VIVID TECHNOLOGIES INC, 10-K, 1998-12-29

VIVID TECHNOLOGIES INC
10-K, 1998-12-29
X-RAY APPARATUS & TUBES & RELATED IRRADIATION APPARATUS

Previous: MUTUAL FUND SELECT GROUP, NSAR-B, 1998-12-29

Next: INKTOMI CORP, 8-K, 1998-12-29

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K
(Mark One)

[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended September 30, 1998

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

For the transition period from ______ to ______

Commission File Number: 0-28946

Vivid Technologies, Inc.
(Exact name of registrant as specified in its charter)

Delaware 04-3054475
(State of incorporation) (I.R.S. Employer Identification No.)

10E Commerce Way, Woburn, Massachusetts 01801
(Address of principal executive offices) (Zip Code)

(781) 938-7800
(Registrant's telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Title of Each Class Name of Each Exchange on Which Registered
None None

Securities registered pursuant to Section 12(g) of the Act:

Common Stock, $.01 par value
Rights to Purchase Common Stock

Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such
shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for
the past 90 days.
Yes X No ___

Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be
contained to the best of Registrant's knowledge, in definitive proxy
or information statements incorporated by reference to Part III of
this Form 10-K or any amendment to this Form 10-K. [ X ]

The aggregate market value of the Registrant's Common Stock, $.01 par
value, held by non-affiliates of the registrant as of November 30,
1998 was $68.9 million based on the price of $8.06 on that date on
the Nasdaq National Market. As of December 14, 1998, 9,908,116
shares of the Registrant's Common Stock, $.01 par value, were issued
and outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

(1) Portions of the Company's Proxy Statement involving the election
of directors, which is expected to be filed within 120 days after the
end of the Company's fiscal year, are incorporated by reference in
Part III (Items 10, 11, 12 and 13) of this Report.

Part I

Item 1. Business

Information contained in this Report contains forward-looking
statements such as statements of the Company's plans, objectives,
expectations and intentions, that can often be identified by the use
of forward-looking terminology, such as "may," "will," "expect,"
"anticipate," "believe," "plan," "intend," "could," "estimates," "is
being" or "goal" or other variations of these terms or comparable
terminology. Such statements, which include statements relating to
the anticipated growth of the market for explosives detection
equipment, the Company's ability to develop and market new products
and the Company's ability to enter new markets, and other matters are
subject to risks and uncertainties that could cause actual results to
differ materially from those anticipated. The cautionary statements
made in this Report should be read as being applicable to all forward-
looking statements wherever they appear in this Report. The forward-
looking statements contained herein speak only as of the date of this
Report. Vivid expressly disclaims any obligation or undertaking to
release publicly any updates or revisions to any such statement or
reflect any change in Vivid's expectations or any change in events,
conditions or circumstances on which any such statement is based.
Factors that could cause or contribute to such differences include
those discussed in the risk factors set forth in Item 7 below (the
"Risk Factors") as well as those discussed elsewhere herein.

Vivid Technologies, Inc. ("Vivid" or the "Company") is a leading
developer, manufacturer and marketer of automated inspection systems
that detect explosives in airline checked baggage. The Company also
offers a system that can be used to screen carry-on baggage and
enhance building security. The Company's family of advanced
explosives detection systems identify targeted materials by analyzing
the physical characteristics of each item in a bag or parcel,
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 or parcel, thereby
preventing a suspect bag or parcel from being loaded into an aircraft
or entering a building until cleared by operator inspection. The
Company's systems can also be used to identify a wide variety of
other substances, including drugs, currency and agricultural
products.

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, 1998, the Company had sold
289 systems worldwide including 30 Model APS for hand baggage and
parcel inspection. Airports at which the Company's systems are
deployed include JFK International Airport in New York, London
Heathrow and London Gatwick, Paris Charles de Gaulle and Paris Orly,
Hong Kong International Airport at Chek Lap Kok, Malaysia's Kuala
Lumpur International Airport, Malpensa in Milan, King Khalid
International Airport in Riyadh, Amsterdam Airport Schiphol, Zurich
Airport, Brussels Airport, and Spain.

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.

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 freestanding
systems in addition to or as an alternative to integrated 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 185 contracting 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 has been conventional X-ray systems that only provide an
operator with an image for interpretation. 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's commercial airports have achieved
100% screening of international checked baggage in response to a
mandate from the UK Department of the Environment Transport and the
Regions (formerly Department of Transport). The European Civil
Aviation Conference ("ECAC"), an organization of 37 member states,
has resolved to implement 100% screening of international checked
baggage. Several of those countries, including Belgium, France,
Germany, Italy, Spain and Switzerland, have begun to implement
checked baggage screening approaches similar to that adopted by the
United Kingdom.

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 a Level 1 system. If the operator rejects
the bag, it is forwarded for Level 3 inspection. Level 3 inspection
is the slowest and most detailed process. Bags rejected at Level 3
are then opened and 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.

In the Asia/Pacific region, two major new airports in Malaysia
and Hong Kong purchased integrated systems and commenced operations
in 1998 with 100% checked baggage screening in place. Other new
airports and terminals in the region, including those in Singapore,
South Korea and Thailand, are being designed to include 100%
screening of international checked baggage using advanced automated
explosives detection systems. Australia and New Zealand intend to
implement checked baggage screening in advance of the Sydney Olympic
games in 2000. Other countries in the region, including Japan and
the Philippines 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 FAA
certified a prototype computed tomography ("CT") system in November
1998. The commercial production model of this system will require
further certification. Other CT systems were certified in December
1994 and April 1998, but, thus far, have failed to demonstrate that
they meet the requirements for 100% checked baggage screening under
realistic operating conditions. As a result, there have been only
limited purchases and installations of automated explosives detection
systems in the United States. Although ECAC has adopted a standard
similar to the FAA standard as a long-term goal, they have allowed
and promoted the deployment of effective systems even though they do
not meet the performance standards that have been adopted.

In response to the 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 and final reports in September 1996 and February 1997,
respectively, and in October 1996, the United States enacted the
Federal Aviation Re-Authorization Act of 1996 (the "Re-Authorization
Act") which included an allocation for the purchase of explosives
detection systems and other advanced security equipment by air
carriers and airport authorities. The Re-Authorization Act requires
that, until such time that the FAA determines that the equipment
certified by the FAA is commercially available and has successfully
completed operational testing, the FAA shall facilitate the
deployment of other commercially available explosives detection
devices which the FAA determines will enhance aviation security.
During 1997 and 1998, the FAA purchased a variety of state-of-the-art
explosives detection devices from several manufacturers, including
eight systems from the Company.

In October 1998, Congress approved and the president signed the
fiscal 1999 budget, which includes $100 million for the purchase and
installation of explosive detection systems and other advanced
security equipment. This level of funding is consistent with the
Gore Commission's recommendation that $100 million be spent annually
for several years to upgrade the nation's aviation security.
Included in the $100 million for fiscal 1999 is a recommendation to
purchase operator assist X-ray systems for the screening of carry-on
luggage.

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 that 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 downtime 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 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," detects particulate and chemical traces of
explosive materials collected by manually 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.

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. As
the global implementation of hold baggage systems continues,
regulators are shifting their focus to the detection of explosives in
carry-on baggage. The final report of the Gore Commission
recommended that the FAA begin conducting feasibility studies with
regard to the use of advanced explosives detection equipment for
carry-on baggage systems. Included in the $100 million federal
budget for fiscal 1999 is a recommendation to purchase operator
assist X-ray systems for the screening of carry-on luggage.

Non-aviation Hand Baggage Inspection Systems. A number of
governmental agencies and private sector organizations in the United
States and abroad are interested in utilizing advanced explosive
detection equipment to enhance facility security. Recent terrorist
attacks including the August 1998 bombings of two U.S. embassies in
Africa have spurred the agencies request additional funding to
upgrade security at domestic and international facilities. The
General Services Administration has approved the Company's Model APS
for building protection. Through September 30, 1998 the Company had
sold 21 systems for facility protection.

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, hand
baggage and parcels. As of September 30, 1998, the Company had
shipped and installed approximately 260 systems for use in airports
and high-security facilities throughout Europe, the Asia-Pacific
region, the Middle East and North America.

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 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 technology, which includes a
combination of additional detector arrays and software, measures and
analyzes 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 checked
baggage inspection 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 color. 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 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.

Integrated Models. The Company's first integrated products were
the VIS Level 1 inspection system and the VDS Level 2 inspection
system. The VIS Level 1 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 several VIS
mainframes to be interconnected ("Matrixed") with multiple 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 approach. The baggage
handling systems in the new airports in Malaysia and Hong Kong and
the new Terminal One at JFK International Airport in New York were
designed to capitalize on the VIS-M's Matrixing capability by
interconnecting several of the Company's VIS-M systems with multiple
workstations to achieve 100% checked baggage screening. Several
other new airports or terminals are being designed to utilize
networked screening systems.

The Company has begun commercial production of its newest system
for screening checked baggage, the Model MVT. This system utilizes a
revolutionary approach to dual energy X-ray enabling improved
explosive detection while preserving the high-speed inspection
necessary to screen large amounts of baggage. This approach gathers
significantly more data than our current generation of systems by
obtaining three different views of each bag. This multi-view
tomography (MVT) technique allows better measurements of both
effective atomic number and density of each item inside a suitcase
than single view dual energy X-ray systems.

In addition to its performance characteristics, MVT has several
other features that the Company believes will make it appealing to
potential customers. The MVT has similar dimensions to the Model VIS
and Model VDS can easily be integrated into baggage handling lines.
For those customers currently utilizing a Vivid system, installing
MVT is a "drop in" upgrade. The existing Vivid system can be removed
and the MVT installed in the same space with virtually no changes to
the conveyor belts entering and exiting the system. MVT also will
communicate with the airport's baggage handling control system the
same way as our current equipment. Additionally, MVT is film safe
meaning that the X-ray dosage is below the threshold for damaging
film unlike competing CT technologies that utilize a significantly
higher dose of X-ray, resulting in systems that damage film. The
Company believes that this feature is important to the airlines that
want to avoid installing screening equipment that could result in
passenger complaints.

Freestanding Models. The Company's freestanding checked baggage
explosives detection systems are intended to be installed in an
airport terminal, 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, inspect
baggage lying flat as they are transported on a conveyor belt.

In 1996, the Company introduced a modified version of the
operator-attended VDS 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. This version, the VDS-II, 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 be
integrated into a baggage handling system or used as a freestanding
system in a baggage handling hall or terminal.

In 1996, the Company also introduced a modified version of the
VDS-II to serve as an inspection system for the inspection of baggage
that exceeds the maximum dimensions that can be accommodated by
standard baggage handling conveyor lines. The system can be
integrated into a baggage handling system or used as a freestanding
system in a baggage hall or terminal.

Carry-on Model. The Company offers its Model APS system to
inspect carry-on baggage, hand baggage and parcels for explosives or
contraband material. The Model APS is similar in configuration to
conventional X-ray systems used to screen for concealed weapons
currently installed in airports and government and private
facilities. While an operator is required to inspect each bag for
weapons, the Model APS automatically alerts the operator to the
presence of suspect explosive materials. The Model 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 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 energy X-ray
technology. The arrangement with Gilardoni reduced the time-to-
market of the Company's APS carry-on baggage inspection system. In
March 1998, the Company began full manufacturing of the Model APS at
its U.S. facility, using components purchased from Gilardoni under
the agreement. Through September 30, 1998 the Company had sold a
total of 30 Model APS to screen carry-on luggage in an airport
environment and examine hand baggage for facility protection.
Examples of customers that have purchased Model APS systems include
Turkey, Billund Airport Denmark, King Khalid International Airport,
Riyadh, Saudi Arabia, Terminal One at JFK International Airport in
New York and the Pentagon. The General Services Administration has
approved the Model APS for building protection.

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, the illegal export of currency and detection of agricultural
products. 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. In addition, during fiscal 1998 the Company
entered into an exclusive technology license agreement for the
development of complimentary explosive detection technology. Under
the agreement, the Company paid $1,250,000 for the exclusive right to
manufacture, use or sell the licensed technology for a three-year
period, with an option to extend the exclusive rights. See "Risk
Factors - Developing Market; Uncertainty of Market Acceptance" and "-
Uncertainty of Product Development."

Products under Development

The Company's product 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 is
continuing to develop the MVT to meet FAA certification requirements.
This development effort was being funded in part by a $3.4 million
research grant from the FAA awarded in May 1997. The Company cannot
assure that it will be able to develop a system that will meet FAA
certification requirements on a timely basis, if at all, or that if
developed, the system will be commercially successful. See "Risk
Factors - Dependence on Government Regulation" and " - Uncertainty of
Product Development."

Marketing and Sales

The company sells and markets its products through its direct
sales force as well as independent sales representatives and
distributors in certain foreign countries, including Spain, France,
Hong Kong, Japan and Malaysia. As of September 30, 1998, the Company
had a 12 person marketing and sales staff. Two members of this staff
are located in the United Kingdom and one in Switzerland. The
Company also has a director of business development for the United
States based in New Jersey with a primary focus on the non-aviation
applications for the Company's systems. The remainder of the
marketing and sales staff is headquartered at the Company's offices
in Woburn, Massachusetts.

In the United States, the Company is working actively with the
FAA, other government agencies, airlines, airport operators and
congressional committees 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. In addition, the Company 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 benefits from customer referrals and the use of certain
customer installations as demonstration sites for its systems. In
fiscal 1996,1997 and 1998, international sales accounted for
approximately 95%, 97%, 78%, respectively, of the Company's revenues.
See "Risk Factors - Reliance on International Sales" and "Note 6 in
Notes to Consolidated Financial Statements."

The selling process for the Company's products often involves a
team comprised of individuals from sales and 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
effort with certain of its customers has 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."

In 1997, the Company entered into an arrangement with Gilardoni
for the manufacture and sale of the Model APS carry-on baggage
explosives detection system. Under this arrangement, the Company has
the exclusive right to manufacture and 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 - Management of Growth."

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 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 includes six support
engineers at its headquarters in Massachusetts, seven support
engineers operating out of the Company's offices in the United
Kingdom and two support engineers in the Asia-Pacific region.

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 have 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; FAA
Certification; and FAA Appropriations."

The FAA currently requires all carry-on baggage and
international checked baggage to be inspected by hand search or with
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
that met this standard under realistic airport operating conditions.
None of the Company's systems have been certified by the FAA. A
prototype of the Company's recently introduced MVT was submitted to
the FAA for precertification readiness testing and data collection.
As of the filing date, the MVT had not been through the FAA's
official certification test. The Company plans to make further
refinements to the system before proceeding to the formal
certification testing. The Company cannot assure that the MVT or any
other products that may be developed by the Company will ever meet
the FAA or any other United States certification standard. See "Risk
Factors - Dependence on Government Regulation; FAA Certification; and
FAA Appropriations."

