. 39




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We depend on key management and personnel and may not be able to retain those
employees or recruit additional qualified personnel. We believe that our future success will be due, in part, to the continued
services of our senior management team. We do not have long-term employment
agreements with any of our executive officers. Losing the services of one or
more members of our management team could negatively affect our business and
our expansion efforts. We do not maintain key person life insurance policies
for members of our management. We could be seriously harmed by the loss of any
of our executive officers. The implementation of our growth strategy will
require that we recruit additional members of our senior management team. In
addition, in order to manage our growth, we will need to recruit and retain
additional skilled personnel, such as advanced engineering professionals. Our
failure to recruit qualified employees in a timely manner and retain them could
harm our business and our ability to continue to grow. Natural disasters, including earthquakes, may damage our facilities. Our corporate and manufacturing facilities in California are located near
major earthquake faults, which have experienced earthquakes in the past. In
the event of a major earthquake or other natural disaster, our facilities may
sustain significant damage and our operations could be harmed. Our business could be harmed if we fail to properly protect our intellectual
property. Our success depends in part on our ability to protect our intellectual
property. Although we attempt to protect our intellectual property in the
United States and other countries through various methods such as patents and
patent applications, trademarks, copyrights and non-disclosure agreements,
there can be no assurance that we will successfully protect our technology or
that competitors will not be able to develop similar technology independently. We have two U.S. patents for automatic concealed object detection systems
using a pre-scan stage as used in our CTX products. These patents expire in
2010 and 2011. The patents have not prevented competitors from developing
CT-based products which do not use a pre-scan stage. The time period for
filing foreign counterparts of our two U.S. EDS patents has expired, and we did
not seek or obtain patent protection. The absence of foreign counterparts to
our patents could adversely affect our ability to prevent a competitor from
using technology similar to technology used in our CTX products. We also have
a U.S. patent for a mechanical radiation shield for our CTX 9000 DSi model,
which expires in 2021. We rely on this technology to increase the speed of the
baggage inspection process. We have filed other applications in the United
States and Europe for patents covering other features contained in our CTX 9000
DSi model. We cannot assure investors that the claims allowed under any
patents held by us will be sufficiently broad to protect our technology against
competition from third parties with similar technologies or products. In
addition, we cannot assure investors that any patents issued to us will not be
challenged, invalidated or circumvented or that the rights granted under these
patents will provide a competitive advantage to us. Moreover, the laws of some
foreign countries do not protect intellectual property rights to the same
extent as the laws of the United States, and we could experience various
obstacles and high costs in protecting our intellectual property rights in
foreign countries. If we are unable to obtain or maintain these protections,
we may not be able to prevent third parties from using our intellectual
property. We also rely on trade secrets, proprietary know-how and continuing
technological innovation to remain competitive. We have taken measures to
protect our trade secrets and know-how, including the use of confidentiality
agreements with our employees. It is possible that these agreements may be
breached and that the available remedies for any breach will not be sufficient
to compensate us for damages incurred. Litigation may be necessary to enforce or defend against claims of intellectual
property infringement, which could be expensive and, if we lose, could prevent
us from selling our products. Litigation may be necessary in the future to enforce our patents and other
intellectual property rights, to protect our trade secrets or to determine the
validity and scope of the proprietary rights of others. Any litigation,
regardless of the outcome, could be costly and require significant time and
attention of key members of our management and technical personnel. 40




