VIVID TECHNOLOGIES INC, S-1/A, 1996-11-27

VIVID TECHNOLOGIES INC
S-1/A, 1996-11-27
X-RAY APPARATUS & TUBES & RELATED IRRADIATION APPARATUS

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<PAGE>

AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 27, 1996

REGISTRATION NO. 333-14311

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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

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AMENDMENT NO. 3
TO
FORM S-1
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933

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VIVID TECHNOLOGIES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

DELAWARE 3844 04-3054475
(STATE OR OTHER (PRIMARY STANDARD (I.R.S. EMPLOYER
JURISDICTION OF INDUSTRIAL IDENTIFICATION NUMBER)
INCORPORATION OR CLASSIFICATION CODE
ORGANIZATION) NUMBER)

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10E COMMERCE WAY, WOBURN, MASSACHUSETTS 01801 (617) 938-7800
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)

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S. DAVID ELLENBOGEN
PRESIDENT AND CHIEF EXECUTIVE OFFICER
VIVID TECHNOLOGIES, INC.
10E COMMERCE WAY
WOBURN, MASSACHUSETTS 01801 (617) 938-7800
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)

----------------

Copies to:
LAWRENCE M. LEVY, ESQUIRE EDWIN L. MILLER, JR., ESQUIRE
BROWN, RUDNICK, FREED & GESMER TESTA, HURWITZ & THIBEAULT, llp
One Financial Center 125 High Street
Boston, Massachusetts 02111 Boston, Massachusetts 02110
(617) 856-8200 (617) 248-7000

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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after the effective date of this Registration
Statement.

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If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [_]

If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]

If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]

If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box. [_]

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THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(A), MAY DETERMINE.

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<PAGE>

EXPLANATORY NOTE

This Registration Statement contains two forms of prospectus: one to be used
with a United States offering (the "U.S. Prospectus") and one to be used in
connection with a concurrent international offering (the "International
Prospectus"). The U.S. Prospectus and the International Prospectus will be
identical in all respects except for the front and back cover pages. The U.S.
Prospectus is included herein and is followed by those pages to be used in the
International Prospectus which differ from those used in the U.S. Prospectus.
Each of the pages for the International Prospectus included herein has been
labeled "Alternate Page for International Prospectus."
<PAGE>

++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++

Subject to Completion, dated November 27, 1996

PROSPECTUS

2,000,000 SHARES

TECHNOLOGIES
INCORPORATED
LOGO

COMMON STOCK

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All of the 2,000,000 shares of Common Stock offered hereby are being sold by
Vivid Technologies, Inc. ("Vivid" or the "Company"). Of such shares, 1,600,000
shares are being offered in the United States and Canada (the "U.S. Offering")
by the U.S. Underwriters (as defined in "Underwriting"), and 400,000 shares are
being offered outside the United States and Canada in a concurrent
international offering (the "International Offering") by the International
Managers (as defined in "Underwriting," and, together with the U.S.
Underwriters, the "Underwriters"). These offerings are collectively referred to
herein as the "Offering." See "Underwriting." The closing of the U.S. Offering
is a condition to the closing of the International Offering and the closing of
the International Offering is a condition to the closing of the U.S. Offering.

Prior to the Offering, there has been no public market for the Common Stock.
The initial public offering price and underwriting discounts and commissions
are identical for each of the Offerings. See "Underwriting" for the factors to
be considered in determining the initial public offering price. It is currently
estimated that the initial public offering price will be between $12.00 and
$14.00 per share. The Common Stock has been approved for quotation on the
Nasdaq National Market under the symbol "VVID."

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SEE "RISK FACTORS" BEGINNING ON PAGE 6 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE SHARES OF COMMON
STOCK OFFERED HEREBY.

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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.

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<TABLE>
<CAPTION>
Price to Underwriting Discounts Proceeds to
Public and Commissions(1) Company(2)
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<S> <C> <C> <C>
Per Share.......................... $ $ $
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Total(3)........................... $ $ $
</TABLE>
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(1) The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended (the "Securities Act"). See "Underwriting."
(2) Before deducting expenses payable by the Company estimated at $650,000. The
Company intends to use $5,780,650 of the net proceeds of the Offering to
redeem all of its outstanding shares of nonconvertible redeemable Series A
Preferred Stock and Series C Preferred Stock. See "Risk Factors--
Substantial Benefits of the Offering to Existing Stockholders," "Use of
Proceeds" and "Certain Transactions--Certain Financing Transactions."
(3) The Company has granted the U.S. Underwriters a 30-day option to purchase
up to an aggregate of 240,000 additional shares of Common Stock solely to
cover over-allotments, if any. The International Managers have been granted
a similar option to purchase up to 60,000 additional shares solely to cover
over-allotments, if any. If such options are exercised in full, the total
Price to Public would be $ , the total Underwriting Discounts and
Commissions would be $ , and the total Proceeds to Company before
estimated expenses would be $ . See "Underwriting."

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The shares of Common Stock offered by this Prospectus are offered by the U.S.
Underwriters subject to prior sale, to withdrawal, cancellation or modification
of the offer without notice, to delivery to and acceptance by the U.S.
Underwriters and to certain further conditions. It is expected that delivery of
the shares will be made at the offices of Lehman Brothers Inc., New York, New
York, on or about , 1996.

LEHMAN BROTHERS

COWEN & COMPANY

NEEDHAM & COMPANY, INC.

, 1996
<PAGE>

[Graphic consists of map of western portion of Europe with small airplanes on
map signifying airports which have installed or ordered Vivid Systems]

The following legends appear on the graphics:

Vivid Logo

Installations

BELGIUM
Brussels National Airport

ENGLAND
Bristol Airport
East Midlands Airport
London Gatwick Airport
London Heathrow Airport
London Stansted Airport
Newcastle Airport
Southampton Airport

FRANCE
Paris Charles de Gaulle Airport
Paris Orly Airport*

NETHERLANDS
Amsterdam Schiphol Airport

SCOTLAND
Aberdeen Airport
Edinburgh Airport
Glasgow Airport

SPAIN
Alicante Airport*

SWITZERLAND
Zurich Airport

*Systems on Order for Installation

IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK OF
THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ NATIONAL MARKET, IN THE
OVER-THE-COUNTER MARKET OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE
DISCONTINUED AT ANY TIME.

<PAGE>

[Graphic consists of a schematic illustrating a possible configuration of the
deployment of the Company's products at an airport, both in a multi-level
checked baggage screening configuration in the baggage handling area and for
screening carry-on baggage at the pre-board screening checkpoint area.
Photographs of the Company's VIS-M systems with multiple workstations, VDS-3
system, APS system and an image of the contents of a bag created by an APS
system are superimposed on the graphic.]

The following legends appear on the graphic:

General Caption: Vivid's automated explosives detection systems are designed to
be used in a variety of multi-level checked baggage screening configurations in
airport baggage handling areas. Vivid's systems are also designed to inspect
carry-on baggage at the pre-board screening checkpoint. As of September 30, 1996
more than 100 of the Company's systems for checked baggage have been selected
for use at 16 airports in Europe, of which over 70 systems were installed.

Level 1 System: The VIS-M system automatically (without the use of an operator)
inspects up to 1,500 checked bags per hour. Baggage cleared by the system
continues en route to the aircraft.

Level 2 Workstations: Images from bags rejected by the Level 1 system are
reviewed by operators at remote Level 2 workstations. Baggage cleared by
the operator continues en route to the aircraft.

Level 3 System: Baggage rejected by the Level 2 operator is forwarded to Level
3 for a more detailed automated analysis and operator review. Baggage rejected
by Level 3 operators is opened in the presence of the passenger.

Advanced Passenger Screening System: The recently introduced APS system
automatically indicates explosive materials contained in carry-on baggage. The
system is being evaluated by various governmental agencies and has not yet been
sold by the Company.

APS Image: Suspect materials are highlighted in bright red to assist the
operator in the detection of explosives. Weapons, such as guns or knives, are
visible to the operator without enhancement.

<PAGE>

(4/C)
<PAGE>

PROSPECTUS SUMMARY

The following summary is qualified in its entirety by reference to the more
detailed information and the consolidated financial statements and notes
thereto (the "Consolidated Financial Statements") appearing elsewhere in this
Prospectus. All references in this Prospectus to the terms "Vivid" and the
"Company" refer to Vivid Technologies, Inc., its Massachusetts predecessor and
its wholly-owned subsidiaries unless otherwise required by the context. See
"Risk Factors" for information that should be considered by prospective
investors.

THE COMPANY

The Company is a leading developer, manufacturer and marketer of automated
inspection systems which detect plastic and other explosives in airline
baggage. The Company's family of advanced explosives detection systems identify
targeted materials by analyzing the physical characteristics of each item in a
bag, including the atomic number and mass, using patented composition analysis
techniques and proprietary dual-energy X-ray technology. These systems
automatically (without the use of an operator) isolate and identify targeted
materials within a bag, thereby preventing a suspect bag from being loaded into
an aircraft until cleared by operator inspection. The Company's systems can
also be used to identify a wide variety of other substances, including drugs
and currency.

In 1993, the Company's automated systems were successfully deployed in
airports as part of an integrated multi-level checked baggage screening
approach that is being adopted in many countries throughout the world. As of
September 30, 1996, the Company had sold more than 100 systems for installation
in airports throughout Europe of which over 70 systems had been installed. The
Company's systems are in use in 14 of the 17 airports that, to the knowledge of
the Company, have deployed advanced integrated automated explosives detection
systems. Airports at which the Company's systems are deployed include London
Heathrow and London Gatwick, Paris Charles de Gaulle, Amsterdam, Zurich,
Brussels and Glasgow.

In response to the December 1988 bombing of Pan American Flight 103 over
Lockerbie, Scotland, many countries began to require the installation of
systems that could detect plastic and other explosives in airline baggage.
Europe, led by the United Kingdom, has been at the forefront of deploying
advanced automated explosives detection screening equipment. The United Kingdom
Department of Transport (the "UK DOT") has required all of the United Kingdom's
commercial airports to deploy systems for 100% screening of international
checked baggage by the end of 1997. The European Civil Aviation Conference
("ECAC"), an organization of 33 member states, has agreed to implement 100%
screening of international checked baggage by the year 2000. In the
Asia/Pacific region, major new airports and terminals, including those in Hong
Kong, Malaysia, Singapore and South Korea, are being designed to include 100%
screening of international checked baggage. In the United States, the Federal
Aviation Administration (the "FAA") has adopted more comprehensive standards
for explosives detection systems than those adopted by the rest of the world.
To date, no system has demonstrated that it meets these standards under
realistic airport operating conditions. As a result, only a limited number of
explosives detection systems have been deployed, primarily on a test basis, in
the United States. In response to the recent crash of TWA Flight 800 off Long
Island, New York in July 1996, the United States has enacted legislation which
includes a $144.2 million allocation for the purchase of explosives detection
systems and other advanced security equipment by air carriers and airport
authorities.

The Company believes that the success of its systems is attributable to their
high performance, cost effectiveness, reliability, product breadth and system
flexibility. These systems identify plastic and other high explosives, with
relatively low false alarm rejections at throughputs of up to 1,500 bags per
hour, which is comparable to the peak throughput of existing baggage handling
equipment. The Company's installed base has had a reported average system
availability of over 99% at airports of varying sizes, including London
Heathrow, one of the world's largest international airports, serving more than
50 million passengers per year.

The Company's objectives are to maintain its leadership in the airport
automated explosives detection systems market and to apply its technology to
address complementary applications. The key elements of the

3
<PAGE>

Company's strategy to achieve these objectives are to maintain its
technological leadership, to continue its international expansion, to
capitalize on the emerging United States market, to expand its product line and
applications for those products, and to explore strategic alliances and
acquisitions to complement its products and technology.

The Company was incorporated as a Massachusetts corporation in May 1989 under
the name of QDR Security, Inc. The Company changed its name to Vivitech, Inc.
in June 1989 and was renamed Vivid Technologies, Inc. in September 1989. In
October 1996, the Company changed its state of incorporation to Delaware. The
Company's principal executive offices are located at 10E Commerce Way, Woburn,
Massachusetts 01801, and its telephone number is (617) 938-7800.

THE OFFERING

<TABLE>
<C> <S>
Common Stock offered by the Company in the U.S. Offering........... 1,600,000 shares
Common Stock offered by the Company in the International Offering.. 400,000 shares
Common Stock to be outstanding after the Offering(1)............... 8,792,370 shares
Use of proceeds.................................................... For working capital and
general corporate
purposes. In addition,
approximately $5.8
million of the net
proceeds will be used to
redeem certain non-
convertible redeemable
Preferred Stock. See
"Use of Proceeds."
Nasdaq National Market symbol...................................... VVID
</TABLE>
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(1) Based upon the number of shares of Common Stock outstanding as of October
15, 1996. Excludes 1,276,969 shares of Common Stock reserved for issuance
as of October 15, 1996 upon exercise of outstanding stock options and
warrants. See "Management--Stock Option Plans," "Description of
Securities--Warrants" and Notes 6 and 7 to the Consolidated Financial
Statements.

4
<PAGE>

SUMMARY CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
-----------------------------------------
1992 1993 1994 1995 1996
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS
DATA:
Revenues............................ $ 631 $ 2,854 $13,801 $14,437 $15,578
Income (loss) before income
taxes(1)........................... (2,091) (859) 2,910 2,104 1,165
Net income (loss)................... $(2,091) $ (859) $ 2,810 $ 2,014 $ 1,165
======= ======= ======= ======= =======
Net income (loss) per common and
common equivalent share............ $ (0.38) $ (0.15) $ 0.39 $ 0.28 $ 0.15
======= ======= ======= ======= =======
Weighted average number of common
and common equivalent shares
outstanding........................ 5,496 5,815 7,198 7,275 7,869
======= ======= ======= ======= =======
</TABLE>

<TABLE>
<CAPTION>
SEPTEMBER 30, 1996
-----------------------
ACTUAL AS ADJUSTED(2)
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<S> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Working capital ........................................ $(1,037) $22,620
Total assets............................................ 11,963 29,585
Currently redeemable preferred stock.................... 5,781 --
Stockholders' equity.................................... 177 23,707
</TABLE>
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(1) Fiscal 1994, 1995 and 1996 expenses include litigation expenses of $0.2
million, $0.3 million and $1.2 million, respectively, primarily relating to
certain patent litigation which was settled by the Company on November 6,
1996. See "Risk Factors--Limited Protection of Intellectual Property
Rights; Patent Litigation," "Business--Intellectual Property" and "--Legal
Proceedings."
(2) Adjusted to give effect to the sale of the 2,000,000 shares of Common Stock
offered hereby at an assumed offering price of $13.00 per share, and the
application of the proceeds therefrom, after deducting the estimated
underwriting discounts and commissions and offering expenses payable by the
Company. See "Use of Proceeds" and "Capitalization."

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The Vivid name and logo is a service mark of the Company. H-1, VIS, VIS-W,
VIS-M, VDS, VDS-II, VDS-III, APS, and Rapid Detection System are trademarks of
the Company.

Unless otherwise indicated, all information in this Prospectus assumes (i) no
exercise of the Underwriters' over-allotment option, (ii) the redemption of
578,065 shares of non-convertible redeemable Series A Preferred Stock and
Series C Preferred Stock effective upon the closing of the Offering, (iii) the
conversion of all of the Company's issued and outstanding shares of convertible
Series B Preferred Stock and Series D Preferred Stock into an aggregate of
5,045,850 shares of Common Stock effective upon the closing of the Offering,
and (iv) the filing of an amended and restated Certificate of Incorporation
(the "Restated Certificate of Incorporation") eliminating the Company's Series
A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock and
Series D Preferred Stock, and effecting certain other changes. See "Risk
Factors--Substantial Benefits of the Offering to Existing Stockholders," "Use
of Proceeds," "Certain Transactions--Certain Financing Transactions,"
"Description of Securities" and the Consolidated Financial Statements.

5
<PAGE>

RISK FACTORS

In addition to the other information in this Prospectus, investors should
carefully consider the following risk factors when evaluating an investment in
the Common Stock offered hereby. This Prospectus contains forward-looking
statements that involve risks and uncertainties, such as statements of the
Company's plans, objectives, expectations and intentions. The cautionary
statements made in this Prospectus should be read as being applicable to all
forward-looking statements wherever they appear in this Prospectus. The
Company's actual results could differ materially from those discussed herein.
Factors that could cause or contribute to such differences include those
discussed below, as well as those discussed elsewhere in this Prospectus.

Reliance on a Significant Customer. In fiscal 1994, 1995 and 1996, sales to
BAA plc ("BAA"), formerly the British Airport Authority, accounted for
approximately 88%, 76% and 79% of the Company's revenues, respectively. BAA is
scheduled to complete deployment of checked baggage explosives detection
systems at its seven airports by the end of 1997. As a result, the Company
expects that its revenues from BAA will become increasingly dependent upon
sales of upgrades, replacement equipment and services, new orders from BAA
will decrease during fiscal 1997 and revenues from BAA will decrease during
the second half of fiscal 1997. The inability of the Company to obtain orders
from customers other than BAA would have a material adverse effect on the
Company's business and financial condition. See "Business--Customers."

Dependence on Government Regulation. The Company's sales of its explosives
detection systems for use in airports has been and will continue to be
dependent upon governmental initiatives to require or support the screening of
baggage with advanced explosives detection systems. Substantially all of such
systems have been installed at airports in countries in which the applicable
governmental or regulatory authority overseeing the operations of the airport
has mandated such screening. Such mandates are influenced by many factors
outside of the control of the Company, including political and budgetary
concerns of governments, airlines and airports. In the United States, the
Aviation Security Act of 1990 directed the FAA to develop a standard for
explosives detection systems and required airports in the United States to
deploy systems meeting this standard by 1993. The standard adopted by the FAA
is more comprehensive than standards adopted in most other countries. The FAA
first certified a computed tomography ("CT") system in December 1994. However,
the FAA has recognized that this system must undergo further testing to
resolve whether it can operate under realistic airport operating conditions,
including processing baggage at required throughput rates. To date, no system
has demonstrated that it meets the FAA standard under realistic airport
operating conditions. As a result, the FAA has not required the installation
of automated explosives detection systems, and only a limited number of these
systems have been deployed, primarily on a test basis, in the United States.
The Company's systems do not meet the FAA certification standard. There can be
no assurance that any of the Company's systems will ever meet this or any
other United States certification standard. Moreover there can be no assurance
that additional countries will mandate the implementation of effective
explosives screening of airline baggage, or that, if mandated, the Company's
systems will meet the certification or other requirements of the applicable
governmental authority. See "Business--Regulation."

In October 1996, the United States enacted legislation which includes a
$144.2 million allocation for the purchase of explosives detection systems and
other advanced security equipment by air carriers and airport authorities.
There can be no assurance that this legislation will not be modified to reduce
the funding for advanced explosives equipment, that the necessary
appropriations will be made to fund the purchases of advanced explosives
equipment contemplated by the legislation, or that, even if such appropriation
is made, any of the Company's automated explosives detection systems will be
purchased for installation at any airports in the United States. See
"Business--Industry Background."

Developing Market; Uncertainty of Market Acceptance. The explosives
detection system market is at a relatively early stage of development.
Acceptance of explosives detection systems on a broad basis will be dependent
upon the acceptance and adoption of explosives detection systems by airlines
and airports throughout the world, the expansion of applications for
explosives detection technology, government initiatives to support the
expansion of this market, the performance and price of the Company's and its
competitors' products, customer reaction to those products and continued cost
and performance improvements in explosives detection technology. There can be
no assurance that the explosives detection market will develop further or that
the

6
<PAGE>

Company will be successful in marketing its products effectively and obtaining
broader market acceptance for its products. Failure to do so would have a
material adverse effect on the Company's business and financial condition.
Further, if one of the Company's or a competitor's systems were to fail to
detect explosives and such failure resulted in an airline bombing, the ability
of the Company to market its products could be materially adversely affected.
See "Business--Industry Background."

Substantial Benefits of the Offering to Existing Stockholders. The Company
intends to use $5.8 million of the net proceeds of the Offering to redeem all
of its outstanding shares of nonconvertible redeemable Series A Preferred
Stock and Series C Preferred Stock. This use of proceeds will result in a
substantial benefit to certain existing stockholders, including Beta Partners
Limited Partnership, an affiliate of a director of the Company, which owns an
aggregate of 80,121 shares of Series A and Series C Preferred Stock and will
therefore receive $0.8 million of the net proceeds of this offering. See "Use
of Proceeds" and "Certain Transactions--Certain Financing Transactions."

Dependence on Management and Key Employees. The Company's success will
depend in large part on the continued services of its executive officers and
other key management employees. The loss of one or more key management
employees or the failure to attract and retain additional personnel could have
a material adverse effect on the Company's business and financial condition.
S. David Ellenbogen, the Company's President, Chief Executive Officer and
Chairman of the Board, and Dr. Jay A. Stein, the Company's Senior Vice
President and a Director, also serve in similar positions at Hologic, Inc.
("Hologic"). Under a management agreement between the Company and Hologic,
Hologic has agreed to provide management services to the Company, including
the part-time assistance of Mr. Ellenbogen and Dr. Stein. Recently, Mr.
Ellenbogen and Dr. Stein have devoted approximately 20 and eight hours per
week, respectively, to the Company. The Company has commenced a search for a
Chief Operating Officer to further support its anticipated growth. There can
be no assurance that the Company will be able to attract and retain a
qualified Chief Operating Officer on a timely basis, if at all, or that the
Company will be able to successfully integrate such person, if hired. Mr.
Ellenbogen has advised the Company that, after the integration of such person,
he intends to reduce his time commitment to the Company. The failure of the
Company to attract and retain a qualified Chief Operating Officer could have a
material adverse effect on the Company's business and financial condition. See
"Management" and "Certain Transactions--Hologic, Inc."

Significant Fluctuations and Unpredictability of Operating
Results. Significant annual and quarterly fluctuations in the Company's
results of operations may be caused by several factors, including the overall
demand for explosives detection systems, market acceptance of the Company's
products, the timing of regulatory approvals for the Company's system and
government initiatives to promote the use of explosives detection systems such
as those manufactured and sold by the Company. Other factors that may cause
fluctuations in operating results include the timing of the announcement,
introduction and delivery of new products and product enhancements by the
Company and its competitors, variations in the Company's product mix and
component costs, timing of customer orders, adjustments of delivery schedules
to accommodate customers programs, the availability of materials and labor
necessary to produce the Company's products, the availability of components
from suppliers, the timing and level of expenditures in anticipation of future
sales, and pricing and other competitive conditions. Customers may also cancel
or reschedule shipments and production difficulties could delay shipments.
Relatively few system sales to relatively few customers comprise a significant
portion of the Company's revenues in each quarter. Therefore, small variations
in the number of systems sold could have a significant effect on the Company's
results of operations. The Company believes that period to period comparisons
of its results of operations are not necessarily meaningful and should not be
relied upon as indications of future performance.

Lengthy Sales Cycle. As a result of the significant capital and other
commitments required to install and integrate the Company's products into an
airport baggage handling system, foreign regulatory approval requirements, and
the developing nature of the explosives detection market, the Company has
experienced extended sales cycles with its customers. The Company's sales
efforts with certain existing and potential customers have extended over
several years. Customers may initially purchase one or a few units for
extensive testing and evaluation before making a decision regarding volume
purchases and, in certain circumstances, the

7
<PAGE>

Company may provide a potential customer with a demonstration unit for
regulatory testing and evaluation free of charge. Delays in anticipated
purchase orders could have a material adverse effect on the Company's business
and financial condition. See "Risk Factors--Significant Fluctuations and
Unpredictability of Operating Results" and "Business--Marketing and Sales."

Reliance on International Sales. In fiscal 1995 and 1996, international
sales accounted for approximately 91% and 95%, respectively, of the Company's
revenues. The Company anticipates that international sales will continue to
account for a significant percentage of the Company's revenues. Risks
associated with international sales include, among other things, international
regulatory requirements and policy changes, political and economic
instability, possible foreign currency controls, intellectual property
protection, currency exchange rate fluctuations, tariffs or other barriers,
staffing and management of foreign operations, inventory management, accounts
receivable collection and the management of distributors or representatives.
In addition, most foreign countries have their own regulatory approval
requirements for sales of the Company's products. As a result, the Company's
introduction of new products into international markets can be costly and time
consuming, and there can be no assurance that the Company will be able to
obtain the required regulatory approvals on a timely basis, if at all.
Furthermore, the Company's international sales have been denominated primarily
in United States dollars. The Company anticipates that its international sales
may increasingly be denominated in foreign currencies, which will expose the
Company to increased risks of currency fluctuation. There can be no assurance
that risks associated with international sales and operations will not have a
material adverse effect on the Company's business and financial condition. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Business--Marketing and Sales."

Uncertainty of Product Development. The Company's success will depend upon
its ability to enhance its existing products, and to develop new products to
meet regulatory and customer requirements and to achieve market acceptance.
The enhancement and development of these products will be subject to all of
the risks associated with new product development, including unanticipated
delays, expenses, technical problems or other difficulties that could result
in the abandonment or substantial change in the commercialization of these
enhancements or new products. Given the uncertainties inherent with product
development and introduction, there can be no assurance that the Company will
be successful in introducing products or product enhancements on a timely
basis, if at all, or that the Company will be able to market successfully
these products and product enhancements once developed.

Rapid Technological Change. The market for the Company's products is
characterized by rapid technological change and evolving industry
requirements. The Company believes that its future success will depend in
large part upon its ability to enhance its existing products and to
successfully develop new products that meet regulatory and customer
requirements and gain market acceptance. There can be no assurance that the
Company's products will not be rendered obsolete by new industry standards or
changing technology.

Competition. The markets for the Company's products are highly competitive.
The Company's systems compete against dual energy X-ray as well as other
competing technologies, including CT and trace detection. Certain of the
Company's competitors have substantially greater manufacturing, marketing and
financial resources than the Company. In addition, other major corporations
have recently announced their intention to enter the security screening
market. One of the Company's competitors has developed a product based upon CT
scanner technology that was certified by the FAA. However, the FAA has
recognized that this system must undergo further testing to resolve whether it
can operate under realistic airport operating conditions. None of the
Company's products have been certified by the FAA. Competitors may develop
superior products or products of similar quality for sale at the same or lower
prices. Other technical innovations may impair the Company's ability to market
its products. There can be no assurance that the Company will be able to
compete successfully with existing or new competitors. See "Business--
Competition."

Limited Protection of Intellectual Property Rights; Patent Litigation. The
Company's success depends significantly upon proprietary technology. The
Company relies on a combination of patent, copyright, trademark and trade
secret laws, non-disclosure agreements and other contractual provisions to
establish, maintain and protect its proprietary rights, all of which afford
only limited protection. The Company has obtained two patents and has pending
four patent applications in the United States. In addition, for certain
foreign countries the

8
<PAGE>

Company has pending patent applications that correspond to the subject matter
of certain United States patents and patent applications. There can be no
assurance that any of the Company's patent applications will be granted, that
any patent or patent application will provide significant protection for the
Company's products and technology, or that the Company's current or future
products, processes or technology will not be challenged under patents held by
competitors or potential competitors. Moreover, there can be no assurance that
foreign intellectual property laws will protect the Company's intellectual
property rights. In the absence of significant patent protection, the Company
may be vulnerable to competitors who attempt to copy the Company's products,
processes or technology.

The Company has an exclusive perpetual license to use certain patent rights
and technology developed by Hologic for the development, manufacture and sale
of X-ray screening security systems for explosives, drugs, currency and other
contraband (subject to termination by either party for certain defined
defaults). The Company also has a nonexclusive license to use this technology
for the development, manufacture and sale of X-ray-based products for process
control applications in the food and beverage industries. If the Company
desires to develop products for other applications, it must either use
alternative technology or obtain an additional license from Hologic. There can
be no assurance that the Company would be able to develop or license
alternative technology for any additional applications, or that the Company
would be able to license Hologic's technology for these applications on
favorable terms, if at all. In addition, there can be no assurance that
Hologic will not develop or license its technology to others for applications
competitive with those that may be developed by the Company outside of areas
for which the Company has an exclusive license. See "Certain Transactions--
Hologic, Inc."

In May 1996, in response to allegations made by American Science and
Engineering, Inc. ("AS&E") to third parties that the Company was infringing
AS&E's patents, the Company filed an action seeking a declaratory judgment
that the Company is not infringing AS&E's patents. In August 1996, AS&E filed
an answer and counterclaim alleging that the Company is infringing one or more
of eight AS&E patents. In October 1996, the court dismissed AS&E's
infringement counterclaims, but has allowed AS&E to raise more specific
infringement counterclaims upon AS&E asserting factual support for such
claims. Although the Company does not believe that it is infringing any valid
patent of AS&E, there can be no assurance that AS&E will not raise more
specific infringement counterclaims. Failure of the Company to prevail in this
litigation could have a material adverse effect on the Company's business and
financial condition. See "Business--Intellectual Property" and "--Legal
Proceedings."