In response to the 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
and final reports in September 1996 and February 1997, respectively,
and in October 1996, the United States enacted the Re-Authorization
Act which included an allocation for the purchase of explosives
detection systems and other advanced security equipment by air
carriers and airport authorities. The FAA has ordered initial
quantities of the CT-based system, trace detection systems and dual
energy X-ray based systems, including eight systems from the Company.
The deployment of these systems will allow the U.S. airlines, which
are the main users of the equipment, to gain experience with the
various technologies enabling them to determine which systems work
best in busy U.S. airport environments.

In October 1998, Congress approved and the president signed the
fiscal 1999 federal budget, which includes $100 million for the
purchase and installation of explosive detection systems and other
advanced security equipment. This level of funding is consistent
with the Gore Commission's recommendation that $100 million be spent
annually for several years to upgrade the nation's aviation security.

The UK DOT has mandated 100% screening of international checked
baggage in the United Kingdom. Similarly, the other ECAC member
states have resolved to implement 100% screening of international
checked baggage. 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, Italy, 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 and have been installed for use
at the new airports in Malaysia and Hong Kong. The Company cannot
assure that its systems will be purchased for installation in any of
the other new airports or terminals under construction or proposed
for construction in that region.

ICAO has adopted various recommendations and requirements for
screening of checked and carry-on baggage. Currently, 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. It cannot be assured
that additional countries will mandate the implementation of
effective explosives screening or 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, it cannot be
assured 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. During fiscal 1998, the main focus of the Company's
research and development personnel was on the development of the
Model MVT.

At September 30, 1998, the Company had 46 employees engaged in
research and development and engineering, including 14 employees
engaged in software development. During fiscal 1996, 1997 and 1998,
the Company's research and development expenses were approximately
$3.5 million, $4.4 million and $5.9 million, respectively. In
addition, during each of these years certain of the Company's
research and development expenses related to work performed under the
Company's FAA research and development grants were included under
costs of goods sold.

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 five patents and has
pending two 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. Three of the Company's
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. The Company's fourth
patent relates to the Company's operator workstations. The Company's
fifth patent relates to the Company's SDE technology. These patents
have expiration dates ranging from 2011 to 2015. It cannot be
assured that any of the Company's unallowed 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, it cannot be assured 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.
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, 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."

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 eight United States
patents and certain foreign patents relating to X-ray and
complimentary technology. The United States patents have expiration
dates ranging from 2002 to 2007. The Company's arrangement with
Gilardoni relating to the Company's Model 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 is currently negotiating an extension to the license with
Gilardoni. In addition, during fiscal 1998 the Company entered into
an exclusive technology license agreement for the development of
complimentary explosive detection technology. Under the agreement,
the Company paid $1,250,000 for the exclusive right to manufacture,
use or sell the licensed technology for a three-year period, with an
option to extend the exclusive rights.

The Company was 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. It cannot be assured
that EG&G will not use the Company's technology in a manner that
would materially and adversely affect the Company's business, results
of operations and financial condition.

The Company is also involved in certain patent litigation with
American Science and Engineering, Inc. ("AS&E"), whereby the Company
was seeking a declaratory judgement 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 asserting factual support for such
claims. In December 1996, AS&E filed a motion for leave to file an
amended counterclaim asserting that the Company was violating one
AS&E patent. The court subsequently dismissed AS&E's motion, but
again allowed AS&E to raise more specific infringement counterclaims
upon AS&E's asserting factual support for such claims. In February
1997, AS&E filed a further memorandum in support of its motion for
leave to file an amended counterclaim. In April 1997, the Court
denied AS&E's motion and dismissed its counterclaim without granting
leave to file an amended counterclaim. In April 1998, AS&E filed a
motion in the Federal Court of Appeals for the First Circuit to
appeal this decision. This appeal is still pending. See "Risk
Factors - Limited Protection of Intellectual Property Rights; Patent
Litigation" and "Item 3. Legal Proceedings."

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 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, the Company cannot assure that its products will not be
rendered obsolete by new industry standards or changing technology.
It cannot be assured 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 overall cost
effectiveness of the Company's systems as measured by a combination
of factors including effective automated explosives detection,
throughput, low cost 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, the FAA first certified this CT-based system and a new model
was certified in April 1998. These systems operate at a
significantly lower throughput rate and significantly higher expense
than the Company's systems. In November 1998 the FAA certified a new
CT-based system developed by another company. This certification
will not apply to the commercial production model of this system,
which is still under development. The Company believes that the CT
systems also are more expensive and operate at a significantly lower
throughput rate compared to the Company's systems. Additionally, the
two newer systems have not been tested over extended periods of time
in actual airport operating conditions. None of the Company's
products have been certified by the FAA. 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. See "Risk Factors - Dependence on Government
Regulation; FAA Certification; and FAA Appropriations."

The Company's Model APS system, which is intended to detect
explosives in carry-on bags and personal effects at airports and
other installations, has recently been evaluated by various
government agencies. This system competes against conventional X-ray
systems, which are lower in price, as well as advanced explosives
detection systems being adapted by the Company's competitors for this
use. The Model APS system competes 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. 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 checked baggage systems and five hand baggage
systems per month and has the capability to accommodate production of
over 20 checked baggage systems and 15 hand baggage systems per
month. In September 1998, the Company began production of its next
generation system MVT. In anticipation of future growth, the Company
entered into a five-year lease agreement for additional space of
approximately 18,500 square feet in a building adjacent to its
existing location. Should market conditions warrant, the Company may
choose to establish overseas manufacturing operations.

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. In 1997, the Company entered into a joint
marketing and royalty agreement with Gilardoni for the Model APS
system. In March 1998, the Company began full manufacturing of the
Model APS at its U.S. facility, using components purchased from
Gilardoni per the agreement. Under the current arrangement Gilardoni
is the sole source for certain components to be manufactured with the
Model APS. There can be no assurance that Gilardoni will supply
these components in a cost effective or timely manner. The failure
of Gilardoni to provide acceptable quality and timely components at
an acceptable price, or an interruption of supplies from such a
supplier as a result of fire, nature calamity, strike or other
significant event could materially and adversely affect the Company's
business, financial condition and results of operations. The Company
is currently in discussions with Gilardoni to allow the Company a
second source for these components.

Backlog

Backlog for the Company's products as of September 30, 1997 and
1998 totaled approximately $15 million and $4 million, respectively.
Backlog consists of purchase orders for which a customer has
scheduled delivery within the next twelve months. In certain
circumstances, orders 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, 1998, the Company had 125 full-time
employees, including 35 in manufacturing operations and quality
assurance, 46 in research, development and engineering, 27 in
marketing, sales and customer support, and 17 in finance and
administration and information systems. None of the Company's
employees is represented by a union. The Company considers its
employee relations to be good.

Executive Officers of the Registrant

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

Name Age Position
S. David Ellenbogen 60 Chairman of the Board and Chief
Executive Officer

Dr. Jay A. Stein 56 Senior Vice President, Technical
Director and Director

William J. Frain 32 Chief Financial Officer and Treasurer

James J. Aldo 47 Vice President of Marketing and Sales

Daniel J. Silva 46 Vice President of Operations

S. David Ellenbogen, a co-founder of the Company, has served as its
Chief Executive Officer and a director since its organization in June
1989 and served as its President from June 1989 until February 1997.
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 "Item 13. Certain Relationships and Related
Transactions."

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 "Item 13.
Certain Relationships and Related Transactions."

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 an auditor
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.

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.

Significant Employees

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

Name Age Position

Kristoph D. Krug 45 Chief Technical Officer

Jeremy M. Attree 39 Director of Operations, Europe

Kristoph D. Krug joined the Company in July 1989 as a Project
Engineer, was promoted to Director of Research and Development
Engineering in 1992 and became Chief Technical Officer in January
1997. 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.

Shareholder Rights Plan

On October 13, 1998, the Board of Directors of Vivid
Technologies, Inc. (the "Company") declared a dividend of one
preferred share purchase right (a "Right") for each outstanding share
of common stock, par value $0.01 per share (the "Common Shares") on
October 27, 1998 (the "Record Date") to the stockholders of record on
that date. Each Right entitles the registered holder to purchase
from the Company one one-thousandth of a share of Series A Junior
Participating Preferred Stock, par value $0.01 per share (the
"Preferred Shares"), of the Company, at a price of $60.00 per one one-
thousandth of a Preferred Share (the "Purchase Price"), subject to
adjustment. The description and terms of the Rights are set forth in
a Rights Agreement (the "Rights Agreement") between the Company and
American Stock Transfer & Trust Company, as Rights Agent (the "Rights
Agent").

Subject to certain limited exceptions, until the earlier to
occur of (i) 10 days following a public announcement that a person or
group of affiliated or associated persons (an "Acquiring Person") has
acquired beneficial ownership of 15% or more of the outstanding
Common Shares, or (ii) 10 business days (or such later date as may be
determined by action of the Board of Directors prior to such time as
any Person becomes an Acquiring Person) following the commencement
of, or announcement of an intention to make, a tender offer or
exchange offer the consummation of which would result in the
beneficial ownership by a person or group of 15% or more of such
outstanding Common Shares (the earlier of such dates being called the
"Distribution Date"), the Rights will be evidenced, with respect to
any of the Common Share certificates outstanding as of the Record
Date, by such Common Share certificate with a copy of the Summary of
Rights attached thereto.

The Agreement provides that, until the Distribution Date, the
Rights will be transferred with and only with the Common Shares.
Until the Distribution Date (or earlier redemption or expiration of
the Rights), new Common Share certificates issued after the Record
Date or upon transfer or new issuance of Common Shares will contain a
notation incorporating the Agreement by reference. Until the
Distribution Date (or earlier redemption or expiration of the
Rights), the surrender for transfer of any certificates for Common
Shares outstanding as of the Record Date, even without such notation
or a copy of the Summary of Rights being attached thereto, will also
constitute the transfer of the Rights associated with the Common
Shares represented by such certificate. As soon as practicable
following the Distribution Date, separate certificates evidencing the
Rights ("Right Certificates") will be mailed to holders of record of
the Common Shares as of the Close of Business on the Distribution
Date and such separate Right Certificates alone will evidence the
Rights.

The Rights are not exercisable until the Distribution Date. The
Rights will expire on October 13, 2008 (the "Final Expiration Date"),
unless the Final Expiration Date is extended or unless the Rights are
earlier redeemed by the Company, in each case, as described below.

The Purchase Price payable, and the number of Preferred Shares
or other securities or property issuable, upon exercise of the Rights
are subject to adjustment from time to time to prevent dilution (i)
in the event of a stock dividend on, or a subdivision, combination or
reclassification of, the Preferred Shares, (ii) upon the grant to
holders of the Preferred Shares of certain rights or warrants to
subscribe for or purchase Preferred Shares at a price, or securities
convertible into Preferred Shares with a conversion price, less than
the then current market price of the Preferred Shares or (iii) upon
the distribution to holders of the Preferred Shares of evidences of
indebtedness or assets (excluding regular periodic cash dividends
paid out of earnings or retained earnings or dividends payable in
Preferred Shares) or of subscription rights or warrants (other than
those referred to above).

The number of outstanding Rights and the number of one one-
thousandths of a Preferred Share issuable upon exercise of each Right
are also subject to adjustment in the event of a stock split of the
Common Shares or a stock dividend on the Common Shares payable in
Common Shares or subdivisions, consolidations or combinations of the
Common Shares occurring, in any such case, prior to the Distribution
Date.

Preferred Shares purchasable upon exercise of the Rights will
not be redeemable. Each Preferred Share will be entitled to a
quarterly dividend payment of 1000 times the dividend declared per
Common Share. In the event of liquidation, the holders of the
Preferred Shares will be entitled to an aggregate payment of 1000
times the aggregate payment made per Common Share. Each Preferred
Share will have 1000 votes, voting together with the Common Shares.
In the event of any merger, consolidation or other transaction in
which Common Shares are exchanged, each Preferred Share will be
entitled to receive 1000 times the amount received per Common Share.
These rights are protected by customary antidilution provisions.

Because of the nature of the Preferred Shares' dividend,
liquidation and voting rights, the value of the one one-thousandth
interest in a Preferred Share purchasable upon exercise of each Right
should approximate the value of one Common Share.

In the event that any person becomes an Acquiring Person, proper
provision shall be made so that each holder of a Right, other than
Rights beneficially owned by the Acquiring Person and its Affiliates
and Associates (which will thereafter be void), will thereafter have
the right to receive upon exercise that number of Common Shares
having a market value of two times the exercise price of the Right.
In the event that, at any time after a Person becomes an Acquiring
Person, the Company is acquired in a merger or other business
combination transaction or 50% or more of its consolidated assets or
earning power are sold, proper provision will be made so that each
holder of a Right will thereafter have the right to receive, upon the
exercise thereof at the then current exercise price of the Right,
that number of shares of common stock of the acquiring company which
at the time of such transaction will have a market value of two times
the exercise price of the Right.

If the Company does not have sufficient Common Shares to satisfy
such obligation to issue Common Shares, or if the Board of Directors
so elects, the Company shall deliver upon payment of the exercise
price of a Right an amount of cash or securities equivalent in value
to the Common Shares issuable upon exercise of a Right; provided
that, if the Company fails to meet such obligation within 30 days
following the later of (x) the first occurrence of an event
triggering the right to purchase Common Shares and (y) the date on
which the Company's right to redeem the Rights expires, the Company
must deliver, upon exercise of a Right but without requiring payment
of the exercise price then in effect, Common Shares (to the extent
available) and cash equal in value to the difference between the
value of the Common Shares otherwise issuable upon the exercise of a
Right and the exercise price then in effect. The Board of Directors
may extend the 30-day period described above for up to an additional
60 days to permit the taking of action that may be necessary to
authorize sufficient additional Common Shares to permit the issuance
of Common Shares upon the exercise in full of the Rights.

At any time after any Person becomes an Acquiring Person and
prior to the acquisition by any person or group of a majority of the
outstanding Common Shares, the Board of Directors of the Company may
exchange the Rights (other than Rights owned by such person or group
which have become void), in whole or in part, at an exchange ratio of
one Common Share per Right (subject to adjustment).

With certain exceptions, no adjustment in the Purchase Price
will be required until cumulative adjustments require an adjustment
of at least 1% in such Purchase Price. No fractional Preferred
Shares will be issued (other than fractions which are integral
multiples of one one-thousandth of a Preferred Share, which may, at
the election of the Company, be evidenced by depository receipts) and
in lieu thereof, an adjustment in cash will be made based on the
market price of the Preferred Shares on the last trading day prior to
the date of exercise.

At any time prior to the time any Person becomes an Acquiring
Person, the Board of Directors of the Company may redeem the Rights
in whole, but not in part, at a price of $0.001 per Right (the
"Redemption Price"). The redemption of the Rights may be made
effective at such time, on such basis and with such conditions as the
Board of Directors in its sole discretion may establish. Immediately
upon any redemption of the Rights, the right to exercise the Rights
will terminate and the only right of the holders of Rights will be to
receive the Redemption Price.