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Our domestic and international competitors, many of whom have
substantially greater resources and have made substantial investments in
competing technologies, may have patents that will prevent, limit or interfere
with our ability to manufacture and sell our products. We have not conducted
an independent review of patents issued to third parties. Because of the
perceived market opportunity we face, companies possessing technology rights
that they believe we might be infringing will now be much more motivated to
assert infringement of their rights. These third parties may assert
infringement or invalidity claims against us and litigation may be necessary to
defend against these claims. An adverse outcome in the defense of a patent
suit could subject us to significant liabilities to third parties, require
disputed rights to be licensed from third parties or require us to cease
selling our products. Even successful defenses of patent suits can be costly
and time-consuming. We have received significant amounts of funding from government grants and
contracts. We cannot assure investors that we will continue to receive this
level of funding for future product development. The U.S. government currently plays an important role in funding the
development of EDS technology and sponsoring its deployment in U.S. airports.
We performed reimbursable research and development for EDS products pursuant to
FAA and TSA grants and contracts totaling $1.8 million in the nine months ended
September 26, 2004, $3.1 million for the year ended December 31, 2003, and
$886,000 for the year ended December 31, 2002. This is a significant reduction
from the $8.3 million for reimbursable research and development for EDS
products from FAA grants and contracts in the year ended December 31, 2001. We
are also aware that other competitors and potential competitors in the EDS
market have received FAA and TSA development grants. The U.S. government also
currently funds almost all of the development of Quantum Magnetics products,
including QR and passive magnetic sensing. We had contract research and
development revenues from the U.S. government for the development of Quantum
Magnetics products of $8.1 million for the nine months ended September 26,
2004, $13.1 million for the year ended December 31, 2003 and of $12.1 million
for the year ended December 31, 2002. We cannot assure investors that
additional research and development funds from the government will become
available in the future or that we will receive any of these additional funds.
If the government fails to continue to sponsor our technology, we would have to
expend more resources on product development, which could adversely affect our
business. In addition, any future grants to our competitors may improve their
ability to develop and market advanced detection products and cause our
customers to delay any purchase decisions, which could harm our ability to
market our products. Substantial leverage and debt service obligations may adversely affect our cash
flow. As a result of the convertible debt offering that we completed in
September 2003, our debt service obligations increased substantially. There is
the possibility that we may be unable to generate cash sufficient to pay the
principal of, interest on and other amounts due in respect of our indebtedness
when due. We may also add equipment loans and lease lines to finance capital
expenditures and may obtain additional long-term debt, working capital lines of
credit and lease lines. Our substantial leverage could have significant negative consequences, including:  
    
    increasing our vulnerability to general adverse economic and industry conditions;  
    
    limiting our ability to obtain additional financing;  
    
    requiring the dedication of a portion of our expected cash flow from operations to
service our indebtedness, thereby reducing the amount of our expected cash flow
available for other purposes, including capital expenditures;  
    
    limiting our flexibility in planning for, or reacting to, changes in our business and
the industry in which we compete; and  
    
    placing us at a possible competitive disadvantage relative to less leveraged
competitors and competitors that have better access to capital resources. 41




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Risks Related to Ownership of Our Common Stock The price of our common stock may fluctuate significantly. The trading price of our common stock has been and may continue to be
subject to large fluctuations, which may result in losses to investors. If the
proposed merger with GE is not completed, or there is heightened uncertainty
about whether it will be completed, our stock price may increase or decrease in
response to a number of events and factors, including:  
    
    the level and changing nature of terrorist activity;  
    
    legislative and regulatory developments related to anti-terrorism efforts or aviation security;  
    
    our quarterly operating results or those of other explosives detection companies;  
    
    the publics reaction to our press releases, announcements and our
filings with the Securities and Exchange Commission;  
    
    our announcement of an acquisition or strategic investment;  
    
    changes in earnings estimates or recommendations by research analysts;  
    
    changes in our relationships with customers; and  
    
    developments affecting our competitors. The market price of our common stock has fluctuated dramatically since the
terrorist attacks of September 11, 2001. For example, immediately prior to
September 11, 2001, our common stock closed at $3.11 per share. Since that
date, our closing stock price has risen to a high of $48.29 per share on March
12, 2002. During 2003, our closing stock price fluctuated from a low of $20.33
per share to a high of $34.41 per share. During the period from January 1,
2004 through March 12, 2004, the last trading day prior to the announcement of
the proposed acquisition of InVision by GE, our closing stock price fluctuated
from a low of $34.35 per share to a high of $41.58 per share. In addition, the
stock market has periodically experienced significant price and volume
fluctuations that have particularly affected the market prices of common stock
of technology companies. These changes have often been unrelated to the
operating performance of particular companies. These broad market fluctuations
may also negatively affect the market price of our common stock and the notes. Delaware law and our charter documents may impede or discourage a takeover,
which could cause the market price of our shares to decline. We are a Delaware corporation and the anti-takeover provisions of Delaware
law impose various impediments on the ability of a third party to acquire
control of us, even if a change in control would be beneficial to our existing
stockholders. Our certificate of incorporation provides for 5,000,000 shares
of preferred stock which our board of directors may issue with terms determined
by them without stockholder approval, a classified board of directors serving
staggered three-year terms, restrictions on who may call a special meeting of
stockholders and a prohibition on stockholder action by written consent. These
provisions of Delaware law and in our charter documents could impede a merger,
takeover or other business combination involving us or discourage a potential
acquirer from making a tender offer for our common stock, which, under certain
circumstances, could reduce the market value of our common stock and the notes. We may not pay cash dividends. We have not declared or paid any cash dividends on our capital stock
previously, and we have agreed not to pay cash dividends under our current bank
line of credit. Historically, we have retained earnings, if any, to support
the development of our business. Payment of future dividends, if any, will be
at the discretion of our board of directors 42