Management of Growth. The Company has undergone a period of growth, and any
continued expansion may significantly strain the Company's management,
financial and other resources. Due to the level of technical and marketing
expertise necessary to support its existing and new customers, the Company
must attract and retain highly qualified and well-trained personnel. There are
a limited number of persons with the requisite skills to serve in these
positions, and it may become increasingly difficult for the Company to hire
such personnel. The Company's expansion may also significantly strain the
Company's management, manufacturing, financial and other resources. There can
be no assurance that the Company's systems, procedures, and controls will be
adequate to support the Company's operations. Failure to manage the Company's
growth properly could have a material adverse effect on the Company's business
and financial condition. See "Management."

Risks Associated with Possible Acquisitions. The Company intends to pursue
potential acquisitions of businesses, products and technologies that could
complement or expand the Company's business. There can be

<PAGE>

no assurance that the Company will be able to identify any appropriate
acquisition candidate. If the Company identifies an acquisition candidate,
there can be no assurance that the Company would be able to successfully
negotiate the terms of any such acquisition, finance such acquisition or
integrate such acquired business, products or technologies into the Company's
existing business and products. Furthermore, the negotiation of potential
acquisitions as well as the integration of an acquired business could cause
diversion of management's time and resources, and require the Company to use
proceeds from the Offering to consummate a potential acquisition. There can be
no assurance that a given acquisition, whether or not consummated, would not
have a material adverse effect on the Company's business or financial
condition. If the Company consummates one or more significant acquisitions in
which consideration consists of Common Stock, stockholders of the Company
could suffer significant dilution of their interests in the Company. See "Risk
Factors--Management of Growth."

Dependence on Principal Supplier for APS System. The Company purchases all
of the X-ray mainframes for its recently introduced APS automated explosives
detection system for carry-on baggage from Gilardoni S.p.A. ("Gilardoni"),
which is located in Italy. The Company and Gilardoni are negotiating an
arrangement under which the Company will manufacture the X-ray mainframes for
the APS systems to be sold outside of Europe, and Gilardoni will manufacture
certain of the Company's systems to be sold in Europe. There can be no
assurance that these negotiations will be successful. An inability of the
Company to obtain timely deliveries of X-ray mainframes of acceptable quality
on favorable terms from Gilardoni could materially adversely affect the
Company's sales of APS systems.

Potential for Product Liability Claims. The Company's business involves the
risk of product liability claims inherent to the explosives detection
industry. There are many factors beyond the control of the Company that could
result in the failure of the Company's products to detect explosives, such as
the reliability of a customer's operators, the ongoing training of such
operators and the maintenance of the Company's products by its customers. For
these and other reasons, there can be no assurance that the Company's products
will detect all explosives concealed in screened bags. The failure to detect
an explosive could give rise to product liability claims and result in
negative publicity that could have a material adverse effect on the Company's
business and financial condition. The Company currently maintains aviation
product liability insurance with an aggregate coverage limit of $150 million
per year, subject to certain deductibles and exclusions. There can be no
assurance that this insurance will be sufficient to protect the Company from
product liability claims, or that product liability insurance will continue to
be available to the Company at a reasonable cost, if at all.

Concentration of Ownership; Control by Management. Upon completion of the
Offering, the Company's executive officers, directors and their affiliates and
members of their immediate families will beneficially own approximately 24.6%
of the outstanding shares of Common Stock, excluding shares issuable upon
exercise of options and warrants. As a result, these stockholders, if acting
together, will be able to exert substantial influence over actions requiring
stockholder approval, including the election of directors, amendments to the
Company's Restated Certificate of Incorporation, mergers, sales of assets or
other business acquisitions or dispositions. See "Principal Stockholders."

Antitakeover Provisions. The Company's Restated Certificate of Incorporation
contains certain provisions that may discourage bids for the Company. This
could limit the price that certain investors might be willing to pay in the
future for shares of the Common Stock. See "Description of Securities."

No Prior Market for Common Stock; Possible Volatility of Stock Price. Prior
to the Offering, there has been no public market for the Common Stock, and no
assurance can be given that any market for the Common Stock will develop or be
sustained. The initial public offering price will be determined through
negotiations between the Company and the Underwriters. Such price may not be
indicative of prices of the Common Stock that will prevail in the trading
market. In addition, the market price for the Common Stock may be highly
volatile. Factors such as the announcement of technical innovations or new
products by the Company or its competitors, announcements of and changes in
government initiatives to promote the use of the Company's or its competitor's
products, variations in anticipated or actual operating results, market
conditions and general economic conditions may have a significant impact on
the market price of the Common Stock. See "Underwriting."

10
<PAGE>

Shares Eligible for Future Sale. Sales of shares of Common Stock in the
public market following the Offering by existing stockholders or option or
warrant holders could adversely affect the market price of the Common Stock.
Upon the expiration of contractual lock-up periods 180 days after the
effective date of this Prospectus (or earlier upon the consent of Lehman
Brothers), 4,359,520 shares of Common Stock (plus shares issuable upon the
exercise of then vested options) will become eligible for sale subject to the
restrictions of Rule 144, and in some cases, Rule 701 under the Securities
Act, and 2,432,850 shares of Common Stock will be eligible for sale in the
public market without restriction under Rule 144(k). Upon the expiration of
the lock-up period, holders of 2,898,520 shares of Common Stock and warrants
to acquire 210,199 shares of Common Stock will have certain registration
rights. See "Shares Eligible for Future Sale."

Immediate and Substantial Dilution. Based upon the net tangible book value
of the Company at September 30, 1996, purchasers of Common Stock offered
hereby will experience immediate and substantial dilution of approximately
$10.30 per share. Purchasers of Common Stock will experience additional
dilution if outstanding options and warrants are exercised. See "Dilution."

USE OF PROCEEDS

The net proceeds to be received by the Company from the sale of the shares
of Common Stock offered hereby are estimated to be $23.5 million, assuming an
initial public offering price of $13.00 per share and after deducting the
estimated underwriting discounts and commissions and offering expenses payable
by the Company.

The principal purposes of the Offering are to increase the Company's
capitalization and financial flexibility, to provide a public market for the
Common Stock and to facilitate future access to public equity markets. The
Company believes that its enhanced financial position will provide the Company
with needed flexibility to respond to technological and market developments
and opportunities, and enhance its ability to attract and retain customers.

The Company intends to use $5.8 million of the net proceeds to redeem all of
its outstanding shares of non-convertible redeemable Series A Preferred Stock
and Series C Preferred Stock, including $0.8 million to Beta Partners Limited
Partnership, an affiliate of a director of the Company. The Company
anticipates that the balance of the net proceeds will be used to increase
funds available for general corporate purposes, including working capital,
research and development, international sales and service offices and capital
equipment. In addition, the Company may use a portion of the proceeds to
expand its presence in Europe and the Asia/Pacific region, including to expand
its sales and service office in the United Kingdom, to establish additional
sales and service offices in Europe and in the Asia/Pacific region, and to
establish a manufacturing operation in one or more of those regions. Proceeds
may also be used to acquire companies, technologies or products that
complement the business of the Company. As of the date of this Prospectus, the
Company has no agreements or commitments and is not currently engaged in any
negotiations for any such acquisition. See "Risk Factors--Risks Associated
with Possible Acquisitions" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations."

Pending such uses, the Company intends to invest the net proceeds in short-
term, investment-grade, interest-bearing investments.

DIVIDEND POLICY

The Company has never declared or paid cash dividends on its capital stock
and does not plan to pay any cash dividends in the foreseeable future. The
Company's current policy is to retain all of its earnings to finance future
growth. The Company's bank line of credit prohibits the payment of cash
dividends without prior bank approval.

11
<PAGE>

DILUTION

At September 30, 1996, the Company had a pro forma net tangible book value
of $0.2 million or $0.02 per share of Common Stock. "Net tangible book value
per share" represents the tangible book value of the Company (total tangible
assets less total liabilities) divided by the number of shares of Common Stock
outstanding on a pro forma basis, after giving effect to the conversion of all
of the Company's outstanding shares of Series B and Series D Preferred Stock
into 5,045,850 shares of Common Stock. Without taking into account any changes
in such net tangible book value after September 30, 1996, other than to give
effect to the sale by the Company of the 2,000,000 shares of Common Stock
offered by the Company hereby at an assumed initial public offering price of
$13.00 and after deducting the estimated underwriting discounts and
commissions and offering expenses payable by the Company, the pro forma net
tangible book value of the Company at September 30, 1996 would have been $23.7
million, or $2.70 per share. This represents an immediate increase in the net
tangible book value per share of $2.68 to existing stockholders and an
immediate dilution of the net tangible book value per share of $10.30 to
persons purchasing the Common Stock offered hereby (the "New Investors"). The
following table illustrates this per share dilution:

<TABLE>
<S> <C> <C>
Assumed initial public offering price per share................ $13.00
Pro forma net tangible book value per share before the
Offering.................................................... $0.02
Increase per share attributable to New Investors............. 2.68
-----
Pro forma as adjusted net tangible book value per share after
the Offering.................................................. 2.70
------
Dilution per share to New Investors............................ $10.30
======
</TABLE>

The following table sets forth on a pro forma basis, as of September 30,
1996, the total number of shares purchased from the Company after giving
effect to the sale of the 2,000,000 shares of Common Stock offered by the
Company hereby, the total consideration paid to the Company and the average
price per share paid by existing stockholders and by New Investors at an
assumed initial public offering price of $13.00 per share:

<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
----------------- ------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
--------- ------- ----------- ------- -------------
<S> <C> <C> <C> <C> <C>
Existing Stockholders....... 6,786,370 77% $ 659,290 2% $ 0.10
New Investors............... 2,000,000 23 26,000,000 98 13.00
--------- --- ----------- ---
Total..................... 8,786,370 100% $26,659,290 100%
========= === =========== ===
</TABLE>

The above information assumes (i) no exercise of the Underwriters' over-
allotment option, (ii) the conversion of all outstanding Series B Preferred
Stock and Series D Preferred Stock into an aggregate of 5,045,850 shares of
Common Stock and (iii) no exercise of outstanding options and warrants after
September 30, 1996. As of September 30, 1996, there were outstanding options
and warrants to purchase an aggregate of 1,260,569 shares of Common Stock at
exercise prices ranging from $0.10 to $3.00 per share. If all of these options
and warrants were exercised in full, there would be additional dilution to New
Investors. See "Management--Stock Option Plans," "Certain Transactions--
Certain Financing Transactions," "Description of Securities--Warrants" and
Notes 6 and 7 to the Consolidated Financial Statements.

<PAGE>

CAPITALIZATION

The following table sets forth (a) the capitalization of the Company as of
September 30, 1996 and (b) the as adjusted capitalization of the Company to
give effect to (i) the conversion of all of the Company's outstanding shares
of Series B Preferred Stock and Series D Preferred Stock into 5,045,850 shares
of Common Stock, (ii) the filing of the Restated Certificate of Incorporation,
and (iii) the sale of the 2,000,000 shares of Common Stock offered by the
Company hereby and the application of the net proceeds therefrom, assuming an
initial public offering price of $13.00 per share, after deducting the
estimated underwriting discounts and commissions and offering expenses payable
by the Company. This table should be read in conjunction with the Consolidated
Financial Statements included elsewhere in this Prospectus.

<TABLE>
<CAPTION>
SEPTEMBER 30, 1996
-----------------------
ACTUAL AS ADJUSTED
---------- -----------
<S> <C> <C>
Obligation under capital leases....................... $ 36,888 $ 36,888
========== ===========
Redeemable preferred stock, $.01 par value:
Series A Preferred Stock:
Authorized--234,375 shares actual, none as
adjusted
Issued and outstanding--234,375 shares actual,
none as adjusted................................. $2,343,750 $ --
Series C Preferred Stock:
Authorized--343,690 shares actual, none as
adjusted
Issued and outstanding--343,690 shares actual,
none as adjusted................................. 3,436,900 --
Stockholders' equity:
Preferred Stock, $.01 par value:
Authorized--none actual, 1,000,000 shares as
adjusted
Issued and outstanding--none actual or as
adjusted....................................... -- --
Convertible Preferred Stock, $.01 par value:
Series B Preferred Stock:
Authorized--250,000 shares actual, none as
adjusted
Issued and outstanding--250,000 shares actual,
none as adjusted............................... 2,500 --
Series D Preferred Stock:
Authorized--254,585 shares actual, none as
adjusted
Issued and outstanding 254,585 shares actual,
none as adjusted............................... 2,546 --
Common Stock, $.01 par value:
Authorized--7,500,000 shares actual, 30,000,000
shares as adjusted
Issued and outstanding--1,740,520 shares actual,
8,786,370 shares as adjusted................... 17,405 87,864
Capital in excess of par value........................ 594,279 24,058,866
Accumulated deficit................................... (440,149) (440,149)
---------- -----------
Total stockholders' equity ......................... 176,581 23,706,581
---------- -----------
Total capitalization............................ $5,957,231 $23,706,581
========== ===========
</TABLE>
- --------
(1) Excludes 1,260,569 shares of Common Stock reserved as of September 30,
1996 for issuance upon exercise of outstanding options and warrants. See
Notes 6 and 7 to the Consolidated Financial Statements.

13
<PAGE>

SELECTED CONSOLIDATED FINANCIAL DATA

The following table contains certain selected consolidated financial data of
the Company and is qualified in its entirety by the more detailed Consolidated
Financial Statements included elsewhere in this Prospectus. The statement of
operations data for the fiscal years ended September 30, 1994, 1995 and 1996,
and the balance sheet data as of September 30, 1995 and 1996, have been derived
from the Consolidated Financial Statements, which statements have been audited
by Arthur Andersen LLP, independent public accountants, and are included
elsewhere in this Prospectus. The statement of operations data for the fiscal
years ended September 30, 1992 and 1993, and the balance sheet data as of
September 30, 1992, 1993 and 1994 have been derived from the Company's
consolidated financial statements, which statements have been audited by Arthur
Andersen LLP and are not included in this Prospectus. This data should be read
in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the Consolidated Financial Statements
appearing elsewhere herein.

<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
-------------------------------------------
1992 1993 1994 1995 1996
------- ------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF
OPERATIONS DATA:
Revenues......................... $ 631 $ 2,854 $13,801 $14,437 $15,578
Cost of revenues................. 368 1,921 6,762 6,129 6,899
------- ------- ------- ------- -------
Gross margin................... 263 933 7,039 8,308 8,679
------- ------- ------- ------- -------
Operating expenses:
Research and development....... 1,620 1,139 2,296 3,653 3,462
Selling and marketing.......... 113 317 716 1,077 1,395
General and administrative..... 549 221 916 1,120 1,515
Litigation expenses............ -- -- 199 309 1,150
------- ------- ------- ------- -------
Total operating expenses..... 2,282 1,677 4,127 6,159 7,522
------- ------- ------- ------- -------
Income (loss) from operations.... (2,019) (744) 2,912 2,149 1,157
Interest income (expense), net... (72) (115) (2) (45) 8
------- ------- ------- ------- -------
Income (loss) before income
taxes........................... (2,091) (859) 2,910 2,104 1,165
Provision for income taxes....... -- -- 100 90 --
------- ------- ------- ------- -------
Net income (loss).............. $(2,091) $ (859) $ 2,810 $ 2,014 $ 1,165
======= ======= ======= ======= =======
Net income (loss) per common and
common equivalent share......... $ (0.38) $ (0.15) $ 0.39 $ 0.28 $ 0.15
======= ======= ======= ======= =======
Weighted average number of common
and common equivalent shares
outstanding..................... 5,496 5,815 7,198 7,275 7,869
======= ======= ======= ======= =======
<CAPTION>
SEPTEMBER 30,
-------------------------------------------
1992 1993 1994 1995 1996
------- ------- ------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Working capital.................. $(1,292) $ (338) $ 2,054 $ 3,968 $(1,037)
Total assets..................... 1,153 1,509 6,365 7,740 11,963
Redeemable preferred stock,
including current portion....... 4,144 5,781 5,781 5,781 5,781
Stockholders' equity (deficit)... (5,217) (5,887) (3,065) (1,045) 177
</TABLE>

<PAGE>

MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis should be read in conjunction with the
"Selected Consolidated Financial Data" and the Consolidated Financial
Statements included elsewhere in this Prospectus. This Prospectus contains
certain forward-looking statements that involve risks and uncertainties, such
as statements of the Company's plans, objectives, expectations and intentions.
The cautionary statements made in this Prospectus should be read as being
applicable to all forward-looking statements wherever they appear in this
Prospectus. The Company's actual results could differ materially from those
anticipated in the forward-looking statements. Factors that could cause or
contribute to such differences include those discussed below, as well as those
discussed elsewhere herein.

OVERVIEW

The Company was founded in 1989 to develop, manufacture and market automated
explosives detection systems following the bombing of Pan American Flight 103
over Lockerbie, Scotland. Following its organization, the Company undertook
extensive research and development, introducing its first free standing
automated explosives detection system, the H-1, in 1991, and its first
integrated automated explosives detection systems for Level 1 and Level 2
screening, the VIS and VDS, in 1993. The Company commenced commercial
shipments of its VIS and VDS systems in January 1994. As of September 30,
1996, the Company had sold more than 100 systems for installation in airports
throughout Europe of which over 70 systems had been installed.

The Company's sales are primarily to owners and operators of airports,
including foreign governments and regulatory authorities. The Company's
revenues are derived primarily from product sales. The Company recognizes
revenue from product sales upon shipment to the customer, provided that no
significant Company obligations remain outstanding and collection of the
related receivable is deemed probable by management. The Company accrues for
anticipated warranty and installation costs upon shipment. The Company's
revenues also include government research and development grants and revenues
from service, the sale of spare parts and training, which have comprised less
than 10% of revenues in the periods presented. In fiscal 1995 and 1996, the
Company recognized $1.4 million and $0.7 million, respectively, in development
revenue from an FAA grant. As of September 30, 1996, the Company had
substantially completed its work under this grant.

The Company's cost of revenues includes a 5% royalty payable with respect to
product sales and other revenues derived from certain patents and technology
exclusively licensed from Hologic for use in the development, manufacture and
sale of X-ray screening security systems for explosives, drugs, currency and
other contraband. This royalty will be reduced to 3% upon the Company reaching
$50 million in cumulative revenues under this exclusive license agreement, and
eliminated upon the Company reaching $200 million of such cumulative revenues.
Through September 30, 1996 the Company had recorded revenues in the aggregate
amount of approximately $46.9 million subject to this exclusive license. See
"Business--Intellectual Property" and "Certain Transactions--Hologic, Inc."

In fiscal 1994, 1995 and 1996, sales to BAA accounted for approximately 88%,
76% and 79% of revenues, respectively. BAA is scheduled to complete deployment
of checked baggage explosives detection systems at its seven airports by the
end of 1997. As a result, the Company expects that its revenues from BAA will
become increasingly dependent upon sales of upgrades, replacement equipment
and services, new orders from BAA will decrease during fiscal 1997 and
revenues from BAA will decrease during the second half of fiscal 1997. The
failure of the Company to obtain orders from customers other than BAA would
have a material adverse

<PAGE>

effect on the Company's business and financial condition. See "Risk Factors--
Reliance on a Significant Customer."

Substantially all of the Company's revenues have been generated by sales to
customers outside the United States. The Company's foreign sales have occurred
principally in the UK and other Western European countries. The Company has a
sales and service office in the UK to support its European operations, plans
to expand its presence in Europe and the Asia/Pacific Region, and expects
international sales to remain an important component of the Company's
business. The Company's export sales have been denominated primarily in United
States dollars. To the extent that the Company changes its pricing practices
to denominate prices in foreign currencies, the Company will be exposed to
increased risks of currency fluctuation. See "Risk Factors--Reliance on
International Sales."

RESULTS OF OPERATIONS

For the periods indicated, the following table sets forth the percentage of
revenues represented by the respective line items in the Company's
consolidated statement of operations:

<TABLE>
<CAPTION>
YEAR ENDED
SEPTEMBER 30,
----------------
1994 1995 1996
---- ---- ----
<S> <C> <C> <C>
Revenues...................................................... 100% 100% 100%
Cost of revenues.............................................. 49 42 44
--- --- ---
Gross margin................................................ 51 58 56
Operating expenses:
Research and development.................................... 17 25 22
Selling and marketing....................................... 5 8 9
General and administrative.................................. 7 8 10
Litigation expenses......................................... 1 2 8
--- --- ---
Total operating expenses.................................. 30 43 49
--- --- ---
Income from operations........................................ 21 15 7
Interest income (expense), net................................ -- -- --
--- --- ---
Income before income taxes.................................... 21 15 7
Provision for income taxes.................................... 1 1 --
--- --- ---
Net income ................................................. 20% 14% 7%
=== === ===
</TABLE>

FISCAL YEAR ENDED SEPTEMBER 30, 1996 COMPARED TO FISCAL YEAR ENDED SEPTEMBER
30, 1995

Revenues. Revenues increased by approximately 8% to $15.6 million in fiscal
1996, from $14.4 million in fiscal 1995. This increase was the result of an
increase in product sales which was partially offset by a decrease in FAA
development grants. The increase in product sales was primarily attributable
to an increase in unit sales, which was partially offset by lower average
selling prices.

Gross Margin. Gross margin decreased to 56% of revenues in fiscal 1996
compared to 58% of revenues in fiscal 1995. The decrease in gross margin was
primarily attributable to the Company's change in product mix, lower average
selling prices, and a reduction in revenues associated with the Company's FAA
grant which were partially offset by manufacturing efficiencies.

During fiscal 1995 and the first half of fiscal 1996, the Company's product
sales consisted primarily of sales of the VIS-W. During the second half of
fiscal 1996, product sales shifted to the newly introduced VIS-M, VDS-III, and
SDE upgrades, each of which has a lower average selling price than the VIS-W.
The Company was able to reduce certain component cost and achieve other
manufacturing efficiencies in the design of the VIS-M and VDS-III, which
substantially offset these lower selling prices. In addition, the Company's
work under its FAA grant was completed in the third quarter of fiscal 1996.
The effect of this grant increased the Company's gross margin by approximately
2% in the first three quarters of fiscal 1996. The Company believes that it
will continue

16
<PAGE>

to experience pricing pressures in fiscal 1997. There can be no assurance that
the Company will be able to continue to reduce manufacturing costs to offset
further reductions, if any, in prices.

Research and Development Expenses. Research and development expenses
decreased by approximately 5% to $3.5 million (22% of revenues) in fiscal 1996
from $3.7 million (25% of revenues) in fiscal 1995. The decrease was primarily
attributable to expenditures in fiscal 1995 related to the Company's
development of its VIS-M product, which was substantially completed by the
first quarter of fiscal 1996.

Selling and Marketing Expenses. Selling and marketing expenses increased by
approximately 29% to $1.4 million (9% of revenues) in fiscal 1996 from $1.1
million (8% of revenues) in fiscal 1995. The increase was primarily
attributable to additional sales and support personnel, and to an increase in
advertising, consulting and trade show costs. The Company anticipates that it
will continue to expand its selling and marketing efforts in fiscal 1997.

General and Administrative Expenses. General and administrative expenses
increased by approximately 35% to $1.5 million (10% of revenues) in fiscal
1996 from $1.1 million (8% of revenues) in fiscal 1995. The increase was
primarily attributable to an increase in personnel and additional overhead
costs related to the Company's move to a new facility in March 1996. The
Company anticipates that it will continue to increase its general and
administrative costs in fiscal 1997.

Litigation Expenses. The Company incurred $1.2 million and $0.3 million of
litigation expenses in fiscal 1996 and 1995, respectively, primarily in
connection with the Company's patent litigation with EG&G. On November 6,
1996, the Company entered into an agreement with EG&G to settle this
litigation. The litigation expenses in fiscal 1996 also included expenses
incurred in connection with the Company's litigation with AS&E. In October
1996, the court dismissed AS&E's infringement counterclaims, but has allowed
AS&E to raise more specific infringement counterclaims upon AS&E asserting
factual support for such claims. As a result of the Company's settlement with
EG&G, the Company expects litigation expenses to be substantially reduced in
fiscal 1997. See "Risk Factors--Limited Protection of Intellectual Property
Rights; Patent Litigation," "Business--Intellectual Property" and "--Legal
Proceedings."

Interest Income (Expense), Net. The Company recognized net interest income
of $8,000 in fiscal 1996 and net interest expense of $45,000 in fiscal 1995.
The change in interest income (expense), net was primarily attributable to
reduced average borrowings by the Company under its bank working capital line
of credit.

Provision for Income Taxes. The Company recorded no provision for income
taxes in fiscal 1996 compared to an effective tax rate of 4% in fiscal 1995.
The provision for income taxes in fiscal 1996 reflected the Company's
recognition of a deferred tax asset. This reduction reflects management's
determination, in accordance with the Financial Accounting Standards Board's
Statement of Financial Accounting Standards ("SFAS") No. 109, that it is more
likely than not that this deferred tax asset will be utilized. If the Company
had not recognized this deferred tax asset, the Company's effective tax rate
in fiscal 1996 would have been 16%. The Company expects that its effective tax
rate will be slightly lower than the statutory tax rates primarily due to the
use of tax credits and the tax benefits associated with the Company's foreign
sales corporation.

FISCAL YEAR ENDED SEPTEMBER 30, 1995 COMPARED TO FISCAL YEAR ENDED SEPTEMBER
30, 1994

Revenues. Revenues increased by approximately 5% to $14.4 million in fiscal
1995 from $13.8 million in fiscal 1994. The increase was primarily
attributable to an increase in development revenues that were partially offset
by a slight decrease in product revenues. In fiscal 1995, the Company
recognized $1.4 million in development revenues from the FAA, compared to no
such development revenues in fiscal 1994. Product sales in fiscal 1995
reflected a significant increase in sales of the Company's VIS-W product which
was offset by a decrease in the number of other products sold.

Gross Margin. Gross margin increased to 58% of product sales in fiscal 1995
from 51% of product sales in fiscal 1994. Gross margin increased as a
percentage of revenues in fiscal 1995 primarily due to a volume increase in
the number of VIS-W systems sold and associated manufacturing efficiencies.
The Company began commercial shipments of its systems in fiscal 1994. Sales
during this period consisted primarily of first generation VDS systems. In
fiscal 1995, sales shifted primarily to the higher priced VIS-W systems.
During the year, the Company was able to achieve certain manufacturing
efficiencies in connection with the sale of these

17
<PAGE>

systems, primarily through the reduction of component costs. During fiscal
1995, the Company also received revenues from an FAA grant. The effect of this
grant decreased the Company's gross margin by approximately 2% in fiscal 1995.

Research and Development Expenses. Research and development expenses
increased by approximately 59% to $3.7 million (25% of revenues) in fiscal
1995 from $2.3 million (17% of revenues) in fiscal 1994. The increase was
primarily attributable to the addition of engineering personnel and outside
consultants working on the development of new products and product
enhancements, including the Company's VIS-M product.

Selling and Marketing Expenses. Selling and marketing expenses increased by
approximately 50% to $1.1 million (8% of revenues) in fiscal 1995 from $0.7
million (5% of revenues) in fiscal 1994. The increase was primarily
attributable to additional sales and support personnel, including staffing of
the Company's United Kingdom office, and to an increase in advertising and
trade show costs.

General and Administrative Expenses. General and administrative expenses
increased by approximately 22% to $1.1 million (8% of revenues) in fiscal 1995
from $0.9 million (7% of revenues) in fiscal 1994. The increase was primarily
attributable costs associate with the Company's growth, including the addition
of personnel, additional costs associated with its United Kingdom subsidiary
and an increase in management services provided by Hologic.

Litigation Expenses. The Company incurred $0.3 million and $0.2 million of
litigation expenses in fiscal 1995 and 1994, respectively, in connection with
the Company's patent litigation with EG&G.

Interest Income (Expense), Net. The Company incurred net interest expense of
$45,000 and $2,000, respectively, in fiscal 1995 and fiscal 1994,
respectively. The increase was primarily attributable to increased average
borrowings by the Company under its bank working capital line of credit.

Provision for Income Taxes. The Company's effective tax rate was 4% in
fiscal 1995 and 3% in fiscal 1994. The provision for income taxes in these
years consisted primarily of federal alternative minimum tax. The Company's
effective tax rate was lower than the statutory tax rates due primarily to the
use of tax credits, the use of net loss carryforwards, and certain tax
benefits associated with the Company's foreign sales corporation incorporated
in December 1994.

18
<PAGE>

QUARTERLY RESULTS OF OPERATIONS

The following table presents certain unaudited consolidated quarterly
financial information for the eight quarters ended September 30, 1996. In the
opinion of the Company's management, this information has been prepared on the
same basis as the Consolidated Financial Statements appearing elsewhere in
this Prospectus and includes all adjustments, consisting only of normal
recurring adjustments, necessary to present fairly the financial results set
forth herein. Results of operations for any previous quarter are not
necessarily indicative of results for any future periods.

