Net cash used in investing activities was $0.5 million in the first quarter of 2001, compared to $3.0 million provided by investing activities in the first quarter of 2000.  Net cash used in investing activities in the first quarter of 2001 resulted from $0.5 million in acquisitions of capital equipment.  Net cash provided by investing activities in the first quarter of 2000 primarily resulted from $4.9 million in sales of short-term investments (net of purchases), partially offset by the cash payment of $1.5 million for the purchase of Inovec, net of cash acquired, and $0.4 million in acquisitions of capital equipment.

             Net cash provided by financing activities was $3.7 million in the first quarter of 2001, compared to $13,000 used in financing activities in the first quarter of 2000. Net cash provided by financing activities in the first quarter of  2001 was primarily due to $3.7 million in net proceeds from borrowings of short-term debt and $77,000 in proceeds from sales under the employee stock purchase plan, partially offset by $111,000 in repayments of long-term debt.  Net cash used in financing activities in the first quarter of 2000 was primarily due to $90,000 in repayments of long-term debt, partially offset by $77,000 in proceeds from sales under the employee stock purchase plan and exercises of incentive stock options.

             In November 2000, the Company renewed its two line of credit agreements with a bank.  The first agreement provides for maximum borrowings in an amount up to the lower of 80% of eligible domestic EDS receivables or $5.0 million.  The second agreement is partially guaranteed by the Export-Import Bank (“EXIM”) of the United States and provides for maximum borrowings in an amount up to the lower of:  (a) the sum of 80% of eligible EDS export accounts receivable plus the lower of: (i) 70% of eligible raw materials and work-in-process inventory designated for export customers; (ii) 60% of outstanding loans under this agreement, or; (iii) $2.0 million, or; (b) $5.0 million.  Borrowings under both agreements bear interest at the bank’s prime rate plus 1.5% (9.5% at April 1, 2001) and are secured by EDS assets. The agreements expire in November 2001 and require that the EDS segment maintain certain levels of tangible net worth and intercompany balances from its wholly-owned subsidiaries, and also prohibit the Company from paying cash dividends.  Proceeds of loans under both lines of credit may be used for general corporate purposes.  At April 1, 2001, the Company had borrowings outstanding of $2.4 million under the domestic EDS agreement and $2.0 million under the EXIM agreement.  Additionally, the Company had outstanding guarantees to customers through issuance of letters of credit secured by the lines of credit totaling $1.2 million and foreign exchange contracts for which a 10% reserve of $155,000 is secured by the lines of credit.   The remaining available borrowing capacity under the lines of credit was $1.2 million at April 1, 2001 based on eligible EDS accounts receivable and inventories as of that date.

             The Company previously borrowed against a committed equipment line of credit agreement with a bank, which converted into a term loan after draw down.  Borrowings are secured by the assets purchased or financed.  At April 1, 2001, the Company had an outstanding $298,000 term loan due June 2003 and a $143,000 term loan due November 2001.  The term loans bear interest at the bank’s prime rate plus 1.5% (9.5% at April 1, 2001).

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

Business Risks

             History of Losses; No Assurance of Continued Profitability.  The Company commenced operations in September 1990, remained in the development stage through 1994 and received its first revenues from product sales in the first nine months of 1995.  The Company experienced net losses for each year from inception through December 31, 1996. The year ended December 31, 1997 was the Company’s first year of profitability.  As of April 1, 2001, the Company had an accumulated deficit of approximately $10.9 million.  Although the Company was profitable on an annual basis for the years 1997, 1998 and 1999, profitability in 1999 was below that of the prior two years and the Company was not profitable in 2000. There can be no assurance that the Company will attain annual profitability for 2001 or in the future. See "Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources."