The terms of the Rights may be amended by the Board of Directors
of the Company without the consent of the holders of the Rights,
except that from and after such time as any person becomes an
Acquiring Person no such amendment may adversely affect the interests
of the holders of the Rights (other than the Acquiring Person and its
Affiliates and Associates).

Until a Right is exercised, the holder thereof, as such, will
have no rights as a stockholder of the Company, including, without
limitation, the right to vote or to receive dividends.

Item 2. Properties

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. In July 1998, the Company entered into a five-year lease
agreement for additional space of approximately 18,500 square feet in
a building adjacent to its existing location in Woburn,
Massachusetts. Approximately 10,000 square feet of this new facility
will be used for manufacturing. The Company also leases 3,600 square
feet of office and manufacturing space in San Diego, California for a
research and development facility. The Company also has two offices
in the United Kingdom, leasing approximately 1,000 square feet of
space for sales and service. In addition, the Company has sales
offices located in Moudon, Switzerland and New Jersey, USA and a
sales and customer support office in Kuala Lumpur, Malaysia. 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 by establishing a manufacturing operation or
expanding its sales and support offices in one or more of those
regions.

Item 3. Legal Proceedings

In May 1996, the Company commenced an action in the United
States District Court for the District of Massachusetts against AS&E
seeking a declaration that the Company does not infringe AS&E patents
related to back scattered X-rays. This followed AS&E's allegations
of infringement to third parties. No discovery has been taken to
date. Following a court decision in July 1997 construing the claims
of the AS&E patent, which decision the Company considers favorable,
in September 1997 the Company filed a motion for summary judgment of
non-infringement. AS&E has not yet filed its papers in opposition to
the Company's motion but is seeking discovery. If granted, the
Company's motion will resolve all issues remaining in the case in
favor of the Company. Earlier, in April 1997, the Court dismissed
AS&E's proposed counterclaim seeking to allege patent infringement,
so that the only remaining issue in the case is the Company's request
for declaration of non-infringement of two claims of a single AS&E
patent. In April 1998, AS&E filed a motion in the Federal Court of
Appeals for the First Circuit to appeal this decision, and the appeal
is still pending.

Item 4. Submission of Matters to a Vote of Security Holders

None.

Part II

Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters

Market Information - The Company's Common Stock is quoted on the
Nasdaq National Market under the symbol "VVID." The following table
sets forth the quarterly high and low sales prices per share of
Common Stock since the Company's initial public offering on December
11, 1996, as reported by the Nasdaq National Market.

Fiscal year Ended September 30, 1998 High Low
First Quarter 16 1/2 10 3/8
Second Quarter 16 3/8 12
Third Quarter 15 3/4 10 1/2
Fourth Quarter 12 6 7/8

Fiscal Year Ended September 30, 1997 High Low
First Quarter 12 3/4 10
Second Quarter 24 1/2 11 7/8
Third Quarter 19 3/4 13 1/4
Fourth Quarter 18 3/8 14 1/4

Number of Holders - As of December 14, 1998, there were approximately
146 holders of record of the Company's Common Stock, including
multiple beneficial holders at depositaries, banks and brokers listed
as a single holder in the street name of each respective depositary,
bank or broker.

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.

Recent Sales of Unregistered Securities - None

Use of Proceeds of Initial Public Offering -On December 10, 1996, the
Securities and Exchange Commission declared effective the Company's
Registration Statement on Form S-1, Commission file number 333-14311,
relating to the initial public offering of the Company's Common
Stock, $.01 par value. The offering commenced on December 11, 1996
and all shares covered by the Registration Statement were sold. The
managing underwriters for the offering were Lehman Brothers Inc.,
Cowen & Company and Needham & Company. The following sets forth
certain information regarding the offering and the Companys'
application of the net proceeds therefrom through September 30, 1998:

INFORMATION RELATING TO THE OFFERING

Number of shares registered 2,300,000
Number of shares sold by the Company 2,300,000

Aggregate price of the offering amount
registered and sold $27,600,000
Offering Expenses:
Underwriting discounts
and commissions $1,932,000
Finders' fees --
Expenses paid to or for
underwriters --
Other expenses $845,000
Total expenses $2,777,000 (1)
Net offering proceeds $24,823,000
-------------------------
(1) No such expenses were paid directly
or indirectly to directors, officers,
general partners of the Company or their
associates; to persons owning ten percent
or more of any class of equity securities
of the Company, or to affiliates of the
Company.

USE OF PROCEEDS

Category Amount
Construction of plant, building
and facilities $63,300
Purchase and installation of
machinery and equipment $800,000
Purchase of real estate --
Acquisition of technology/license $1,750,000
Repayment of indebtedness --
Redemption of redeemable
preferred stock (1) $5,780,650
Working capital $6,021,841
Temporary investments, net $10,407,209
Notes, drafts, bills of
exchange or bankers'
acceptances which mature not
later than one year from
the date of issuance
Long-term investments __
Investment-grade commercial
paper, with an average
maturity period of 15 months
Total investments $10,407,209
Total $24,823,000
-----------------------
(1) Of this amount, approximately $900,000 was paid to Beta
Partners Limited Partnership. Frank Kenny, a director of the
Company, is a general partner of this partnership. No other
proceeds of the offering were paid directly or indirectly to
directors, officers, general partners of the Company or their
associates; to persons owning ten percent or more of any class
of equity securities of the Company; or to affiliates of the
Company.

Item 6. Selected 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 herein. This
data should be read in conjunction with "Item 7. Management's
Discussion and Analysis of Financial Condition and Results of
Operations" and the Consolidated Financial Statements appearing
elsewhere herein.
Year ended September 30,
1994 1995 1996 1997 1998
(in thousands, except per share data)

Consolidated Statement of Operations Data:
Revenues $13,801 $14,437 $15,578 $31,702 $38,718
Cost of revenues 6,762 6,129 6,899 13,203 16,361
Gross margin 7,039 8,308 8,679 18,499 22,357

Operating expenses:
Research and development 2,296 3,653 3,462 4,390 5,859
Selling and marketing 716 1,077 1,395 3,556 4,335
General and administrative 916 1,120 1,515 2,929 3,952
Litigation expenses 199 309 1,150 427 220
Total operating
expenses 4,127 6,159 7,522 11,302 14,366

Income from operations 2,912 2,149 1,157 7,197 7,991
Interest and other
income (expense), net (2) (45) 8 862 1,477

Income before provision
for income taxes 2,910 2,104 1,165 8,059 9,468
Provision for income taxes 100 90 -- 2,193 2,838

Net income $ 2,810 $ 2,014 $ 1,165 $ 5,866 $ 6,630

Net income per share
Basic $ 1.74 $ 1.21 $ 0.69 $ 0.78 $ 0.68
Diluted $ 0.40 $ 0.28 $ 0.15 $ 0.60 $ 0.65

Weighted average number of shares outstanding
Basic 1,615 1,663 1,682 7,548 9,685
Diluted 7,050 7,127 7,869 9,838 10,251

(Dollars in thousands)
September 30,
1994 1995 1996 1997 1998
Consolidated Balance Sheet Data:
Working capital $2,054 $3,968 $(1,037) $29,297 $36,329
Total assets 6,365 7,740 11,963 37,457 45,924
Redeemable preferred stock,
including current
portion 5,781 5,781 5,781 -- --
Stockholders' equity
(deficit) (3,065) (1,045) 177 31,711 38,900

Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations

The following discussion and analysis should be read in
conjunction with "Item 1. Business," "Item 6. Selected Financial
Data," the Company's Consolidated Financial Statements and Notes
thereto and the information described under the caption "Risk
Factors" below.

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, 1998, the Company had shipped and installed 259
checked baggage systems for use in airports throughout Europe, the
Asia/Pacific region, the United States and Canada. Also, the Company
shipped 30 Model APS, a freestanding system to screen carry-on
baggage for explosives and weapons for use in airports and protection
of public, private, and government facilities. The General Services
Administration has approved the Company's Model APS for building
protection. During fiscal 1998 the Company completed shipments to,
and celebrated the opening of the new airports in Hong Kong and
Malaysia. These two airports are the first in Asia to implement 100%
screening for explosives utilizing a total of 52 Vivid systems. In
addition, JFK Terminal One opened in May 1998 deploying 13 Vivid
systems (7 APS and 6 checked luggage systems) and is the first
terminal in the United States to automatically inspect 100% of
passenger baggage for explosives.

The Company's sales are primarily to owners and operators of
airports, including foreign governments and regulatory authorities,
and other government agencies and departments, specifically for the
purchase of non-aviation equipment. 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. The Company recognizes revenues under its
development grants as services are rendered. In May 1997, the
Company received a $3.5 million research and development grant from
the FAA to fund, in part, the development of a cost effective, high
speed explosive detection system, based upon the Company's current
proprietary technology, that is intended to meet FAA certification
requirements. The Company completed work under this grant in the
first quarter of fiscal 1999. In fiscal 1996, 1997, and 1998 the
Company recognized $0.7 million, $0.8 million, and $2.7 million
respectively, in development revenue from FAA grants.

The Company's cost of revenues includes a royalty payable with
respect to product sales and other revenues derived from the license
with Hologic. Under the terms of this exclusive agreement, this
royalty was reduced from 5% to 3% of revenues derived from such
license in January 1997 upon the Company reaching $50 million in
cumulative revenues subject to the exclusive license. Upon the
Company reaching $200 million of cumulative revenues subject to this
exclusive license, the royalty will be eliminated entirely. As of
September 30, 1998, the Company had reached approximately $118
million in cumulative revenues. See "Item 1. Business-Intellectual
Property" and "Item 13. Certain Relationships and Related
Transactions."

In fiscal 1996, 1997 and 1998, sales to BAA accounted for
approximately 79%, 39% and 42%, respectively, of the Company's
revenues. Additionally, in fiscal 1997 and 1998 Airport Authority
Hong Kong and accounted for 19% and 12%, respectively, and Toyo
Kanetsu K.K., the baggage-handling contractor for Malaysia's Kuala
Lumpur International Airport, accounted for 27% and 2%, respectively,
of the Company's revenues. The Company expects that its revenues from
these customers will decrease and will become increasingly dependent
upon sales of upgrades, replacement equipment and services. The
failure of the Company to obtain orders from customers other than
these customers would have a material adverse effect on the Company's
business, results of operations and financial condition. See "Risk
Factors-Customer Concentration." Revenues from the FAA including
$2.7 million in research and development funding accounted for 16% of
the Company's revenues in fiscal 1998.

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 United Kingdom, other Western
European countries and more recently in the Asia/Pacific region and
the Middle East. In fiscal 1998, the Company sold, shipped, and
installed 80 checked baggage systems and 28 hand baggage systems,
worldwide. The Company has sales and service offices in the United
Kingdom and Malaysia to support its European and Asia/Pacific
operations, respectively, and has expanded its presence in Europe and
the Middle East. The Company expects international sales to remain
an important component of its business.

The Company's export sales generally have been denominated in
United States dollars. During fiscal 1997 and 1998 approximately 25%
and 20%, respectively, of the Company's revenues were denominated in
foreign currencies. The Company on occasion has hedged its foreign
currency exposure by entering into forward foreign exchange contracts
to hedge against foreign currency fluctuations. It cannot be assured
that these hedging efforts will be successful. At September 30, 1998,
the Company had no exchange contracts. Gains and losses on forward
foreign exchange commitments are deferred and recognized in revenue
in the same period as the hedged transactions. The net gain (loss)
was not material in 1997 or 1998. 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:

Year Ended
September 30,
1996 1997 1998
Revenues 100% 100% 100%
Cost of revenues 44 42 42
Gross margin 56 58 58
Operating expenses:
Research and development 22 14 15
Selling and marketing 9 11 11
General and administrative 10 9 10
Litigation expenses 8 1 1
Total operating
expenses 49 35 37

Income from operations 7 23 21
Interest and other income, net -- 3 3
Income before income taxes 7 26 24
Provision for income taxes -- 7 7
Net income 7% 19% 17%

Fiscal Year Ended September 30, 1998 Compared to Fiscal Year Ended
September 30, 1997

Revenues. Revenues increased by approximately 22% to $38.7 million
in fiscal 1998, from $31.7 million in fiscal 1997. This increase in
revenues primarily was the result of an increase in product sales of
checked baggage systems and the newly introduced hand baggage system.
The increase in product sales was primarily attributable to the total
number of product shipments to Europe, the Middle East, and the
United States, including installations at JFK Terminal One, partially
offset by slightly lower average selling prices of the Company's
products and a change in product mix. During fiscal 1998, the
Company shipped and installed 80 checked baggage units and 28 hand
baggage units compared to 76 units and 2 units, respectively, in
fiscal 1997. The Company also recognized approximately $2.7 million
of revenue under a FAA research grant, compared to $0.8 million in
fiscal 1997 under the same grant. For the fourth quarter of fiscal
1998 revenues decreased by approximately 18% to $8.8 million when
compared to $10.7 million for the third quarter of fiscal 1998. The
decrease was primarily related to the Company's transition to the
next generation system, MVT, and delays in purchase decisions by
potential Asian customers.

Gross Margin. Gross margin was 58% of revenues in fiscal 1998 and
fiscal 1997. The increase in unit sales, revenue associated with the
Company's FAA development grant, service contracts and improved
manufacturing efficiencies, which increased margins, were offset by
lower average selling prices and initial sales of the Company's hand
baggage unit which had lower margins than the Company's checked
baggage units.

Research and Development Expenses. Research and development
expenses increased by approximately 33% to $5.9 million (15% of
revenues) in fiscal 1998 from $4.4 million (14% of revenues) in
fiscal 1997. The increase in research and development expenses in
fiscal 1998 was primarily due to the addition of engineering
personnel and outside consultants working on the development of new
products, mainly the development of a second generation explosives
detection system in an effort to reach FAA certification, and
enhancements to existing products, including enhancements to the
Model APS system for carry-on baggage and the VIS-M. Certain
expenses in connection with the development of the Company's next
generation system have been included in costs of goods sold in
connection with the most recent FAA research and development grant.

Selling and Marketing Expenses. Selling and marketing expenses
increased approximately 22% to $4.3 million (11% of revenues) in
fiscal 1998 from $3.6 million (11% of revenues) in fiscal 1997. The
increase in selling and marketing expenses in fiscal 1998 primarily
was due to additional sales and support personnel as a result of the
expansion of operations in Europe and the United States, and to a
lesser extent an increase in advertising, consulting and public
relations, trade shows and related travel costs.

General and Administrative Expenses. General and administrative
expenses increased approximately 35% to $3.9 million (10% of
revenues) in fiscal 1998 from $2.9 million (9% of revenues) in fiscal
1997. The increase in general and administrative expenses in fiscal
1998 was primarily attributable to an increase in personnel and
related costs, patent amortization, and license fees, as well as
additional overhead costs as the headcount for the Company increased
approximately 14%.

Litigation Expenses. The Company incurred $220,000 and $427,000 of
litigation expenses in fiscal 1998 and 1997, respectively, primarily
in connection with the Company's patent litigation with AS&E and to a
lesser extent EG&G. See "Item 3. Legal Proceedings."