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after taking into account various factors, including our financial condition,
operating results and current and anticipated cash needs. We may become subject to costly and time-consuming class action litigation
following significant changes in our stock price. In the past, following periods of volatility in the market price of a
companys securities, securities class action litigation has often been
instituted against such a company. Were such litigation to be commenced
against us, we would incur substantial costs and there would be diversion of
our managements attention and resources, which could materially harm our
business, results of operations and financial condition. 
 Item 3. Quantitative and Qualitative Disclosures About Market Risk We consider investments purchased with an original or remaining maturity
of less than three months at the date of purchase to be cash equivalents. We
maintain an investment portfolio of various holdings, types, and maturities
(see Note 1 to the condensed consolidated financial statements). These
securities are classified as available for sale and consequently are recorded
on the consolidated balance sheets at fair value with unrealized gains or
losses reported as a separate component of accumulated other comprehensive
income (loss), net of tax. The following table summarizes our cash, cash
equivalents and short-term investments for the periods indicated (in
thousands): September 26,
    
    December 31,2004
    
    2003Cash and cash equivalents
    
    $
    122,263
    
    
    $
    182,382Short-term investments
    
    
    221,301
    
    
    
    94,557Restricted cash
    
    
    5,635
    
    
    
    Total
    
    $
    349,199
    
    
    $
    276,939
 At any time, a sharp rise in interest rates could adversely impact the
fair value of our investment portfolio. Conversely, declines in interest rates
could have a positive impact on the fair value of our investment portfolio. We
do not currently hedge these interest rate exposures. The following table
presents the changes in fair value in investment securities held at September
26, 2004 that are sensitive to changes in interest rates (in thousands) based
on hypothetical adjustments in the applicable interest rates: Valuation of securities
    
    
    
    
    
    Valuation of securitiesgiven an interest rate
    
    
    
    given an interest rateincrease of X basis points
    
    Fair value as of
September 26,
    
    decrease of X basis points150 BPS
    
    100 BPS
    
    50 BPS
    
    2004
    
    (50 BPS)
    
    (100 BPS)
    
    (150 BPS)*Total
    
    $
    348,086
    
    
    $
    348,847
    
    
    $
    349,619
    
    
    $
    349,199
    
    
    $
    351,186
    
    
    $
    351,979
    
    
    $
    352,780
  *
    
    A reduction of 150 basis points, or BPS, is unlikely due to the low
interest rates in effect as of September 26, 2004. These instruments are not leveraged and are held for purposes other than
trading. The modeling technique used measures the change in fair value arising
from selected potential changes in interest rates, using a three-month
investment horizon and hypothetical parallel shifts in the yield curve of plus
or minus 50 BPS, 100 BPS and 150 BPS. Our international system sales and maintenance contracts are generally
denominated in U.S. dollars. In instances where there are significant
international system sales contracts denominated in a foreign currency, we
often enter into forward contracts to mitigate foreign exchange risk. We do
not enter into market risk sensitive instruments for trading purposes. In the
third quarter of 2004, we did not enter into any new foreign exchange options
and forward contracts to hedge against foreign exchange risk for contracts with
international customers denominated in euros and entered into $5.3 million to
hedge against foreign exchange risk for anticipated expenditures denominated in
euros and Swiss francs. At September 26, 2004, December 31, 2003 and December 43




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31, 2002, we had outstanding contracts to convert euros to U.S. dollars
with notional values totaling $5.3 million, $17.3 million and $34.7 million,
with a positive fair value of approximately $20,000 and negative fair values of
$1.4 million and $4.9 million, respectively. At September 26, 2004, we had
outstanding contracts to convert U.S. dollars to euros with notional values
totaling $6.1 million and a negative fair value of $182,000. At September 26,
2004, we had outstanding contracts to convert dollars to Swiss francs with
notional values totaling $3.6 million and a negative fair value of $11,000.
The following table depicts the maturities of the outstanding contract amounts
(in thousands): Within 3Contract Maturity
    