<TABLE>
<CAPTION>
QUARTER ENDED
-------------------------------------------------------------------------
DEC. 31, MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30
1994 1995 1995 1995 1995 1996 1996 1996
-------- -------- -------- --------- -------- -------- -------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
UNAUDITED CONSOLIDATED
STATEMENT OF OPERATIONS
DATA:
Revenues................ $3,795 $3,575 $3,357 $3,710 $3,017 $3,224 $3,921 $5,416
Cost of revenues........ 1,801 1,745 1,507 1,076 1,259 1,398 1,704 2,538
------ ------ ------ ------ ------ ------ ------ ------
Gross margin........... 1,994 1,830 1,850 2,634 1,758 1,826 2,217 2,878
Operating expenses:
Research and
development........... 805 1,054 1,023 771 789 799 924 950
Selling and marketing.. 237 262 296 282 285 268 434 408
General and
administrative........ 277 247 332 264 341 364 365 445
Litigation expenses.... 98 111 18 82 61 61 61 967
------ ------ ------ ------ ------ ------ ------ ------
Total operating
expenses.............. 1,417 1,674 1,669 1,399 1,476 1,492 1,784 2,770
------ ------ ------ ------ ------ ------ ------ ------
Income from operations.. 577 156 181 1,235 282 334 433 108
Interest income
(expense), net......... (9) (23) (20) 7 18 7 (23) 6
------ ------ ------ ------ ------ ------ ------ ------
Income before income
taxes.................. 568 133 161 1,242 300 341 410 114
Provision for income
taxes.................. 24 6 7 53 -- -- -- --
------ ------ ------ ------ ------ ------ ------ ------
Net income............. $ 544 $ 127 $ 154 $1,189 $ 300 $ 341 $ 410 $ 114
====== ====== ====== ====== ====== ====== ====== ======
<CAPTION>
QUARTER ENDED
-------------------------------------------------------------------------
DEC. 31, MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30,
1994 1995 1995 1995 1995 1996 1996 1996
-------- -------- -------- --------- -------- -------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
AS A PERCENTAGE OF TOTAL
REVENUES:
Revenues................ 100% 100% 100% 100% 100% 100% 100% 100%
Cost of revenues........ 48 49 45 29 42 43 43 47
------ ------ ------ ------ ------ ------ ------ ------
Gross margin........... 52 51 55 71 58 57 57 53
------ ------ ------ ------ ------ ------ ------ ------
Operating expenses:
Research and
development........... 21 30 31 21 26 25 24 18
Selling and marketing.. 6 7 9 8 10 8 11 7
General and
administrative........ 7 7 10 7 11 11 9 8
Litigation expenses.... 3 3 -- 2 2 2 2 18
------ ------ ------ ------ ------ ------ ------ ------
Total operating
expenses.............. 37 47 50 38 49 46 46 51
------ ------ ------ ------ ------ ------ ------ ------
Income from operations.. 15 4 5 33 9 11 11 2
Interest income
(expense), net......... -- -- -- -- 1 -- (1) --
------ ------ ------ ------ ------ ------ ------ ------
Income before income
taxes.................. 15 4 5 33 10 11 10 2
Provision for income
taxes.................. 1 -- -- 1 -- -- -- --
------ ------ ------ ------ ------ ------ ------ ------
Net income............. 14% 4% 5% 32% 10% 11% 10% 2%
====== ====== ====== ====== ====== ====== ====== ======
</TABLE>

19
<PAGE>

The Company's results of operations have been and may continue to be subject
to significant quarterly fluctuations, due to a number of factors, many of
which are beyond the control of the Company. Relatively few system sales to
relatively few customers comprise a significant portion of the Company's
revenues in each quarter. Therefore, small variations in the number of systems
sold could have a significant effect on the Company's results of operations.
The Company believes that period to period comparisons of its results of
operations are not necessarily meaningful and should not be relied upon as
indications of future performance. See "Risk Factors--Significant Fluctuations
and Unpredictability of Operating Results."

The Company has received a substantial portion of its revenues from product
sales to BAA. In the third quarter of fiscal 1996, the Company began shipment
of its first VIS-M products. In the same period, the Company began upgrading
previously installed systems with its new scatter detection enhancement
technology. Revenues in the fourth quarter of fiscal 1996 also reflected sales
of its freestanding VDS systems, including its VDS-III, which the Company
introduced and began shipping in that quarter.

The quarterly fluctuations of the Company's gross margin was primarily
attributable to changing product mix, initial costs associated with the
introduction of the Company's VIS-M and VDS-III products increased
manufacturing efficiencies achieved as the Company's products have matured
and, in fiscal 1995, year-end inventory adjustments.

The Company's research and development expense increased in the third and
fourth quarters of fiscal 1996, primarily reflecting expenses incurred in the
development of the Company's APS explosives detection system for carry-on
baggage and the continued enhancement of its existing products. The growth of
selling and marketing expenses and general and administrative expenses
reflects the Company's growing infrastructure, including increased marketing,
operational and administrative staff to support the Company's sales and
anticipated growth, and increased trade show costs. The increase in litigation
expenses in the fourth quarter of 1996 was primarily attributable to expenses
incurred in connection with the Company's litigation with EG&G, which was
settled on November 6, 1996.

LIQUIDITY AND CAPITAL RESOURCES

Since inception, the Company has funded its operations and capital
expenditures through internally generated cash flow, proceeds from sales of
securities and the availability of a working capital line of credit. At
September 30, 1996, the Company had a working capital deficit of $1.0 million,
including $1.7 million in cash and cash equivalents. The Company also has a
$3.0 million bank line of credit which expires on February 28, 1997. The
Company's bank line of credit bears interest at the bank's prime rate (8.25%
as of September 30, 1996). The line of credit is secured by substantially all
of the Company's assets and contains certain financial and other covenants. At
September 30, 1996, the Company had no amounts outstanding under this line of
credit.

During fiscal 1996, the Company's net cash used in operating activities was
approximately $0.2 million. During that period, $2.6 million and $1.6 million
increases in accounts receivable and inventory, respectively, were partially
offset by net income and non-cash depreciation and amortization expenses
totaling $1.5 million and an increase in accounts payable, accrued expenses
and customer deposits of $0.8 million, $1.2 million and $1.0 million,
respectively. As of September 30, 1996, the Company had a $3.5 million account
receivable due from BAA, a significant portion of which was overdue. As of
October 15, 1996, $3.4 million of this account receivable had been paid. The
increase in accrued expenses is primarily attributable to the Company's
settlement of its litigation with EG&G and expenses associated with the
Company's increased sales in the fourth quarter of fiscal 1996.

During fiscal 1995, operating activities provided the Company with net cash
of $1.0 million. During that period, net income and non-cash depreciation and
amortization expenses totaling $2.3 million were partially offset by increases
in inventory, accounts receivable and other current assets, and a $0.7 million
reduction in customer deposits. The reduction in customer deposits reflected
the Company's decision to change its terms of sale to reduce or eliminate
customer deposits in response to customer demands.

The Company's capital expenditures during fiscal 1996 and in fiscal 1995
were $0.43 million and $0.38 million, respectively. While the Company does not
have any significant commitments for capital expenditures, the Company
anticipates that it will continue to purchase equipment to support its
anticipated growth.

During fiscal 1996 and during fiscal 1995, the net cash used in and provided
by financing activities were $0.3 million and $7,000, respectively. Net cash
provided by financing activities is primarily attributable to borrowings under

20
<PAGE>

the Company's bank line of credit and proceeds from the sale of Common Stock
pursuant to employee stock options.

The Company has 578,065 shares of redeemable non-convertible Series A and
Series C Preferred Stock outstanding. All of these shares are redeemable
within one year of September 30, 1996. The Company will redeem all of the
issued and outstanding shares of the Series A and Series C Preferred Stock at
the closing of the Offering in order to eliminate certain rights and
preferences of the holders of such stock.

In May 1996, in response to allegations made by AS&E to third parties that
the Company was infringing AS&E's patents, the Company filed an action seeking
a declaratory judgment that the Company is not infringing AS&E's patents. In
August 1996, AS&E filed an answer and counterclaim alleging that the Company
is infringing one or more of eight AS&E patents. In October 1996, the court
dismissed AS&E's infringement counterclaims, but has allowed AS&E to raise
more specific infringement counterclaims upon AS&E asserting factual support
for such claims. Although the Company does not believe that it is infringing
any valid patent of AS&E, there can be no assurance that AS&E will not raise
more specific infringement counterclaims. Currently, management does not
believe that it is probable that this litigation will have a material adverse
effect on the Company's business and financial condition; however, there can
be no assurance that this will be the case. See "Risk Factors--Limited
Protection of Intellectual Property Rights; Patent Litigation," "Business--
Intellectual Property" and "--Legal Proceedings."

The Company believes that the net proceeds from the Offering, cash received
from operations and its current sources of liquidity will be adequate to fund
the Company's operations through at least the next twelve months. However for
a discussion of certain factors that could adversely affect the Company's
financial position and results of operations, see "Risk Factors."

RECENT ACCOUNTING PRONOUNCEMENTS

In October 1995, the Financial Accounting Standards Board issued SFAS 123
"Accounting for Stock-Based Compensation," which becomes effective for fiscal
years beginning after December 15, 1995. SFAS 123 establishes new financial
accounting and reporting standards for stock-based compensation plans.
However, entities are allowed to elect whether to measure compensation expense
for stock-based compensation under SFAS 123 or APB No. 25, "Accounting for
Stock Issued to Employees." The Company has elected to remain with the
accounting under Accounting Principles Board ("APB") Opinion No. 25 and will
make the required pro forma disclosures of net income and earnings per share
as if the provisions of SFAS 123 had been applied in its September 30, 1997
financial statements. The potential impact of adopting this standard on the
Company's pro forma disclosures of net income and earnings per share has not
been quantified at this time.

21
<PAGE>

BUSINESS

OVERVIEW

The Company is a leading developer, manufacturer and marketer of automated
inspection systems which detect plastic and other explosives in airline
baggage. The Company's family of advanced explosives detection systems
identify targeted materials by analyzing the physical characteristics of each
item in a bag, including the atomic number and mass, using patented
composition analysis techniques and proprietary dual-energy X-ray technology.
These systems automatically (without the use of an operator) isolate and
identify targeted materials within a bag, thereby preventing a suspect bag
from being loaded into an aircraft until cleared by operator inspection. The
Company's systems can also be used to identify a wide variety of other
substances, including drugs and currency.

In 1993, the Company's automated systems were successfully deployed in
airports as part of an integrated multi-level checked baggage screening
approach that is being adopted in many countries throughout the world. As of
September 30, 1996, the Company had sold more than 100 systems for
installation in airports throughout Europe of which over 70 systems had been
installed. The Company's systems are in use in 14 of the 17 airports that, to
the knowledge of the Company, have deployed advanced integrated automated
explosives detection systems. Airports at which the Company's systems are
deployed include London Heathrow and London Gatwick, Paris Charles de Gaulle,
Amsterdam, Zurich, Brussels and Glasgow.

INDUSTRY BACKGROUND

Markets. There are over 600 commercial airports worldwide providing
scheduled service to more than 2.5 billion passengers per year. Of these
airports, over 400 are located in the United States, 150 in Europe and 50 in
the Asia/Pacific region. Based upon the installations of the Company's
systems, the Company believes that one integrated multi-level checked baggage
screening system can serve up to approximately one million passengers per year
in mid-size and large airports. The capabilities of each integrated multi-
level system at each airport, as well as the number of systems required, will
vary depending upon a variety of factors, including the explosives detection
equipment deployed, the configuration of the airport's baggage handling
systems, the nature of the integration of the explosives detection equipment
with the airport's baggage handling systems and the profile of the airport's
passenger traffic flow. Airports deploying advanced explosives detection
equipment, including smaller airports, may choose to implement one or more
freestanding systems.

The Company believes that the implementation of effective checked baggage
screening will highlight the ineffectiveness of conventional X-ray systems to
identify explosives in carry-on baggage. The United Nations International
Civil Aviation Organization ("ICAO") requires all 184 member states to inspect
100% of international carry-on baggage for the detection of weapons, and
virtually all airports use conventional X-ray systems for this purpose. The
Company believes that several thousand of these conventional X-ray systems are
installed in airports throughout the world, and that these systems are
candidates for replacement with more sophisticated systems.

Market Evolution and Government Initiatives. In the 1970s, in response to
hijackings, airports worldwide began to install X-ray systems to screen carry-
on baggage for weapons such as guns and knives. When combined with walk-
through metal detectors, these systems substantially reduced the number of
airplane hijackings. The success of these systems in airports also fostered
their adoption for use by governmental agencies and private companies. As the
threat to civil aviation evolved in the early 1980's from hijackings to
bombings, many countries required checked baggage on international flights to
be inspected. Most equipment initially deployed for this purpose have been
conventional X-ray systems. Although conventional X-ray systems are effective
for the detection of weapons made from dense materials with defined shapes,
such as guns and knives, they are ineffective in detecting explosive materials
that are not as dense and can be molded into virtually any shape.

In response to the December 1988 bombing of Pan American Flight 103 over
Lockerbie, Scotland, many countries began the installation of systems that
could detect plastic and other explosives in airline baggage. Europe, led by
the United Kingdom, has been at the forefront of deploying advanced automated
explosives detection equipment.The United Kingdom Department of Transport (the
"UK DOT") has required the United

22
<PAGE>

Kingdom's commercial airports to deploy systems for 100% screening of
international checked baggage by the end of 1997. The European Civil Aviation
Conference ("ECAC"), an organization of 33 member states, has agreed to
implement 100% screening of international checked baggage by the year 2000.
Several of those countries, including Belgium, France, Netherlands, Spain and
Switzerland, have begun to implement checked baggage screening approaches
similar to that adopted by the United Kingdom.

In the Asia/Pacific region, major new airports and terminals, including
those in Hong Kong, Malaysia, Singapore and South Korea, are being designed to
include 100% screening of international checked baggage using advanced
automated explosives detection systems. These and other countries in the
region, including Japan, are also studying the implementation of these systems
at existing airports.

Following the Pan American Flight 103 bombing, the United States enacted the
Aviation Security Improvement Act of 1990 (the "Aviation Security Act"). The
Aviation Security Act directed the Federal Aviation Administration (the "FAA")
to develop a standard for explosives detection systems and required airports
in the United States to deploy systems meeting this standard by 1993. The
standard adopted by the FAA is more comprehensive than standards adopted by
the rest of the world. To date, no system has demonstrated that it meets the
FAA standard under realistic airport operating conditions, including
processing baggage at required throughput rates. As a result, the FAA has not
required the installation of automated explosives detection systems, and only
a limited number of these systems have been deployed, primarily on a test
basis, in the United States.

In response to the recent crash of TWA Flight 800 off Long Island, New York
in July 1996, President Clinton formed the White House Commission on Aviation
Safety and Security, chaired by Vice President Gore (the "Gore Commission"),
to review airline and airport security and oversee aviation safety. The Gore
Commission released its initial report in September 1996, and in October 1996,
the United States enacted legislation which includes a $144.2 million
allocation for the purchase of explosives detection systems and other advanced
security equipment by air carriers and airport authorities.

Implementation of Checked Baggage Systems. Effective screening of checked
baggage for explosives and other contraband is a complex task. To accomplish
this task while meeting the operational requirements of airports, a screening
system must be flexible, accurate, fast, reliable and cost-effective. The
screening system must have the ability to effectively identify a wide range of
explosives, including plastic explosives which can be molded into virtually
any shape. In addition, the system must have an acceptable false alarm rate,
rejecting only a limited percentage of explosive-free luggage. The system must
also process baggage rapidly and have limited down-time to avoid delays. Costs
associated with installation include the cost of modifying the airport's
baggage handling system to accommodate the explosives detection equipment and
the cost of integrating that equipment with the baggage handling system. A key
component of the cost of operation is the staffing associated with operating
these systems.

Several advanced explosives detection systems have been developed to address
these requirements, each with its own inherent advantages and limitations.
These systems include dual energy X-ray, trace detection and computed
tomography ("CT") systems. Dual energy X-ray systems measure the X-ray
absorption properties of a bag's contents at two different X-ray energies to
determine if any of the items have the physical characteristics of explosive
materials. Trace detection equipment, known as "sniffers," detect particulate
and chemical traces of explosive materials collected by an operator by wiping
or vacuuming the bag under inspection. CT systems use hundreds of partial X-
ray images, referred to as slices, to analyze the contents of a bag. The FAA
first certified a CT-based system in December 1994. However, the FAA has
recognized that this system must undergo further testing to resolve whether it
can operate under realistic airport operating conditions, including processing
baggage at required throughput rates. Certain information, which has been
derived from publicly available information, regarding each of these systems
is set forth in the following table:

<TABLE>
<CAPTION>
TECHNOLOGY EQUIPMENT PRICE THROUGHPUT (1) FILM SAFETY
- ----------------------------- --------------------- -------------- -------------
<S> <C> <C> <C>
Dual Energy X-ray............ $200,000 - $ 450,000 900 - 1,500 Film safe
Trace Detection.............. $ 50,000 - $ 170,000 120 - 180 Film safe
Computed Tomography.......... $800,000 - $1,000,000 100 - 260 Not film safe
</TABLE>
- --------
(1) Throughput measures the number of bags that can be inspected by the system
per hour.

23
<PAGE>

In 1993, BAA plc ("BAA"), formerly the British Airport Authority and one of
the first airport operators to implement 100% checked baggage screening using
automated explosives detection equipment, developed a multi-level automated
screening approach that integrates the explosives detection equipment directly
into the airport baggage handling systems. The multi-level approach, which is
being adopted throughout Europe and the Asia/Pacific region, separates the
screening process into multiple steps, and permits the use of equipment at
each stage that is most suitable for the requirements of that particular
stage.

Under the multi-level approach, a fully-automated Level 1 explosives
detection system is integrated into the existing airport baggage handling
system to screen rapidly all baggage without an operator in attendance. Bags
rejected by the Level 1 system are subjected to Level 2 inspection. Level 2
inspection equipment allows an operator to review and manipulate images of the
contents of the rejected bags provided by the Level 1 system or a separate
Level 2 system. If the operator rejects the bag, it is forwarded for Level 3
inspection. Level 3 inspection is the slowest and the most detailed process.
Bags rejected at Level 3 are then inspected by hand in the presence of the
passenger. Bags not rejected at any inspection level are conveyed by the
baggage handling system for loading into the aircraft. This multi-level
approach, when implemented with rapid automated explosives detection
equipment, can maintain the processing rates of existing baggage handling
systems. The multi-level approach also significantly reduces operating costs
by reducing staffing requirements.

Level 1 inspection systems, which must inspect all baggage on a conveyor
line, are often required to inspect baggage during peak periods at the rate of
900 to 1,500 bags per hour (2.4 to 4.0 seconds per bag) in order to avoid
delays in the baggage handling process. Level 2 inspection systems are often
required to process baggage at the rate of 180 to 360 bags per hour (10 to 20
seconds per bag). Level 3 systems can be slower to accommodate the greater
precision required for the operator to fully inspect the bag in order to avoid
the undesirable and expensive final inspection process, which requires the bag
to be reunited with the passenger and inspected by hand.

As a result of their high throughput rates, dual energy X-ray explosives
detection systems have been deployed in all integrated Level 1 and most Level
2 installations. Trace Detection, and to a lesser extent CT scanners, have
generally been deployed as Level 3 systems. More recently, enhanced versions
of dual energy X-ray explosives detection systems have been deployed as Level
3 systems. In addition, trace detection, dual energy X-ray and CT scanners
have been deployed as free-standing checked baggage explosives detection
systems.

Implementation of Carry-on Baggage Systems. There are currently no
requirements for the use of automated explosives detection systems to screen
carry-on baggage. However, the presence of explosives in carry-on baggage
poses a serious threat to civil aviation. A published industry source
estimated that approximately one quarter of bombs smuggled on board aircraft
were hidden in carry-on baggage. Although the current focus of explosives
detection efforts has been on the screening of checked baggage, a potential
extension of explosives detection technology is to screen carry-on baggage.

THE VIVID SOLUTION

The Company has developed a family of effective explosives detection systems
that automatically (without the use of an operator) isolate and identify
suspect materials in airport baggage and prevent the rejected baggage from
being loaded into an aircraft until cleared by operator inspection. The
Company's systems are in use in 14 of the 17 airports that, to the knowledge
of the Company, have deployed advanced integrated automated explosives
detection systems. Airports at which the Company's systems are deployed
include London Heathrow and London Gatwick, Paris Charles de Gaulle,
Amsterdam, Zurich, Brussels and Glasgow. Many of the Company's customers have
placed multiple orders for the Company's systems and have served as referrals
for additional sales. The Company believes that the success of its systems is
attributable to the following advantages:

High Performance. The Company's patented composition analysis techniques and
proprietary X-ray technology enable its systems to effectively identify
plastic and other high explosives, with relatively low false alarm rejections
at throughputs of up to 1,500 bags per hour, which is comparable to the peak
throughput of existing baggage handling equipment. The Company believes that
no competitive system offers as high a

24
<PAGE>

throughput with comparable detection capabilities and false alarm rates as the
Company's VIS systems. The Company's systems are capable of being upgraded to
detect many new materials as they are developed.

Cost Effectiveness. The Company has introduced a number of innovations to
reduce the cost of installation, integration and operation of a multi-level
checked baggage screening system. As a result, the Company believes that its
integrated systems achieve a competitive cost per bag inspected, including the
cost of the equipment, installation, integration and operation.

Proven Reliability. The Company's installed base of over 100 systems, some
of which have been in continuous operation since 1992, have a reported average
system availability of over 99%.

Product Breadth and System Flexibility. The Company offers a broad line of
automated explosives detection systems that address the security needs of
airports of varying sizes under a variety of operating conditions. Airports
which have installed the Company's systems range in size from England's
Southampton Airport, which processes approximately 500,000 passengers per
year, to London Heathrow Airport, which processes more than 50 million
passengers per year.

STRATEGY

MAINTAIN TECHNOLOGICAL LEADERSHIP. The Company has been at the forefront of
developing and advancing the market for automated explosives detection
systems. The Company believes that it was the first to introduce the
following: (i) an X-ray-based advanced automated explosives detection system
for checked baggage screening capable of being fully integrated into an
airport baggage handling system; (ii) an explosives detection system
architecture allowing multiple workstations to display images from multiple
Level 1 systems; (iii) an explosives detection system combining dual energy X-
ray with scatter detection technology; and (iv) a dual energy X-ray-based
explosives detection system allowed for use as a Level 3 inspection system.
The Company intends to expand upon its core technical expertise to continue
offering leading edge automated screening solutions.

CONTINUE INTERNATIONAL EXPANSION. The Company has concentrated its initial
marketing efforts on airports in countries outside of the United States in
response to the early adoption of advanced explosives detection equipment in
those markets. The Company believes that the deployment of its systems in
Europe provides valuable referral sites to promote further sales of its
products. The Company has established a sales and servicing subsidiary in the
United Kingdom to support its European efforts and plans to expand its
presence in Europe and in the Asia/Pacific region.

CAPITALIZE ON EMERGING UNITED STATES MARKET. Through September 1996, the FAA
had not mandated the deployment of any advanced explosives detection systems.
In October 1996, the United States enacted legislation which includes a $144.2
million allocation for the purchase of explosives detection systems and other
advanced security equipment by air carriers and airport authorities. The
Company is expanding its sales and marketing force to address this emerging
market and is working actively with the FAA, other government agencies,
airlines, airport operators, Congressional committees and the Gore Commission
to promote the efficacy and cost-effectiveness of its products for deployment
in United States airports.

EXPAND PRODUCT LINE AND APPLICATIONS. The Company is expanding its product
line and applications of its existing products to serve markets other than
explosives detection screening of airport checked baggage. These new market
opportunities include the screening of airport carry-on baggage, the
protection of government and private facilities, the detection of drugs and
currency, the screening of mail and advanced process control.

EXPLORE STRATEGIC ALLIANCES AND ACQUISITIONS. The Company intends to pursue
strategic alliances, acquisitions and licenses of complementary technologies
to further enhance its growth.

25
<PAGE>

PRODUCTS

The Company develops, manufactures and markets a family of advanced
automated systems that can detect explosives and other contraband in airline
baggage and other parcels. The first market to emerge for these systems has
been explosives detection for airline baggage. The Company's product line
includes Level 1 and Level 2 integrated automated explosives detection systems
for checked baggage, freestanding automated explosives detection systems for
Level 3, terminal and baggage hall inspection of checked baggage, and an
automated explosives detection system for carry-on baggage. The list prices
for the Company's automated integrated and freestanding checked baggage
explosives detection systems range from approximately $250,000 to $450,000.
The Company's list price for its carry-on baggage explosives detection system
is approximately $75,000. As of September 30, 1996, the Company had sold more
than 100 systems for installation in airports throughout Europe of which over
70 systems had been installed.

Each of the Company's automated checked baggage explosives detection systems
uses a proprietary instrumentation quality power supply that generates
alternating high (150kV) and low (75kV) energy pulses at film safe levels of
exposure. The power supply is driven by an X-ray controller that uses both
current and source voltage feedback to maintain a stable, repeatable fan
shaped X-ray beam. As the X-ray beam passes through the bag and its contents,
a portion of the beam is absorbed (referred to as X-ray absorption or
attenuation) and a portion is scattered. The beam that passes through the bag
without being absorbed or scattered is referred to as the transmitted beam and
contains information regarding the X-ray absorption properties of the objects
within the bag at each of the two levels of energy generated by the X-ray
tube. This information can be used to analyze the atomic number, mass and
other physical characteristics of the objects within the bag. The transmitted
beam also contains information that can be used to make high quality images of
the contents of a bag.

The Company's automated checked baggage explosives detection systems
incorporate a high resolution detector array that collects high quality data
from the transmitted X-ray beam consisting of more than one million pixels of
information per bag. The systems then employ the Company's patented
composition analysis software algorithms to identify and separate the
individual objects within a bag, including objects in between other items or
within a container. These algorithms also analyze the atomic number, mass and
other characteristics of each of those objects to determine whether they match
those of a targeted item, such as explosives or other contraband. Additional
algorithms detect materials such as lead that could be used to shield an
explosive device from this analysis.

X-ray absorption analysis techniques are less effective for detecting
certain configurations of explosives which only absorb a very small fraction
of the transmitted beam. However, these materials tend to scatter X-rays more
than other materials. The Company has developed proprietary scatter detection
enhancement ("SDE") technology that enhances its systems' ability to detect
these configurations. The Company's SDE system, which includes a combination
of additional detection arrays and software, measures and analyses the
scattered X-ray intensity emitted from baggage in both the forward and
backward direction. If the scatter levels indicate the possible presence of a
suspect material in a bag, the affected area is further analyzed to determine
if a threat is present. The Company has incorporated SDE technology in most of
its products, either as an option or a standard feature, and also offers this
technology as an upgrade for existing systems.

Both the Company's composition and scatter analysis techniques result in a
computer generated decision regarding the contents of the baggage screened.
Any bag that is determined to contain a suspect object will cause the system
to reject the bag. In the case of an operator attended system, such as a Level
2 or Level 3 system, an image of the rejected bag is presented to an operator
for detailed inspection. The bag image is presented in high resolution gray
scale, with the suspect object highlighted in bright red. The system can be
programmed to sound an alarm, as well as require the operator to acknowledge
the alarm by pressing a designated button to either reject or clear the bag.

The Company has integrated its products into a wide range of airport baggage
handling systems. These products make use of an effective control software
developed by the Company to facilitate communication between the explosives
detection system and the airport baggage handling system. If no suspect object
is detected by the automated system, a "clear" status is sent to the baggage
handling system, allowing the bag to continue

26
<PAGE>

directly to the aircraft. If a suspect object is detected, a "reject" message
is sent to the baggage handling system, requiring the next level of
inspection. The Company has gained broad acceptance of its control software by
working closely with many of the major baggage handling systems and control
systems contractors.