Interest Income. The Company recognized net interest income of
approximately $1.3 million in fiscal 1998 compared to net interest
income of $813,000 in fiscal 1997. The increase in fiscal 1998 was
primarily attributable to higher average cash balances resulting from
the receipt of proceeds from the Company's initial public offering in
fiscal 1997, and the generation of cash from operations in fiscal
1998.

Provision for Income Taxes. The Company's effective tax rate for
fiscal 1998 was 30% compared to 27% in fiscal 1996. The Company's
effective tax rate in fiscal 1998 was 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 and
Massachusetts securities corporation. The increase in the provision
for income taxes in fiscal 1998 is primarily attributable to
increased product sales in the United States, which offset the
benefit from the foreign sales corporation.

Fiscal Year Ended September 30, 1997 Compared to Fiscal Year Ended
September 30, 1996

Revenues. Revenues increased by approximately 104% to $31.7
million in fiscal 1997, from $15.6 million in fiscal 1996. This
increase in revenues primarily was the result of an increase in
product sales. The increase in product sales was primarily
attributable to the total number of product shipments to Europe as
well as the commencement of shipments to Chek Lap Kok Airport in Hong
Kong and shipments to Kuala Lumpur International Airport in Malaysia,
partially offset by slightly lower average selling prices of the
Company's products. During fiscal 1997, the Company shipped and
installed 76 units compared to 30 units in fiscal 1996.

Gross Margin. Gross margin increased to 58% of revenues in
fiscal 1997 compared to 56% of revenues in fiscal 1996. The increase
in gross margin in fiscal 1997 was primarily attributable to the
decrease, commencing in January 1997, in royalties due to Hologic for
the exclusive license of certain patents and technology from 5% to
3%, as well as decreased costs attributable to improved manufacturing
efficiencies recognized during the year. These decreases were
partially offset by lower average selling prices.

During the second half of fiscal 1996, the Company's product sales
consisted primarily of sales of the newly introduced VIS-M and VDS-II
as well as SDE upgrades. During fiscal 1997, the Company was able to
reduce certain component costs and achieve other manufacturing
efficiencies in the design of the VIS-M and VDS-II, which
substantially offset lower average selling prices. The Company also
had a significant increase in sales of upgrades, parts and
maintenance in fiscal 1997. During the third quarter of fiscal 1997
the Company began recognizing revenue under the $3.5 million FAA
research grant. This grant did not have a material impact on gross
margins during fiscal 1997.

Research and Development Expenses. Research and development
expenses increased by approximately 27% to $4.4 million (14% of
revenues) in fiscal 1997 from $3.5 million (22% of revenues) in
fiscal 1996. The increase in research and development expenses in
fiscal 1997 was primarily due to the addition of engineering
personnel and outside consultants working on the development of new
products and enhancements to existing products, including
enhancements to the Model APS system for carry-on baggage and the VIS-
M (Matrix configuration). Certain expenses in connection with the
development of the Company's next generation system have been
included in costs of goods sold in connection with the most recent
FAA research and development grant. As a percentage of revenues,
research and development expenses declined in the current year,
reflecting increased revenues in fiscal 1997.

Selling and Marketing Expenses. Selling and marketing expenses
increased approximately 155% to $3.6 million (11% of revenues) in
fiscal 1997 from $1.4 million (9% of revenues) in fiscal 1996. The
increase in selling and marketing expenses in fiscal 1997 primarily
was due to additional sales and support personnel, as a result of the
expansion of operations in Europe and the establishment of operations
in the Asia/Pacific region, the payment of commissions to sales
representatives in the Asia/Pacific region, and to a lesser extent an
increase in advertising, consulting, trade shows and related travel
costs.

General and Administrative Expenses. General and administrative
expenses increased approximately 93% to $2.9 million (9% of
revenues) in fiscal 1997 from $1.5 million (10% of revenues) in
fiscal 1996. The increase in general and administrative expenses in
fiscal 1997 was primarily attributable to an increase in personnel
and related costs (including non-recurring costs related to
relocation fees) as well as additional overhead costs as the
headcount for the Company increased approximately 42%.

Litigation Expenses. The Company incurred $427,000 and $1.2
million of litigation expenses in fiscal 1997 and 1996, respectively,
primarily in connection with the Company's patent litigation with
EG&G and to a lesser extent AS&E.

Interest Income. The Company recognized net interest income of
approximately $813,000 in fiscal 1997 compared to net interest income
of $8,000 in fiscal 1996. The increase in fiscal 1997 was primarily
attributable to higher average cash balances resulting from the
receipt of proceeds from the Company's initial public offering.

Provision for Income Taxes. The Company's effective tax rate for
fiscal 1997 was 27% compared to no provision for income taxes in
fiscal 1996. The Company's effective tax rate in fiscal 1997 was
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. The provision for income taxes in fiscal 1996 was
a result of the Company's recognition of a deferred tax asset, which
reflected management's determination, in accordance with the
Financial Accounting Standards Board's Statement of Financial
Accounting Standards ("SFAS") No. 109, that it was more likely than
not that this deferred tax asset would be utilized.

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, 1998, the Company had working capital of
$36.3 million, including approximately $26.0 million in cash and cash
equivalents and short-term investments. The Company also has a $5.0
million bank line of credit, which expires in February 1999. The
Company's bank line of credit bears interest at the bank's prime rate
(8.25% as of September 30, 1998). The line of credit is unsecured
and contains certain financial and other covenants. At September 30,
1998, the Company had no amounts outstanding under this line of
credit. See "Item 5. Market for Registrant's Common Equity and
Related Stockholder Matters" and "Item 13. Certain Relationships and
Related Transactions."

During the fiscal year ended September 30, 1998, the Company's net
cash provided by operating activities was approximately $8.3 million
and was comprised of net income adjusted for non-cash expenses
including depreciation and amortization totaling $7.4 million, a
decrease of $2.2 million in accounts receivable and an increase in
deferred revenue of $1.7 million offset by a $1.7 million increase in
inventories, an $850,000 million increase in other current assets and
a decrease of $724,000 in accounts payable. The increase in
inventories were primarily attributable to the Company's increased
product sales, the commercial introduction of the new Model APS
system, and initial production of the Model MVT.

During the fiscal year ended September 30, 1998, the Company's net
cash used in investing activities was approximately $4.9 million,
primarily reflecting the net purchase of approximately $2.8 million
of short-term investments. Cash used in investing activities also
included capital expenditures for fiscal 1998 of approximately
$840,000 and an increase of $1.3 million in other assets related to
the licensing of certain technologies. 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 the fiscal year ended September 30, 1998, net cash provided
by financing activities was $558,000, primarily attributable to
approximately $473,000 of proceeds from the exercise of stock options
and $85,000 from the exercise of stock purchase warrants.

The Company does not currently have any significant capital
commitments and believes that existing sources of liquidity,
including the net proceeds of its initial public offering, funds
expected to be generated from operations and its line of credit will
provide adequate cash to fund the Company's anticipated operational
and other cash needs through at least the next twelve months.
However, for a brief discussion of the factors that could adversely
affect the Company's financial position and results of operations,
see "Risk Factors."

Year 2000 Readiness Disclosure

The year 2000 issue is the potential for system and processing
failure of date-related data and the result of computer-controlled
systems using two digits rather than four to define the applicable
year. For example, computer programs that have time-sensitive
software may recognize a date using "00" as the year 1900 rather than
the year 2000. This could result in system failure or
miscalculations causing disruptions of operations, including, among
other things, a temporary inability to process transactions, send
invoices or engage in similar normal business activities.

The Company may be affected by year 2000 issues related to non-
compliant information technology ("IT") systems or non-IT systems
operated or sold by the Company or by third parties. The Company has
substantially completed assessment of its internal IT systems and non-
IT systems. The Company has tested all products internally and has
adopted a Year 2000 Qualification Test Procedure to ensure that all
products operate properly through the year 2000 and beyond. In
addition to internal testing the Company has received compliance
certificates from the FAA and BAA confirming that the Company's
existing products are year 2000 compliant. The Company has also
submitted a survey to all vendors subject to year 2000 compliance.
In addition to the survey, the Company has internally tested
components supplied by outside vendors. The Company has also
performed an internal review of in-house computers, network,
operating system and financial reporting package confirming year 2000
compliance. At this point in its assessment, the Company is not
currently aware of any year 2000 problems relating to systems
operated or sold by the Company that would have a material adverse
effect on the Company's business, results of operations or financial
condition.

Although the Company believes that its systems are year 2000
compliant, the Company utilizes third-party equipment and software
that may not be year 2000 compliant. In addition, the Company's
products and software are often sold to be integrated into or
interface with third party equipment or software. Failure of third-
party equipment or software to operate properly with regard to the
year 2000 and thereafter could require the Company to incur
unanticipated expenses to remedy any problems, which could have a
material adverse effect on the Company business, results of
operations and financial condition. The Company may also be
vulnerable to any failures by its major suppliers, service providers
and customers to remedy their own internal IT and non-IT system year
2000 issues which could, among other things, have a material and
adverse affect on the Company's supplies and orders. The Company is
unable to estimate the nature or extent of any potential adverse
impact resulting from the failure of third parties, such as its
suppliers, service providers and customers, to achieve year 2000
compliance. Moreover, such third parties, even if year 2000
compliant, could experience difficulties resulting from year 2000
issues that may affect their suppliers, service providers and
customers. As a result, although the Company does not currently
anticipate that it will experience any material shipment delays from
their major product suppliers or any material sales delays from its
major customers due to year 2000 issues, these third parties may
experience year 2000 problems. Any such problems could have a
material adverse effect on the Company's business, results of
operations and financial condition.

Other than its activities described above, the Company does not
have and does not plan to develop a contingency plan to address year
2000 issues. Should any unanticipated significant year 2000 issues
arise, the Company's failure to implement such a contingency plan
could have a material adverse affect on its business, financial
condition and results of operations.

To the extent that the Company does not identify any material non-
compliant IT systems or non-IT systems operated by the Company or by
third parties, such as the Company's suppliers, service providers and
customers, the most reasonably likely worst case year 2000 scenario
is a systemic failure beyond the control of the Company, such as a
prolonged telecommunications or electrical failure, or a general
disruption in United States or global business activities that could
result in a significant economic downturn. The Company believes that
the primary business risks, in the event of such failure or other
disruption, would include but not be limited to, loss of customers or
orders, increased operating costs, inability to obtain inventory on a
timely basis, disruptions in product shipments, or other business
interruptions of a material nature, as well as claims of
mismanagement, misrepresentation, or breach of contract, any of which
could have a material adverse effect on the Company's business,
results of operations and financial condition.

Recent Accounting Pronouncements

In June 1997, the FASB issued SFAS No. 130, Reporting
Comprehensive Income. SFAS No. 130 requires disclosure of all
components of comprehensive income on an annual and interim basis.
Comprehensive income is defined as the change in equity of a business
enterprise during a period from transactions and other events and
circumstances from nonowner sources. SFAS No. 130 is effective for
fiscal years beginning after December 15, 1997.

In July 1997, the FASB issued SFAS No. 131, Disclosures About
Segments of an Enterprise and Related Information. SFAS No. 131
requires certain financial and supplementary information to be
disclosed on an annual and interim basis for each reportable segment
of an enterprise, as defined. SFAS No. 131 is effective for fiscal
years beginning after December 15, 1997. Unless impracticable,
companies would be required to disclose similar prior period
information upon adoption.

In March 1998, the American Institute of Certified Public
Accountants (AICPA) issued Statement of Position (SOP) 98-1,
Accounting for the Costs of Computer Software Developed or Obtained
for Internal Use. SOP 98-1 requires computer software costs
associated with internal-use software to be charged to operations as
incurred until certain capitalization criteria are met. SOP 98-1 is
effective beginning January 1, 1999. The Company does not expect the
adoption of this statement to have a material impact on its
consolidated financial position or results of operations.

In June 1998, the FASB issued SFAS No. 133, Accounting for
Derivative Instruments and Hedging Activities. SFAS No. 133
establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in
other contracts (collectively referred to as derivatives) and for
hedging activities. SFAS No. 133 is effective for fiscal years
beginning after June 15, 1999. The Company does not expect the
adoption of this statement to have a material impact on its
consolidated financial position or results of operations.

Risk Factors

This Report 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 Report should be read as being applicable to all forward-
looking statements wherever they appear in this Report. 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 Report.

Customer Concentration. In fiscal 1996, 1997 and 1998, sales to
BAA accounted for approximately 79%, 39% and 42%, respectively, of
the Company's revenues. Additionally, in fiscal 1997 and 1998
Airport Authority Hong Kong accounted for 19% and 12%, respectively,
and Toyo Kanetsu K.K., the baggage-handling contractor for Malaysia's
Kuala Lumpur International Airport, accounted for 27% and 2%,
respectively, of the Company's revenues. In fiscal 1998, revenues
from the FAA constituted 16% of the Company's revenues. The BAA, the
Airport Authority Hong Kong and Toyo Kanetsue K.K., have either
completed or nearly completed deployment of checked baggage
explosives detection systems at their respective airports. As a
result, the Company expects that its revenues from these customers
will decrease and will become increasingly dependent upon sales of
upgrades, replacement equipment and services. Revenues from the FAA
included $2.7 million received under a research and development
contract which the Company substantially completed in fiscal 1998.
The inability of the Company to replace the revenue from these
projects would have a material adverse effect on the Company's
business, results of operations and financial condition.

Dependence on Government Regulation; FAA Certification; and FAA
Appropriations. 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. The Company cannot
assure 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.

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. A second CT based system from the same manufacturer was
certified in April 1998. A third CT-based system was certified by
the FAA in November 1998. None of the Company's systems have been
certified by the FAA. A prototype of the Company's recently
introduced MVT was submitted to the FAA for precertification
readiness testing and data collection. As of the filing date, the
MVT had not been through the FAA's official certification test. The
Company plans to make further refinements to the system before
proceeding to the formal certification testing. The Company cannot
assure that the MVT or any other products that may be developed by
the Company will ever meet the FAA or any other United States
certification standard. See "Item 1. Business-Regulation."

In October 1996, the United States enacted the Re-Authorization
Act, which included an allocation for the purchase of explosives
detection systems and other advanced security equipment by air
carriers and airport authorities. Utilizing this allocation, the FAA
has ordered initial quantities of the CT-based system, trace
detection systems and dual energy X-ray based systems, including
eight systems from the Company. In October 1998, Congress approved
and the president signed the fiscal 1999 budget, which includes $100
million for the purchase and installation of explosive detection
systems and other advanced security equipment. This level of funding
is consistent with the Gore Commission's recommendation that $100
million be spent annually for several years to upgrade the nation's
aviation security. However, any additional funding will be subject
to approval in future budgets. Included in the $100 million for
fiscal 1999 is a recommendation to purchase operator assist X-ray
systems for the screening of carry-on luggage. The FAA has
informally advised the Company that it expects to allocate these
funds in the beginning of calendar 1999. The FAA is not required to
allocate any funds to purchase the Company's systems. In the past,
the FAA's allocation of funds has favored those systems that have
received FAA certification. As a result, the failure of the Company
to have obtained FAA certification for the MVT by the time all or a
portion of the fiscal 1999 funds are allocated could have an adverse
effect on the number of Company systems that the FAA may order, if
any. The failure of the Company to obtain significant orders from
the FAA could have a material adverse effect on its business, results
of operations and financial condition.