    Months
    
    4-6 Months
    
    7-9 Months
    10-12 MonthsAmount at 9/26/04
    
    $
    12,565
    
    
    $
    2,512
    
    
    $
    
    
    
    $
    Amount at 12/31/03
    
    
    16,738
    
    
    
    588
    
    
    
    
    
    
    
    Amount at 12/31/02
    
    
    13,884
    
    
    
    18,020
    
    
    
    2,653
    
    
    
    99
 Certain costs of providing warranty and maintenance services for systems
sold to foreign countries are denominated in local currencies. To the extent
exchange rates fluctuate, it could become more expensive to provide these
services. To date, these costs have not been significant; however, we expect
they will increase as our installed base increases. We are exposed to foreign currency exchange rate risk inherent in our
sales commitments, anticipated sales, anticipated purchases and assets and
liabilities denominated in currencies other than the U.S. dollar. We transact
business primarily in four currencies worldwide, of which the most significant
to our operations is the euro. In some situations, we are a net receiver of
foreign currencies and therefore benefit from a weaker U.S. dollar and are
adversely affected by a stronger U.S. dollar relative to those foreign
currencies in which we transact significant amounts of business. We performed a
sensitivity analysis as of September 26, 2004, December 31, 2003 and December
31, 2002 using a modeling technique that measures the change in the fair values
arising from a hypothetical 10% and 15% adverse movement in the levels of
foreign currency exchange rates relative to the U.S. dollar (that is,
strengthening of the U.S. dollar) with all other variables held constant. The
analysis covers all of our foreign exchange forward options and contracts
offset by the underlying exposures. The analysis excludes balances and
transactions pertaining to Yxlon. Foreign exchange rate risk is relatively low
for Yxlon given that it primarily transacts business in euros. The cash flow impacts of our sensitivity analysis as of September 26, 2004
are summarized in the following table (the foreign currency exchange rates used
were based on market rates in effect at September 26, 2004): Cash flow impact of change in exchange ratesFair Value as of(in thousands)
    
    Contract Amount
    
    September 26, 2004
    
    10% Change
    
    15% ChangeForeign exchange forward contracts
    
    $
    4,431
    
    
    $
    (173
    )
    
    $
    (392
    )
    
    $
    (567
    )Foreign exchange forward options
    
    
    280
    
    
    
    2
    
    
    
    (2
    )
    
    
    (2
    )Accounts receivable
    
    
    4,731
    
    
    
    4,929
    
    
    
    (493
    )
    
    
    (739
    )Firm orders*
    
    
    4,861
    
    
    
    6,054
    
    
    
    (605
    )
    
    
    (908
    )Other working capital balances, net
    
    
    2,087
    
    
    
    2,101
    
    
    
    199
    
    
    
    298Total
    
    
    
    
    
    
    
    
    
    $
    (1,293
    )
    
    $
    (1,918
    )
    The cash flow impact of changes in exchange rates at September 26, 2004 is
not significantly different from the cash flow impact of changes in exchange
rates at December 31, 2003 and 2002. 44