The Company's systems are offered in a variety of configurations depending
on the application or installation requirements. The following table sets
forth certain information regarding the Company's current product line of
automated explosives detection systems:

CHECKED BAGGAGE

<TABLE>
<CAPTION>
YEAR OF
MODEL INTRODUCTION APPLICATIONS FEATURES (1)
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C>
H-1 1991 Freestanding terminal or baggage .Operator interface
hall inspection .0.2 meters/sec. belt speed
.Film safe
- --------------------------------------------------------------------------------------------
VIS 1993 Integrated Level 1 system .No operator required
.1,500 or 900 bags per hour
throughput
.0.5 meters/sec. belt speed
.SDE option
.Film safe
- --------------------------------------------------------------------------------------------
VDS-II 1995(2) Freestanding terminal or baggage .Operator interface
hall inspection, or integrated .0.25 meters/sec. belt speed
Level 2 system .Film safe
- --------------------------------------------------------------------------------------------
VIS-W 1994 Integrated combined Level 1 and .No operator required for Level 1
Level 2 system inspection
.One Level 2 workstation with
operator interface
.1,500 or 900 bags per hour
throughput
.0.5 meters/sec belt speed
.SDE option
.Film safe
- --------------------------------------------------------------------------------------------
VDS-III 1996 Freestanding Level 3, or terminal .Operator interface
or baggage hall inspection .0.25 meters/sec. belt speed
.SDE included
.Film safe
- --------------------------------------------------------------------------------------------
VIS-M 1996 Integrated combined Level 1 and .No operator required for Level 1
Level 2 system inspection
.Supports up to five Level 2
workstations with operator
interface
.Two mainframe matrixing
capability
.1,500 or 900 bags per hour
throughput
.0.5 meters/sec belt speed
.SDE option
.Linear screening compatible (3)
.Film safe
</TABLE>

CARRY-ON BAGGAGE

<TABLE>
<CAPTION>
YEAR OF
MODEL INTRODUCTION APPLICATIONS FEATURES (1)
- --------------------------------------------------------------------------------------
<S> <C> <C> <C>
APS 1996 Freestanding carry-on baggage .Advanced operator interface
screening for explosives and .0.2 meters/sec. belt speed
weapons .Film safe
</TABLE>
- --------
(1) Throughput only applies to integrated Level 1 systems that do not have an
operator interface.
(2) The first VDS model was introduced in 1993.
(3) Enables Level 2 screening without diverting baggage to a secondary
conveyor belt.

27
<PAGE>

Integrated Models. The Company's first integrated products were the VIS
Level 1 inspection system and the VDS Level 2 inspection system. The VIS
system is used to inspect 100% of the baggage on a baggage conveyor line. The
system is capable of automatically inspecting up to 1,500 bags per hour
without an operator. The VDS Level 2 system is designed to provide an operator
with a high quality image in addition to automatically highlighting suspicious
objects as an aid to the operator to inspect bags rejected by the automated
Level 1 system. The system also allows the operator to view the contents of a
bag using various imaging modes and magnifications to determine whether the
bag should be cleared or sent to Level 3 for additional investigation.

The VIS-W was the Company's first single system alternative to discrete
Level 1 and Level 2 systems. The VIS-W combines a VIS Level 1 X-ray system
("VIS mainframe") with a single remote Level 2 operator workstation. The VIS
mainframe transmits images of rejected bags to the Level 2 operator
workstation. Level 2 inspection is then performed by an operator at a
workstation in the same manner as an operator of a discrete Level 2 VDS
system, thereby eliminating the need for a separate Level 2 explosives
detection system to re-scan all bags rejected at Level 1.

The VIS-M, introduced in April 1996, further extends the capability of the
workstation concept by allowing one or two VIS mainframes to be interconnected
("Matrixed") with up to five Level 2 operator workstations. During off-peak
periods, workstations can be switched off, thereby significantly reducing
staffing requirements and operating costs. The efficiency gained by the
additional workstations combined with enhanced baggage control software allows
an operator to review images of the contents of a bag while the bag continues
en route to the aircraft. This eliminates the need and associated costs of a
secondary conveyor system to hold the bags while Level 2 inspection is taking
place. These costs can be a significant portion of the total cost of purchase
and installation of a multi-level integrated explosives detection system. The
Company is further seeking to improve the efficiency of its Matrix
configuration by allowing more than two VIS-M systems to be networked with
multiple Level 2 operator workstations.

Freestanding Models. The Company's freestanding checked baggage explosives
detection systems are intended to be installed in airport terminals, such as
in front of airline check-in counters or in a baggage handling hall. The H-1
inspects bags in the upright position, as they tend to be carried by a
passenger. The VDS series of systems, which can be used as freestanding
systems, inspects baggage lying flat as they are transported on a conveyor
belt.

The Company has recently introduced the operator attended VDS-III system to
serve as a Level 3 inspection system. Since less than 1% of the bags reach
Level 3, additional time is available for bag inspection. The VDS-III combines
the Company's SDE capability with a high resolution image to enhance detection
capability. The system is a low cost alternative to CT scanners for Level 3
inspection. It is also faster and less labor intensive than trace detection
systems. This system can also be used as a freestanding system in a baggage
handling hall.

Carry-on Model. The Company has recently introduced its APS system to
inspect carry-on baggage for explosives or contraband material. The system is
being evaluated by various governmental agencies. To date, the Company has not
sold any APS systems. The APS is similar in configuration to conventional X-
ray systems currently installed in airports to screen carry-on baggage for
concealed weapons. While an operator is required to inspect each bag for
weapons, the APS automatically alerts the operator to the presence of suspect
explosive materials. The APS incorporates an advanced proprietary operator
interface that allows the operator to view the contents of a bag using various
imaging modes and magnifications to determine whether the bag should be
cleared or rejected for further inspection.

The Company developed the APS system with Gilardoni, S.p.A. ("Gilardoni") a
manufacturer of conventional X-ray weapons screening systems and nuclear and
X-ray-based equipment for the medical field. The system combines many of the
advanced detection algorithms developed by the Company for its automated
checked baggage explosives detection systems with an X-ray main frame using
conventional dual X-ray technology manufactured by Gilardoni. The arrangement
with Gilardoni has greatly reduced the time-to-market of the Company's new APS
carry-on baggage inspection system and provides the Company with a
manufacturing capability within the European Union. See "Risk Factors--
Dependence on Principal Supplier for APS System."

28
<PAGE>

OTHER PRODUCTS AND APPLICATIONS

The Company believes that installations of advanced automated explosives
detection systems at airports will accelerate the adoption of this technology
for other security applications, including the protection of government and
private facilities, and the screening of mail. The Company is also exploring
opportunities with various governmental authorities and agencies in the United
States and internationally to use its equipment for the detection of illicit
drugs and the illegal export of currency. Further, the Company believes that
its technology can expand the traditional role of X-ray technology in process
control applications by providing enhanced or new value-added functions such
as material analysis, segregation and sorting of materials, and quality
control. For example, the Company is pursuing discussions with a food
processing company regarding the possibility of entering into a development
agreement to adapt the Company's technology for nondestructive testing for
food processing applications. See "Risk Factors--Developing Market;
Uncertainty of Market Acceptance" and "--Uncertainty of Product Development."

CUSTOMERS

The Company's customers have consisted primarily of owners, operators and
regulators of international airports located in the United Kingdom and other
European countries. The Company's customers include BAA, the Direction
Geuerale de L'Aviation Civile of France, Brussels Airport Authority, Zurich
Airport Authority, and Schiphol Amsterdam Airport Authority. The following is
a list of the airports for which these and other of the Company's customers
have installed or have ordered the Company's systems. These airports range in
size from facilities that process approximately 500,000 passengers per year to
more than 50 million passengers per year.

<TABLE>
<CAPTION>
UNITED KINGDOM CONTINENTAL EUROPE
<S> <C>
London Heathrow Paris Charles de Gaulle
London Gatwick Paris Orly*
London Stansted Amsterdam Schiphol
Glasgow Zurich
Edinburgh Brussels National
Newcastle Alicante (Spain)*
Aberdeen
East Midlands
Bristol
Southampton
</TABLE>
- --------
* Orders included in backlog as of the date of this Prospectus. In certain
circumstances, these orders may be canceled or delayed by customers without
significant penalty.

In fiscal 1995 and 1996, sales to BAA accounted for approximately 76% and
79%, respectively, of the Company's revenues. See "Risk Factors--Reliance on a
Significant Customer."

MARKETING AND SALES

The Company sells and markets its products through its direct sales force,
as well as independent sales representatives in certain foreign countries,
including Spain, Japan and Malaysia. As of September 30, 1996, the Company had
a six person marketing and sales staff, including one employee engaged in
marketing and sales out of the Company's sales and service office in the
United Kingdom.

In the United States the Company is working actively with the FAA, other
government agencies, airlines, airport operators, Congressional committees and
the Gore Commission to promote the efficacy and cost-effectiveness of its
products for deployment in United States airports. The Company is also working
with United States and foreign governmental agencies to promote its products
for non-aviation applications. The Company also markets its products through
participation in trade shows, publication of articles and advertising in trade
journals, participation in industry forums and standard setting organizations,
and distribution of sales literature. The Company has also benefited from
customer referrals and the use of certain customer installations as
demonstration sites for its systems. In fiscal 1995 and 1996, international
sales accounted for approximately 91%

<PAGE>

and 95% of the Company's revenues, respectively. All of these foreign sales
were to the United Kingdom and other European countries. See "Risk Factors--
Reliance on International Sales."

The selling process for the Company's products often involves a team
comprised of individuals from sales, marketing, engineering, operations and
senior management. This team frequently engages in a multi-level sales effort
directed toward a variety of constituents which may include government
regulators, the local airport operator or authority, systems integrators and
airlines. The Company's sales efforts with certain of its customers have
extended over several years. Potential customers frequently require the
Company's products to be tested against various performance standards and
competitive products. The Company maintains demonstration units for this
purpose and intends to increase its investment in demonstration units in order
to accelerate the introduction of its products to new customers. Delays in
anticipated purchase orders by the Company's customers and potential customers
could have a material adverse effect on the Company's business. See "Risk
Factors--Lengthy Sales Cycle."

The Company has entered into an arrangement with Gilardoni for the
manufacture and sale of the APS carry-on baggage explosives detection system.
Under this arrangement, the Company has the exclusive right to sell this
system in the United States, the United Kingdom, certain other European
countries and Mexico. In addition, the Company has agreed not to sell any
competitive X-ray-based system within its territory unless manufactured by
Gilardoni or the Company. The Company intends to pursue strategic alliances,
acquisitions and licenses of complementary technologies to further enhance its
growth. See "Risk Factors--Dependence on Principal Supplier for APS System."

CUSTOMER SERVICE AND SUPPORT

The Company provides a high level of customer support to assist in the
installation and integration of the Company's products into its customers'
facilities and to assist in maintaining the reliability of the Company's
products once installed. The Company offers a number of customer support
services, including applications support, training, system preventative and
corrective system maintenance, and upgrades. The Company generally provides
one year parts warranty and offers primary and back-up service contracts to
its customers. The Company's customer support staff currently consists of two
support engineers at its headquarters in Massachusetts and four support
engineers operating out of the Company's office in the United Kingdom.

REGULATION

The explosives detection systems manufactured and marketed by the Company
for use in airports are subject to regulation by the FAA, corresponding
foreign governmental authorities and ICAO, the United Nations organization for
establishing standard practices for the aviation industry on a worldwide
basis. Sales of the Company's explosives detection systems for use in airports
has been and will continue to be dependent upon governmental initiatives to
require or support the screening of baggage with advanced explosives detection
systems. Substantially all of such systems have been installed at airports in
countries in which the applicable governmental or regulatory authority
overseeing the operations of the airport has mandated such screening. Such
mandates are influenced by many factors outside of the control of the Company,
including political and budgetary concerns of governments, airlines and
airports. See "Risk Factors--Dependence on Government Regulation."

The FAA currently requires all carry-on baggage and international checked
baggage to be inspected by conventional X-ray equipment. United States
airlines operating at airports outside of the United States are required to
meet FAA security requirements in addition to the requirements of the local
authorities. The FAA permits the use of the Company's systems by United States
airlines at foreign airports as an alternative to conventional X-ray
equipment.

Under the Aviation Security Act, the FAA was required to develop a standard
for explosives detection systems and to certify equipment which met this
standard under realistic airport operating conditions. The Aviation Security
Act also required the deployment of certified equipment within the United
States by 1993. The standard adopted by the FAA is more comprehensive than
standards adopted in most other countries. To date, no system has demonstrated
that it meets the FAA standard under realistic airport operating conditions.
As a

30
<PAGE>

result, the FAA has not required the installation of automated explosives
detection systems, and only a limited number of these systems have been
deployed, primarily on a test basis, in the United States. The FAA first
certified a CT-based system in December 1994. However, the FAA has recognized
that this system must undergo further testing to resolve whether it can
operate under realistic airport operating conditions, including processing
baggage at required throughput rates. The Company's systems do not meet the
FAA certification standard. There can be no assurance that any Company systems
will ever meet this or any other United States certification standard.

In response to the recent crash of TWA Flight 800, President Clinton formed
the Gore Commission to review airline and airport security and oversee
aviation safety. The Gore Commission released its initial report in September
1996, and in October 1996, the United States enacted legislation which
includes a $144.2 million allocation for the purchase of explosives detection
systems and other advanced security equipment by air carriers and airport
authorities. There can be no assurance that this legislation will not
otherwise be modified to reduce the funding for advanced explosives equipment,
that the necessary appropriations will be made to fund the purchases of
advanced explosives equipment contemplated by the legislation, or that, even
if such appropriation is made, any of the Company's automated explosives
detection screening systems will be purchased for installation at any airports
in the United States.

The UK DOT has mandated 100% screening of international checked baggage in
the United Kingdom by 1997. Similarly, the other ECAC member states have
agreed to implement 100% screening of international checked baggage by the
year 2000. The Company's Level 1, Level 2 and Level 3 systems, as well as the
Company's SDE technology, have been allowed for use by the UK DOT. In most
other ECAC member states, the Company's systems either must be tested and
approved or procured by governmental authorities overseeing the operation of
airports within the country. In addition to the United Kingdom, the Company's
systems have been purchased or approved for use in airports in many European
countries including Belgium, France, The Netherlands, Spain and Switzerland.

Governmental authorities overseeing the construction of new airports in the
Asia/Pacific region are defining requirements for the use of advanced
explosives detection systems to achieve 100% screening of international
checked baggage at those airports. As a result, the Company's systems are also
being evaluated by the applicable regulatory authorities in countries in the
Asia/Pacific region for purchases at new airports being constructed in
Malaysia and Hong Kong. There can be no assurance that the Company's systems
will be purchased for installation in any of these new terminals.

ICAO has adopted various recommendations and requirements for screening of
checked and carry-on baggage. Currently, the ICAO requires the screening of
all international carry-on bags and recommends the screening of international
checked baggage. This requirement and recommendation relates only to the
screening of baggage and does not require any specific technology to be used.
There can be no assurance that additional countries will mandate the
implementation of effective explosives screening of airline baggage, or that,
if mandated, the Company's systems will meet the certification or other
requirements of the applicable governmental authority. Even if the Company's
systems meet the applicable requirements, there can be no assurance that the
Company would be able to market its systems effectively.

RESEARCH AND DEVELOPMENT

The Company's research and development efforts are focused on developing new
products for the explosives and contraband detection system market and further
enhancing the functionality, reliability and performance of its existing
product line. The Company's research and development personnel also are
involved in establishing protocols, monitoring and interpreting and submitting
test data to the FAA and other domestic and foreign regulatory agencies to
obtain the requisite certifications, clearances and approvals for its
products. At September 30, 1996, the Company had 28 employees engaged in
research and development and engineering, including 11 employees engaged in
software development. During fiscal 1994, 1995 and 1996, the Company's
research and product development expenses were approximately $2.3 million,
$3.7 million and $3.5 million, respectively. See "Business--Products."

31
<PAGE>

INTELLECTUAL PROPERTY

The Company relies upon trade secrets and patents to protect its technology.
Due to the rapid technological change that characterizes the explosives
detection system industry, the Company believes that the improvement of
existing technology, reliance upon trade secrets and unpatented proprietary
know-how and the development of new products are generally as important as
patent protection in establishing and maintaining a competitive advantage.
Nevertheless, the Company has obtained patents and will continue to make
efforts to obtain patents, when available, in connection with its product
development program. The Company has obtained two patents and has pending four
patent applications in the United States. In addition, for certain foreign
countries the Company has pending patent applications that correspond to the
subject matter of certain United States patents and patent applications. The
Company's two United States patents relate to applications of its dual X-ray
technology and the Company's software algorithms used to implement the
Company's screening analysis techniques and expire in 2011. There can be no
assurance that any of the Company's patent applications will be granted, that
any patent or patent application will provide significant protection for the
Company's products or technology, be of commercial benefit to the Company, or
that its validity will not be challenged. Moreover, there can be no assurance
that foreign intellectual property laws will protect the Company's
intellectual property rights. In the absence of significant patent protection,
the Company may be vulnerable to competitors who attempt to copy or use the
Company's products, processes or technology. See "Risk Factors--Limited
Protection of Intellectual Property Rights; Patent Litigation."

The Company has an exclusive perpetual license to use certain patents and
technology developed by Hologic, Inc. ("Hologic") for the development,
manufacture and sale of X-ray screening security systems for explosives,
drugs, currency and other contraband (subject to termination by either party
for certain defined defaults). The Company also has a nonexclusive license to
use this technology for the development, manufacture and sale of X-ray-based
products for process control applications in the food and beverage industries.
Each of Hologic and the Company have also granted to the other a non-
exclusive, royalty-free license to use any unpatented technology developed by
the other in connection with such party's research and development activities.
In addition, each of Hologic and the Company have the right to obtain from the
other an exclusive license, on commercially reasonable terms to be negotiated,
for any patented new developments. See "Risk Factors--Limited Protection of
Intellectual Property Rights; Patent Litigation" and "Certain Transactions--
Hologic, Inc."

The Company also licenses certain other technologies used in its products,
often on an exclusive or semi-exclusive basis, for a defined field of use.
These licenses involve four United States patents and certain foreign patents
relating to X-ray technology. The United States patents have expiration dates
ranging from 2002 to 2007. The Company's arrangement with Gilardoni relating
to the Company's APS automated explosives detection system for screening of
carry-on baggage contains cross licenses of intellectual property rights
associated with each party's technology incorporated into the system. This
license expires in 1999, subject to certain early termination and extension
options.

The Company has been involved in patent litigation with EG&G Astrophysics
Research Corporation ("EG&G"), in which each party claimed that the other was
infringing certain patents held by the other. On November 6, 1996, the Company
and EG&G signed a settlement agreement pursuant to which, among other things,
each party agreed not to sue the other for patent infringement for nonmedical
uses of X-ray technology covered by each other's existing patents or by patent
applications which claim priority from such patents or, for products existing
as of September 12, 1996, covered by patents that may be issued pursuant to
existing patent applications. As a result, each party will have broad rights
to use the other's existing X-ray technology for an unlimited period of time.
There can be no assurance that EG&G will not use the Company's technology in a
manner that would materially and adversely affect the Company's business and
financial condition. The Company is also involved in certain patent litigation
with American Science and Engineering, Inc. ("AS&E"), whereby the Company is
seeking a declaratory judgment that it is not infringing any AS&E patent. In
connection with this litigation, AS&E filed a counterclaim alleging that the
Company is infringing one or more of eight AS&E patents. In October 1996, the
court dismissed AS&E's infringement counterclaims, but allowed AS&E to raise
more specific infringement counterclaims upon AS&E asserting support for such
claims. See "Risk Factors--Limited Protection of Intellectual Property Rights;
Patent Litigation" and "Business--Legal Proceedings."

32
<PAGE>

COMPETITION

The markets for the Company's products are highly competitive. Certain of
the Company's competitors have substantially greater manufacturing, marketing
and financial resources than the Company. Other major corporations have
recently announced their intention to enter the security screening market.
Competitors may develop superior products or products of similar quality for
sale at the same or lower prices. Moreover, there can be no assurance that the
Company's products will not be rendered obsolete by new industry standards or
changing technology. There can be no assurance that the Company will be able
to compete successfully with existing or new competitors. See "Risk Factors--
Rapid Technological Change."

While certain of the Company's competitors currently market automated
checked baggage explosives detection products that use dual energy X-ray
technology, the Company believes that it is able to compete favorably with
these products based upon the over-all cost effectiveness of the Company's
systems as measured by a combination of factors including effective automated
explosives detection, throughput, expense of operation, installation and
integration, price, reliability, and their proven operation in a variety of
airports.

The Company's systems also compete with systems employing other technologies
including CT scanner technology and trace detection technology. A product
based upon CT scanner technology currently detects a wider range of explosives
than does the Company's systems. In 1994, this CT-based system was first
certified by the FAA. However, the FAA has recognized that this system must
undergo further testing to resolve whether it can operate under realistic
airport operating conditions. This system operates at a significantly lower
throughput rate and significantly higher expense than the Company's systems.
In addition, as currently certified, the installation of this CT-based
equipment for Level 1 explosives screening would require the use of two
systems, substantially increasing the total system price, cost of installation
and cost of operation. As a result, there have only been limited permanent
installations of CT systems in airports, typically as either Level 2 or Level
3 systems. Products based upon trace detection technology have throughput
rates lower than those based on dual energy X-ray or CT technology and
generally have been installed as Level 3 systems.

The Company's new APS system, which is intended to detect explosives in
carry-on bags and personal effects at airports and other installations, has
recently been introduced and is in the process of being evaluated by various
government agencies. These systems will compete against conventional X-ray
systems, which are lower in price, as well as advanced explosives detection
systems being adapted by its competitors for this use. The APS system will
compete on the basis of price, detection capabilities, ease of use, expense of
operation and reliability.

MANUFACTURING

The Company's manufacturing operations consist primarily of assembly, test,
burn-in and quality control. The Company has adopted stringent quality
assurance procedures that include standard design practices, component
selection procedures, vendor control procedures, and comprehensive reliability
testing and analysis to ensure the reliability of its products. As a result of
these efforts, the Company has received ISO 9001 certification. The Company's
manufacturing facility is currently producing approximately eight of the
Company's systems per month and has the capability to accommodate production
of over 20 systems per month. Should market conditions warrant, the Company
may choose to establish overseas manufacturing operations. See "Use of
Proceeds."

The Company purchases a major portion of the parts and peripheral components
for its products, and manufactures certain subsystems, such as the high
voltage power supply, from raw materials. Most parts and materials are readily
available from several supply sources. The Company purchases all of its X-ray
mainframes for its APS system from Gilardoni, which is located in Italy. The
Company and Gilardoni are negotiating an arrangement under which the Company
will manufacture the X-ray mainframes for the system for sales outside of
Europe and Gilardoni will manufacture certain of the Company's systems to be
sold in Europe. There can be no assurance that these negotiations will be
successful. See "Risk Factors--Dependence on Principal Supplier for APS
System."

33
<PAGE>

BACKLOG

Backlog for the Company's products as of September 30, 1995 and 1996 totaled
approximately $4.9 million and $7.5 million, respectively. Backlog consists of
purchase orders for which a customer has scheduled delivery within the next
twelve months. In certain circumstances, order included in backlog may be
canceled or rescheduled by customers without significant penalty. Backlog as
of any particular date should not be relied upon as indicative of the
Company's revenues for any future period.

EMPLOYEES

As of September 30, 1996, the Company had 77 full-time employees, including
23 in manufacturing operations and quality assurance, 28 in research,
development and engineering, 12 in marketing, sales and customer support,
eight in finance and administration and six in data management. None of the
Company's employees is represented by a union. The Company considers its
employee relations to be good.

FACILITIES

The Company leases its administrative headquarters and manufacturing
facility located in Woburn, Massachusetts. The facility consists of
approximately 43,000 square feet, including 21,000 square feet dedicated to
the Company's manufacturing operations. The Company also leases a 700 square
foot sales and service office in the United Kingdom. The Company believes that
its facilities will be adequate for its needs for the foreseeable future and
that suitable additional space will be available at commercially reasonable
prices as needed. Should market conditions warrant, the Company may expand its
presence in Europe and the Asia/Pacific region, including expanding its sales
and service office in the United Kingdom, establishing additional sales and
service offices in Europe and in the Asia/Pacific region, and establishing a
manufacturing operation in one or more of those regions.

LEGAL PROCEEDINGS

In October 1994, EG&G filed a patent infringement claim against the Company
in the United States District Court for the District of Massachusetts,
alleging that certain of the Company's products infringed a patent held by
EG&G. EG&G sought damages and expenses from the Company and sought to enjoin
the Company from selling products that allegedly infringed the EG&G patent. In
December 1994, the Company filed an answer denying any infringement and
counterclaims seeking to invalidate the EG&G patent and alleging that EG&G
infringed three patents owned or licensed by the Company. On November 6, 1996,
the Company and EG&G entered into a settlement agreement relating to this
litigation. See "Business--Intellectual Property."

In May 1996, in response to allegations made by AS&E to third parties that
the Company was infringing AS&E's patents, the Company filed an action in the
United States District Court for the District of Massachusetts seeking a
declaratory judgment that the Company is not infringing AS&E's patents. In
August 1996, AS&E filed an answer and counterclaim alleging that the Company
is infringing one or more of eight AS&E patents. In October 1996, the court
dismissed AS&E's infringement counterclaims, but has allowed AS&E to raise
more specific infringement counterclaims upon AS&E asserting factual support
for such claims. Although the Company does not believe that it is infringing
any valid patent of AS&E, there can be no assurance that AS&E will not raise
more specific infringement counterclaims. Failure of the Company to prevail in
this litigation could have a material adverse effect on the Company's business
and financial condition. See "Risk Factors--Limited Protection of Intellectual
Property Rights; Patent Litigation" and "Business--Intellectual Property."

34
<PAGE>

MANAGEMENT

EXECUTIVE OFFICERS AND DIRECTORS

The executive officers and directors of the Company and their ages are as
follows:

<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
S. David Ellenbogen 58 Chief Executive Officer, President and Director
Dr. Jay A. Stein 54 Senior Vice President, Technical Director and Director
William J. Frain 30 Chief Financial Officer and Treasurer
James J. Aldo 45 Vice President of Marketing and Sales
Daniel J. Silva 44 Vice President of Operations
Ambassador L. Paul
Bremer, III(1)(2) 55 Director
Frank Kenny(1)(2) 52 Director
Glenn P. Muir(1)(2) 37 Director
Gerald Segel(1)(2) 75 Director
</TABLE>
- --------
(1) Member of the Compensation Committee.
(2)Member of the Audit Committee.

The Company has commenced a search for a Chief Operating Officer to support
its anticipated growth. See "Risk Factors--Dependence on Management and Key
Employees."

S. DAVID ELLENBOGEN, a co-founder of the Company, has served as its
President and a director since its organization in June 1989. Mr. Ellenbogen
was also a co-founder of Hologic, a developer, manufacturer and seller of X-
ray and other bone densitometers, served as its President from October 1985
until May 1994, and is currently its Chairman of the Board and Chief Executive
Officer. Prior to founding Hologic, Mr. Ellenbogen served as President,
Treasurer and a director of Diagnostic Technology, Inc. ("DTI"), which he co-
founded in 1981. DTI, which developed an X-ray product for digital
angiography, was acquired in 1982 by Advanced Technology Laboratories, Inc.
("ATL"), a wholly-owned subsidiary of Squibb Corporation. Mr. Ellenbogen was
involved in the management of the digital angiography group of ATL from 1982
to 1985. Mr. Ellenbogen is employed by Hologic and performs part-time
management services for the Company pursuant to a management agreement between
the Company and Hologic. See "Risk Factors--Dependence on Management and Key
Employees" and "Certain Transactions--Hologic, Inc."

DR. JAY A. STEIN, a co-founder of the Company and Hologic, has served as
Senior Vice President, Technical Director and a director for both companies
since their organization. Dr. Stein co-founded DTI with Mr. Ellenbogen in
1981, served as Vice President and Technical Director of DTI and was Technical
Director of the digital angiography group of its successor, ATL, from 1982 to
1985. Dr. Stein received a Ph.D. in Physics from The Massachusetts Institute
of Technology. He is the principal author of fifteen patents pertaining to X-
ray technology. Dr. Stein is employed by Hologic and performs part-time
management services for the Company pursuant to a management agreement between
the Company and Hologic. See "Risk Factors--Dependence on Management and Key
Employees" and "Certain Transactions--Hologic, Inc."

WILLIAM J. FRAIN, a Certified Public Accountant, has served as Chief
Financial Officer and Treasurer since October 1996. Prior to that, Mr. Frain
served as Controller from August 1993 until October 1996. Prior to joining the
Company, Mr. Frain served as a financial auditor in the Enterprise Group at
Arthur Andersen LLP from September 1988 to August 1993.

JAMES J. ALDO has served as Vice President of Marketing and Sales since July
1993. Prior to that, Mr. Aldo served as Director of Sales and Marketing since
joining the Company in July 1989. Prior to joining the Company, Mr. Aldo held
positions in marketing, sales, engineering and field service management at
AS&E and served as Eastern Regional Manager at Tegal, Inc., a subsidiary of
Motorola, Inc., a manufacturer of capital equipment for the semiconductor
industry.

<PAGE>

DANIEL J. SILVA has served as Vice President of Operations since April 1994.
Prior to that, Mr. Silva served as the Company's Director of Operations from
June 1992 to April 1994. Mr. Silva was hired as an Operations Manager in June
1991. Prior to joining the Company, Mr. Silva held positions in manufacturing,
project management and program management at AS&E.