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 and its competitors products, the timing of regulatory
approvals for the Company's systems and government initiatives to
promote the use of explosives detection systems such as those
manufactured and sold by the Company and economic conditions in the
Company's targeted markets. 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.

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. The Company cannot assure that the explosives detection
market will develop further or that the 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, results of operations 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.

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 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,
results of operations and financial condition.

Reliance on International Sales. . In fiscal 1996,1997 and 1998,
international sales accounted for approximately 95%, 97%, 78%,
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 particular, recent
economic instability in the Asia/Pacific region may further delay or
reduce airport capital projects in that region which could have a
material adverse effect on the Company's business, results of
operations and financial condition. 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. Moreover, the Company cannot assure that it 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. The Company on occasion has
hedged its foreign currency exposure by entering into forward foreign
exchange contracts to hedge against foreign currency fluctuations.
The Company's hedging efforts may not be successful, and other risks
associated with international sales and operations may have a
material adverse effect on the Company's business, results of
operations and financial condition.

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 is a risk that the
Company will not be successful in introducing products or product
enhancements, including products that meet FAA certification
standards, on a timely basis, if at all, and that the Company will
not 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. The
Company's products may 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 and
currently have systems in development. Two of the Company's
competitors has developed products based upon CT scanner technology
that was certified by the FAA. The FAA has certified none of the
Company's products. 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. The Company cannot assure that it will be able
to compete successfully with existing or new competitors.

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 five patents and has pending two
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 cannot assure that its unallowed
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,
foreign intellectual property laws may not 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. The Company may not 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,
Hologic could 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.

The Company was 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 is a risk that
EG&G will use the Company's technology in a manner that would
materially and adversely affect the Company's business, results of
operations and financial condition.

In May 1996, the Company commenced an action in the United States
District Court for the District of Massachusetts against AS&E seeking
a declaration that the Company does not infringe AS&E patents related
to back scattered X-rays. This followed AS&E's allegations of
infringement to third parties. No discovery has been taken to date.
Following a court decision in July 1997 construing the claims of the
AS&E patent, which decision the Company considers favorable, in
September 1997 the Company filed a motion for summary judgment of non-
infringement. AS&E has not yet filed its papers in opposition to the
Company's motion but is seeking discovery. If granted, the Company's
motion will resolve all issues remaining in the case in favor of the
Company. Earlier, in April 1997, the Court dismissed AS&E's proposed
counterclaim seeking to allege patent infringement, so that the only
remaining issue in the case is the Company's request for declaration
of non-infringement of two claims of a single AS&E patent. In April
1998, AS&E filed a motion in the Federal Court of Appeals for the
First Circuit to appeal this decision. This appeal is still pending.
Although the Company does not believe that it is infringing any valid
patent of AS&E, AS&E could make a new counterclaim in which it raises
more specific infringement allegations. Failure of the Company to
prevail in this litigation could have a material adverse effect on
the Company's business, results of operations and financial
condition.

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. The Company cannot assure that its
systems, procedures, and controls will be adequate to support the
Company's operations or that the Company will be able to successfully
integrate its new personnel. Failure to manage the Company's growth
properly could have a material adverse effect on the Company's
business, results of operations and financial condition.

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.
The Company may not be able to identify any appropriate acquisition
candidate. If the Company identifies an acquisition candidate, the
Company may not 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 working capital to consummate a potential acquisition.
Any acquisition, whether or not consummated, could have a material
adverse effect on the Company's business, results of operations 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.

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, the Company's products may not 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, results of operations 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. This insurance may be insufficient to
protect the Company from product liability claims. Moreover, there
is a risk that product liability insurance will not continue to be
available to the Company at a reasonable cost, if at all.

Euro Conversion. On January 1, 1999, 11 of the 15 member countries
of the European Union are scheduled to establish fixed conversion
rates between their existing sovereign currencies and the euro. As
of January 1, 2002, the transition to the euro will be complete. The
Company has operations within the European Union and is currently
preparing for the euro conversion. The issues that the Company is
addressing include analyzing exchange rate risk in cross boarder
transactions involving participating countries and assessing the
potential impact of increased price transparency. In addition, the
euro may impact general economic conditions such as interest and
foreign exchange rates within the participating countries or in other
areas where the Company operates, including the United Kingdom and
Switzerland. The Company is analyzing the impact of the euro with
view to minimize the effects on the Company's operations. The
Company does not expect the costs associated with this transition to
be material. The Company's functional currency for accounting
purposes is the U.S. Dollar. The overall effect of the transition to
the euro may have a material adverse affect on the Company's
business, financial condition and financial results.

Concentration of Ownership; Control by Management. As of December
14, 1998, the Company's executive officers, directors and their
affiliates and members of their immediate families beneficially owned
approximately 14% 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.

Antitakeover Provisions. The Company's Restated Certificate of
Incorporation contains certain provisions that may discourage bids
for the Company. On October 15, 1998 the Board of Directors of the
Company adopted a shareholder purchase rights plan and declared a
distribution of one Right for each outstanding share of the Company's
Common Stock. This could limit the price that certain investors might
be willing to pay in the future for shares of the Common Stock.

Volatility of Stock Price. The market price of the Common Stock
has been and may continue to be highly volatile. The Company
believes that a variety of factors could cause the price of the
Common Stock to fluctuate, perhaps substantially, including:
announcements of developments related to the Company's business,
including announcements of certification by the FAA or other
regulatory authorities of the Company's or its competitors products;
quarterly fluctuations in the Company's actual or anticipated
operating results and order levels; general conditions in the
worldwide economy; announcements of technological innovations; new
products or product enhancements by the Company or its competitors;
developments in patents or other intellectual property rights and
litigation; and developments in the Company's relationships with its
customers and suppliers. In addition, in recent years the stock
market in general and the markets for shares of small capitalization
and "high-tech" companies in particular, have experienced extreme
price fluctuations which have often been unrelated to the operating
performance of affected companies. Any such fluctuations in the
future could adversely affect the market price of the Common Stock
and the market price of the Common Stock may decline.

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

Foreign Exchange Hedging. The accounts of the foreign subsidiary,
Vivid Technologies UK Ltd., are translated in accordance with SFAS
No. 52, Foreign Currency Translation. In translating the accounts of
the foreign subsidiary into U.S. dollars, assets and liabilities are
translated at the rate of exchange in effect at year-end, while
stockholders' equity is translated at historical rates. Revenue and
expense accounts are translated using the weighted average exchange
rate in effect during the year. Foreign currency transaction gains
or losses for Vivid Technologies UK Ltd. are included in the
accompanying consolidated statements of operations since the
functional currency for this subsidiary is the U.S. dollar.

The Company had sales of approximately $8,044,000 and $6,804,000
denominated in foreign currencies during 1997 and 1998, respectively.
The Company recognized a loss of approximately $47,000 and a gain of
approximately $36,000, related to such foreign currency transactions
in 1997 and 1998, respectively, which is included in other income
(loss) in the accompanying consolidated statements of income.

During fiscal 1997, the Company entered into forward foreign
exchange contracts to hedge certain receivables denominated in a
foreign currency. The purpose of this hedging activity was to
protect the Company from the risk that dollar cash flows from such
receivables would be adversely affected by changes in exchange rates.
The Company does not engage in speculative hedging practices. As of
September 30, 1997, the Company had forward foreign exchange
contracts maturing through February 2, 1998 to purchase $5,393,000 in
Hong Kong dollars. In accordance with SFAS No. 105, the contract was
marked to market. At September 30, 1998, the Company had no exchange
contracts. Gains and losses on forward foreign exchange commitments
are deferred and recognized in revenue in the same period as the
hedged transactions. The net gain (loss) was not material in 1997 or
1998. See "Risk Factors-Reliance on International Sales" under Item
7, Management's Discussion and Analysis of Financial Condition and
Results of Operations.

Investment Portfolio. The Company does not use derivative
financial instruments that meet high credit quality standards, as
specified in the Company's investment policy guidelines; the policy
also limits the amount of credit exposure to any one issue, issuer,
and type of instrument. See "Note 1 - Operations and Significant
Accounting Policies" in the Consolidated Financial Statements.

Item 8. Financial Statements and Supplementary Data

The consolidated Financial Statements and Supplementary Data of the
Company are listed under Part IV, Item 14, in this Report.

Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure

Not applicable.

PART III

Item 10. Directors and Executive Officers of the Registrant

The information required by this Item 10 is hereby incorporated
by reference to the text appearing under Part I, Item 1 - Business
under the caption "Executive Officers of the Registrant" in this
Report, and by reference to the Company's definitive proxy statement
to be filed by the Company within 120 days after the close of its
fiscal year.

Item 11. Executive Compensation

The information required by this Item 11 is hereby incorporated
by reference to the information under the heading "Executive
Compensation" in the Company's definitive proxy statement to be filed
by the Company within 120 days after the close of its fiscal year.

Item 12. Security Ownership of Certain Beneficial Owners and
Management

The information required by this Item 12 is hereby incorporated
by reference to the information under the heading "Securities
Beneficially Owned by Directors, Officers and Principal Stockholders"
in the Company's definitive proxy statement to be filed by the
Company within 120 days after the close of its fiscal year.

Item 13. Certain Relationships and Related Transactions

The information required by this Item 13 is hereby incorporated
by reference to the information under the heading "Certain
Transactions," if any, in the Company's definitive proxy statement to
be filed by the Company within 120 days after the close of its fiscal
year.

PART IV

Item 14. Exhibits, Financial Statement Schedules, and Reports on
Form 8-K

(a) The following documents are filed as part of this report:

(1) Financial Statements
Page
Report of Independent Public Accountants F-1

Consolidated Balance Sheets as of September 30, 1997
and 1998 F-2

Consolidated Statements of Income for the years
ended September 30, 1996, 1997 and 1998 F-3

Consolidated Statements of Stockholders' Equity
for the years ended September 30, 1996, 1997 and 1998 F-4

Consolidated Statements of Cash Flows for the years ended
September 30, 1996, 1997 and 1998 F-5

Notes to Consolidated Financial Statements F-6

(2) Financial Statement Schedules

Supplemental schedules are not provided because of the absence
of conditions under which they are required or because the
required information is given in the financial statements or
notes thereto.

(3) Listing of Exhibits

Exhibit No. Reference

2.01 Merger Agreement between the Company A**
and the Company's Massachusetts
predecessor

3.01 Restated Certificate of Incorporation A**

3.02 By-laws of the Company A**

4.01 Specimen Certificate for shares of A**
the Company's Common Stock

4.02 Description of Capital Stock A**
(contained in the Restated
Certificate of Incorporation of the
Company, filed as Exhibit 3.01)

4.03 Description of Registration Rights A**
(contained in Exhibits 10.05, 10.11
and 10.13)

4.04 Rights Agreement between the C**
Registrant and American Stock
Transfer & Trust Company, as Rights
Agent, dated as of October 13, 1998

10.01 Contract for the Manufacture, Supply, A**
Installation and Commissioning of
Hold Baggage Screening Equipment
between the Company and BAA plc.

10.02 Distribution and Development A**
Agreement between the Company and
Gilardoni S.p.A.

10.02a Memorandum of Understanding between B**
Gilardoni S.p.A. and the Company

10.03 First Amended and Restated Line of A**
Credit Loan and Security Agreement
between the Company and BayBank, N.A.
and corresponding Note of the Company
in favor of BayBank, N.A.

10.04 Form of Warrant to purchase Common A**
Stock issued to certain investors.

10.05 Warrant to purchase Common Stock A**
issued to Dominion Fund II, L.P.

10.06 1989 Combination Stock Option Plan of A**
the Company*

10.07 1996 Non-Employee Director Stock A**
Option Plan of the Company*

10.08 1996 Equity Incentive Plan of the A**
Company*

10.09 Facility lease between the Company A**
and Cummings Properties Management,
Inc.

10.09a Facility lease between the Company Filed herewith
and Cummings Properties Management,
Inc.

10.10 Form of Indemnification Agreement for A**
directors and officers of the
Company*

10.11 Series A and Series B Preferred Stock A**
Purchase Agreement

10.12 Series C and Series D Preferred Stock A**
Purchase Agreement

10.13 Conversion Agreement between the A**
Company and certain investors

10.14 Amended Shareholder Agreement among A**
the Company's Massachusetts
predecessor, S. David Ellenbogen, Jay
A. Stein and certain investors

10.15 Management Services Agreement between A**
the Company and Hologic, Inc.*

10.16 License and Technology Agreement A**
between Company and Hologic, Inc.,
together with First Amendment to such
License and Technology Agreement

10.17 Description of Bonus Plan* A**

10.18 Demand Line of Credit Loan and B**
Security Agreement between the
Company and BankBoston, N.A. and
corresponding Note of the Company in
favor of BankBoston, N.A.

10.19 Amended and Restated Demand Line of Filed herewith
Credit Note

21.01 Subsidiaries of the Company A**

23.01 Consent of Arthur Andersen LLP Filed herewith

27.01 Financial Data Schedule Filed herewith
____________________

A Incorporated by reference to the Company's registration
statement on Form S-1 (Registration No. 333-14311). The number
set forth herein is the number of the Exhibit in said
registration statement.

B Incorporated by reference to the Company's Form 10-K for the
fiscal year ended September 30, 1997. The number set forth
herein is the number of the Exhibit in said Form 10-K.

C Incorporated by reference to the Company's Form 8-K dated
October 13, 1998 filed as exhibit number 4 therein.

* Management contract or compensatory plan or arrangement.

** In accordance with Rule 12b-32 under the Securities Exchange Act
of 1934, as amended, reference is made to the documents
previously filed with the Securities and Exchange Commission,
which documents are hereby incorporated by reference.

(b) REPORTS ON FORM 8-K

The Company did not file any current reports on Form 8-K during
the quarter ended September 30, 1998.

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Company has duly caused this
report to be signed on its behalf by the undersigned, thereunto duly
authorized.

VIVID TECHNOLOGIES, INC.

Dated: December 29, 1998 By: /s/ S. David Ellenbogen
S. David Ellenbogen
Chief Executive Officer

Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf
of the Company and in the capacities and on the dates indicated.