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We do not expect the impact of changes in interest rates to have a
material impact on our operations, cash flow or liquidity. In addition, the
impact of inflation has not been material on our operations, cash flow or
liquidity to date. 
 Item 4. Controls and Procedures Evaluation of Disclosure Controls and Procedures Based on our managements evaluation (with the participation of our
principal executive officer and principal financial officer) of our disclosure
controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the
Securities Exchange Act of 1934, as amended (the Exchange Act)), as of the
end of the period covered by this quarterly report, our principal executive
officer and principal financial officer have concluded that, except for the
matters described under Changes in Internal Control Over Financial Reporting
below, such disclosure controls and procedures are effective to ensure that
information required to be disclosed by us in reports that we file or submit
under the Exchange Act is recorded, processed, summarized and reported within
the time periods specified in Securities and Exchange Commission rules and
forms. Changes in Internal Control Over Financial Reporting There was no change in our internal control over financial reporting
during our third fiscal quarter of 2004 that has materially affected, or is
reasonably likely to materially affect, our internal control over financial
reporting. On July 30, 2004, we announced an internal investigation of possible
offers of improper payments by our distributors in connection with foreign
sales activities, potentially in violation of the Foreign Corrupt Practices
Act. In connection with the internal investigation, we are continuing to
evaluate whether there are deficiencies and weaknesses in our internal
compliance programs, disclosure controls and procedures and internal controls
over financial reporting. If we determine that there are deficiencies and
weaknesses in our internal compliance programs or internal controls over
financial reporting, we intend to implement the necessary changes to rectify
any such deficiencies or weaknesses. 
 PART II. OTHER INFORMATION 
 Item 1. Legal Proceedings InVision and our subsidiary, Quantum Magnetics, together with many other
entities, were named as defendants in approximately 156 products liability
lawsuits by individual plaintiffs seeking damages for wrongful death in
connection with the terrorist acts of September 11, 2001. The litigation was
consolidated in In re: September 11 Litigation, 21 MC 97 (AKH), United States
District Court for the Southern District of New York. InVision and Quantum
Magnetics have been served with 103 complaints. Each complaint with which we
have been served alleges that defendants have breached a duty to airplane
passengers and others by failing to properly screen passengers and carry-on
baggage for dangerous weapons. We believe that the plaintiffs claims lack
merit, especially in light of the fact that InVision and Quantum Magnetics did
not, as of September 11, 2001, have any passenger or carry-on baggage screening
equipment at security checkpoints in any of the airports from which the
hijacked airplanes departed. By court order, the plaintiffs were required to
file and serve Amended Master Complaints and Appendices by March 31, 2004 to
reflect all defendants and causes of action in the In re: September 11
Litigationthat had been added since their original Master Complaints were
filed. InVision and Quantum Magnetics were not included in the plaintiffs
Amended Master Complaints and their Appendices. Since these Amended Master
Complaints are controlling over the individual complaints filed by the
plaintiffs, all plaintiffs in the In re: September 11 Litigationhave
effectively dismissed their claims against InVision and Quantum Magnetics.
Notices of dismissals or dismissal orders have been received in all of the
individual complaints. In September 2004, new complaints alleging personal
injury and property damages were filed in the In re: September 11 Litigation.
None of these complaints name InVision and Quantum Magnetics as defendants. As
a result of the filing of these new complaints, the new deadline for the named
defendants to assert cross-claims and third party claims is March 31, 2005. 45




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On March 19, 2004, two alleged holders of InVision common stock filed
purported class action lawsuits in California Superior Court for the County of
Alameda. The complaints name as defendants each of our directors as well as
InVision. The complaints allege that, in pursuing the transaction with GE and
approving the merger agreement, the directors violated their fiduciary duties
to the holders of InVision common stock by, among other things, failing to
obtain the highest price reasonably available, tailoring the terms of the
transaction to meet GEs needs, engaging in self-dealing and obtaining personal
financial benefits not shared equally by the plaintiffs and other stockholders.
The complaints also allege that the merger agreement resulted from a flawed
process designed to ensure a sale to one buyer. The lawsuits have been
consolidated by stipulation of the parties under one lead case, Waltman, et al.
v. InVision Technologies, Inc., et al., Lead Case No. RG04146722. On May 3,
2004, InVision and three directors filed a demurrer to the consolidated
complaint on the grounds that plaintiffs failed to allege sufficient facts to
state a cause of action. The remaining five directors filed a motion to quash
the service of summons because they are not California residents, and,
therefore, the court lacks jurisdiction over them. On May 25, 2004, in response
to the demurrer, the plaintiffs filed a consolidated amended class action
complaint asserting similar causes of action, thereby rendering the demurrer
moot. The plaintiffs served initial written discovery requests and following
the May 26, 2004 Initial Complex Case Management Conference, the plaintiffs
were permitted limited expedited discovery for the purpose of a bringing a
motion for a preliminary injunction. On June 17, 2004, prior to the filing of
any motion for a preliminary injunction, the parties entered into a memorandum
of understanding to settle the consolidated class action suit. Under the terms
of the memorandum, InVision and the plaintiffs to the consolidated action have
agreed, subject to approval by the court, to enter into a settlement with
respect to all claims raised by the plaintiffs to the consolidated action. The
terms of the settlement contemplated by the memorandum required that additional
disclosures be made concerning the merger. Those disclosures were made
available in the June 18, 2004 joint press release issued by GE Infrastructure
and InVision. The parties also agreed that plaintiffs may seek attorneys fees
and costs in the amount of $450,000 that InVision will pay, if the attorneys
fees and costs are granted by the court. There will be no other settlement
payment by InVision, GE or any of the members of InVisions board of directors,
who were also named as defendants in the lawsuits. On September 16, 2004, the
Court permitted plaintiffs to file a second amended complaint. The second
amended complaint added a purported derivative claim against the individual
defendants and alleged that they had permitted, or failed to prevent, the
activities that gave rise to the internal investigation into possible offers of
improper payments by our distributors in connection with foreign sales
activities. By agreement of the parties and order of the Court, no responsive
pleading is due pending the Courts consideration of the proposed settlement.
If the court approves the settlement contemplated in the memorandum, the
lawsuits, as amended, will be dismissed. However, there can be no assurance
that the court will approve the proposed settlement or that any ultimate
settlement will be under terms substantially similar to those contemplated by
the memorandum. On July 30, 2004, we announced that we had met with the Department of
Justice and the Securities and Exchange Commission concerning our voluntary
disclosure of an internal investigation of possible offers of improper payments
by our distributors in connection with foreign sales activities. We are
continuing to cooperate fully with any investigation of these matters by the
Department of Justice and/or the Securities and Exchange Commission. On August 4, 2004, an alleged holder of InVision common stock filed a
purported class action lawsuit in the United States District Court for the
Northern District of California, captioned Engelken, Individually and On Behalf
of All Others Similarly Situated, v. InVision Technologies, Inc., et al. The
complaint names as defendants Giovanni Lanzara, the Chairman of our Board of
Directors, Sergio Magistri, our Chief Executive Officer and a director, and
Ross Mulholland, Senior Vice President and Chief Financial Officer of InVision,
as well as InVision. The complaint alleges that we and the individual
defendants failed to disclose that our foreign distributors had made improper
payments in connection with foreign sales activities, that we had improperly
accounted for such payments, that our improper accounting for such payments
allowed us to enter into a definitive merger agreement with GE, that we and the
individual defendants made related misrepresentations, and that these alleged
nondisclosures and misrepresentations violated Section 10(b) of the Exchange
Act and Rule 10b-5.