AMBASSADOR L. PAUL BREMER, III has been a director of the Company since July
1996. Ambassador Bremer has served as a Managing Director of Kissinger
Associates, Inc., a strategic consulting firm headed by former Secretary of
State Henry Kissinger, since 1989. Prior to joining Kissinger Associates,
Ambassador Bremer held numerous positions in the United States Diplomatic
Service, including as the United States Ambassador to the Netherlands from
1983 to 1986, and as Ambassador-at-Large for Counter-Terrorism responsible for
developing and implementing America's global policies to combat terrorism,
from 1986 to 1989. Ambassador Bremer is a Trustee of the Economic Club of New
York, serves on the Board of Advisors of the Russian--American Press and
Information Center, and is a member of the International Institute for
Strategic Studies and the Council on Foreign Relations. Ambassador Bremer also
serves as a director of Air Products and Chemicals, Inc. See "Certain
Transactions--Consulting Services."

FRANK KENNY has been a director of the Company since 1989. Mr. Kenny has
served as Managing Director of Delta Partners Ltd., a venture capital company
since June 1994. Mr. Kenny has also served as Managing Partner of Beta
Partners, Inc., a venture capital company, since 1987. Mr. Kenny is also a
director of Abacus Direct Corporation.

GLENN P. MUIR has been a director of the Company since October 1996. Mr.
Muir, a Certified Public Accountant, served as Treasurer of the Company from
August 1993 until October 1996 and served as Controller of the Company from
the Company's inception until August 1993, under the Company's management
agreement with Hologic. Mr. Muir has been the Vice President of Finance and
Treasurer of Hologic since February 1992. Mr. Muir joined Hologic as its
Controller in October 1988 and served in that capacity until February 1992.
See "Certain Transactions--Hologic, Inc."

GERALD SEGEL has been a director of the Company since October 1996. Mr.
Segel, currently retired, was Chairman of the Board of Tucker Anthony
Incorporated from January 1987 to May 1990. From 1983 through January 1987 he
served as President of Tucker Anthony Incorporated. Mr. Segel also serves a
director of Litchfield Financial Inc. and Hologic.

Mr. Ellenbogen, Mr. Kenny and Dr. Stein have been elected to the Board of
Directors pursuant to agreements among the Company, Mr. Ellenbogen, Dr. Stein
and the holders of the Company's Preferred Stock. Under these agreements, the
holders of the Preferred Stock have agreed to vote their shares for the
election of Mr. Ellenbogen and Dr. Stein, and Mr. Ellenbogen and Dr. Stein
have agreed to vote their shares to elect designees of the holders of the
Preferred Stock. Mr. Kenny is the designee of the holders of the Preferred
Stock. The agreements will terminate upon the closing of the Offering.

Upon the closing of the Offering, the Company's Board of Directors will be
divided into three classes, with the classes being elected for staggered
three-year terms. At each annual meeting of stockholders, directors will be
elected to succeed those in the class whose term then expires, and each
elected director will serve for a term expiring at the third succeeding annual
meeting of stockholders after such director's election, and until the
director's successor is elected and qualified. As a result, directors stand
for election only once in three years. Executive officers serve at the
discretion of the Board of Directors.

The Board of Directors has appointed a Compensation Committee and an Audit
Committee, each of which is currently composed of Messrs. Bremer, Kenny, Muir
and Segel. The functions of the Compensation Committee include presentation
and recommendations to the Board of Directors on compensation levels for
officers and directors and issuance of stock options to the Board of
Directors, employees and affiliates. The functions of the Audit Committee
include recommending to the Board of Directors the engagement of the
independent accountants,

36
<PAGE>

reviewing the scope of internal controls and reviewing the implementation by
management of recommendations made by the independent accountants.

SIGNIFICANT EMPLOYEES

Certain key employees of the Company who are not also officers or directors
are as follows:

<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<C> <C> <S>
Kristoph D. Krug 43 Director of Engineering
Jeremy M. Attree 37 Director of Operations, Europe
</TABLE>

KRISTOPH D. KRUG joined the Company in July 1989 as a Project Engineer and
was promoted to Director of Research and Development Engineering in 1992. Mr.
Krug is the author of two of the Company's patents for X-ray screening. Prior
to joining the Company, Mr. Krug was Engineering Manager at Teradyne, Inc., a
manufacturer of automated test equipment.

JEREMY M. ATTREE has served as Director of Operations, Europe since joining
the Company in October 1993. From September 1991 to October 1993, Mr. Attree
served as Marketing Manager for EA Technology Ltd, a primary research and
development center for the electricity industry in the United Kingdom. Prior
to joining EA Technology, Mr. Attree served as Marketing Director and
Development Manager for Schlumberger Industries, Security Division, where he
was engaged primarily in the development of new products in the airport
security field.

DIRECTOR COMPENSATION

Each nonemployee director receives (i) an annual retainer of $5,000, payable
$1,250 per quarter, (ii) a directors meeting fee of $1,000 for each meeting of
the Board of Directors at which the director is physically present and $500
for each meeting at which the director participated by telephone and (iii) a
committee meeting fee for each meeting of a committee of the Board of
Directors at which the director was physically present, in the amount of
$1,000 if the meeting is held on a day other than a day of a meeting of the
Board of Directors and $500 if held on the same day as a meeting of the Board
of Directors, but no fee if the committee meeting is held at the same time or
immediately in conjunction with the meeting of the Board of Directors.

Nonemployee directors are also eligible to receive stock options pursuant to
the Company's 1996 Nonemployee Director Stock Option Plan. See "Management--
Stock Option Plans."

37
<PAGE>

EXECUTIVE COMPENSATION

The following Summary Compensation Table sets forth the compensation during
the fiscal year ended September 30, 1996 of each of the Chief Executive
Officer and the executive officers of the Company whose annual salary and
bonus exceeded $100,000 for services in all capacities to the Company during
the fiscal year.

<TABLE>
<CAPTION>
LONG TERM
COMPENSATION
ANNUAL COMPENSATION(1) AWARDS
----------------------------- -------------
OTHER ANNUAL SECURITIES ALL OTHER
NAME AND PRINCIPAL SALARY BONUS COMPENSATION UNDERLYING COMPENSATION
POSITION ($) ($) ($) OPTION (#)(2) ($)
- ------------------ -------- ------- ------------ ------------- ------------
<S> <C> <C> <C> <C> <C>
S. David Ellenbogen(3).. $ 71,000 $25,000 -- -- --
Chief Executive
Officer,
President and Director
James J. Aldo........... 114,916 93,750 -- -- --
Vice President of
Marketing and Sales
Daniel J. Silva ........ 112,900 68,750 -- -- --
Vice President of
Operations
</TABLE>
- --------
(1) In accordance with the rules of the Securities and Exchange Commission the
compensation described in the tables does not include medical, group life
insurance or other benefits received by the executive officers named in
the above table which are available to all salaried employees of the
Company, and certain perquisites and other personal benefits, securities
or property received by the executive officers which do not exceed the
lesser of $50,000 or 10% of any such officer's salary and bonus described
in this table.
(2) The Company did not make any restricted stock awards, grant any stock
appreciation rights or make any long-term incentive payments during fiscal
1996.
(3) Represents Mr. Ellenbogen's compensation paid by the Company to Hologic
pursuant to a management agreement between the Company and Hologic. The
Company pays to Hologic its proportionate share of Hologic's overhead,
including the salary of Hologic's employees rendering services to the
Company. See "Certain Transactions--Hologic, Inc."

STOCK OPTION PLANS

The following two tables set forth certain information with respect to (i)
the number of options granted to the named executive officers in fiscal 1996
and (ii) the aggregate number of and value of options exercised and
exercisable by the named executive officers during fiscal 1996.
<TABLE>
<CAPTION>
POTENTIAL
REALIZABLE VALUE
AT ASSUMED
ANNUAL RATES OF
STOCK PRICE
APPRECIATION FOR
INDIVIDUAL GRANTS OPTION TERM(3)
----------------------------------------------- -----------------
NUMBER OF
SECURITIES PERCENT OF
UNDERLYING TOTAL OPTIONS
OPTIONS GRANTED TO EXERCISE OR
GRANTED(1) EMPLOYEES IN BASE PRICE EXPIRATION
NAME (#) FISCAL YEAR $/SHARE(2) DATE 5% ($) 10%($)
- ---- ---------- ------------- ----------- ---------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
S. David Ellenbogen..... -- -- -- -- -- --
James J. Aldo........... 10,000 14.9% $3.00 7/22/2006 $ 18,867 $ 47,812
10,000 1.00 11/6/2005 6,289 15,937
Daniel J. Silva......... 10,000 14.9% 3.00 7/22/2006 18,867 47,812
10,000 1.00 11/6/2005 6,289 15,937
</TABLE>

OPTION GRANTS IN LAST FISCAL YEAR

- --------
(1) Options vest at the rate of 20% per year commencing one year after the
date of grant and each year thereafter until fully vested.
(2) All options were granted at not less than the fair market value as
determined by the Board of Directors of the Company on the date of grant.
(3) Amounts reported in this column represent hypothetical values that may be
realized upon exercise of the options immediately prior to the expiration
of their term, assuming the specified compounded rates of appreciation of
the Company's Common Stock over the term of the options. These numbers are
calculated based on rules promulgated by the Securities and Exchange
Commission. Actual gains, if any, on stock option exercises and Common
Stock holdings are dependent on the time of such exercise and the future
performance of the Company's Common Stock.

38
<PAGE>

The following table sets forth the aggregate number and value of options
exercisable and unexercisable by the named executive officers during fiscal
1996. No stock options were exercised by any of the named executive officers
in fiscal 1996.

FISCAL YEAR-END OPTION VALUES

<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED IN-
UNDERLYING UNEXERCISED THE-MONEY OPTIONS AT
OPTIONS AT 9/30/96(#) 9/30/96($)(1)
NAME EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
- ---- ------------------------- -------------------------
<S> <C> <C>
S. David Ellenbogen......... --/-- --/--
James J. Aldo............... 84,500/42,000 $1,073,000/$494,000
Daniel J. Silva............. 55,000/50,000 686,500/591,000
</TABLE>
- --------
(1) There was no public trading market for the Common Stock as of September
30, 1996. Accordingly, these values have been calculated on the basis of
the assumed initial public offering price of $13.00 per share, less the
applicable exercise price.

1989 Combination Stock Option Plan. In 1989, the Company adopted the 1989
Combination Stock Option Plan (the "1989 Option Plan"). The purpose of the
1989 Option Plan is to provide long-term incentives and rewards to the
Company's employees, officers, directors, advisors and consultants. The
Company has adopted an informal policy of granting stock options to each
employee. A total of 1,250,000 shares of Common Stock has been reserved for
issuance under the 1989 Option Plan. As of October 15, 1996, options to
purchase 873,300 shares of Common Stock at exercise prices ranging from $0.10
to $9.50 per share were outstanding under the 1989 Option Plan.

1996 Nonemployee Director Stock Option Plan. In October 1996, the Company
adopted the 1996 Nonemployee Director Stock Option Plan (the "Directors Plan")
to promote the Company's interests by attracting and retaining highly skilled,
experienced and knowledgeable nonemployee directors. Any director who is not
an employee of the Company is eligible to receive nonqualified stock options
under the Directors Plan. A total of 125,000 shares of Common Stock have been
reserved for issuance under the Directors Plan.

The Directors Plan provides that each eligible director, elected or
appointed after October 10, 1996, will be granted an option to acquire 10,000
shares, effective upon the date he or she is first elected to the Board of
Directors. Each eligible director will also receive an option to acquire 2,500
shares each year. The initial grant of options to eligible directors under the
Directors Plan vest at the rate of 20% per year, with the first installment
vesting one year from the date of grant. The annual grant of options under the
Directors Plan vest six months after the date of grant. The exercise price for
all options granted under the Directors Plan will be the fair market value of
the shares of Common Stock at the time the options granted. No option under
the Directors Plan may be exercised subsequent to ten years from the date of
grant.

Options to purchase 10,000 shares of Common Stock at an exercise price of
$3.00 per share granted to each of Messrs. Bremer and Segel in July 1996 will
be credited against the number of shares eligible for issuance under the
Directors Plan.

1996 Equity Incentive Plan. In October 1996, the Company adopted the 1996
Equity Incentive Plan (the "Incentive Plan") to promote the Company's
interests by attracting and retaining key employees, directors, consultants
and advisors and providing incentives for such individuals to assist the
Company in achieving long-range performance goals. A total of 750,000 shares
of Common Stock have been reserved for issuance upon the exercise of options
and other awards to be granted under the Incentive Plan.

Under the Incentive Plan, the Company may grant both incentive stock options
and non-qualified stock options, as well as stock appreciation rights
("SARs"), performance or award shares, and restricted stock. SARs entitle the
holder thereof to receive upon exercise, cash or common stock, as determined
by the Board of Directors of the Company, equal in value to the difference
between the SAR issuance price and the fair market value of the shares subject
to the SAR on the date of exercise. Performance or award shares may be issued
to a participant in the Plan for no value in the event certain performance
milestones, determined by the Board, have

39
<PAGE>

been reached by the Company or the plan participant. Restricted stock may be
issued to a participant in the Plan for no value but may not be sold by the
participant for a restriction period to be determined by the Board.

The Incentive Plan contains change in control provisions which could cause
options to become immediately exercisable and restrictions and deferred
limitations applicable to other awards to lapse in the event of a change in
control of the Company.

Options and other awards under the Incentive Plan may not be granted after
October 8, 2006. No options or other awards have been issued under the
Incentive Plan.

BONUS PLANS

The Company maintains an informal bonus program for certain employees,
including executive officers, under which such employees may be awarded
discretionary cash bonuses based upon an evaluation of individual performance
and the performance of the Company during the year.

LIMITATION OF OFFICERS' AND DIRECTORS' LIABILITY; INDEMNIFICATION AGREEMENTS

The Company's Restated Certificate of Incorporation and Bylaws include
provisions (i) to eliminate the personal liability of the Company's directors
for monetary damages resulting from breaches of their fiduciary duty and (ii)
to permit the Company to indemnify its directors and officers to the fullest
extent permitted by Delaware law. The Company has entered into indemnification
agreements with each of its directors and anticipates that it will enter into
similar agreements with any future directors. The Company may also enter into
similar agreements with certain of the Company's officers who are not also
directors. Generally, each indemnification agreement attempts to provide the
maximum protection permitted by Delaware law with respect to indemnification
of directors or officers.

The indemnification agreements provide that the Company will pay certain
amounts incurred by a director or officer in connection with any civil or
criminal action or proceeding and specifically including actions by or in the
name of the Company (derivative suits) where the individual's involvement is
by reason of the fact that he is or was a director or officer. Such amounts
include, to the maximum extent permitted by law, attorneys fees, judgments,
civil or criminal fines, settlement amounts and other expenses customarily
incurred in connection with legal proceedings. Under the indemnification
agreements, a director or officer will not receive indemnification if he is
found not to have acted in good faith in the reasonable belief that his action
was in the best interests of the Company.

The Company expects to obtain directors and officers liability insurance.

<PAGE>

CERTAIN TRANSACTIONS

HOLOGIC, INC.

In June 1989, the Company obtained an exclusive perpetual license to use
certain patent rights and technology developed by Hologic for the development,
manufacture and sale of X-ray screening security systems for explosives,
drugs, currency and other contraband (subject to termination by either party
for certain defined defaults). In September 1996, this license was amended to
grant the Company a nonexclusive license to use these patents and technology
for the development, manufacture and sale of the X-ray-based products capable
of being used for process control applications in the food and beverage
industries. Mr. Ellenbogen and Dr. Stein are directors of Hologic and hold
similar offices in Hologic as they do in the Company. Mr. Ellenbogen and Dr.
Stein collectively beneficially own approximately 6.7% of the outstanding
voting stock of Hologic.

Under the license agreement with Hologic, the Company is required to pay
Hologic royalties of 5% of the first $50 million of net sales of screening
security systems using Hologic's technology, and 3% of net sales in excess of
$50 million, up to a maximum of $200 million of net sales of these products.
The Company is also required to pay royalties of 3% up to a maximum of $200
million of net sales of products covered by the Company's nonexclusive license
for food and beverage process control. The maximum aggregate royalties payable
by the Company to Hologic under this exclusive arrangement are $7.0 million,
and under the nonexclusive arrangement, are $6.0 million. In fiscal 1994,
1995, and 1996, the Company incurred royalties of approximately $688,000,
$719,000 and $775,000, respectively, for payment under this arrangement, on
aggregate sales through fiscal 1996 of approximately $46.9 million.

Under a management agreement, through the second quarter of fiscal 1996,
Hologic provided the Company with management, engineering and administrative
support, and space at Hologic's facilities. Hologic continues to provide part-
time management services of Mr. Ellenbogen and Dr. Stein, and through
September 1996 the services of Glenn P. Muir. Under this arrangement, the
Company was required to pay Hologic its proportionate share of Hologic's
expenses, including the salaries of its employees and overhead, in rendering
services to the Company. Currently the payments made under this arrangement
are the Company's proportionate share of Mr. Ellenbogen's and Dr. Stein's
compensation. No compensation is paid by the Company to any of Hologic's
employees, including Mr. Ellenbogen and Dr. Stein. The management agreement
may be terminated by either party on six months' written notice. For fiscal
1994, 1995 and 1996, the Company incurred expenses of approximately $544,000,
$530,000 and $325,000, respectively, for rent (through the second quarter of
fiscal 1996) and services under the management agreement with Hologic. In
fiscal 1994 and 1995, the Company also purchased subassemblies in the amount
of approximately $229,000 and $210,000, respectively, from Hologic.

During fiscal 1996, Mr. Ellenbogen and Dr. Stein have typically devoted
approximately 16 and 8 hours per week, respectively, to the Company. In
connection with this Offering and the growth of the Company's business, Mr.
Ellenbogen is currently expending approximately 20 hours per week to the
Company. The Company has commenced a search for a chief operating officer to
further support its anticipated growth. There can be no assurance that the
Company will be able to attract and retain a qualified chief operating officer
on a timely basis, if at all, or that the Company will be able to successfully
integrate such person, if hired. After the integration of such person into the
management of the Company, Mr. Ellenbogen's time commitment is anticipated to
return to its previous level. See "Risk Factors--Dependence on Management and
Key Employees."

The Company believes that the agreements and transactions between the
Company and Hologic are commercially reasonable. The Company did not, however,
negotiate with any unaffiliated third parties prior to reaching an agreement
with Hologic and cannot therefore determine whether the terms of the
transactions are more or less favorable than could have been obtained from
third parties.

CERTAIN FINANCING TRANSACTIONS

In June 1989, the Company sold 234,375 shares of Series A Preferred Stock
and 250,000 shares of Series B Preferred Stock to a limited number of
investors pursuant to a private placement at prices of $10.00 and $.625 per
share, respectively (an aggregate of $2,343,750 and $156,250, respectively).
In January 1991 and July 1993 the Company sold an aggregate of 343,690 shares
of Series C Preferred Stock and 254,585 shares of Series D

41
<PAGE>

Preferred Stock to a limited number of investors pursuant to private
placements at prices of $10.00 and $1.50 per share, respectively (an aggregate
of $3,436,900 and $381,873, respectively). The holders of this Preferred Stock
also received warrants to purchase an aggregate of 361,002 shares of Common
Stock. The Series A Preferred Stock and Series C Preferred Stock are not
convertible and are redeemable by the Company at a purchase price of $10.00
per share. Each share of Series B Preferred Stock and Series D Preferred Stock
is convertible into ten shares of Common Stock.

The holders of the Series A Preferred Stock and Series C Preferred Stock
deferred and waived certain of the Company's mandatory redemption obligations
with respect to such Preferred Stock. The waivers remain effective through
November 1, 1996 and thereafter until the holders of not less than 60% of the
shares of the applicable series provide the Company with 60 days prior notice
of their intention to reinstate the Company's mandatory redemption obligations
with respect to the covered shares. All of these shares are redeemable within
one year of June 30, 1996. The Company has elected to redeem all of the
578,065 issued and outstanding shares of the Series A and Series C Preferred
Stock at the closing of the Offering, for an aggregate redemption price of
$5,780,650, in order to eliminate certain rights and preferences that the
holders of such stock would otherwise have had.

Upon the closing of the Offering, the Series B Preferred Stock and Series D
Preferred Stock will be automatically converted into an aggregate of 5,045,850
shares of Common Stock. In connection with the Offering, the holders of the
Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock
and Series D Preferred Stock have agreed to waive certain of their rights and
preferences that relate to the Offering and other continuing obligations of
the Company.

Purchasers of Company's Preferred Stock include:

<TABLE>
<CAPTION>
NUMBER OF SHARES
-----------------------------------
PURCHASER(1) SERIES A SERIES B SERIES C SERIES D
- ------------ -------- -------- -------- --------
<S> <C> <C> <C> <C>
Burr, Egan, Deleage & Co................... 102,001 108,801 143,131 106,024
Beta Partners Limited Partnership.......... 37,500 40,000 52,621 38,978
Pioneer Capital Corporation................ 37,500 40,000 52,621 38,978
Massachusetts Capital Resource Company..... 37,500 40,000 52,621 38,978
Claflin Capital Corporation................ 9,375 10,000 27,964 20,714
HLM Partners V Limited Partnership......... 10,499 11,199 14,732 10,913
</TABLE>
- --------
(1) Includes shares held by venture capital funds managed or controlled by the
purchasers listed above or by certain officers of one of those
corporations. Beta Partners Limited Partnership is an affiliate of a
director of the Company. See "Principal Stockholders."

CONSULTING SERVICES

In April 1996, the Company retained the services of Kissinger Associates,
Inc., a strategic consulting firm, to provide advice and assistance in
connection with the Company's efforts to expand the market for its products
and technology outside of the United States. The Company pays Kissinger
Associates an annual retainer fee of $100,000, and will be required in certain
instances to pay an additional fee based upon the value of each sale of
equipment or technology to a customer for which Kissinger Associates'
assistance has been requested. Ambassador L. Paul Bremer, III, a director of
the Company, is a Managing Director of Kissinger Associates.

42
<PAGE>

PRINCIPAL STOCKHOLDERS

The following table sets forth certain information as of October 15, 1996
concerning the beneficial ownership of Common Stock by (i) each person who is
known by the Company to own beneficially more than 5% of the outstanding
shares of Common Stock, (ii) each director of the Company, (iii) each of the
executive officers named in the Summary Compensation Table and (iv) all
executive officers and directors of the Company as a group, after giving
effect to the redemption of all outstanding shares of non-convertible
redeemable Series A Preferred Stock and Series C Preferred Stock. This
information is based upon information received from or on behalf of the named
individuals. Unless otherwise noted, the beneficial owners listed have sole
voting and investment power over the shares listed.

<TABLE>
<CAPTION>
PERCENTAGE OF
OUTSTANDING SHARES
------------------------------
NUMBER OF
SHARES OF
COMMON STOCK
NAME AND ADDRESS OF BENEFICIALLY
BENEFICIAL OWNER OWNED(1) BEFORE OFFERING AFTER OFFERING
- ------------------- ------------ --------------- --------------
<S> <C> <C> <C>
Funds managed by Burr, Egan, 2,301,945 33.1% 25.7%
Deleage & Co.(2).................
One Post Office Square, Suite
3800
Boston, Massachusetts 02103
Beta Partners Limited 846,284 12.4 9.6
Partnership(3)(5)................
One Post Office Square, Suite
3800
Boston, Massachusetts 02103
Frank Kenny(4)(5)................. 846,284 12.4 9.6
One Post Office Square, Suite
3800
Boston, Massachusetts 02103
Massachusetts Capital Resource 846,284 12.4 9.6
Company(6).......................
420 Boylston Street
Boston, Massachusetts 02116
Pioneer Capital Corporation(7).... 803,970 11.7 9.1
60 State Street
Boston, Massachusetts 02109
Charles T. O'Neill, as 800,000 11.8 9.1
Trustee(8).......................
c/o O'Neill & Neylon
950 Winter Street
Waltham, Massachusetts 02154
Dr. Jay A. Stein(9)............... 762,000 11.2 8.7
c/o Vivid Technologies, Inc.
10E Commerce Way
Woburn, Massachusetts 01801
S. David Ellenbogen(10)........... 428,000 6.3 4.9
c/o Vivid Technologies, Inc.
10E Commerce Way
Woburn, Massachusetts 01801
James J. Aldo(11)................. 86,500 1.3 *
Daniel J. Silva(12)............... 57,000 * *
Glenn P. Muir(13)................. 35,250 * *
L. Paul Bremer, III............... -- -- --
Gerald Segel...................... -- -- --
All directors and officers as a 24.6
group (9 persons) (14)........... 2,222,134 31.6
</TABLE>

<PAGE>

- --------
* Less than 1% of the outstanding Common Stock.
(1) The number of shares of Common Stock deemed outstanding prior to the
Offering includes (i) 1,746,520 shares of Common Stock outstanding as of
October 15, 1996, (ii) an aggregate of 5,045,850 shares of Common Stock
issuable upon conversion of all outstanding shares of Series B Preferred
Stock and Series D Preferred Stock and (iii) shares issuable pursuant to
options and warrants held by the respective person or group which may be
exercised within 60 days after October 15, 1996 ("presently exercisable
stock options" and "presently exercisable warrants," respectively), as set
forth below. The number of shares of Common Stock deemed outstanding after
the Offering includes an additional 2,000,000 shares of Common Stock which
are being offered for sale by the Company in the Offering. Beneficial
ownership is determined in accordance with rules of the Securities and
Exchange Commission that deem shares to be beneficially owned by any
person who has or shares voting or investment power with respect to such
shares. Presently exercisable options and presently exercisable warrants
are deemed to be outstanding and to be beneficially owned by the person or
group holding stock options or warrants for the purpose of computing the
percentage ownership of such person or group, but not treated as
outstanding for the purpose of computing the percentage ownership of any
other person or group.
(2) Comprised of (i) 1,492,700 shares and 106,794 shares issuable pursuant to
presently exercisable warrants held by Alta III Limited Partnership ("Alta
III"), (ii) 236,940 shares and 16,952 shares issuable pursuant to
presently exercisable warrants held by Gallion Partners II ("Gallion"),
(iii) 379,100 shares and 27,122 shares issuable pursuant to presently
exercisable warrants held by C.V. Sofinnova Partners Four ("Sofinnova"),
(iv) 37,490 shares and 2,682 shares issuable pursuant to presently
exercisable warrants held by Alta Jami Boston Limited Partnership ("Alta
Jami"), and (v) 2,020 shares and 145 shares issuable pursuant to presently
exercisable warrants held by Golden Coins N.V. ("Golden Coins"),
respectively. The respective general partners of Alta III, Alta Jami,
Gallion, Golden Coins and Sofinnova exercise sole voting and investment
power with respect to the shares held by the funds. The principals of
Burr, Egan, Deleage & Co. ("Burr Egan") are general partners of Alta III
Management Partners Limited Partnership (the general partner of Alta III)
and Alta Jami. As general partners of these funds, the principals of Burr
Egan may be deemed to share voting and investment power for the shares
held by the funds. Burr Egan serves as an advisor to Gallion, Sofinnova
and Golden Coins. The principals of Burr Egan disclaim beneficial
ownership of all shares held by the foregoing funds except to the extent
of their pecuniary interests therein. Excludes shares beneficial owned by
Beta Partners Limited Partnership. See footnote 3 below.
(3) Comprised of 789,780 shares and 56,504 shares issuable pursuant to
presently exercisable warrants. Certain principals of Burr Egan are
special limited partners of Beta Partners Limited Partnership ("Beta
Partners"). Burr Egan exercises no investment or voting power as to the
shares held by Beta Partners. Such principals disclaim beneficial
ownership of the shares held by Beta Partners except to the extent of this
pecuniary interests therein.
(4) Comprised of shares beneficially owned by Beta Partners. Mr. Kenny serves
as a general partner of Beta Management Partners Limited Partnership, the
general partner of Beta Partners. Mr. Kenny disclaims beneficial ownership
of such shares except to the extent of his pecuniary interests therein.
(5) Excludes an aggregate of 4,256,060 shares and 304,498 shares issuable
pursuant to presently exercisable warrants held by the funds managed by
Burr Egan, Pioneer Capital Corporation and Claflin Capital Management,
Inc., and by Massachusetts Capital Resource Company, Christopher W. Lynch,
Geneva Partnership and HLM Partners V Limited Partnership, which holders
have designed Mr. Kenny, pursuant to certain securities purchase
agreements, to serve as their designee on the Company's Board of
Directors. See "Management--Executive Officers and Directors."
(6) Comprised of 789,780 shares and 56,504 shares issuable pursuant to
presently exercisable warrants.
(7) Comprised of 750,290 shares and 53,680 shares issuable pursuant to
presently exercisable warrants held by Pioneer Ventures Limited
Partnership, a venture fund the general partner of which is a wholly-owned
subsidiary of Pioneer Capital Corporation which exercises voting and
investment authority with respect to the shares owned by Pioneer Ventures
Limited Partnership. Excludes 19,490 shares and 2,827 shares issuable
pursuant to presently exercisable warrants held by Geneva Partnership, a
family partnership of one of the principals of Pioneer Capital
Corporation, and 20,000 shares held by Christopher W. Lynch, a principal
of Pioneer Capital Corporation. Pioneer Capital Corporation disclaims
beneficial ownership of all such shares.
(8) Includes (i) 250,000 shares held by Mr. O'Neill as Trustee of the
Ellenbogen Family Irrevocable Trust of 1996; (ii) 350,000 shares held by
Mr. O'Neill as Trustee of the S. David Ellenbogen 1996 Retained Annuity
Trust; and (iii) 200,000 shares held by Mr. O'Neill as Trustee of the Jay
A. Stein 1996 Retained Annuity Trust. Mr. O'Neill disclaims beneficial
ownership of all such shares.
(9) Includes 72,000 shares held by Dr. Stein as Trustee. Also includes 200,000
shares held in trust by Mr. O'Neill as Trustee of the Jay A. Stein 1996
Retained Annuity Trust. Dr. Stein disclaims beneficial ownership of the
shares held by Dr. Stein as Trustee.
(10) Includes 60,000 shares held by Mr. Ellenbogen as Trustee. Also includes
350,000 shares held in trust by Mr. O'Neill, as Trustee of the S. David
Ellenbogen 1996 Retained Annuity Trust. Excludes 250,000 shares held in
trust by Mr. O'Neill, as Trustee of the Ellenbogen Family Irrevocable
Trust of 1996. Mr. Ellenbogen disclaims beneficial ownership of shares
held by Mr. Ellenbogen as Trustee and shares held in trust by Mr. O'Neill
as Trustee of the Ellenbogen Family Irrevocable Trust of 1996.
(11) Consists of 86,500 shares of Common Stock issuable pursuant to presently
exercisable stock options.
(12) Consists of 57,000 shares of Common Stock issuable pursuant to presently
exercisable stock options.
(13) Includes 31,000 shares of Common Stock issuable pursuant to presently
exercisable stock options.
(14) Includes 181,600 shares issuable pursuant to presently exercisable stock
options and 56,504 shares issuable pursuant to presently exercisable
warrants. See footnotes 3, 11, 12 and 13 above.