             Fluctuations in Operating Results.  The Company's past operating results have been, and its future operating results will be, subject to fluctuations resulting from a number of factors, including: the timing and size of orders from, and shipments to, major customers; budgeting and purchasing cycles of its customers; delays in product shipments caused by manufacturing delays related to introduction of new products, custom requirements of customers or ability of the customer to accept shipment; the timing of enhancements to the CTX Series by InVision or introduction of new products by it or its competitors and the market acceptance thereof; changes in pricing policies by InVision, its competitors or suppliers, including decreases in average selling prices of the CTX Series in response to competitive pressures; the proportion of revenues derived from competitive bid processes; the mix between sales to domestic and international customers and the mix between sales of various CTX products; the availability and cost of key components; and fluctuations in general economic conditions. InVision also may experience decreases in spending reimbursed by government or third party contracts or choose to increase spending which is not  reimbursed by government or other third party contracts in response to competition or as it pursues new market opportunities in the areas of wood scanning, landmine detection and others, all of which may have a material adverse effect on InVision's business, financial condition or results of operations. InVision's EDS systems revenues in any period are derived from sales of multiple CTX Series systems to a limited number of customers and are recognized upon shipment which, in view of the high sales price of units in the CTX Series, causes minor variations in the number of orders, or the timing of shipments, to substantially affect the Company's quarterly revenues. Because a significant portion of the Company's quarterly operating expenses are, and will continue to be, relatively fixed in nature, such revenue fluctuations will cause the Company's quarterly and annual operating results to vary substantially. Accordingly, the Company believes that period-to-period comparisons of its results of operations are not meaningful and cannot be relied upon as indicators of future performance. Because of all of the foregoing factors, the Company's operating results have from time to time in the past been and may again in the future be below the expectations of public market analysts and investors.  This failure to meet market expectations has in the past and may again in the future result in a decline in the trading price of the common stock.

             Dependence on Large Orders; Customer Concentrations; Lengthy Sales Cycle.  In any given fiscal year, the Company's product and service revenues have principally consisted, and the Company believes will continue to consist, of orders of multiple units from a limited number of customers. While the number of individual customers may vary from period to period, the Company is nevertheless dependent upon these multiple orders for a substantial portion of its revenues. There can be no assurance that the Company will obtain such multiple orders on a consistent basis. To date, all orders for CTX Series systems from United States customers have been entirely funded by the FAA, and the Company's largest sales contract to date, for 105 CTX Series systems, all of which have been shipped, was with the FAA.  In 2000, the Company entered into several contracts with customers to purchase CTX Series systems over a period of several years.  These contracts have a minimum and maximum number of units the customer can order, however, there can be no assurance that the customer will order more than the minimum number of units in accordance with the terms in the contract.   The Company's inability to obtain sufficient multiple orders or the failure of the FAA to continue such purchases or funding would have a material adverse effect on the Company's business, financial condition or results of operations. Moreover, the timing and shipment of such orders could cause the operating results in any quarter to differ from the projections of securities analysts, which could adversely affect the trading price of the common stock.

             Public Agency Contract and Budget Considerations.  Substantially all of InVision's EDS customers and a high percentage of Quantum’s research and development customers to date have been public agencies or quasi-public agencies.  In contracting with public agencies, the Company is subject to public agency contract requirements which vary from jurisdiction to jurisdiction and which are subject to budgetary processes and expenditure constraints.  Budgetary allocations for explosive detection systems are dependent, in part, upon governmental policies which fluctuate from time to time in response to political and other factors, including the public's perception of the threat of commercial airline bombings.  Many domestic and foreign government agencies have experienced budget deficits that have led to decreased capital expenditures in certain areas.  The Company's results of operations may be subject to substantial period-to-period fluctuations as a result of these and other factors affecting capital spending.  A reduction of funding for explosive detection technology deployment could materially and adversely affect the Company's business, financial condition or results of operations. Future sales to public agencies will depend, in part, on the Company's ability to meet public agency contract requirements, certain of which may be onerous or even impossible for the Company to satisfy. In addition, public agency contracts are frequently awarded only after formal competitive bidding processes, which have been and may continue to be protracted, and typically contain provisions that permit cancellation in the event that funds are unavailable to the public agency. There can be no assurance that the Company will be awarded any of the contracts for which its products are bid or, if awarded, that substantial delays or cancellations of purchases will not result from protests initiated by losing bidders.   In addition, the Company’s landmine detection equipment currently in the prototype stage is deemed a regulated military device subject to export restrictions under the U.S. Department of State regulations. Export of landmine detection equipment may be difficult or limited to a small number of countries, even for purposes of demonstration and further data collection and development.

             Wood Industry Purchasing Cycle; Acceptance of New Products.  The Company’s revenues related to the wood segment, including optimization systems manufactured by Inovec, will be subject to the ability and willingness of customers in the wood industry to purchase capital equipment to improve productivity, yield and finished product value.  The factors that affect the decision to purchase such capital equipment include the demand for wood products, market prices for logs and finished wood products, labor costs, interest rates and other general economic factors.  In addition, the revenues related to the Company’s CT scanners for the wood industry will be subject to the acceptance of new technology by customers in the wood industry.  There are no assurances that market conditions in the wood industry will be favorable for the sale of capital equipment, or that the Company’s new products will be accepted by the industry in any particular time, or at all.