A substantially identical lawsuit was filed on August 9, 2004. On
October 13, 2004, the Court granted a motion by The Glazer Funds to
consolidate the actions and to be appointed lead plaintiff. On
October 29, 2004 the parties submitted a proposed scheduling order to
the Court that contemplates the filing of a consolidated amended
complaint on or before December 9, 2004, and a hearing on any motions
to dismiss on March 29, 2005. The disposition of the proposed
scheduling order is uncertain. We also are involved in legal proceedings, claims and litigation
arising in the ordinary course of business. While
the outcome of the matters arising in the ordinary course of business
is currently not determinable, we do not believe that the
ultimate resolution of those matters will have a material
adverse effect on our consolidated financial
condition, results of operations or cash flows. With respect to the
other matters, the outcome is currently not determinable, and we are unable at this time to predict the financial impact of
these matters on our consolidated financial condition, results of
operations or cash flows. 46




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Item 6. Exhibits 2.1
    
    Share and Purchase Transfer Agreement dated as of February 21, 2003 among the
registrant, Yxlon Beteiligungs-Verwaltung GmbH, NDT International Holdings A.S, Yxlon
International Holding GmbH, Yxlon International X-Ray GmbH, Joseph Kosanetzky,
Reinhard Bonisch and Botts & Company Ltd. (1)2.2
    
    Agreement and Plan of Merger, dated as of March 15, 2004, among the registrant,
General Electric Company and Jet Acquisition Sub, Inc. (2)3.1
    
    Amended and Restated Certificate of Incorporation of the registrant. (3)3.2
    
    Amendment to Amended and Restated Certificate of Incorporation of the registrant (4)3.3
    
    Bylaws of the registrant, as amended. (5)4.1
    
    Reference is made to Exhibits 3.1 through 3.3.4.2
    
    Indenture, dated as of September 19, 2003, between the registrant and U.S. Bank
National Association, as Trustee. (6)4.3
    
    Registration Rights Agreement, dated as of September 19, 2003 between the registrant
and Merrill Lynch, Pierce, Fenner & Smith Incorporated. (6)4.4
    
    Form of Note for the registrants 3% Convertible Senior Notes due October 1, 2023. (6)10.1
    
    Waiver Letter dated as of October 30, 2004 among the registrant, General Electric
Company and Jet Acquisition Sub, Inc. (7)31.1
    