<PAGE>

DESCRIPTION OF SECURITIES

Upon the consummation of the Offering, the authorized capital stock of the
Company will consist of 30,000,000 shares of Common Stock, $.01 par value, and
1,000,000 shares of Preferred Stock, $.01 par value (the "Preferred Stock").

COMMON STOCK

As of October 15, 1996, after giving effect to the conversion of all
outstanding shares of Series B Preferred Stock and Series D Preferred Stock
into an aggregate of 5,045,850 shares of Common Stock, there were 6,792,370
shares of Common Stock outstanding, held of record by 49 stockholders. There
will be 8,792,370 shares of Common Stock outstanding after giving effect to
the sale of the shares of Common Stock offered hereby.

The holders of Common Stock are entitled to one vote per share on all
matters to be voted on by the stockholders and are entitled to receive such
dividends, if any, as may be declared from time to time by the Board of
Directors from funds legally available therefor. The holders of Common Stock
do not have cumulative voting rights in the election of directors. Upon
liquidation or dissolution of the Company, the holders of Common Stock are
entitled to receive all assets available for distribution to the stockholders,
subject to any preferential or other rights of the holders of Preferred Stock.
The Common Stock has no preemptive or other subscription rights, and there are
no conversion rights or redemption or sinking fund provisions with respect to
such shares. All of the shares of Common Stock are, and the shares to be sold
in the Offering will be, fully paid and nonassessable.

PREFERRED STOCK

Upon the consummation of the Offering, the Board of Directors may, without
further action of the stockholders of the Company, issue Preferred Stock in
one or more classes or series and fix the rights and preferences thereof,
including the dividend rights, dividend rates, conversion rights, voting
rights, terms of redemption (including sinking fund provisions), redemption
price or prices, liquidation preferences and the number of shares constituting
any class or series, and the designations of such class or series.

The voting and other rights of the holders of Common Stock will be subject
to, and may be adversely affected by, the rights of holders of any Preferred
Stock that may be issued in the future. Issuances of Preferred Stock, while
providing desirable flexibility in connection with possible acquisitions and
other corporate purposes, could have the effect of making it more difficult
for a third party to acquire, or of discouraging a third party from acquiring,
a majority of the outstanding voting stock of the Company. The Company has no
present plans to issue any shares of Preferred Stock.

WARRANTS

In January 1992, the Company sold a warrant to Dominion Fund II, L.P.
("Dominion") for the purchase of 42,667 shares of Common Stock, at an exercise
price of $1.50 per share. This warrant was sold in connection with a loan made
to the Company by Dominion. In March 1992 and February 1994, the Company
issued warrants to the purchasers of its Series C Preferred Stock and Series D
Preferred Stock for the purchase of an aggregate of 361,002 shares of Common
Stock at an exercise price of $1.50 per share. All of the outstanding warrants
are currently exercisable. Warrants to purchase 53,680 shares of Common Stock
will expire in February 2000, and the remainder will expire five years after
the completion of the Offering.

ANTITAKEOVER PROVISIONS

In addition to the Preferred Stock, the Company's Restated Certificate of
Incorporation includes several additional provisions which may render more
difficult an unfriendly tender offer, proxy contest, merger or other change in
control of the Company. These provisions may discourage bids for the Company
and therefore may limit the price that certain investors might be willing to
pay in the future for shares of Common Stock.

The Company's Restated Certificate of Incorporation contains a so-called
"anti-greenmail" provision. The provision is intended to discourage
speculators who accumulate beneficial ownership of a significant block of

<PAGE>

stock and then, under the threat of making a tender offer or proxy contest or
instigating some other corporate disruption, succeed in extracting from the
corporation a premium price to repurchase the shares acquired by the
speculator. This tactic has become known as greenmail. The anti-greenmail
provision prohibits the Company from purchasing any shares of Common Stock
from a related person at a per share price in excess of the fair market value
at the time of such purchase, unless the purchase is approved by two-thirds of
the holders of the outstanding shares of Common Stock, excluding any votes
cast by the Related Person. The term Related Person is defined in general to
mean any person, other than a founder of the Company (Mr. Ellenbogen and Dr.
Stein), who acquires more than 5% of the Company's voting stock. Stockholder
approval is not required for such purchases when the offer is made available
on the same terms to all holders of shares of Common Stock or when the
purchases are effected in the open market.

The Restated Certificate of Incorporation also contains a provision that
will require the affirmative vote of the holders of 66 2/3% of the outstanding
Common Stock to approve amendments to the Company's Restated Certificate of
Incorporation or to approve extraordinary transactions that are required to be
approved by stockholders under the Delaware General Corporation Law, including
mergers, sales of substantially all of the Company's assets and dissolution,
which actions are not approved by a majority of the Continuing Directors (as
defined below) of the Company. The Company's Restated Certificate of
Incorporation provides that the affirmative vote of the holders of only a
majority of the outstanding Common Stock is required to approve such matters
if they have been approved by the Continuing Directors. The term Continuing
Director is defined to mean (i) any member of the Board of Directors who is
unaffiliated with a Related Person and was a member of the Board of Directors
prior to the time any person became a Related Person and (ii) any successor to
such a Continuing Director who is not affiliated with any Related Person and
is recommended to succeed a Continuing Director by a majority of the
Continuing Directors then on the Board of Directors. A majority of the
Continuing Directors can designate a new director to be a Continuing Director,
even though such person is affiliated with a Related Person.

The Continuing Directors are currently closely affiliated with management
and are anticipated to continue to be so into the foreseeable future.
Accordingly, the effect of the provision of the Company's Restated Certificate
of Incorporation described in the preceding paragraph would be to make it
unlikely that any transaction requiring a stockholder vote would receive the
requisite approval unless supported by management. The 66 2/3% voting
requirement would apply to recapitalizations, management-led buy-outs and
other management-led transactions requiring the vote of stockholders under the
Delaware General Corporation Law, if such transactions were not approved by
the Continuing Directors. However, because of the likelihood of the close
association of the Continuing Directors to management, it would be more likely
that such transactions would obtain the approval of the Continuing Directors
and require only majority stockholder approval.

The Restated Certificate of Incorporation provides for the classification of
the Company's Board of Directors into three classes, with the classes being
elected for staggered three-year terms. At each annual meeting of
stockholders, directors will be elected to succeed those in the class whose
term then expires, and each elected director shall serve for a term expiring
at the third succeeding annual meeting of stockholders after such director's
election, and until the director's successor is elected and qualified. Thus,
directors stand for election only once in three years. This provision also
restricts the ability of stockholders to enlarge the Board of Directors.
Changes in the number of Directors may be effected by a vote of a majority of
the Continuing Directors (as defined in the Restated Certificate of
Incorporation) or by the stockholders by vote of at least 80% of the shares of
the Company's voting stock outstanding, voting as a single class. Under this
provision, Directors may only be removed with or without cause by the
affirmative vote of the holders at least 80% of the combined voting power of
the outstanding shares of the Company's voting stock, voting together as a
single class.

The Restated Certificate of Incorporation also provides that any action
required or permitted to be taken by the stockholders of the Company may be
taken only at a duly called annual or special meeting of the stockholders, and
may not be taken by written consent. This provision could have the effect of
delaying until the next annual stockholders meeting stockholder actions which
are favored by the holders of a majority of the outstanding voting securities
of the Company. This provision may also discourage another person or entity
from making a tender offer for the Company's Common Stock, because such person
or entity, even if it acquired a

46
<PAGE>

majority of the outstanding voting securities of the Company, would be able to
take action as a stockholder (such as electing new directors or approving a
merger) only at a duly called stockholders meeting, and not by written
consent.

Another provision included in the Company's Restated Certificate of
Incorporation requires the Board of Directors to consider social, economic and
other factors in evaluating whether certain types of corporate transactions
proposed by another party are in the best interests of the Company and its
stockholders. These transactions include (i) the purchase or acquisition
through exchange or otherwise of any of the Company's outstanding equity
securities, (ii) the merger or consolidation of the Company with another
corporation and (iii) the purchase or other acquisition of all or
substantially all of the Company's properties and assets.

Section 203 of the Delaware General Corporation Law prohibits a Delaware
corporation from engaging in a wide range of specified transactions with any
interested stockholder, defined to include, among others, any person or entity
who in the last three years obtained 15% or more of any class or series of
stock entitled to vote in the election of directors, unless, among other
exceptions, the transaction is approved by (i) the Board of Directors prior to
the date the interested stockholder obtained such status or (ii) the holders
of two-thirds of the outstanding shares of each class or series of stock
entitled to vote generally in the election of directors, not including those
shares owned by the interested stockholder. By virtue of the Company's
decision not to elect out of the statute's provisions, the statute applies to
the Company.

TRANSFER AGENT AND REGISTRAR

The Transfer Agent and Registrar for the Common Stock is the American Stock
Transfer & Trust Company.

47
<PAGE>

CERTAIN UNITED STATES FEDERAL TAX CONSEQUENCES TO NON-UNITED STATES HOLDERS

The following is a general discussion of the material United States federal
income and estate tax consequences of the ownership and disposition of the
Common Stock applicable to Non-United States Holders of such Common Stock. For
the purposes of this discussion, a "Non-United States Holder" is any person
other than (i) a citizen or resident of the United States, (ii) a corporation,
partnership or other entity created or organized in the United States or under
the laws of the United States or any state, or (iii) an estate or trust
treated as a United States Person under Section 7701(a)(30) of the Code. The
term "Non-United States Holder" does not include individuals who were United
States citizens within the ten-year period immediately preceding the date of
this Prospectus and whose loss of United States citizenship had as one of its
principal purposes the avoidance of United States taxes. This discussion does
not deal with all aspects of United States federal income and estate taxation
and does not deal with foreign, state and local tax consequences that may be
relevant to Non-United States Holders in light of their personal
circumstances. Furthermore, the following discussion is based on current
provisions of the United States Internal Revenue Code (the "Code") and
administrative and judicial interpretations as of the date hereof, all of
which are subject to change. Prospective non-United States investors are urged
to consult their tax advisors regarding the United States federal, state,
local and non-United States income and other tax consequences of owning and
disposing of Common Stock.

DIVIDENDS

Generally, any dividend paid to a Non-United States Holder of Common Stock
will be subject to United States withholding tax either at a rate of 30% of
the gross amount of the dividend or such lower rate as may be specified by an
applicable tax treaty. Under current United States Treasury regulations,
dividends paid to an address outside the United States are presumed to be paid
to a resident of such country (absent knowledge that such presumption is not
warranted) for purposes of the withholding discussed above and, under the
current interpretation of United States Treasury regulations, for purposes of
determining applicability of a tax treaty rate. However, under proposed United
States Treasury regulations not currently in effect, a Non-United States
Holder of Common Stock (including a beneficial owner of an interest in certain
Non-United States Holders) who wishes to claim the benefit of an applicable
treaty rate would be required to satisfy certain certification and disclosure
requirements. Dividends received by a Non-United States Holder that are
effectively connected with a United States trade or business conducted by such
Non-United States Holder are exempt from such withholding tax. However, such
effectively connected dividends, net of certain deductions and credits, are
taxed at the same graduated rates applicable to United States persons.
Currently, certain certification and disclosure requirements must be complied
with in order to be exempt from withholding under the effectively connected
income exemption.

In addition to the graduated tax described above, dividends received by a
corporate Non-United States Holder that are effectively connected with a
United States trade or business of the corporate Non-United States Holder may
also be subject to a branch profits tax at a rate of 30% or such lower rate as
may be specified by an applicable tax treaty.

A Non-United States Holder of Common Stock eligible for a reduced rate of
United States withholding tax pursuant to a tax treaty may obtain a refund of
any excess amounts currently withheld by filing an appropriate claim for
refund with the United States Internal Revenue Service.

GAIN ON DISPOSITION OF COMMON STOCK

A Non-United States Holder generally will not be subject to United States
federal income tax on any gain realized upon the sale or other disposition of
his Common Stock unless: (i) such gain is effectively connected with a United
States trade or business of the Non-United States Holder; (ii) the Non-United
States Holder is an individual who holds such Common Stock as a capital asset
and who is present in the United States for 183 days or more during the
calendar year in which such sale or disposition occurs and certain other
conditions are met or (iii) the Company is or has been a "United States real
property holding corporation" for federal income tax purposes at any time
within the shorter of the five-year period preceding such disposition or such
holder's

48
<PAGE>

holding period. The Company has determined that it is not and does not believe
that it will become a "United States real property holding corporation" for
federal income tax purposes. Even if the Company were to become a "United
States real property holding corporation," gains realized on a disposition of
Common Stock by a Non-United States Holder which did not directly or
indirectly own more than 5% of the Common Stock during the shorter of the
periods described above generally would not be subject to United States
federal income tax, provided that the Common Stock is "regularly traded" on an
established securities market.

An individual Non-United States Holder with gain described in clause (i) of
the preceding paragraph will be taxed on the net gain derived from the sale
under regular graduated United States federal income tax rates. An individual
Non-United States Holder described in clause (ii) above will be subject to a
flat 30% tax on the gain derived from the sale, which may be offset by United
States capital losses (notwithstanding the fact that the individual is not
considered a resident of the United States). A corporate Non-United States
Holder with gain described in clause (i) of the preceding paragraph, it will
be taxed on its gain under regular graduated United States federal income tax
rates and, in addition, may be subject to the branch profits tax equal to 30%
of its effectively connected earnings and profits within the meaning of the
Code for the taxable year, as adjusted for certain items, unless it qualifies
for a lower rate under an applicable income tax treaty.

BACKUP WITHHOLDING AND INFORMATION REPORTING

Generally, the Company must report to the United States Internal Revenue
Service the amount of dividends paid, the name and address of the recipient of
such dividends, and the amount, if any, of tax withheld. A similar report is
sent to the recipient of such dividends. Pursuant to tax treaties or other
agreements, the United States Internal Revenue Service may make its reports
available to tax authorities in the recipient's country of residence.

Under current Treasury Regulations, dividends paid to a Non-United States
Holder at an address within the United States may be subject to backup
withholding at a rate of 31% if the Non-United States Holder fails to
establish that it is entitled to an exemption or to provide a correct taxpayer
identification number and other information to the payor. Under current
Treasury Regulations, backup withholding will generally not apply to dividends
paid to Non-United States Holders at an address outside the United States
(unless the payor has knowledge that the payee is a United States person).
Under proposed United States Treasury regulations not currently in effect,
however, a Non-United States Holder will be subject to back-up withholding
unless applicable certification requirements are met.

Under current Treasury Regulations, the payment of the proceeds of the
disposition of Common Stock to or through the United States office of a broker
is subject to information reporting and backup withholding at a rate of 31%
unless the holder certifies its Non-United States Holder status under
penalties of perjury or otherwise establishes an exemption. Generally, the
payment of the proceeds of the disposition by a Non-United States Holder of
Common Stock outside the United States to or through a foreign office of a
broker will not be subject to backup withholding. However, information
reporting requirements (but not backup withholding) will apply to a payment of
disposition proceeds outside the United States through an office outside the
United States of a broker that is (a) a United States person, (b) a United
States "controlled foreign corporation" for United States tax purposes or (c)
a foreign person 50% or more of whose gross income for certain periods is from
the conduct of a United States trade or business unless such broker has
documentary evidence in its files of the owner's foreign status and has no
knowledge to the contrary or the holder otherwise establishes an exemption.

Backup withholding is not an additional tax. Rather, the tax liability of
persons subject to backup withholding will be reduced by the amount of tax
withheld. If withholding results in an overpayment of taxes, a refund may be
obtained, provided that the required information is furnished to the United
States Internal Revenue Service.

ESTATE TAX

A Non-United States Holder who is an individual and who owns Common Stock at
the time of his death or has made certain lifetime transfers of an interest in
Common Stock will be required to include the value of such stock in his gross
estate for United States federal estate tax purposes, unless an applicable
estate tax treaty provides otherwise.

49
<PAGE>

SHARES ELIGIBLE FOR FUTURE SALE

Upon completion of the Offering, the Company will have 8,792,370 shares of
Common Stock outstanding (assuming no exercise of outstanding options or
warrants). Of these shares, the 2,000,000 shares sold in this offering will be
freely tradable without restriction or further registration under the
Securities Act of 1933, as amended (the "Securities Act"), except that any
shares purchased by "affiliates" of the Company, as that term is defined in
Rule 144 ("Rule 144") under the Securities Act ("Affiliates"), may generally
only be sold in compliance with the limitations of Rule 144 described below.

SALES OF RESTRICTED SHARES

The remaining 6,792,370 shares of Common Stock are deemed "Restricted
Shares" under Rule 144. Of the Restricted Shares, up to 2,207,330 shares may
be eligible for sale in the public market immediately after this offering
pursuant to Rule 144(k) under the Securities Act; all of these shares are
subject to the lock-up agreements described below (the "Lock-up Agreements").
All of the remaining Restricted Shares may be eligible for sale in the public
market in accordance with Rule 144 or Rule 701 under the Securities Act
beginning 90 days after the date of this Prospectus; 4,585,040 of these shares
are subject to Lock-up Agreements. Certain security holders have the right to
have their Restricted Shares registered by the Company under the Securities
Act as described below.

In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated), including an Affiliate, who has beneficially
owned Restricted Shares for at least two years is entitled to sell, within any
three-month period, a number of such shares that does not exceed the greater
of (i) one percent of the then outstanding shares of Common Stock
(approximately 87,924 shares immediately after this offering) or (ii) the
average weekly trading volume in the Common Stock on the Nasdaq National
Market during the four calendar weeks preceding the date on which notice of
such sale is filed. Sales under Rule 144 are also subject to certain
limitations on manner of sale, notice requirements, and availability of
current public information about the Company. In addition, under Rule 144(k),
a person who is not an Affiliate and has not been an Affiliate for at least
three months prior to the sale and who has beneficially owned Restricted
Shares for at least three years may resell such shares without compliance with
the foregoing requirements. In meeting the two and three year holding periods
described above, a holder of Restricted Shares can include the holding periods
of a prior owner who was not an Affiliate. The Securities and Exchange
Commission has announced a proposal to reduce the two-year Rule 144 and the
three-year Rule 144(k) holding periods by one year.

Rule 701 under the Securities Act provides that the shares of Common Stock
acquired on the exercise of currently outstanding options may be resold by
persons, other than Affiliates, beginning 90 days after the date of this
Prospectus, subject only to the manner of sale provisions of Rule 144, and by
Affiliates under Rule 144 without compliance with its two-year minimum holding
period, subject to certain limitations.

OPTIONS AND WARRANTS

As of October 15, 1996, options and warrants to purchase a total of
1,276,969 shares of Common Stock were outstanding and 384,350 of the shares
issuable pursuant to such options and warrants are not yet exercisable.
Substantially all of the holders of these options and warrants have executed
Lock-up Agreements. An additional 1,020,180 shares of Common Stock are
available for future grants under the Company's stock option plans. See
"Management--Stock Option Plans."

The Company intends to file one or more registration statements on Form S-8
under the Securities Act to register all shares of Common Stock subject to
outstanding stock options and Common Stock issuable pursuant to the Company's
stock option plans that do not qualify for an exemption under Rule 701 from
the registration requirements of the Securities Act. The Company expects to
file these registration statements promptly following the closing of the
Offering, and such registration statements are expected to become effective
upon filing. Shares covered by these registration statements will thereupon be
eligible for sale in the public markets, subject to the Lock-up Agreements, to
the extent applicable.

50
<PAGE>

LOCK-UP AGREEMENTS

Certain security holders and all officers and directors of the Company, who
in the aggregate hold substantially all of the outstanding shares of Common
Stock and substantially all of the outstanding options or warrants to purchase
shares of Common Stock, have agreed, pursuant to the Lock-up Agreements, that
they will not, without the prior written consent of Lehman Brothers Inc.,
offer, sell, contract to sell or otherwise dispose of, directly or indirectly,
any shares of Common Stock beneficially owned by them for a period of 180 days
after the date of this Prospectus.

REGISTRATION RIGHTS

Upon the expiration of contractual lock-up periods, certain security holders
of the Company (the "Rights Holders") will be entitled to require the Company
to register under the Securities Act the sale of up to a total of 2,898,520
shares of outstanding Common Stock and up to 210,199 shares of Common Stock
issuable upon exercise of outstanding warrants (the "Registrable Shares")
under the terms of certain agreements between the Company and the Rights
Holders (the "Registration Agreements"). The Registration Agreements provide
that in the event the Company proposes to register any of its securities under
the Securities Act at any time or times, the Rights Holders, subject to
certain exceptions, shall be entitled to include Registrable Shares in such
registration. However, the managing underwriter of any such offering may
exclude for marketing reasons some or all of such Registrable Shares from such
registration. The Rights Holders have, subject to certain conditions and
limitations, additional rights to require the Company to prepare and file a
registration statement under the Securities Act with respect to their
Registrable Shares. The Company is generally required to bear the expenses of
all such registrations, except underwriting discounts and commissions. All
Rights Holders have signed Lock-up Agreements covering their Registrable
Shares.

51
<PAGE>

UNDERWRITING

The underwriters of the U.S. Offering of the Common Stock (the "U.S.
Underwriters"), for whom Lehman Brothers Inc., Cowen & Company and Needham &
Company, Inc. are serving as representatives (the "Representatives"), have
severally agreed, subject to the terms and conditions of the U.S. Underwriting
Agreement, the form of which is filed as an exhibit to the Registration
Statement, to purchase from the Company, and the Company has agreed to sell to
each U.S. Underwriter, the following number of shares of Common Stock at the
public offering price less the underwriting discounts and commissions set
forth on the cover page of this Prospectus:

<TABLE>
<CAPTION>
NUMBER OF
U.S. UNDERWRITERS SHARES
----------------- ---------
<S> <C>
Lehman Brothers Inc................................................
Cowen & Company....................................................
Needham & Company, Inc.............................................
---------
Total............................................................ 1,600,000
=========
</TABLE>

The managers of the International Offering named below (the "International
Managers"), for whom Lehman Brothers International (Europe), Cowen & Company
and Needham & Company, Inc. are acting as lead managers, have severally
agreed, subject to the terms and conditions of the International Underwriting
Agreement, the form of which is filed as an exhibit to the Registration
Statement, to purchase from the Company, and the Company has agreed to sell to
each International Manager, the following aggregate number of shares of Common
Stock at the public offering price less the underwriting discounts and
commissions set forth on the cover page of this Prospectus:

<TABLE>
<CAPTION>
NUMBER OF
INTERNATIONAL MANAGERS SHARES
---------------------- ---------
<S> <C>
Lehman Brothers International (Europe).............................
Cowen & Company....................................................
Needham & Company, Inc.............................................
-------
Total............................................................ 400,000
=======
</TABLE>

The U.S. Underwriting Agreement and the International Underwriting Agreement
(collectively, the "Underwriting Agreements") provide that the obligations of
the U.S. Underwriters and the International Managers, respectively, to
purchase shares of Common Stock are subject to the approval of certain legal
matters by counsel and to certain other conditions and that if any of the
shares of Common Stock are purchased by the U.S. Underwriters pursuant to the
U.S. Underwriting Agreement or by the International Managers pursuant to the
International Underwriting Agreement, all the shares of Common Stock agreed to
be purchased by either the U.S. Underwriters or the International Managers, as
the case may be, pursuant to their respective Underwriting Agreement, must be
so purchased. The offering price and underwriting discounts and commissions
for the U.S. Offering and the International Offering are identical. The
closing of the International Offering is a condition to the closing of the
U.S. Offering, and the closing of the U.S. Offering is a condition to the
closing of the International Offering.

52
<PAGE>

The Company has been advised that the U.S. Underwriters and the
International Managers propose to offer shares of Common Stock directly to the
public initially at the public offering price set forth on the cover page of
this Prospectus and to certain selected dealers (who may include the U.S.
Underwriters and International Managers) at such public offering price less a
selling concession not to exceed $ per share. The Underwriters may allow
and the selected dealers may reallow a concession not to exceed $ per
share. After the initial offering of the Common Stock, the public offering
price, the concession to selected dealers and the reallowance to other dealers
may be changed by the U.S. Underwriters and the International Managers. The
Representatives have informed the Company that the Underwriters do not intend
to confirm sales of shares of Common Stock to any accounts over which they
exercise discretionary authority.

The U.S. Underwriters and the International Managers have entered into an
Agreement Between U.S. Underwriters and International Managers (the "Agreement
Between") pursuant to which each U.S. Underwriter has agreed that, as part of
the distribution of the shares of Common Stock offered in the U.S. Offering,
(a) it is not purchasing any of such shares for the account of anyone other
than a U.S. or Canadian Person (as defined below) and (b) it has not offered
or sold, and will not offer, sell, resell or deliver, directly or indirectly,
any of such shares or distribute any prospectus relating to the U.S. Offering
outside the United States or Canada or to anyone other than a U.S. or Canadian
Person. In addition, pursuant to the Agreement Between, each International
Manager has agreed that, as part of the distribution of the shares of Common
Stock offered in the International Offering, (a) it is not purchasing any of
such shares for the account of any U.S. or Canadian Person and (b) it has not
offered or sold, and will not offer, sell, resell or deliver, directly or
indirectly, any of such shares or distribute any prospectus relating to the
International Offering within the United States or Canada or to any U.S. or
Canadian Person. The foregoing limitations do not apply to stabilization
transactions or to certain other transactions specified in the Underwriting
Agreements and the Agreement Between, including: (i) certain purchases and
sales between the U.S. Underwriters and the International Managers; (ii)
certain offers, sales, resales, deliveries or distributions to or through
investment advisors or other persons exercising investment discretion; (iii)
purchases, offers or sales by a U.S. Underwriter and (iv) other transactions
specifically approved by the U.S. Underwriters and International Managers. As
used herein, "U.S. or Canadian Person" means any resident or citizen of the
United States or Canada, any corporation, pension, profit sharing or other
trust or other entity organized under or governed by the laws of the United
States or Canada or any political subdivision thereof (other than the foreign
branch of any United States or Canadian Person), any estate or trust the
income of which is subject to United States or Canadian federal income
taxation regardless of the source of its income, and any United States or
Canadian branch of a person other than a United States or Canadian Person. The
term "United States" means the United States of America (including the states
thereof and the District of Columbia) and its territories, its possessions and
other areas subject to its jurisdiction. The term "Canada" means the provinces
of Canada, its territories, its possessions and other areas subject to its
jurisdiction.

Pursuant to the Agreement Between, sales may be made among the U.S.
Underwriters and the International Mangers of such number of shares of Common
Stock as may be mutually agreed. The price of any shares so sold shall be the
public offering prices as then in effect for Common Stock being sold by the
U.S. Underwriters and International Managers, less an amount not greater than
the selling concession unless otherwise determined by mutual agreement. To the
extent that there are sales pursuant to the Agreement Between, the number of
shares initially available for sale by the U.S. Underwriters and the
International Managers may be more or less than the amount specified on the
cover page of this Prospectus.