Signature Title Date

/s/ S. David Ellenbogen Director and Chief December 29, 1998
S. David Ellenbogen Executive Officer

/s/ William J. Frain Chief Financial December 29, 1998
William J. Frain Officer, Treasurer
and Principal
Accounting Officer

/s/ Jay A. Stein Director December 29, 1998
Jay A. Stein

/s/ L. Paul Bremer III Director December 29, 1998
L. Paul Bremer III

/s/ Frank Kenny Director December 29, 1998
Frank Kenny

/s/ Glenn P. Muir Director December 29, 1998
Glenn P. Muir

/s/ Gerald Segel Director December 29, 1998
Gerald Segel

Report of Independent Public Accountants

To Vivid Technologies, Inc.:

We have audited the accompanying consolidated balance sheets of
Vivid Technologies, Inc. (a Delaware corporation) and subsidiaries
as of September 30, 1997 and 1998, and the related consolidated
statements of income, stockholders' equity and cash flows for each
of the three years in the period ended September 30, 1998. 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 consolidated financial statements referred to
above present fairly, in all material respects, the financial
position of Vivid Technologies, Inc. and subsidiaries as of
September 30, 1997 and 1998, and the results of their operations
and their cash flows for each of the three years in the period
ended September 30, 1998, in conformity with generally accepted
accounting principles.

/s/ Arthur Andersen LLP

Boston, Massachusetts
November 3, 1998

VIVID TECHNOLOGIES, INC. AND SUBSIDIARIES

Consolidated Balance Sheets

September 30,
1997 1998
Assets
Current Assets:
Cash and cash equivalents $11,571,630 $15,555,189
Short-term investments 6,432,405 10,407,209
Accounts receivable 9,493,519 7,316,863
Inventories 6,195,096 7,874,036
Deferred tax asset 606,790 606,790
Other current assets 742,729 1,593,021

Total current assets 35,042,169 43,353,108

Property and Equipment, at cost:
Machinery and equipment 2,166,867 2,347,896
Equipment under capital leases 198,580 198,580
Leasehold improvements 165,995 228,374
Furniture and fixtures 84,462 129,479
2,615,904 2,904,329
Less-Accumulated depreciation and amortization 1,531,709 1,488,893
1,084,195 1,415,436

Other Assets, net 1,330,233 1,155,945

$37,456,597 $45,924,489

Liabilities and Stockholders' Equity

Current Liabilities:
Accounts payable $1,571,197 $ 846,457
Accrued expenses 2,418,431 2,766,268
Deferred revenue 1,755,788 3,411,864

Total current liabilities 5,745,416 7,024,589

Commitments and Contingencies (Note 9)

Stockholders' Equity:
Common stock, $.01 par value-
Authorized-30,000,000 shares
Issued and outstanding-9,496,684 and
9,904,666 shares in 1997 and 1998, respectively 94,967 99,047
Capital in excess of par value 26,190,785 26,745,142
Retained earnings 5,425,429 12,055,711

Total stockholders' equity 31,711,181 38,899,900

$37,456,597 $45,924,489

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

VIVID TECHNOLOGIES, INC. AND SUBSIDIARIES

Consolidated Statements of Income

Year Ended September 30,
1996 1997 1998

Revenues $15,578,326 $31,702,188 $38,718,041

Cost of Revenues (includes
approximately $775,000, $988,000 and
$1,014,000, respectively, of
royalties to Hologic; see Note 7) 6,899,433 13,202,925 16,360,872

Gross profit 8,678,893 18,499,263 22,357,169

Operating Expenses (includes
approximately $325,000, $112,000 and
$138,000, respectively, of
management service expenses to
Hologic; see Note 7):
Research and development 3,461,555 4,390,446 5,858,883
Selling and marketing 1,394,880 3,556,006 4,334,823
General and administrative 1,515,420 2,928,658 3,952,431
Litigation expenses 1,149,889 427,000 220,000

Total operating expenses 7,521,744 11,302,110 14,366,137

Income from Operations 1,157,149 7,197,153 7,991,032

Interest Income 7,615 812,926 1,270,759

Other Income, net -- 48,834 206,880

Income before income taxes 1,164,764 8,058,913 9,468,671

Provision for Income Taxes -- 2,193,335 2,838,389

Net income $1,164,764 $5,865,578 $6,630,282

Net Income per Share:
Basic $ .69 $ .78 $ .68
Diluted $ .15 $ .60 $ .65

Weighted Average Number of
Shares Outstanding:
Basic 1,682,109 7,547,964 9,684,975
Diluted 7,868,853 9,838,300 10,251,429

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

VIVID TECHNOLOGIES, INC. AND SUBSIDIARIES
<TABLE>
Consolidated Statements of Stockholders' Equity

<CAPTION>
Series B Series D
Convertible Convertible
Preferred Preferred
Stock Stock Common Stock
Number $.01 Number $.01 Number $.01 Capital in Retained
of Par of Par of Par Excess of Earnings
Shares Value Shares Value Shares Value Par Value (Deficit) Total

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
Exercise of stock
options, including
tax benefit of
$659,194 -- -- -- -- 333,800 3,338 809,231 -- 812,569
Exercise of stock
purchase warrants -- -- -- -- 76,514 765 32,195 -- 32,960
Conversion of - -
preferred stock
into common stock (250,000) (2,500) (254,585) (2,546) 5,045,850 50,459 (45,413) -- --
Sale of common
stock, net of
issuance costs
of approximately
$2,777,000 -- -- -- -- 2,300,000 23,000 24,800,493 -- 24,823,493
Net income -- -- -- -- -- -- -- 5,865,578 5,865,578

Balance,
September 30, 1997 -- -- -- -- 9,496,684 94,967 26,190,785 5,425,429 31,711,181
Exercise of stock
options, including
tax benefit of
$247,617 -- -- -- -- 159,110 1,591 472,090 -- 472,681
Exercise of stock
purchase warrants -- -- -- -- 248,872 2,489 82,267 -- 84,756
Net income -- -- -- -- -- -- -- 6,630,282 6,630,282

Balance,
September 30, 1998 -- -- -- -- 9,904,666 99,047 26,745,142 12,055,711 38,899,900
</TABLE>

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

VIVID TECHNOLOGIES, INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows

Year Ended September 30,
1996 1997 1998

Cash Flows from Operating Activities:
Net income $1,164,764 $5,865,578 $6,630,282
Adjustments to reconcile net income
to net cash provided by (used in)
operating activities-
Depreciation and amortization 344,894 441,072 759,420
Issuance of common stock for services 45,000 -- --
Changes in assets and liabilities-
Accounts receivable (2,552,354) (5,773,041) 2,176,656
Inventories (1,557,190) (1,453,438) (1,678,940)
Deferred tax asset (181,000) (425,790) --
Other current assets (387,520) (297,827) (850,292)
Accounts payable 767,303 72,957 (724,740)
Accrued expenses 1,156,031 (1,014,483) 347,837
Deferred revenue 1,042,085 713,703 1,656,076

Net cash (used in) provided by
operating activities (157,987) (1,871,269) 8,316,299
Cash Flows from Investing Activities:
Purchase of property and equipment (427,053) (533,034) (836,893)
Purchases of investments -- (11,650,261) (12,384,948)
Maturities of investments -- 3,999,000 9,629,000
(Increase) decrease in other assets (37,581) 109,620 (1,298,336)

Net cash used in investing activities (464,634) (8,074,675) (4,891,177)

Cash Flows from Financing Activities:
Net proceeds from sale of common stock -- 24,823,493 --
Proceeds from exercise of stock
purchase warrants -- 32,960 84,756
Redemption of Series A and Series C
preferred stock -- (5,780,650) --
Proceeds from exercise of stock
options (including tax benefit) 11,395 812,569 473,681
Payments on capital lease obligations (161,962) (32,522) --
Deferred financing costs (127,000) -- --

Net cash provided by (used in)
financing activities (277,567) 19,855,850 558,437

Net (Decrease) Increase in Cash and
Cash Equivalents (900,188) 9,909,906 3,983,559

Cash and Cash Equivalents, beginning
of year 2,561,912 1,661,724 11,571,630

Cash and Cash Equivalents, end
of year $1,661,724 11,571,630 15,555,189

Supplemental Disclosure of Cash Flow Information:
Cash paid during the year for-
Interest $53,001 $2,040 --
Income taxes $351,000 $1,772,500 $2,325,033

Supplemental Disclosure of Noncash
Investing and Financing Activities:
Assets acquired under capital leases $198,850 $ -- $ --
Conversion of Series B and D preferred
stock into common stock $ -- $5,045,850 $ --

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

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 that
detect plastic and other explosives in airline baggage.

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

(a)Principles of Consolidation

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

(b)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
accrues for estimated installation costs, in addition to
estimated warranty costs, at the time of shipment. The
Company recognizes revenue from the sale of extended
warranty agreements ratably over the extended warranty
period.

During fiscal 1996, 1997 and 1998, the Company recognized
revenue of approximately $716,000, $821,000 and $2,699,000,
respectively, under two separate research and development
grants from an agency of the U.S. government to pursue
certain explosives detection research. The Company
recognizes revenue under these grants as services are
rendered, provided that the government has appropriated
sufficient funds for the work. The Company retains rights
to all technological discoveries and products resulting from
these efforts.

Deferred revenue represents amounts received from customers
for products and services in advance of revenue recognition.

(c)Cash and Cash Equivalents and Investments

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. In accordance with SFAS No. 115, investments
that 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. The Company has deemed all of its investments
to be held-to-maturity, which total approximately
$18,371,000 and $25,477,000 at September 30, 1997 and 1998,
respectively.
Cash equivalents are highly liquid investments with original
maturities of three months or less at the time of
acquisition. As of September 30, 1997 and 1998, there was
approximately $10,720,000 and $15,070,000, respectively, in
cash equivalents consisting of funds held in money market
accounts, certificates of deposit, municipal bonds and
repurchase agreements with overnight maturities. Short-term
investments have maturities of greater than three months but
less than one year. Investments with maturities of greater
than one year have been classified as long-term investments.
As of September 30, 1997, the Company had long-term
investments of approximately $1,219,000 consisting of
commercial paper, with an average maturity period of 15
months. As of September 30, 1998 the Company had no long-
term investments.

(d)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, investments and trade accounts receivable. The
Company places its investments in several financial
institutions. The Company has not experienced any material
losses on these investments to date. The Company has not
experienced any material losses related to receivables from
individual customers or groups of customers, from any
geographic region or in the baggage security and inspection
industry.

During fiscal 1997, the Company entered into forward foreign
exchange contracts to hedge certain receivables denominated
in a foreign currency. The purpose of this hedging activity
was to protect the Company from the risk that dollar cash
flows from such receivables would be adversely affected by
changes in exchange rates. The Company does not engage in
speculative hedging practices. As of September 30, 1997,
the Company had forward foreign exchange contracts maturing
through February 2, 1998 to purchase $5,393,000 in Hong Kong
dollars. In accordance with SFAS No. 105, the contract was
marked to market. At September 30, 1998, the Company had no
exchange contracts. Gains and losses on forward foreign
exchange commitments are deferred and recognized in revenue
in the same period as the hedged transactions. The net gain
(loss) was not material in 1997 or 1998.

The Company received greater than 10% of total revenues from
the following customers during the years ended September 30,
1996, 1997 and 1998:

September 30,
Customer 1996 1997 1998

A 79% 39% 42%
B * 19 12
C * 27 *
D * * 16

*Revenues derived from these customers were less than 10% of the
Company's total.

The Company had accounts receivable balances greater than
10% of total accounts receivable from the following
customers as of September 30, 1997 and 1998:

September 30,
Customer 1997 1998

A * 26%
B 61% *
C 12 *
D * *
E 15 19
F * 11
G * 19

*Accounts receivable balances from these customers were less than
10% of the Company's total.

(e)Disclosure of Fair Value of Financial Instruments

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

(f) Translation of Foreign Currencies

The accounts of the foreign subsidiary are translated in
accordance with SFAS No. 52, Foreign Currency Translation.
In translating the accounts of the foreign subsidiary into
U.S. dollars, assets and liabilities are translated at the
rate of exchange in effect at year-end, while stockholders'
equity is translated at historical rates. Revenue and
expense accounts are translated using the weighted average
exchange rate in effect during the year. Foreign currency
transaction gains or losses for Vivid Technologies UK Ltd.
are included in the accompanying consolidated statements of
operations since the functional currency for this subsidiary
is the U.S. dollar.

The Company had sales of approximately $8,044,000 and
$6,804,000 denominated in foreign currencies during 1997 and
1998, respectively. The Company recognized a loss of
approximately $47,000 and a gain of approximately $36,000,
related to such foreign currency transactions in 1997 and
1998, respectively, which is included in other income (loss)
in the accompanying consolidated statements of income.

(g)Inventories

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

September 30,
1997 1998

Raw materials $3,175,211 $4,061,775
Work-in-process 1,743,746 1,440,435
Finished goods 1,276,139 2,371,826

$6,195,096 $7,874,036

Finished goods and work-in-process inventories consist of
materials, labor and overhead.

(h)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:

Assets Estimated
Classification Useful Life

Machinery and equipment 5 years
Equipment under capital leases Life of lease
Leasehold improvements Life of lease
Furniture and fixtures 7 years

(i)Other Assets

During 1998, the Company entered into an exclusive
technology license agreement. Under the agreement, the
Company paid $1,250,000 for the exclusive right to
manufacture, use or sell the licensed technology for a three-
year period, with a nonexclusive right for the remainder of
the life of the patents. The Company also has the option to
extend the exclusive rights beyond three years. Upon the
ultimate commercialization of the technology, the Company
will be required to pay royalties on sales of products
incorporating the licensed technology, as defined. The
license fee is included in other assets in the accompanying
consolidated balance sheets and is being amortized over a
period of five years. At September 30, 1998, the Company
has recorded accumulated amortization of approximately
$250,000 related to this asset.

Other assets also consists of long-term investments,
deposits and patent costs, which are being amortized over 10
years using the straight-line method. The Company
periodically assesses the realizability of long-lived
assets, including intangible assets such as patent costs and
license fees, 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.

(j)Net Income per Share

In March 1997, the Financial Accounting Standards Board
(FASB) issued SFAS No. 128, Earnings per Share. This
statement established standards for computing and presenting
earnings per share and applies to entities with publicly
traded common stock or potential common stock. In February
1998, the Securities and Exchange Commission (SEC) issued
Staff Accounting Bulletin (SAB) No. 98. This bulletin
revises the SEC's guidance for calculating earnings per
share with respect to equity security issuances before an
initial public offering (IPO). These statements are
effective for fiscal years ending after December 15, 1997.
The prior years' earnings per share have been retroactively
restated to reflect the adoption of SFAS No. 128 and SAB No.
98.

Basic net income per share was determined by dividing net
income by the weighted average common shares outstanding
during the period. Diluted net income per share was
determined by dividing net income by diluted weighted
average shares outstanding. Diluted weighted average shares
reflects the dilutive effect, if any, of potential common
stock. Potential common stock includes common stock
options, warrants to purchase common stock and convertible
preferred stock to the extent their effect is dilutive.
Nominal issuances arise when a registrant issues common
stock, options or warrants to purchase common stock or other
potentially dilutive instruments for nominal consideration,
as defined by SAB No. 98, in the periods preceding an IPO.
During the period preceding the Company's IPO, the Company
did not have any nominal issuances.