    Section 302 Certification of Chief Executive Officer.31.2
    
    Section 302 Certification of Chief Financial Officer.32.1
    
    Certificate of Chief Executive Officer and Chief Financial Officer.
  (1)
    
    Filed as an exhibit to the registrants Quarterly Report on Form 10-Q for
the quarter ended March 30, 2003 and incorporated herein by reference.(2)
    
    Filed as an exhibit to the registrants Annual Report on Form 10-K for
the year ended December 31, 2003 and incorporated herein by reference.(3)
    
    Filed as an exhibit to the registrants Registration Statement on Form
S-1 (No. 333-05517) and incorporated herein by reference.(4)
    
    Filed as an exhibit to the registrants Annual Report on Form 10-K for
the year ended December 31, 2001 and incorporated herein by reference.(5)
    
    Filed as an exhibit to the registrants Quarterly Report on Form 10-Q for
the quarter ended June 29, 2003 and incorporated herein by reference.(6)
    
    Filed as an exhibit to the registrants Registration Statement on Form
S-3 (No. 333-110289) and incorporated herein by reference.(7)
    
    Filed as an exhibit to the registrants Current Report on Form 8-K filed
on November 1, 2004 and incorporated herein by reference. 47




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SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized. INVISION TECHNOLOGIES, INC.Date: November 4, 2004
    
    /s/ Sergio Magistri
Sergio Magistri, Ph.D.
President and Chief Executive Officer(Authorized Officer)Date: November 4, 2004
    
    /s/ Ross Mulholland
Ross Mulholland
Senior Vice President and Chief Financial Officer(Principal Financial and Accounting Officer)
 48




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EXHIBIT INDEX Exhibit2.1
    
    Share and Purchase Transfer Agreement dated as of February 21, 2003 among the
registrant, Yxlon Beteiligungs-Verwaltung GmbH, NDT International Holdings A.S, Yxlon
International Holding GmbH, Yxlon International X-Ray GmbH, Joseph Kosanetzky,
Reinhard Bonisch and Botts & Company Ltd. (1)2.2
    
    Agreement and Plan of Merger, dated as of March 15, 2004, among the registrant,
General Electric Company and Jet Acquisition Sub, Inc. (2)3.1
    
    Amended and Restated Certificate of Incorporation of the registrant. (3)3.2
    
    Amendment to Amended and Restated Certificate of Incorporation of the registrant (4)3.3
    
    Bylaws of the registrant, as amended. (5)4.1
    
    Reference is made to Exhibits 3.1 through 3.3.4.2
    
    Indenture, dated as of September 19, 2003, between the registrant and U.S. Bank
National Association, as Trustee. (6)4.3
    
    Registration Rights Agreement,
dated as of September 19, 2003 between the registrant and Merrill Lynch, Pierce, Fenner & Smith Incorporated. (6)4.4
    
    Form of Note for the registrants 3% Convertible Senior Notes due October 1, 2023. (6)10.1
    
    Waiver Letter dated as of
October 30, 2004 among the registrant, General Electric Company and Jet Acquisition Sub, Inc. (7)31.1
    
    Section 302 Certification of Chief Executive Officer.31.2
    
    Section 302 Certification of Chief Financial Officer.32.1
    
    Certificate of Chief Executive Officer and Chief Financial Officer.
  (1)
    
    Filed as an exhibit to the registrants Quarterly Report on Form 10-Q for
the quarter ended March 30, 2003 and incorporated herein by reference.(2)
    
    Filed as an exhibit to the registrants Annual Report on Form 10-K for
the year ended December 31, 2003 and incorporated herein by reference.(3)
    
    Filed as an exhibit to the registrants Registration Statement on Form
S-1 (No. 333-05517) and incorporated herein by reference.(4)
    
    Filed as an exhibit to the registrants Annual Report on Form 10-K for
the year ended December 31, 2001 and incorporated herein by reference.(5)
    
    Filed as an exhibit to the registrants Quarterly Report on Form 10-Q for
the quarter ended June 29, 2003 and incorporated herein by reference.(6)
    
    Filed as an exhibit to the registrants Registration Statement on Form
S-3 (No. 333-110289) and incorporated herein by reference.(7)
    
    Filed as an exhibit to the registrants Current Report on Form 8-K filed
on November 1, 2004 and incorporated herein by reference. 49