Each International Manager has represented and agreed that: (i) it has not
offered or sold and, prior to the date six months after the date of issue of
the shares of Common Stock, will not offer or sell any shares of Common Stock
to persons in the United Kingdom except to persons whose ordinary activities
involve them in acquiring, holding, managing or disposing of investments (as
principal or agent) for the purposes of their businesses or otherwise in
circumstances which have not resulted and will not result in an offer to the
public in the United Kingdom within the meaning of the Public Offers of
Securities Regulations 1995; (ii) it has complied and will comply with all
applicable provisions of the Financial Services Act 1986 with respect to
anything done by it in relation to the Common Stock in, from or otherwise
involving the United Kingdom and (iii) it has only issued or passed on, and
will only issue or pass on, to any person in the United Kingdom, any document
received

53
<PAGE>

by it in connection with the issue of the Common Stock if that person is of a
kind described in Article 11(3) of the Financial Services Act 1986 (Investment
Advertisements) (Exemptions) Order 1995.

Purchasers of the shares offered pursuant to the Offering may be required to
pay stamp taxes and other charges in accordance with the laws and practices of
the country of purchase in addition to the offering price set forth on the
cover page hereof.

The Company has granted to the U.S. Underwriters and the International
Mangers options to purchase up to an aggregate of 240,000 and 60,000
additional shares of Common Stock, respectively, at the initial public
offering price less the aggregate underwriting discounts and commissions shown
on the cover page of this Prospectus, solely to cover over-allotments, if any.
The options may be exercised at any time up to 30 days after the date of this
Prospectus. To the extent that the U.S. Underwriters and the International
Mangers exercise such options, each of the U.S. Underwriters and the
International Managers, as the case may be, will be committed (subject to
certain conditions) to purchase a number of option shares proportionate to
such U.S. Underwriter's or International Manager's initial commitment.

The Company has agreed to indemnify the U.S. Underwriters and the
International Mangers against certain liabilities, including liabilities under
the Act, and to contribute to payments which the U.S. Underwriters and the
International Managers may be required to make in respect thereof.

The Company, the officers and directors of the Company and certain other
stockholders of the Company have agreed that they will not, without the prior
written consent of Lehman Brothers Inc., offer, sell, grant any options to
purchase or otherwise dispose of any shares of Common Stock within 180 days
after the date of this Prospectus, other than (i) the shares of Common Stock
to be sold to the Underwriters in the Offering, (ii) the issuance of options
and sales of Common Stock pursuant to currently existing stock-based
compensation plans and (iii) the issuance of shares of Common Stock as
consideration for the acquisition of one or more businesses (provided that
such Common Stock may not be resold prior to the expiration of the 180-day
period referenced above). See "Shares Eligible for Future Sale."

Prior to the Offering there has been no public market for the Common Stock.
The initial public offering price for the Common Stock will be determined by
negotiation among the Company and the Representatives. Among the factors to be
considered in determining the initial public offering price will be prevailing
market and economic conditions, estimates of the business potential and
prospects of the Company, the state of the Company's business operations, an
assessment of the Company's management, the consideration of the above factors
in relation to market valuations of companies in related business and other
factors deemed relevant. The estimated initial public offering price range set
forth on the cover page of this preliminary prospectus is subject to change as
a result of market conditions and other factors.

54
<PAGE>

LEGAL MATTERS

Certain legal matters in connection with the Offering will be passed upon
for the Company by Brown, Rudnick, Freed & Gesmer, Boston, Massachusetts.
Certain legal matters in connection with the Offering will be passed upon for
the Underwriters by Testa, Hurwitz & Thibeault, LLP, Boston, Massachusetts. A
member of Brown, Rudnick, Freed & Gesmer, counsel to the Company, is Secretary
of the Company.

EXPERTS

The financial statements included in this Prospectus or elsewhere in this
Registration Statement have been audited by Arthur Andersen LLP, independent
public accountants, as indicated in their report with respect thereto, and are
included herein upon the authority of said firm as experts in giving said
reports.

ADDITIONAL INFORMATION

The Company has filed with the Securities and Exchange Commission
("Commission"), Washington, D.C. 20549, a Registration Statement on Form S-1
("Registration Statement") under the Securities Act with respect to the Common
Stock offered hereby. This Prospectus does not contain all of the information
set forth in the Registration Statement and the exhibits and schedules
thereto. For further information with respect to the Company and the Common
Stock, reference is made to the Registration Statement and the exhibits and
schedules thereto. Statements contained in this Prospectus as to the contents
of any contract or other document are not necessarily complete and, in each
instance where such contract or document is filed as an exhibit to the
Registration Statement, reference is made to the copy of such contract or
document filed as an exhibit to the Registration Statement, each such
statement being qualified in all respects by such reference. Copies of the
Registration Statement, including the exhibits thereto, may be inspected
without charge and copied, at prescribed rates, at the public reference
facilities maintained by the Commission at 450 Fifth Street, N.W., Washington,
D.C. 20549, and at the Commission's Regional Offices at Citicorp Center, 500
West Madison Street, Suite 1400, Chicago, Illinois 60661 and 7 World Trade
Center, Suite 1300, New York, New York 10048. In addition, the Commission
maintains a Web site that contains reports, proxy and information statements
and other information regarding registrants (including the Company) that file
electronically with the Commission, which can be accessed at
http://www.sec.gov.

As a result of the Offering, the Company will become subject to the
information and reporting requirements of the Securities Exchange Act of 1934,
as amended, and in accordance therewith will file periodic reports, proxy
statements and other information with the Securities and Exchange Commission.
The Company intends to distribute to its stockholders annual reports
containing consolidated financial statements audited by its independent
accountants and will make available copies of quarterly reports for the first
three quarters of each fiscal year containing unaudited consolidated financial
information.

55
<PAGE>

VIVID TECHNOLOGIES, INC. AND SUBSIDIARIES

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Public Accountants................................. F-2
Consolidated Balance Sheets as of September 30, 1995 and 1996 ........... F-3
Consolidated Statements of Operations for the Years Ended September 30,
1994, 1995 and 1996..................................................... F-4
Consolidated Statements of Stockholders' Equity (Deficit) for the Years
Ended September 30, 1994, 1995 and 1996................................. F-5
Consolidated Statements of Cash Flows for the Years Ended September 30,
1994, 1995 and 1996..................................................... F-6
Notes to Consolidated Financial Statements............................... F-7
</TABLE>

F-1
<PAGE>

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To Vivid Technologies, Inc.:

We have audited the accompanying consolidated balance sheets of Vivid
Technologies, Inc. (a Massachusetts corporation) and subsidiaries as of
September 30, 1995 and 1996, and the related consolidated statements of
operations, stockholders' equity (deficit) and cash flows for each of the
three years in the period ended September 30, 1996. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.

In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Vivid Technologies, Inc.
and subsidiaries as of September 30, 1995 and 1996, and the results of their
operations and their cash flows for each of the three years in the period
ended September 30, 1996, in conformity with generally accepted accounting
principles.

Arthur Andersen LLP

Boston, Massachusetts
October 25, 1996 (except with
respect to the matter discussed
in Note 12(C) as to which the
date is November 6, 1996)

F-2
<PAGE>

VIVID TECHNOLOGIES, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
SEPTEMBER 30, SEPTEMBER 30, 1996
------------------------ ------------------
1995 1996 PRO FORMA
----------- ----------- ------------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents........ $ 2,561,912 $ 1,661,724 $ 1,661,724
Accounts receivable.............. 1,168,124 3,720,478 3,720,478
Inventories...................... 3,184,468 4,741,658 4,741,658
Deferred tax asset............... -- 181,000 181,000
Other current assets............. 57,382 444,902 444,902
----------- ----------- -----------
Total current assets............. 6,971,886 10,749,762 10,749,762
----------- ----------- -----------
Property and equipment, at cost:
Machinery and equipment.......... 1,378,390 1,681,659 1,681,659
Furniture and fixtures........... 68,534 58,855 58,855
Leasehold improvements........... 120,540 143,776 143,776
Equipment under capital leases... -- 198,580 198,580
----------- ----------- -----------
1,567,464 2,082,870 2,082,870
Less--accumulated depreciation
and amortization................ 867,088 1,097,717 1,097,717
----------- ----------- -----------
700,376 985,153 985,153
----------- ----------- -----------
Other assets, net................. 67,264 228,077 228,077
----------- ----------- -----------
$ 7,739,526 $11,962,992 $11,962,992
=========== =========== ===========
LIABILITIES AND STOCKHOLDERS'
EQUITY (DEFICIT)
Current liabilities:
Obligation under capital leases.. -- 36,888 36,888
Accounts payable................. 726,571 1,493,874 1,493,874
Accrued expenses................. 2,276,883 3,432,914 3,432,914
Currently redeemable series A
preferred stock................. -- 2,343,750 2,343,750
Currently redeemable series C
preferred stock................. -- 3,436,900 3,436,900
Customer deposits................ -- 1,042,085 1,042,085
----------- ----------- -----------
Total current liabilities........ 3,003,454 11,786,411 11,786,411
----------- ----------- -----------
Redeemable preferred stock $.01
par value, net of current
portion:
Series A--
234,375 shares authorized,
issued and outstanding.......... 2,343,750 -- --
----------- ----------- -----------
Series C--
343,690 shares authorized,
issued and outstanding ......... 3,436,900 -- --
----------- ----------- -----------
Commitments and contingencies
(notes 10 and 12)
Stockholders' equity (deficit):
Convertible preferred stock, $.01
par value--
Series B--
Authorized--250,000 shares,
none pro forma
Issued and outstanding--250,000
shares, none pro forma
(liquidation preference of
$156,250)...................... 2,500 2,500 --
Series D--
Authorized--254,585 shares,
none pro forma
Issued and outstanding--254,585
shares, none pro forma
(liquidation preference of
$381,878)...................... 2,546 2,546 --
Common stock, $.01 par value--
Authorized--7,500,000 shares
Issued and outstanding--
1,674,350 shares in 1995,
1,740,520 shares in 1996 and
6,786,370 shares pro forma..... 16,743 17,405 67,864
Capital in excess of par value... 538,546 594,279 548,866
Accumulated deficit.............. (1,604,913) (440,149) (440,149)
----------- ----------- -----------
Total stockholders' equity
(deficit)..................... (1,044,578) 176,581 176,581
----------- ----------- -----------
$ 7,739,526 $11,962,992 $11,962,992
=========== =========== ===========
</TABLE>

The accompanying notes are an integral part of these consolidated financial
statements.

F-3
<PAGE>

VIVID TECHNOLOGIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
-------------------------------------
1994 1995 1996
----------- ----------- -----------
<S> <C> <C> <C>
Revenues............................... $13,801,281 $14,437,220 $15,578,326
Cost of revenues (includes
approximately $917,000, $929,000 and
$775,000, respectively, of royalties
to and purchases from Hologic, see
Note 10).............................. 6,761,739 6,128,986 6,899,433
----------- ----------- -----------
Gross margin......................... 7,039,542 8,308,234 8,678,893
----------- ----------- -----------
Operating expenses (includes
approximately $544,000, $530,000 and
$325,000, respectively, of management
service expenses from Hologic, see
Note 10):
Research and development............. 2,295,927 3,653,041 3,461,555
Selling and marketing................ 716,312 1,077,235 1,394,880
General and administrative........... 915,479 1,120,292 1,515,420
Litigation expenses.................. 199,388 308,482 1,149,889
----------- ----------- -----------
Total operating expenses............ 4,127,106 6,159,050 7,521,744
----------- ----------- -----------
Income from operations................. 2,912,436 2,149,184 1,157,149
Interest income........................ 1,818 53,378 60,616
Interest expense....................... (4,553) (98,487) (53,001)
----------- ----------- -----------
Income before income taxes............. 2,909,701 2,104,075 1,164,764
Provision for income taxes............. 100,000 90,000 --
----------- ----------- -----------
Net income........................... $ 2,809,701 $ 2,014,075 $ 1,164,764
=========== =========== ===========
Net income per common and common
equivalent share...................... $ 0.39 $ 0.28 $ 0.15
=========== =========== ===========
Weighted average number of common and
common equivalent shares outstanding.. 7,198,301 7,275,138 7,868,853
=========== =========== ===========
</TABLE>

The accompanying notes are an integral part of these consolidated financial
statements.

F-4
<PAGE>

VIVID TECHNOLOGIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)

<TABLE>
<CAPTION>
SERIES B SERIES D
CONVERTIBLE CONVERTIBLE
PREFERRED STOCK PREFERRED STOCK COMMON STOCK
------------------- ------------------- ------------------- CAPITAL
NUMBER $.01 NUMBER $.01 NUMBER $.01 IN EXCESS OF ACCUMULATED
OF SHARES PAR VALUE OF SHARES PAR VALUE OF SHARES PAR VALUE PAR VALUE DEFICIT TOTAL
--------- --------- --------- --------- --------- --------- ------------ ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, September
30, 1993............ 250,000 $2,500 254,585 $2,546 1,545,750 $15,458 $521,311 $(6,428,689) $(5,886,874)
Exercise of stock
options............ -- -- -- -- 101,850 1,018 10,927 -- 11,945
Net income.......... -- -- -- -- -- -- -- 2,809,701 2,809,701
------- ------ ------- ------ --------- ------- -------- ----------- -----------
Balance, September
30, 1994............ 250,000 2,500 254,585 2,546 1,647,600 16,476 532,238 (3,618,988) (3,065,228)
Exercise of stock
options............ -- -- -- -- 26,750 267 6,308 -- 6,575
Net income.......... -- -- -- -- -- -- -- 2,014,075 2,014,075
------- ------ ------- ------ --------- ------- -------- ----------- -----------
Balance, September
30, 1995............ 250,000 2,500 254,585 2,546 1,674,350 16,743 538,546 (1,604,913) (1,044,578)
Issuance of common
stock for
services........... -- -- -- -- 15,000 150 44,850 -- 45,000
Exercise of stock
options............ -- -- -- -- 51,170 512 10,883 -- 11,395
Net income.......... -- -- -- -- -- -- -- 1,164,764 1,164,764
------- ------ ------- ------ --------- ------- -------- ----------- -----------
Balance, September
30,
1996 ............... 250,000 $2,500 254,585 $2,546 1,740,520 $17,405 $594,279 $ (440,149) $ 176,581
======= ====== ======= ====== ========= ======= ======== =========== ===========
</TABLE>

The accompanying notes are an integral part of these consolidated financial
statements.

F-5
<PAGE>

VIVID TECHNOLOGIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
----------------------------------
1994 1995 1996
---------- ---------- ----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income................................. $2,809,701 $2,014,075 $1,164,764
Adjustments to reconcile net income to net
cash provided by (used in) operating
activities--
Depreciation and amortization.............. 195,031 276,838 344,894
Issuance of common stock for services...... -- -- 45,000
Changes in assets and liabilities--
Accounts receivable....................... (761,359) (331,765) (2,552,354)
Inventories............................... (2,266,822) (241,116) (1,557,190)
Deferred tax asset........................ -- -- (181,000)
Other current assets...................... 6,755 (23,546) (387,520)
Accounts payable.......................... 696,230 (504,129) 767,303
Accrued expenses.......................... 1,235,351 535,331 1,156,031
Customer deposits......................... 102,390 (677,390) 1,042,085
---------- ---------- ----------
Net cash provided by (used in) operating
activities.............................. 2,017,277 1,048,298 (157,987)
---------- ---------- ----------
Cash flows from investing activities:
Purchase of property and equipment, net.... (584,136) (383,670) (427,053)
Decrease (increase) in short-term
investments............................... (500,000) 500,000 --
Decrease (increase) in other assets........ (39,929) 4,063 (37,581)
---------- ---------- ----------
Net cash provided by (used in) investing
activities.............................. (1,124,065) 120,393 (464,634)
---------- ---------- ----------
Cash flows from financing activities:
Proceeds from exercise of stock options.... 11,945 6,575 11,395
Payments on capital lease obligations...... -- -- (161,962)
Deferred financing costs................... -- -- (127,000)
---------- ---------- ----------
Net cash provided by (used in) financing
activities.............................. 11,945 6,575 (277,567)
---------- ---------- ----------
Net increase (decrease) in cash and cash
equivalents................................ 905,157 1,175,266 (900,188)
Cash and cash equivalents, beginning of
year....................................... 481,489 1,386,646 2,561,912
---------- ---------- ----------
Cash and cash equivalents, end of year...... $1,386,646 $2,561,912 $1,661,724
========== ========== ==========
Supplemental disclosure of cash flow
information:
Cash paid during the year for--
Interest................................... $ 6,698 $ 98,487 $ 53,001
========== ========== ==========
Income taxes............................... $ 48,000 $ 74,000 $ 351,000
========== ========== ==========
Supplemental disclosure of non-cash
investing and financing activities:
Assets acquired under capital leases....... $ -- $ -- $ 198,850
========== ========== ==========
</TABLE>

The accompanying notes are an integral part of these consolidated financial
statements.

F-6
<PAGE>

VIVID TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(1) OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES

Vivid Technologies, Inc. (the Company) is a leading developer, manufacturer
and marketer of automated inspection systems which detect plastic and other
explosives in airline baggage.

The Company currently sells the majority of its products to one customer,
BAA plc (BAA). BAA is scheduled to complete deployment of checked baggage
explosives detection systems at its seven airports by the end of 1997. As a
result, the Company expects that new orders from BAA will decrease during
fiscal 1997. The inability of the Company to obtain orders from customers
other than BAA would have a material adverse effect on the Company's business
and financial condition.

The accompanying consolidated financial statements reflect the application
of the accounting policies as described below.

(A) Pro Forma Presentation

The pro forma consolidated balance sheet as of September 30, 1996 reflects
the automatic conversion of all outstanding shares of Series B and Series D
convertible preferred stock into an aggregate of 5,045,850 shares of common
stock, which will occur upon the closing of the Company's proposed initial
public offering (See Note 5).

(B) Net Income per Common and Common Equivalent Share

Net income per common and common equivalent share is based on the pro forma
weighted average number of common and common equivalent shares outstanding
during the period, assuming the automatic conversion of all outstanding shares
of convertible preferred stock into 5,045,850 shares of common stock. Pursuant
to the requirements of the Securities and Exchange Commission Staff Accounting
Bulletin No. 83, common and common equivalent shares issued during the 12
months immediately prior to the date of the initial filing of the Company's
registration statement have been included in the calculation of weighted
average number of common shares outstanding for all periods presented using
the treasury stock method. Fair market value for the purpose of the
calculation was assumed to be $13.00. Common stock equivalents issued in
earlier periods have been included when the effect would be dilutive.

The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiaries, Vivid Technologies UK Ltd. and Vivid
Foreign Sales Corporation. All material intercompany transactions and balances
have been eliminated in consolidation.

(D) Management Estimates

The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.

(E) Cash and Cash Equivalents

The Company considers all highly liquid securities with original maturities
of three months or less to be cash equivalents.

The Company accounts for investments in accordance with Statement of
Financial Accounting Standards (SFAS) No. 115, Accounting for Certain
Investments in Debt and Equity Securities. Under SFAS No. 115, investments for
which the Company has the positive intent and ability to hold to maturity are
reported at amortized cost, which approximates fair market value, and are
classified as held-to-maturity. At September 30,

F-7

<PAGE>

VIVID TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

1995, these investments consist of U.S. Government securities and are
classified as cash equivalents. Investments purchased to be held for
indefinite periods of time, and not intended to be held until maturity, are
classified as available-for-sale. At September 30, 1995 and 1996, these
investments consist of a pooled fund, managed by the Company's bank, which
invests primarily in United States Government fixed-income securities and are
included in cash equivalents and reported at cost, which approximates fair
market value.

(F) Concentration of Credit Risk and Significant Customers

SFAS No. 105, Disclosure of Information About Financial Instruments with
Off-Balance-Sheet Risk and Financial Instruments with Concentrations of Credit
Risk, requires disclosure of any significant off-balance sheet and credit risk
concentrations. Financial instruments that subject the Company to credit risk
consist primarily of cash and cash equivalents and trade accounts receivable.
The Company places its investments in highly rated financial institutions. The
Company has not experienced any losses on these investments to date. Accounts
receivable in the amounts of approximately $519,000 and $3,505,000 at
September 30, 1995 and 1996, respectively, were due from BAA, a customer
outside the United States, who accounted for 88%, 76% and 79% of revenues in
fiscal 1994, 1995 and 1996, respectively. The Company has not experienced any
material losses related to receivables from individual customers or groups of
customers in the baggage security and inspection industry.

(G) Disclosure of Fair Value of Financial Instruments

The Company's financial instruments consist mainly of cash and cash
equivalents, accounts receivable, and accounts payable. The carrying amounts
of the Company's cash and cash equivalents, accounts receivable and accounts
payable approximate fair value due to the short-term nature of these
instruments.

(H) Inventories

Inventories are stated at the lower of cost (first-in, first-out) or market
and consist of the following:

<TABLE>
<CAPTION>
SEPTEMBER 30,
---------------------
1995 1996
---------- ----------
<S> <C> <C>
Raw materials........................................ $2,294,010 $3,336,696
Work-in-process...................................... 721,093 858,983
Finished goods....................................... 169,365 545,979
---------- ----------
$3,184,468 $4,741,658
========== ==========
</TABLE>

Finished goods consist of materials, labor and overhead.

(I) Depreciation and Amortization

The Company provides for depreciation and amortization by charges to
operations using the straight-line and declining-balance methods, which
allocate the cost of property and equipment over their estimated useful lives,
as follows:

<TABLE>
<CAPTION>
ESTIMATED
ASSETS CLASSIFICATION USEFUL LIFE
--------------------- -------------
<S> <C>
Machinery and equipment...................................... 5 Years
Furniture and fixtures....................................... 7 Years
Leasehold improvements....................................... Life of lease
Equipment under capital leases............................... Life of lease
</TABLE>

F-8
<PAGE>

VIVID TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

(J) Other Assets

Other assets consist primarily of patent costs, which are being amortized
over 10 years using the straight-line method, deferred financing costs
associated with the Company's initial public offering contemplated herein, and
deposits. The Company assesses the realizability of these intangible assets in
accordance with SFAS No. 121, Accounting for Impairment of Long-Lived Assets
and for Long-Lived Assets to be Disposed Of. The Company has not recorded any
impairment of its intangible assets to date and periodically reviews the
realizability of these intangible assets.

(K) Revenue Recognition

The Company recognizes product revenue upon shipment. The Company's product
sales are not conditioned upon satisfactory installation by the Company.
Installation is typically performed by the customer or a systems integrator of
the airport's baggage handling system. However, the Company has typically
assisted the systems integrator and accordingly accrues for estimated
installation costs, in addition to estimated warranty costs, at the time of
shipment. Other revenues, which consist primarily of development revenues, are
recorded as the services are rendered. During 1995 and 1996 the Company
recognized revenue of approximately $1,355,000 and $716,000, respectively,
under a research and development grant from the U.S. Government. In accordance
with the terms of the grant, the Company was paid approximately $2,100,000
under a cost reimbursement type award to pursue certain explosives detection
research. As of September 30, 1996, the Company's obligations under the grant
were satisfied and all funding had been received.

At September 30, 1996, the Company had received a customer advance from BAA
that represents payments received prior to the shipment of the product.

(L) Research and Development and Software Development Costs

Research and development costs have been charged to operations as incurred.
SFAS No. 86, Accounting for the Costs of Computer Software to be Sold, Leased
or Otherwise Marketed, requires the capitalization of certain computer
software development costs incurred after technological feasibility is
established. The Company believes that once technological feasibility of a
software product has been established, the additional development costs
incurred to bring the product to a commercially acceptable level are not
significant.

(M) State of Incorporation

On October 25, 1996 the Company approved the change of its state of
incorporation from Massachusetts to Delaware.

(2) INCOME TAXES

The Company accounts for income taxes under SFAS No. 109, Accounting for
Income Taxes, the objective of which is to recognize the amount of current and
deferred income taxes at the date of the financial statements as a result of
all differences in the tax basis and financial statement carrying amount of
assets and liabilities as measured by enacted tax laws.

The approximate income tax effect of each type of temporary difference and
carryforward is as follows:

<TABLE>
<CAPTION>
SEPTEMBER 30,
---------------------
1995 1996
---------- ---------
<S> <C> <C>
Research and development credit carryforwards....... $ 228,000 $ 69,000
Foreign net operating losses........................ -- 51,000
Nondeductible accruals.............................. 190,000 97,000
Nondeductible reserves.............................. 515,000 278,000
Unamortized start-up costs.......................... 97,000 24,000
Other temporary differences......................... 9,000 2,000
Valuation allowance................................. (1,039,000) (340,000)
---------- ---------
Net deferred tax asset............................ $ -- $ 181,000
========== =========
</TABLE>

F-9
<PAGE>

VIVID TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

At September 30, 1996, the Company has research and development credit
carryforwards for federal income tax purposes of approximately $69,000. The
research and development credit carryforwards expire from 2007 through 2010
and are subject to review and possible adjustment by the Internal Revenue
Service.

Under SFAS No. 109, the Company recognizes a deferred tax asset for the
future benefit of its temporary differences if it concludes that it is more
likely than not that the deferred tax asset will be realized. The reduction in
the valuation allowance from September 30, 1995 to September 30, 1996 is due
to managment's belief that it is more likely than not that the majority of the
deferred tax assets will be realized.

A reconciliation of the federal statutory rate to the Company's effective
tax rate is as follows:

<TABLE>
<CAPTION>
SEPTEMBER 30,
-------------------
1994 1995 1996
----- ----- -----
<S> <C> <C> <C>
Income tax provision at federal statutory rate........ 34.0% 34.0% 34.0%
Increase (decrease) in tax resulting from--
State tax provision, net of federal benefit......... 6.3 6.3 8.1
Foreign net operating losses not benefited.......... -- -- 4.1
Net operating loss carryforwards utilized........... (38.9) (31.2) --
Reduction in valuation allowance.................... -- -- (15.5)
Research and development tax credit utilized........ -- (6.8) (24.1)
Alternative minimum taxes........................... 2.0 2.0 --
Foreign sales corporation benefit................... -- -- (7.5)
Other............................................... -- -- 0.9
----- ----- -----
Effective tax rate................................ 3.4% 4.3% -- %
===== ===== =====
</TABLE>

The provision for income taxes in the accompanying consolidated statements
of operations consists of the following:

<TABLE>
<CAPTION>
SEPTEMBER 30,
-------------------------
1994 1995 1996
-------- ------- --------
<S> <C> <C> <C>
Federal--
Current....................................... $100,000 $90,000 $179,000
Deferred...................................... -- -- (179,000)
-------- ------- --------
100,000 90,000 --
-------- ------- --------
State--
Current....................................... -- -- 2,000
Deferred...................................... -- -- (2,000)
-------- ------- --------
$100,000 $90,000 $ --
======== ======= ========
</TABLE>

(3) LINE OF CREDIT

The Company has a secured demand line of credit with a bank for $3,000,000.
Borrowings under the line, which are limited to a percentage of eligible
accounts receivable and inventories, as defined, are available through
February 28, 1997. Borrowings under the line bear interest at the bank's prime
rate (8.25% at September 30, 1996). There were no amounts outstanding under
this line at September 30, 1995 and 1996. The line of credit is collateralized
by substantially all assets of the Company.

F-10

<PAGE>

VIVID TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

(4) REDEEMABLE PREFERRED STOCK

At September 30, 1996, the Company has authorized 578,065 shares of
redeemable preferred stock, par value $.01 per share, of which 234,375 shares
and 343,690 shares have been designed as Series A and Series C redeemable
preferred stock, respectively. The redeemable preferred stockholders have the
following rights and privileges:

(A) Voting

The holders of Series A and Series C redeemable preferred stock have no
voting rights, unless the Company fails to redeem the Series A or Series C
redeemable preferred stock, as required, upon which the Series A or the Series
C redeemable preferred stockholders shall be entitled to elect the least
amount of directors that would constitute a majority of the Board of
Directors. No other voting rights exist for holders of Series A and Series C
redeemable preferred stock.

(B) Liquidation

The Series C redeemable preferred stockholders have a liquidation preference
over Series A, Series B and Series D preferred stockholders and common
stockholders in the amount of $10 per share. The Series A redeemable preferred
stockholders have a liquidation preference over the Series B convertible
preferred stockholders and common stockholders in the amount of $10 per share.

Series C redeemable preferred stockholders are entitled to dividends, if and
when declared by the Board of Directors, at the rate of $.10 per share. After
all Series C redeemable preferred dividends have been paid, Series A
redeemable preferred stockholders are entitled to dividends, if and when
declared by the Board of Directors, at a rate of $.10 per share. Dividends are
not cumulative. To date, the Company has not declared or paid any dividends.