The calculations of basic and diluted weighted average
shares outstanding are as follows:

Year Ended September 30,
1996 1997 1998

Basic weighted average shares outstanding 1,682,109 7,547,964 9,684,975

Weighted average potential common stock 6,186,744 2,290,336 566,454

Diluted weighted average shares
outstanding 7,868,853 9,838,300 10,251,429

Diluted weighted average shares outstanding do not include
113,726 and 503,347 common equivalent shares for the years
ended September 30, 1997 and 1998, respectively, as their
effect would be antidilutive.

(k)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. The Company is subject
to risks and uncertainties, in particular, dependence on key
customers and international sales, rapid technological
change, dependence on government regulations and significant
fluctuations and unpredictability of operating results.

(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)New Accounting Standards

In June 1997, the FASB issued SFAS No. 130, Reporting
Comprehensive Income. SFAS No. 130 requires disclosure of
all components of comprehensive income on an annual and
interim basis. Comprehensive income is defined as the
change in equity of a business enterprise during a period
from transactions and other events and circumstances from
nonowner sources. SFAS No. 130 is effective for fiscal
years beginning after December 15, 1997.

In July 1997, the FASB issued SFAS No. 131, Disclosures
About Segments of an Enterprise and Related Information.
SFAS No. 131 requires certain financial and supplementary
information to be disclosed on an annual and interim basis
for each reportable segment of an enterprise, as defined.
SFAS No. 131 is effective for fiscal years beginning after
December 15, 1997. Unless impracticable, companies would be
required to disclose similar prior period information upon
adoption.

In March 1998, the American Institute of Certified Public
Accountants (AICPA) issued Statement of Position (SOP) 98-1,
Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use. SOP 98-1 requires computer
software costs associated with internal-use software to be
charged to operations as incurred until certain
capitalization criteria are met. SOP 98-1 is effective
beginning January 1, 1999. The Company does not expect the
adoption of this statement to have a material impact on its
consolidated financial position or results of operations.

In April 1998, the AICPA issued SOP 98-5, Reporting on the
Costs of Start-Up Activities. SOP 98-5 provides guidance on
the financial reporting of start-up costs and organization
costs. It requires costs of start-up activities and
organization costs to be expensed as incurred. This SOP is
effective for financial statements for fiscal years
beginning after December 15, 1998. Initial application of
this SOP will require that the Company take a one-time
charge for any capitalized start-up or organization costs
remaining on the balance sheet. The Company does not expect
the adoption of this statement to have a material impact on
its consolidated financial position or results of
operations.

In June 1998, the FASB issued SFAS No. 133, Accounting for
Derivative Instruments and Hedging Activities. SFAS No. 133
establishes accounting and reporting standards for
derivative instruments, including certain derivative
instruments embedded in other contracts (collectively
referred to as derivatives) and for hedging activities.
SFAS No. 133 is effective for fiscal years beginning after
June 15, 1999. The Company does not expect the adoption of
this statement to have a material impact on its consolidated
financial position or results of operations.

(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:

September 30,
1997 1998

Research and development credit carryforwards $32,000 $32,000
Nondeductible accruals 27,000 331,000
Nondeductible reserves 543,000 223,000
Other temporary differences 4,790 20,790

Net deferred tax asset $606,790 $606,790

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.

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

September 30,
1996 1997 1998

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 8.1 3.2 1.9
Foreign sales corporation benefit (7.5) (5.0) (3.5)
Foreign net operating losses not benefited 4.1 -- --
Reduction in valuation allowance (15.5) (1.2) --
Research and development tax credit utilized (24.1) (3.8) (3.3)
Other 0.9 (0.2) 0.9

Effective tax rate --% 27.0% 30.0%

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

September 30,
1996 1997 1998
Federal-
Current $179,000 $2,173,335 2,767,389
Deferred (179,000) (224,000) --

-- 1,949,335 2,767,389
State-
Current 2,000 271,000 71,000
Deferred (2,000) (27,000) --

-- 244,000 71,000

$ -- $2,193,335 $2,838,389

(3) Line of Credit

The Company has an unsecured demand line of credit with a bank
for $5,000,000. Borrowings under the line are available
through February 28, 1999 and bear interest at one of several
interest rates, including the bank's prime rate (8.25% at
September 30, 1998) and a LIBOR index rate. There were no
amounts outstanding under this line at September 30, 1997 and
1998.

(4) Redeemable Preferred Stock

The Company had previously authorized 578,065 shares of
redeemable preferred stock, par value $.01 per share, of which
234,375 shares and 343,690 shares had been designated as Series
A and Series C redeemable preferred stock, respectively. In
connection with the Company's initial public offering during
1997, the Company redeemed all outstanding shares of Series A
and Series C redeemable preferred stock for approximately
$5,781,000, which represents a redemption value of $10.00 per
share.

(5) Stockholders' Equity

(a) Preferred Stock

In December 1996, the Company's Board of Directors
authorized the issuance of up to 1,000,000 shares of
undesignated $.01 par value preferred stock, the rights and
privileges of which are to be determined by the Company's
Board of Directors. The Series A, B, C and D preferred
stock were retired in connection with the Company's initial
public offering (see Note 5(b) and (c)). There are no
preferred shares outstanding as of September 30, 1997 or
1998.

(b) Series B and D Convertible Preferred Stock

The Company had previously authorized 504,585 shares of
convertible preferred stock, par value $.01 per share, of
which 250,000 shares and 254,585 shares had been designated
as Series B and Series D convertible preferred stock,
respectively. In connection with the Company's initial
public offering in fiscal 1997, all shares of Series B and
Series D convertible preferred stock were converted into an
aggregate 5,045,850 shares of common stock.

(c)Initial Public Offering

During fiscal 1997, the Company completed its initial public
offering of 2,300,000 shares of the Company's common stock
at $12.00 per share. The Company received net proceeds of
approximately $24,823,000 after deducting the underwriters'
commission and issuance costs. The Company used
approximately $5,781,000 of the net proceeds to redeem all
of its outstanding shares of redeemable Series A and Series
C preferred stock. In connection with the initial public
offering, all of the Company's Series B and Series D
preferred stock was converted into an aggregate of 5,045,850
shares of common stock.

(d)Common Stock

The Company has authorized 30,000,000 shares of $.01 par
value common stock. The Company has reserved the following
number of common shares as of September 30, 1998:

Exercise of stock purchase warrants 53,678
Exercise of stock options 1,406,570
1,460,248

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

(e)Stock Plans

1989 Combination Stock Option Plan

The Company's 1989 Combination Stock Option Plan (the 1989
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.
Under the 1989 Plan, the Company has reserved shares for
the granting of options to purchase up to 1,250,000 shares
of the Company's common stock.

The 1996 Equity Incentive Plan

In October 1996, the Company approved the 1996 Equity
Incentive Plan (the Equity Plan) for which the Company
reserved shares for the granting of options to purchase up
to 750,000 shares of the Company's common stock.

The 1996 Nonemployee Director Stock Option Plan

In October 1996, the Company approved the 1996 Nonemployee
Director Stock Option Plan (the Director Plan) for which
the Company has reserved shares for the granting of
options to purchase up to 125,000 shares of the Company's
common stock.

As of September 30, 1998, there were 595,220 options
available for future grants under all plans. A summary of
stock option activity under all plans is as follows:

Shares Price per Weighted
Share Average
Exercise
Price

Outstanding, September 30, 1995 757,420 $ .10-1.00 $ .46
Granted 157,750 1.00-3.00 2.22
Exercised (51,170) .10-1.00 .85
Terminated (7,100) .50-1.00 .87

Outstanding, September 30, 1996 856,900 .10-3.00 .78
Granted 386,050 9.50-17.00 14.27
Exercised (333,800) .10-3.00 .46
Terminated (20,450) .50-3.00 1.15

Outstanding, September 30, 1997 888,700 .10-17.00 6.75
Granted 225,950 .01-14.88 12.77
Exercised (159,110) .01-11.00 .60
Terminated (148,890) .50-16.75 11.08

Outstanding, September 30, 1998 806,650 $ .10-17.00 $ 8.85

Exercisable, September 30, 1998 276,580 $ .10-17.00 $ 4.33

During fiscal 1998, the Company issued an option to purchase 10,000
shares of common stock to an employee at a price below fair market.
All other options were issued at the fair market value at the grant
date. The Company recorded the difference between the grant price
and fair market value in the statement of income.

The range of exercise prices for options outstanding and options
exercisable at September 30, 1998 are as follows:

Options Outstanding Options Exercisable
Range of Weighted Number Weighted Number Weighted
Exercise Average Average Average
Price Remaining Exercise Exercise
Contractual Price Price
Life
(in years)

$0.10-$1.00 4.7 269,600 $ 0.61 184,050 $ 0.48
$3.00-$9.50 8.0 105,300 4.77 32,940 4.31
$10.75-$15.50 9.1 213,900 13.71 5,940 14.71
$15.88-$17.00 8.5 217,850 16.25 53,650 16.38

Total 7.33 806,650 $ 8.85 276,580 $ 4.33

The Company accounts for its stock-based compensation plans under
Accounting Principles Board Opinion No. 25, Accounting for Stock
Issued to Employees. In October 1995, the FASB issued SFAS No.
123, Accounting for Stock-Based Compensation, which established a
fair-value-based method of accounting for stock-based compensation
plans. The Company has adopted the disclosure-only alternative
under SFAS No. 123 which requires disclosure of the pro forma
effects on net income and earnings per share as if SFAS No. 123 had
been adopted, as well as certain other information.

The Company has computed the pro forma disclosures required under
SFAS No. 123 for all stock options and warrants granted to
employees of the Company in fiscal 1996, 1997 and 1998 using the
Black Scholes option pricing model prescribed by SFAS No. 123. The
assumptions used to calculate the SFAS No. 123 pro forma disclosure
and the weighted average information for 1996, 1997 and 1998 are as
follows:

Year Ended September 30,
1996 1997 1998

Risk-free interest rate 6.04% 6.01% 5.52%
Expected dividend yield -- -- --
Expected lives (in years) 4.7 4.9 4.7
Expected volatility 53% 52% 67%
Weighted-average grant date
fair value of options
granted during the year $1.10 $7.16 $8.08

The pro forma effect of applying SFAS No. 123 for all options and
granted to employees of the Company in 1996, 1997 and 1998 would be
as follows:

Year Ended September 30,
1996 1997 1998

Net Income-
As reported $1,164,764 $5,865,578 $6,630,282
Pro forma 1,125,371 5,104,357 5,382,540

Net income per share-
Basic-
As reported $0.69 $0.78 $0.68
Pro forma 0.67 0.68 0.56
Diluted-
As reported $0.15 $0.60 $0.65
Pro forma 0.14 0.52 0.53

The resulting pro forma compensation expense may not be
representative of the amount to be expected in future years,
as the pro forma expense may vary based on the number of
options granted. The Black-Scholes option pricing model was
developed for use in estimating the fair value of traded
options that have no vesting restrictions and are fully
transferable. In addition, option pricing models require the
input of highly subjective assumptions, including expected
stock price volatility. Because the Company's employee
stock options have characteristics significantly different
from those of traded options and because changes in the
subjective input assumptions can materially affect the fair
value estimate, in management's opinion, the existing models
do not necessarily provide a reliable single measure of the
fair value of its employee stock options.

(f)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. This stock
purchase warrant was exercised during fiscal 1997, resulting
in a net issuance of 39,789 shares of common stock.

In conjunction with the issuance of certain convertible
notes in fiscal 1993, the Company sold, at nominal value,
warrants to purchase 361,002 shares of the Company's common
stock for $1.50 per share. The warrants expire in December
2001. During fiscal 1997 and 1998, warrants to purchase
37,792 and 269,530 shares, respectively, were exercised
resulting in the net issuance of 36,725 and 248,872 shares
of common stock, respectively.

(g)Shareholder Purchase Rights Plan

In October 1998, the Company's Board of Directors adopted a
Shareholder Protection Rights Plan declaring a dividend of
one right for each share of the Company's common stock
outstanding at the close of business on October 27, 1998.
The rights entitle the Company's shareholders to purchase
one one-thousandth of a share of a series of junior
participating preferred stock of the Company at an exercise
price of $60.00, subject to adjustment. The rights will not
be exercisable until a subsequent distribution date which
will occur if a person or group acquires beneficial
ownership of 15% or more of the Company's common stock or
announces a tender or exchange offer that would result in a
group owning 15% or more of the Company's common stock.
Subject to certain limited exceptions, if a person or group
acquires beneficial ownership of 15% or more of the
Company's outstanding common stock, each holder of a right
(other than the 15% holder whose rights become void once
such holder reaches the 15% threshold) will thereafter have
a right to purchase, upon payment of the purchase price of
the right, that number of shares of the Corporation's common
stock, which at the time of such transaction will have a
market value equal to two times the purchase price of the
right. In the event that, at any time after a person or
group acquires 15% or more of the Company's common stock,
the Company is acquired in a merger or other business
combination transaction of 50% or more of its consolidated
assets or earning power are sold, each holder of a right
will thereafter have the right to purchase, upon payment of
the purchase price of the right, that number of shares of
common stock of the acquiring company which at the time of
such transaction will have a market value of two times the
purchase price of the right. The Board of Directors of the
Company may exchange the rights (other than rights owned by
such person or group which have become void), in whole or in
part, at an exchange ratio of one share of common stock per
right (subject to adjustment). At any time prior to the
time any person or group acquires 15% or more of the
Company's common stock, the Board of Directors of the
Company may redeem the rights in whole, but not in part, at
a price of $0.001 per right. The rights will expire on
October 13, 2008 unless earlier redeemed or exchanged.

(6) Geographical Sales Data

A summary of the Company's revenues by geographic region is as
follows:

September 30,
1996 1997 1998

Europe 95.0% 51.5% 57.3%
United States 4.6 2.6 22.5
Asia 0.3 45.7 14.3
Middle East -- -- 5.9
Other 0.1 0.2 --

Total 100% 100% 100%

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

(7) 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 $325,000, $112,000 and $138,000 in fiscal
1996, 1997 and 1998, respectively. Approximately $20,000
and $27,000 had not been paid as of September 30, 1997 and
1998, respectively, under the management services agreement.

(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 revenues up
to $200 million, with no royalty payments on aggregate
revenues in excess of $200 million. During 1997, the
Company reduced its royalty payments to 3% under the
Exclusive License upon achievement of cumulative revenues in
excess of $50 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 1996, 1997 and 1998, the
Company incurred royalty expenses under the Exclusive
License of approximately $775,000, $988,000 and $1,014,000,
respectively, of which approximately $753,000 and $504,000
had not been paid as of September 30, 1997 and 1998,
respectively. To date, the Company has not incurred any
royalty expenses under the Nonexclusive License.

(8) 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 $65,000, $74,000 and
$133,000 as a provision for profit-sharing contribution for
fiscal 1996, 1997 and 1998, respectively.