(D) Redemptions

The Company has the option to redeem Series A and Series C redeemable
preferred stock at any time for $10 per share plus any accrued but unpaid
dividends. The holders of the Series A preferred stock and Series C preferred
stock deferred and waived certain of the Company's mandatory redemption
obligations with respect to such preferred stock. The waivers remain effective
through November 1, 1996 and thereafter until the holders of not less than 60%
of the shares of the applicable series provide the Company with 60 days prior
notice of their intention to reinstate the Company's mandatory redemption
obligations with respect to the covered shares. Absent the waiver, the Company
is required to redeem the Series A and Series C redeemable preferred stock for
$10 per share plus any accrued but unpaid dividends, provided that funds are
legally available, as follows:

SERIES C REDEEMABLE PREFERRED STOCK

. On the 90th day following the end of each fiscal year, the number of
shares equal to the lesser of 25% of net income, if any, for the fiscal
year or 33 1/3% of cash flows, as defined, for the fiscal year, divided
by the redemption price per share.

. On June 22, 1995, 75,000 shares of the outstanding shares of Series C
redeemable preferred stock, less any shares previously redeemed.

. On January 25, 1996, 90,000 shares of the outstanding shares of Series C
redeemable preferred stock.

. On June 22, 1996, all remaining outstanding shares of Series C
redeemable preferred stock.

F-11
<PAGE>

VIVID TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

SERIES A REDEEMABLE PREFERRED STOCK

. On the 90th day following the end of each fiscal year, the number of
shares equal to 25% of net income, if any, for the fiscal year, divided
by the redemption price per share, provided that the Series C redeemable
preferred stock has been fully redeemed.

. On June 22, 1996, 60,000 shares of the outstanding shares of Series A
redeemable preferred stock, less any shares previously redeemed.

. On January 25, 1997, 90,000 shares of the outstanding shares of Series A
redeemable preferred stock.

. On June 22, 1997, all remaining outstanding shares of Series A
redeemable preferred stock.

(5) CONVERTIBLE PREFERRED STOCK

Authorized Preferred Stock

On October 25, 1996, the Company approved the filing of a Restated
Certificate of Incorporation (the Restated Certificate of Incorporation) which
provides for a new class of undesignated $.01 par value preferred stock. Upon
the filing of the Restated Certificate of Incorporation, the Series A, B, C
and D preferred stock will no longer be authorized. The Company will be
authorized to issue up to 1,000,000 shares of this undesignated preferred
stock. The Restated Certificate of Incorporation will be filed upon the
closing of the initial public offering contemplated herein.

At September 30, 1996, the Company has authorized 504,585 shares of
convertible preferred stock, par value $.01 per share, of which 250,000 shares
and 254,585 shares have been designated as Series B and Series D convertible
preferred stock, respectively. The convertible preferred stockholders have the
following rights and privileges:

(A) Voting

The holders of Series B and Series D convertible preferred stock are
entitled to vote with the common stockholders as one class at the rate and
number of votes that they would receive upon conversion.

(B) Conversion

At September 30, 1996, each share of Series B and Series D convertible
preferred stock is convertible into 10 shares of common stock. This rate is
adjustable under certain circumstances in the event that the Company issues
additional shares of common stock, as defined, or effects a stock split or
stock dividend. The right of conversion is at the option of the holder;
however, the conversion is required upon the completion of an initial public
offering, provided that the gross proceeds to the Company exceed $5,000,000.

The Series D convertible preferred stockholders have a liquidation
preference over Series A and Series B preferred stockholders and common
stockholders in the amount of $1.50 per share. The Series B preferred
stockholders have a liquidation preference over the common stockholders in the
amount of $.625 per share.

(D) Dividends

After all Series A and Series C redeemable preferred dividends have been
paid, Series B and Series D convertible preferred stockholders may receive
dividends, at a rate equal to dividends declared on common stock, before any
dividends are paid on common stock. Dividends are not cumulative. No cash
dividends were declared or paid as of September 30, 1996.

F-12
<PAGE>

VIVID TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

(6) STOCK PURCHASE WARRANTS

In conjunction with a $400,000 promissory note issued in fiscal 1992 and
repaid in fiscal 1993, the Company sold a warrant, at nominal value, to
purchase 42,667 shares of the Company's common stock at $1.50 per share. The
warrant expires at various dates after February 2000 or five years after the
completion of an initial public offering of the Company's common stock with
aggregate proceeds of at least $5,000,000.

In conjunction with the issuance of certain convertible notes in fiscal
1993, the Company issued, at nominal value, warrants to purchase 361,002
shares of the Company's common stock for $1.50 per share. The warrants expire
the earlier of 10 years from the date of issue or five years after the
completion of an initial public offering of the Company's common stock, with
aggregate proceeds of at least $5,000,000.

(7) COMMON STOCK

(A) Stock Options

The Company's 1989 Combination Stock Option Plan (the Plan) provides for the
grant to key employees incentive stock options to purchase shares of the
Company's common stock at a price not less than fair market value as
determined by the Board of Directors, or nonqualified options at a price
specified by the Board of Directors. As of September 30, 1996, the Company has
authorized 1,250,000 shares of common stock for issuance under the Plan, of
which options to purchase 1,186,200 shares have been granted and 225,520
shares have been exercised. These options generally vest over a five-year
period. A summary of stock option activity is as follows:

<TABLE>
<CAPTION>
SHARES PRICE PER SHARE
-------- ---------------
<S> <C> <C>
Outstanding, September 30, 1993.................. 642,500 $.10-- $.50
Granted........................................ 177,750 .50-- 1.00
Exercised...................................... (101,850) .10-- .50
Terminated..................................... (6,150) .10-- .50
-------- -----------
Outstanding, September 30, 1994.................. 712,250 .10-- 1.00
Granted........................................ 119,250 1.00
Exercised...................................... (26,750) .10-- .50
Terminated..................................... (47,330) .50-- 1.00
-------- -----------
Outstanding, September 30, 1995.................. 757,420 .10-- 1.00
Granted........................................ 157,750 1.00-- 3.00
Exercised...................................... (51,170) .10-- 1.00
Terminated..................................... (7,100) .50-- 1.00
-------- -----------
Outstanding, September 30, 1996.................. 856,900 $.10--$3.00
======== ===========
Exercisable, September 30, 1996.................. 487,350 $.10--$1.00
======== ===========
</TABLE>

In October 1995, the Financial Accounting Standards Board issued SFAS No.
123, Accounting for Stock-Based Compensation. SFAS No. 123 requires the
measurement of the fair value of stock options or warrants to be included in
the statement of operations or disclosed in the notes to financial statements.
The Company is required to adopt SFAS No. 123 in fiscal 1997 and has
determined that it will continue to account for stock-based compensation for
employees under Accounting Principles Board Opinion No. 25 and elect the
disclosure-only alternative under SFAS No. 123. The Company will be required
to disclose the pro forma net income or loss and per share amounts in the
notes to financial statements using the fair-value-based method beginning in
the year ending September 30, 1997, with comparable disclosures for the year
ended September 30, 1996. The Company has not determined the impact of these
pro forma adjustments. Subsequent to September 30, 1996, the Company granted
options to purchase 23,700 shares of common stock at an exercise price of
$9.50 per share.

F-13
<PAGE>

VIVID TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

On October 25, 1996, the Company approved the 1996 Equity Incentive Plan
(the Equity Plan) and the 1996 Nonemployee Director Stock Option Plan (the
Director Plan). Under the Equity Plan and the Director Plan, the Company is
authorized to grant options to purchase 750,000 shares and 125,000 shares,
respectively, of the Company's common stock.

(B) Issuance of Common Stock

In July 1996, the Company issued 15,000 shares of common stock to BAA at no
cost in lieu of fees on certain sales of the Company's products for which BAA
provided substantial assistance through access to BAA's facilities and liaison
activities. The Company has recorded a $45,000 charge to selling and marketing
expenses for the issuance of these shares.

On September 26, 1996, the Company increased the number of authorized shares
of common stock to 10,000,000. On October 25, 1996, the Company approved the
Restated Certificate of Incorporation which includes an increase in the number
of authorized shares of common stock to 30,000,000. The Restated Certificate
of Incorporation will be filed upon the closing of the initial public offering
contemplated herein.

(8) RESERVED COMMON STOCK

The Company has reserved the following number of common shares as of
September 30, 1996:

<TABLE>
<S> <C>
Conversion of Series B convertible preferred stock............... 2,500,000
Conversion of Series D convertible preferred stock............... 2,545,850
Exercise of stock purchase warrants.............................. 403,669
Exercise of stock options........................................ 1,024,480
---------
6,473,999
=========
</TABLE>

(9) GEOGRAPHICAL SALES DATA

Export sales as a percentage of total sales are as follows:

<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
----------------------------
1994 1995 1996
-------- -------- --------
<S> <C> <C> <C>
Europe............................................ 92.7% 90.6% 95.0%
Other............................................. 4.6 -- 0.4
-------- -------- --------
Total........................................... 97.3% 90.6% 95.4%
======== ======== ========
</TABLE>

Substantially all of the Company's assets are located in the United States.

(10) RELATED PARTY TRANSACTIONS

(A) Management Services Agreement

The Company has an agreement with Hologic, Inc. (Hologic), an affiliated
company, whereby Hologic provides management, administrative and support
services. In addition, the Company subleased its facilities from Hologic under
a sublease agreement, which was terminated in February 1996, for approximately
$15,000 per month. The Company paid Hologic for all direct costs incurred, as
well as a portion of Hologic's overhead costs, as defined, representing a pro
rata portion of costs attributable to the Company. Expenses charged to
operations under these agreements were approximately $544,000, $530,000 and
$325,000 in fiscal 1994, 1995 and 1996, respectively. The Company also made
purchases of approximately $229,000 and $210,000 from Hologic in fiscal 1994
and 1995, respectively. The Company had no purchases from Hologic in 1996.
Approximately $463,000 and $34,000 had not been paid as of September 30, 1995
and 1996, respectively, under the management services agreement.

F-14
<PAGE>

VIVID TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

(B) License and Technology Agreement

The Company has an agreement with Hologic whereby the Company has a
perpetual, exclusive, worldwide license to utilize certain of Hologic's
technology and patents for the purpose of developing the Company's X-ray
screening security systems for explosives, drugs, currency and other
contraband (the Exclusive License). In September 1996, this license was
amended to grant the Company a nonexclusive license to utilize these patents
and technology for certain new product development for other applications (the
Nonexclusive License). Royalty payments to Hologic under the Exclusive License
are 5% of revenues, as defined, on the first $50 million in sales; thereafter,
payments are 3% on sales up to $200 million, with no royalty payments on
aggregate revenues in excess of $200 million. Royalty payments under the
Nonexclusive License are 3% on sales up to $200 million, with no royalty
payments on aggregate revenues in excess of $200 million. The agreement
terminates by mutual agreement of the two parties or upon certain other
defined circumstances. During fiscal 1994, 1995 and 1996, the Company incurred
royalty expenses under the Exclusive License of approximately $688,000,
$719,000 and $775,000, respectively, of which approximately $351,000 and
$624,000 had not been paid as of September 30, 1995 and 1996, respectively.
The Company has not incurred any royalty expenses under the Nonexclusive
License.

(11) PROFIT-SHARING 401(K) PLAN

The Company has a qualified profit-sharing plan covering substantially all
of its employees. Contributions to the plan are at the discretion of the
Company's Board of Directors. The Company has recorded approximately $63,000,
$65,000 and $65,000 as a provision for the profit-sharing contribution for
fiscal 1994, 1995 and 1996, respectively.

(12) COMMITMENTS AND CONTINGENCIES

(A) Operating Leases

In March 1996, the Company moved into its new operating facility. The
Company is renting the facility under an operating lease which expires in
February 2001. The Company's future minimum lease payments under all operating
leases as of September 30, 1996 are approximately as follows:

<TABLE>
<CAPTION>
YEAR AMOUNT
---- ----------
<S> <C>
1997.............................. $ 389,000
1998.............................. 389,000
1999.............................. 389,000
2000.............................. 389,000
2001.............................. 162,000
----------
$1,718,000
==========
</TABLE>

Rent expense charged to operations for the years ended September 30, 1994,
1995 and the first five months of fiscal 1996 was approximately $15,000 per
month as a part of the management services agreement with Hologic (see Note
10(A)). Rent expense charged to operations since the Company moved operating
facilities through September 30, 1996 was approximately $227,000.

(B) Capital Leases

The Company leases certain equipment under capital leases. The leases expire
through June 1997, and the interest rates range from 9.4% to 12.6%. Total
remaining payments, including interest, are approximately $42,000.

F-15
<PAGE>

VIVID TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

In May 1996, in response to allegations made by AS&E to third parties that
the Company was infringing AS&E's patents, the Company filed an action in the
United States District Court for the District of Massachusetts seeking a
declaratory judgment that the Company is not infringing AS&E's patents. In
August 1996, AS&E filed an answer and counterclaim alleging that the Company
is infringing one or more of eight AS&E patents. In October 1996, the court
dismissed AS&E's infringement counterclaims, but has allowed AS&E to raise
more specific infringement counterclaims upon AS&E asserting factual support
for such claims. The Company does not believe that it is infringing any valid
patents of AS&E and is vigorously pursuing its position. However, there can be
no assurance that the Company will prevail in its litigation or reach a
favorable settlement with AS&E. Currently, management does not believe that it
is probable that future events related to this litigation will have a material
adverse effect on the Company's financial statements.

(D) Patent License Agreement

During fiscal 1996, the Company entered into a patent license agreement for
the exclusive license of certain explosives detection technology. Under this
agreement, the Company is required to pay aggregate royalties of up to
$1,000,000 based on net sales, as defined. During fiscal 1996, the Company
incurred approximately $28,000 of royalty expense related to this agreement.

(13) ACCRUED EXPENSES

Accrued expenses in the accompanying consolidated balance sheets consist of
the following:

<TABLE>
<CAPTION>
SEPTEMBER 30,
---------------------
1995 1996
---------- ----------
<S> <C> <C>
Payroll and payroll related......................... $ 454,197 $ 513,967
Accrued warranty.................................... 773,000 773,000
Accrued royalties................................... 350,948 651,424
Accrued legal....................................... 61,188 1,291,877
Other............................................... 637,550 202,646
---------- ----------
$2,276,883 $3,432,914
========== ==========
</TABLE>

F-16
<PAGE>

[Three photographs of installations of the Company's systems at various
airports.]

Caption: Vivid Systems installed at BAA Airports.

<PAGE>

- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------

No dealer, salesperson or any other person has been authorized to give any
information or to make any representations not contained in this Prospectus,
and, if given or made, such information or representations must not be relied
upon as having been authorized by the Company, or any U.S. Underwriter. This
Prospectus does not constitute an offer of any securities other than those to
which it relates or an offer to sell, or a solicitation of an offer to buy, to
any person in any jurisdiction where such an offer or solicitation would be
unlawful. Neither the delivery of this Prospectus nor any sale made hereunder
shall, under any circumstances, create any implication that the information
contained herein is correct as of any time subsequent to the date hereof.

-----------------------

TABLE OF CONTENTS

<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary....................................................... 3
Risk Factors............................................................. 6
Use of Proceeds.......................................................... 11
Dividend Policy.......................................................... 11
Dilution................................................................. 12
Capitalization........................................................... 13
Selected Consolidated Financial Data..................................... 14
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 15
Business................................................................. 22
Management............................................................... 35
Certain Transactions..................................................... 41
Principal Stockholders................................................... 43
Description of Securities................................................ 45
Certain United States Federal Tax Consequences to Non-United States
Holders................................................................. 48
Shares Eligible for Future Sale.......................................... 50
Underwriting............................................................. 52
Legal Matters............................................................ 55
Experts.................................................................. 55
Additional Information................................................... 55
Index to Consolidated Financial Statements............................... F-1
</TABLE>

-----------------

Until , 1996 (25 days after the date of this Prospectus), all dealers
effecting transactions in the registered securities, whether or not partici-
pating in this distribution, may be required to deliver a Prospectus. This is
in addition to the obligation of dealers to deliver a Prospectus when acting
as underwriters and with respect to their unsold allotments or subscriptions.

- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------

2,000,000 SHARES

TECHNOLOGIES
INCORPORATED
LOGO

COMMON STOCK

-----------------

PROSPECTUS
, 1996

-----------------

Lehman Brothers

Cowen & Company

Needham & Company, Inc.

- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------

<PAGE>

PART II

INFORMATION NOT REQUIRED IN PROSPECTUS

ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION

The costs of issuance and distribution which will be borne by the Registrant
are as follows:

<TABLE>
<S> <C>
SEC Registration Fee............................................ $ 11,709
NASD Filing Fee................................................. 4,364
Nasdaq National Market Listing Fee.............................. 39,480
Blue Sky Fees and Expenses...................................... 6,000
Transfer Agent and Registrar Fees............................... 3,500
Accounting Fees and Expenses.................................... 125,000*
Legal Fees and Expenses......................................... 275,000*
Printing and Engraving ......................................... 85,000*
Miscellaneous................................................... 87,447*
--------
Total....................................................... $650,000
========
</TABLE>
- --------
*Estimated

ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS

Article Ninth of the Registrant's Certificate of Incorporation eliminates
the personal liability of directors to the Registrant or its stockholders for
monetary damages for breach of fiduciary duty to the full extent permitted by
Delaware law. Article VII of the Registrant's Bylaws provides that the
Registrant may indemnify its officers and directors to the full extent
permitted by the Delaware General Corporation Law. Section 145 of the Delaware
General Corporation Law authorizes a corporation to indemnify directors,
officers, employees and agents of the corporation if such party acted in good
faith in a manner he believed to be in or not opposed to the best interest of
the corporation and, with respect to any criminal action or proceeding, had no
reasonable cause to believe his conduct was unlawful, as determined in
accordance with the Delaware General Corporation Law. Section 145 further
provides that indemnification shall be provided if the party in question is
successful on the merits or otherwise. See "Management--Limitation of
Officers' and Directors' Liability; Indemnification Agreements" in Part I of
this Registration Statement for a description of indemnification agreements
the Registrant has entered into with its Directors. The effect of these
provisions and the indemnification agreements is to permit such
indemnification by the Registrant for liabilities arising under the Securities
Act of 1933, as amended (the "Securities Act"). The Registrant also expects to
obtain directors and officers liability insurance.

ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES

The following information is furnished with regard to all securities issued
by the Registrant within the past three years which were not registered under
the Securities Act.

(1) Pursuant to an agreement entered into on February 2, 1994 (the
"Conversion Agreement"), on February 3, 1994, the Registrant converted notes
with an aggregate outstanding balance, including principal and accrued and
unpaid interest, of $1,818,773 into an aggregate of 163,690 shares of Series C
Preferred Stock and an aggregate of 121,252 shares of Series D Preferred
Stock. In connection with this transaction, certain warrants that were issued
in 1992 were modified. The following sets forth the name, number of shares and
consideration paid by each recipient under the Conversion Agreement.

<TABLE>
<CAPTION>
NUMBER OF SHARES OF NUMBER OF SHARES OF
NAME SERIES C PREFERRED STOCK SERIES D PREFERRED STOCK CONSIDERATION
---- ------------------------ ------------------------ -------------
<S> <C> <C> <C>
Burr, Egan, Deleage &
Co. ................... 76,863 56,937 $ 854,031
Pioneer Capital
Corporation............ 25,621 18,978 284,677
Beta Partners, Inc...... 25,621 18,978 284,677
Massachusetts Capital
Resource Company....... 25,621 18,978 284,677
Claflin Capital......... 9,964 7,381 110,711
------- ------- ----------
163,690 121,252 $1,818,773
</TABLE>

II-1
<PAGE>

(2) From October 1, 1993 through November 7, 1996, options to purchase a
total of 208,170 shares of Common Stock, granted under the Registrant's 1989
Combination Stock Option Plan were exercised at exercise prices ranging from
$0.10 to $1.00 per share, at an aggregate purchase price of $39,715.

(3) In July 1996, the Company issued 15,000 shares of Common Stock to BAA
plc in consideration of BAA's agreement to forgo fees on certain sales of the
Registrant's products for which BAA provided substantial assistance through
access to BAA's facilities and liaison activities.

To the extent that the foregoing transactions constituted "sales" within the
meaning of the Securities Act, the securities issued in such transactions were
not registered under the Securities Act, as amended, in reliance upon the
exemptions from registration set forth in Section 3(b) and 4(2) of the
Securities Act, relating to sales by an issuer not involving any public
offering, and in reliance upon Regulation S of the Securities Act relating to
sales by an issuer of securities outside the United States. None of the
foregoing transactions, either individually or in the aggregate, involved a
public offering.

ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

(a) Exhibits

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
+1.01 Proposed form of U.S. Underwriting Agreement.
+1.02 Proposed form of International Underwriting Agreement.
+2.01 Merger Agreement between the Registrant and the Registrant's
Massachusetts predecessor.
+3.01 Certificate of Incorporation of the Registrant.
+3.02 By-laws of the Registrant.
+3.03 Form of Restated Certificate of Incorporation of the Registrant.
+4.01 Specimen Certificate for shares of the Registrant's Common Stock.
+4.02 Description of Capital Stock (contained in the Certificate of
Incorporation of the Registrant, filed as Exhibit 3.01).
+4.03 Description of Registration Rights (contained in Exhibits 10.05,
10.11, 10.12 and 10.13).
+5.01 Legal Opinion of Brown, Rudnick, Freed & Gesmer.
+10.01 Contract for the Manufacture, Supply, Installation and Commissioning
of Hold Baggage Screening Equipment between the Registrant of BAA
plc.
+10.02 Distribution and Development Agreement between the Registrant and
Gilardoni S.p.A.
+10.03 First Amended and Restated Line of Credit Loan and Security Agreement
between the Registrant and BayBank, N.A. and corresponding Note of
the Company in favor of BayBank, N.A.
+10.04 Form of Warrant to purchase Common Stock issued to certain investors.
+10.05 Warrant to purchase Common Stock issued to Dominion Fund II, L.P.
+10.06 1989 Combination Stock Option Plan of the Registrant.
+10.07 1996 Non-Employee Director Stock Option Plan of the Registrant.
+10.08 1996 Equity Incentive Plan of the Registrant.
+10.09 Facility lease between the Registrant and Cummings Properties
Management, Inc.
+10.10 Form of Indemnification Agreement for directors and officers of the
Registrant.
+10.11 Series A and Series B Preferred Stock Purchase Agreement.
+10.12 Series C and Series D Preferred Stock Purchase Agreement.
+10.13 Conversion Agreement between the Registrant and certain investors.
</TABLE>

II-2
<PAGE>

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
+10.14 Amended Shareholder Agreement among the Registrant's Massachusetts
predecessor, S. David Ellenbogen, Jay A. Stein and certain investors.
+10.15 Management Services Agreement between the Registrant and Hologic, Inc.
+10.16 License and Technology Agreement between the Registrant and Hologic,
Inc., together with First Amendment to such License and Technology
Agreement.
+10.17 Description of Bonus Plan.
+11.01 Statement re: Earnings Per Share.
+21.01 Subsidiaries of the Registrant.
+23.01 Consent of Brown, Rudnick, Freed & Gesmer (contained in Exhibit 5.01).
23.02 Consent of Arthur Andersen LLP.
+24.01 Power of Attorney (contained on page II-4).
+27.01 Financial Data Schedule.
</TABLE>
- --------
*To be filed by amendment.

+Previously filed as an exhibit to the Registrant's Registration Statement
on Form S-1 (Registration No. 333-14311) filed on October 17, 1996,
Amendment No. 1 to such Registration Statement filed on November 8, 1996 or
Amendment No. 2 to such Registration Statement filed on November 20, 1996
and incorporated herein by reference.

(b) Financial Statement Schedules

All schedules have been omitted because they are not required or because the
required information is given in the Consolidated Financial Statements or
Notes thereto.

ITEM 17. UNDERTAKINGS

(a) Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the provisions described under "Item 14--
Indemnification of Directors and Officers" above, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities
Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.

(b) The undersigned Registrant hereby undertakes to provide to the
Underwriters at the closing specified in the underwriting agreement
certificates in such denominations and registered in such names as required by
the Underwriters to permit prompt delivery to each purchaser.

(1) For purposes of determining any liability under the Securities Act,
the information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form
of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.

(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.

II-3
<PAGE>

SIGNATURES

PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT
HAS DULY CAUSED THIS AMENDMENT NO. 3 TO THE REGISTRATION STATEMENT TO BE
SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE
TOWN OF WOBURN, COMMONWEALTH OF MASSACHUSETTS, ON NOVEMBER 27, 1996.

Vivid Technologies, Inc.

/s/ S. David Ellenbogen
By: _________________________________
S. DAVID ELLENBOGEN, PRESIDENT

PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS AMENDMENT
NO. 3 TO THE REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS
IN THE CAPACITIES AND ON THE DATES INDICATED.

SIGNATURE TITLE DATE

/s/ S. David Ellenbogen Principal Executive
- ------------------------------------- Officer and November 27,
S. DAVID ELLENBOGEN Director 1996

/s/ William J. Frain Principal Financial
- ------------------------------------- and Accounting November 27,
WILLIAM J. FRAIN Officer 1996

* Director
- ------------------------------------- November 27,
JAY A. STEIN 1996

* Director
- ------------------------------------- November 27,
L. PAUL BREMER, III 1996

* Director
- ------------------------------------- November 27,
FRANK KENNY 1996

* Director
- ------------------------------------- November 27,
GLENN P. MUIR 1996

* Director
- ------------------------------------- November 27,
GERALD SEGEL 1996

/s/ S. David Ellenbogen,
*By: _______________________________,
S. DAVID ELLENBOGEN,
ATTORNEY-IN-FACT

II-4
<PAGE>

EXHIBIT INDEX

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION PAGE
------- ----------- ----
<C> <S> <C>
+1.01 Proposed form of U.S. Underwriting Agreement...................
+1.02 Proposed form of International Underwriting Agreement..........
+2.01 Merger Agreement between the Registrant and the Registrant's
Massachusetts predecessor.....................................
+3.01 Certificate of Incorporation of the Registrant.................
+3.02 By-laws of the Registrant......................................
+3.03 Form of Restated Certificate of Incorporation of the
Registrant....................................................
+4.01 Specimen Certificate for shares of the Registrant's Common
Stock.........................................................
+4.02 Description of Capital Stock (contained in the Certificate of
Incorporation of the Registrant, filed as Exhibit 3.01).......
+4.03 Description of Registration Rights (contained in Exhibits
10.05, 10.11, 10.12 and 10.13)................................
+5.01 Legal Opinion of Brown, Rudnick, Freed & Gesmer................
+10.01 Contract for the Manufacture, Supply, Installation and
Commissioning of Hold Baggage Screening Equipment between the
Registrant of BAA plc. .......................................
+10.02 Distribution and Development Agreement between the Registrant
and Gilardoni S.p.A. .........................................
+10.03 First Amended and Restated Line of Credit Loan and Security
Agreement between the Registrant and BayBank, N.A. and
corresponding Note of the Company in favor of BayBank, N.A....
+10.04 Form of Warrant to purchase Common Stock issued to certain
investors.....................................................
+10.05 Warrant to purchase Common Stock issued to Dominion Fund II,
L.P. .........................................................
+10.06 1989 Combination Stock Option Plan of the Registrant...........
+10.07 1996 Non-Employee Director Stock Option Plan of the
Registrant....................................................
+10.08 1996 Equity Incentive Plan of the Registrant...................
+10.09 Facility lease between the Registrant and Cummings Properties
Management, Inc. .............................................
+10.10 Form of Indemnification Agreement for directors and officers of
the Registrant................................................
+10.11 Series A and Series B Preferred Stock Purchase Agreement.......
+10.12 Series C and Series D Preferred Stock Purchase Agreement.......
+10.13 Conversion Agreement between the Registrant and certain
investors.....................................................
+10.14 Amended Shareholder Agreement among the Registrant's
Massachusetts predecessor, S. David Ellenbogen, Jay A. Stein
and certain investors.........................................
+10.15 Management Services Agreement between the Registrant and
Hologic, Inc. ................................................
+10.16 License and Technology Agreement between the Registrant and
Hologic, Inc., together with First Amendment to such License
and Technology Agreement .....................................
+10.17 Description of Bonus Plan......................................
+11.01 Statement re: Earnings Per Share...............................
+21.01 Subsidiaries of the Registrant.................................
+23.01 Consent of Brown, Rudnick, Freed & Gesmer (contained in Exhibit
5.01).........................................................
23.02 Consent of Arthur Andersen LLP.................................
+24.01 Power of Attorney (contained on page II-4).....................
+27.01 Financial Data Schedule........................................
</TABLE>
- --------
*To be filed by amendment.

<PAGE>

EXHIBIT 23.02

CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS

As independent public accountants, we hereby consent to the use of our
reports and to all references to our Firm included in or made a part of this
registration statement.

Arthur Andersen LLP

Boston, Massachusetts

November 27, 1996