(9) Commitments and Contingencies

(a)Operating Leases

The Company is renting the facilities under operating leases
which expire through February 2003. The Company's future
minimum lease payments under all operating leases as of
September 30, 1998 are as follows:

Year Amount

1999 $553,000
2000 688,000
2001 331,000
2002 262,000
2003 207,000

$2,041,000

Rent expense charged to operations for fiscal 1996, 1997 and
1998 was approximately $302,000, $438,000 and $525,000,
respectively.

(b)Patent Infringement Claims

Litigation expense in the accompanying statements of income
represents costs incurred related to certain patent
infringement claims which have been settled or dismissed as
of September 30, 1998. From time to time, the Company is
party to various types of litigation. The Company believes
it has meritorious defenses to all claims, and in its
opinion, all litigation currently pending or threatened will
not have a material effect on the Company's financial
position or results of operations.

(c)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, 1997 and 1998, the Company incurred approximately
$28,000, $97,000 and $112,000, respectively, of royalty
expense related to this agreement.

(d)Joint Development and Royalty Agreement

During fiscal 1997, the Company entered into a joint
development and royalty agreement for the development of
certain explosives detection technology. Under the terms of
the agreement, the Company is required to pay a royalty of
$3,000 per unit sold of the developed product, as defined.
During 1998, the Company prepaid royalties in the amount of
approximately $500,000, which are being amortized as the
royalties are incurred. At September 30, 1998,
approximately $414,000 of prepaid royalties are included in
other current assets in the accompanying consolidated
balance sheets. For the year ended September 30, 1998, the
Company incurred $87,000 in royalty expenses. No royalty
expenses were incurred for the year ended September 30,
1997.

(10) Accrued Expenses

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

September 30,
1997 1998

Payroll and payroll-related $601,959 $907,959
Accrued warranty 798,000 798,000
Accrued royalties 789,684 537,782
Accrued legal 75,954 50,323
Other 152,834 79,564
Accrued taxes -- 392,640
$2,418,431 $2,766,268

CUMMINGS PROPERITES MANAGEMENT, INC.
STANDARD FORM
COMMERCIAL LEASE
698351-WFD

In consideration of the covenants herein contained, Cummings
Properties Management, Inc., hereinafter called LESSOR, does hereby
lease to Vivid Technologies, Inc. (a MA corp.), 10-E Commerce Way,
Woburn, MA 01801 hereinafter called LESSEE, the following described
premises, hereinafter called the leased premises: approximately
18,462 square feet at 10-I Commerce Way, Woburn, MA 01801

TO HAVE AND HOLD the leased premises for a term of five (5) years
commencing at noon on July 1, 1998 and ending at noon on June 30,
2003 unless sooner terminated as herein provided. LESSOR and
LESSEE now covenant and agree that the following terms and
conditions shall govern this lease during the term hereof and for
such further time as LESSEE shall hold the leased premises.

1. RENT. LESEE shall pay to LESSOR based rat at the rate of two
hundred seventy six thousand six (276,006.00) U.S. dollars per
year, drawn on a U.S. bank, payable in advance in monthly
installments of $23,000.50 on the first day in each calendar month
in advance, the first monthly payment to be made upon LESSEE's
execution of this lease, including payment in advance of
appropriate fractions of a monthly payment for any portion of a
month at the commencement or end of said lease term. All payments
shall be made to LESSOR or agent at 200 West Cummings Park Woburn,
Massachusetts 01801, or at such other place, as LESSOR shall from
time to time in writing designate. If the "Cost of Living" has
increased as shown by the Consumer Price Index (Boston,
Massachusetts, all items, all urban consumers), U.S. Bureau of
Labor Statistics, the amount of base rent due during each calendar
year of this lease and any extensions thereof shall be annually
adjusted in proportion to any increase in the Index. All such
adjustments shall take place with the rent due on January 1 of each
year during the lease term. The base month from which to determine
the amount of each increase in the Index shall be January 1998,
which figure shall be compared with the figure for November 1998,
and each November thereafter to determine the percentage increase
(if any) in the base rent to be paid during the following calendar
year. In the event that the Consumer Price Index as presently
computed is discontinued as a measure of "Cost of Living" changes,
any adjustments shall then be made on the basis of a comparable
index then in general use.

2. SECURITY DEPOSIT. LESSEE shall pay to LESSOR a security
deposit in the amount of forty six thousand (46,000.00) U.S.
dollars upon the execution of this lease by LESSEE, which shall be
held as security for LESSEE's performance as herein provided and
refunded to LESSEE without interest at the end of this lease,
subject to LESSEE's satisfactory compliance with the conditions
hereof. LESSEE may not apply the security deposit to payment of the
last month's rent. In the event of any default or breach of this
lease by LESSEE, LESSOR may immediately apply the security deposit
first to offset any outstanding invoice or other payment due to
LESSOR, with the balance applied to outstanding rent. If all or
any portion of the security deposit is applied to cure a default or
breach during the term of the lease, LESSEE shall be responsible
for restoring said deposit forthwith, and failure to do so shall be
considered a substantial default under the lease. LESSEE's failure
to remit the full security deposit or any portion thereof when due
shall also constitute a substantial lease default. Until such time
as LESSEE pays the security deposit and first month's rent, LESSOR
may declare this lease null and void for failure of consideration.

3. USE OF PREMISES. LESSEE shall use the leased premises only
for the purpose of executive and administrative offices, electronic
research and development, and light manufacturing.

4. ADDITIONAL RENT. LESSEE shall pay to LESSOR as additional rent
a proportionate share (based on square footage leased by LESSEE as
compared with the total leasable square footage of the building of
which the leased premises are a part) of any increase in the real
estate taxes levied against the land and building of which the
leased premises are a part (hereinafter called the building),
whether such increase is caused by an increase in the tax rate, or
the assessment on the property, or a change in the method of
determining real estate taxes. LESSEE shall make payment within
thirty (30) days of written notice from LESSOR that such increased
taxes are payable, and any additional rent shall be prorated should
the lease be terminated before the end of any tax year. The base
from which to determine the amount of any increase in taxes shall
be the rate and the assessment in effect as of July 1, 1997.

5. UTILITIES. LESSOR shall provide equipment per LESSOR's
building standard specifications to heat the leased premises in
season and to cool all office areas between May 1 and November 1.
LESSEE shall pay all charges for utilities used on the leased
premises, including electricity, gas, oil, water and sewer. LESSEE
shall pay the utility provider or LESSOR, as applicable, for all
such utility charges asa determined by separate meters serving the
leased premises. LESSEE shall also pay LESSOR a proportionate
share of any other fees andb charges relating in any way to utility
use at the building. No plumbing, construction or electrical workc
of any type shall be done without LESSOR's prior written approval
and LESSEE obtaining the appropriate municipal permit. a)
reasonably b) excluding tie-in fees and capital expenditures for
which LESSEE is not otherwise responsible hereunder c) (excluding
data or telephone wiring)

6. COMPLIANCE WITH LAWS. LESSEE acknowledges that no trade,
occupation, activity or work shall be conducted in the leased
premises or use made thereof which may be unlawful, improper, noisy
or contrary to any applicable statute, regulation, ordinance or
bylaw. LESSEE shall keep all employees working in the leased
premises covered by Worker's Compensation Insurance and shall
obtain any licenses and permits necessary for LESSEE's occupancy.
LESSEE shall be responsible for causing any alterations by LESSEE
which are allowed hereunder to be in full compliance with any
applicable statute, regulation, ordinance or bylaw, and for causing
the leased premises to be in such full compliance in connection
with LESSEE's specific use.

7. FIRE, CASUALTY, EMINENT DOMAIN. Should a substantial portion
of the leased premises, or of the property of which they are a
part, be substantially damaged by fire or other casualty, or be
taken by eminent domain, LESSORa may elect to terminate this
leaseb. When such fire, casualty, or taking renders the leased
premisesc unsuitable for their intended use, a just and
proportionate abatement of rent shall be made, and LESSEE may elect
to terminate this lease if: (a) LESSOR fails to give written notice
within thirty (30) days of intention to restore the leased
premises, or (b) LESSOR fails to restore the leased premises to a
condition reasonably suitable for their intended use within ninety
(90) days of said fire, casualty or taking. LESSOR reserves all
rights for damages or injury to the leased premises for any taking
by eminent domain, except for damage to LESSEE's property,
equipment, LESSEE's relocation costs, or unamortized improvements
installed by LESSEE. a) or LESSEE b) as provided herein below c)
or a portion thereof reasonably

8. FIRE INSURANCE. Subject to the provisions of Section 6,
LESSEE shall not permit any use of the leased premises which will
adversely affect or make voidable any insurance on the property of
which the leased premises are a part, or on the contents of said
property, or which shall be contrary to any law or regulation from
time to time established by the Insurance Service Office (or
successor), local Fire Department, LESSOR's insurer, or any similar
body. LESSEE shall on demand reimburse LESSOR, and all other
tenants, all extra insurance premiums caused by LESSEE's use of the
leased premises for a use not set forth in Section 3 hereinabove.
LESSEE shall not vacate the leased premises other than during
LESSEE's customary non-business days or hours.

9. a) building b) (including replacement) during
LESSOR's normal business hours of the parking areas and
c) its agents d) to LESSEE's property e) except
LESSOR's negligence, chemical, water or corrosion damage
caused by LESSEE,

9. MAINTENANCE OF PREMISES. LESSOR will be responsible for all
structural maintenance of thea and for the maintenanceb of all
space heating and cooling equipment, sprinklers, doors, locks,
plumbing, and electrical wiring, but specifically excluding damage
caused by the careless, malicious, willful, or negligent acts of
LESSEE orc, chemical, water or corrosion damaged from any sourcee,
and maintenance of any non "building standard" leasehold
improvements. LESSEE agrees to maintain at its expense all otherf
aspects of the leased premises in the same condition as they are at
the commencement of the term or as they may be put in during the
term of this lease, normal wear and tear and damage by fire or
other casualtyg only excepted, and whenever necessary, to replace
light bulbs, plate glass and other glass therein, acknowledging
that the leased premises are now in good order and the light bulbs
and glass whole. LESSEE will properly control or vent all solvents,
degreasers, smoke, odors, etc. and shall not cause the area
surrounding the leased premises to be in anything other than a neat
and clean condition, depositing all waste in appropriate
receptacles. LESSEE shall be solely responsible for any damage
to plumbing equipment, sanitary lines, or any other portion of the
building which results from the discharge or use of any acid or
corrosive substance by LESSEE. LESSEE shall not permit the leased
premises to be overloaded, damaged, stripped or defaced, nor suffer
any waste, and will not keep animals within the leased premises.
If the leased premises include any wooden mezzanine type space, the
floor capacity of such space is suitable only for office use, light
storage or assembly work. LESSEE will protect any carpet with
plastic or masonite chair pads under any rolling chairs. Unless
heat is provided at LESSOR's expense, LESSEE shall maintain
sufficient heat to prevent freezing of pipes or other damage. Any
increase in air conditioning equipment or electrical capacity or
any installation or maintenance of equipment which is necessitated
by some specific aspect of LESSEE's use of the leased premises
shall be LESSEE's sole responsibility, at LESSEE's expense and
subject to LESSOR's prior written consent. All maintenance
provided by LESSOR shall be during LESSOR's normal business hours.
f) interior non-structural g) or the act or omission of LESSOR or
its agents

10. a), but without LESSOR's consent for any such alteration
costing less than $10,000.00 c) or bonded over

10. ALTERATIONS. LESSEE shall not make structural alterations or
additions of any kind to the leased premises, but may make
nonstructural alterations provided LESSOR consents thereto in
writinga. All such allowed alterations shall be at LESSEE's
expense and shall conform with LESSOR's construction
specifications. If LESSOR or LESSOR's agent provides any services
or maintenance for LESSEE in connection with such alterations or
otherwise under this leaseb, any just invoice will be promptly
paid. LESSEE shall not permit any mechanics' liens, or similar
liens, to remain upon the leased premises in connection with work
of any character performed or claimed to have been perfomed at the
direction of LESSEE and shall cause any such lien to be released or
removed without cost to LESSORd. Any alterations or additions
shall become part of the leased premises and the property of
LESSOR. Any alterations completed by LESSOR or LESSEE shall be
LESSOR's "building standard" unless noted otherwise. LESSOR shall
have the right at any time to change the arrangement of parking
areas, stairs, walkways or other common areas of the buildinge. b)
at LESSEE's request or as a result of LESSEE's breach of its lease,
obligations (after expiration of any applicable grace period) e)
provided any changes do not materially impair LESSEE's access to
and use of the leased premises.

11. ASSIGNMENT OR SUBLEASING. LESSEE shall not assign this lease
or sublet or allow any other firm or individual to occupy the whole
or any part of the leased premises without LESSOR's prior written
consent. Notwithstanding such assignment or subleasing, LESSEE and
GUARANTOR shall remain liable to LESSOR for the payment of all rent
and for the full performance of the covenants and conditions of
this lease. LESSEE shall pay LESSOR promptly fora legal and
administrative expenses incurred by LESSOR in connection with any
consent requested hereunder by LESSEE.

a) reasonable.

12. SUBORDINATION. This lease shall be subject and subordinate to
any and all mortgages and other instruments in the nature of a
mortgage, now or at any time hereafter, and LESSEE shall, when
requested, promptly execute and deliver such written instruments as
shall be necessary to show the subordination of this lease to said
mortgages or other such instruments in the nature of a mortgage.

13. LESSOR'S ACCESS. LESSOR or agents of LESSOR maya at any
reasonable time enter to view the leased premises, to make repairs
and alterations as LESSORb. for the leased premisesd, the common
areas or any other portions of the building, to make repairs which
LESSEE is required but has failed to do, andg to show the leased
premises to others. a) upon reasonable prior notice b) is
required hereunder to perform c) during the last 6 months of the
lease term d) or as LESSOR should elect to do for

14. SNOW REMOVAL. The plowing of snow from all roadways and
unobstructed parking areas shall be at the sole expense of LESSOR.
The control of snow and ice on all walkways, steps and loading area
serving the leased premises and all other areas not readily
accessible to plows shall be the sole responsibility of LESSEE.
Notwithstanding the foregoing, however, LESSEE shall hold LESSOR
and OWNER harmless from any and all claims by LESSEE's agents,
representatives, employees, callers or invitees for damage or
personal injury resulting in any way from snow or ice on any area
serving the leased premises.a

15. a)For purposes of LESSEE's liability and insurance under
Section 14, 16 and 17 c) use reasonable efforts to

15. ACCESS AND PARKING. LESSEE shall have the right without
additional charge to use parking facilities provided for the
leased premises in common with others entitled to the use thereofa.
Said parking areas plus any stairs, corridors, walkways, elevators
or other common areas (hereinafter collectively called the common
areas) shall in all cases be considered a part of the leased
premises when they are used by LESSEE or LESSEE's employees,
agents, callers or invitees. LESSEE will not obstruct in any
manner any portion of the building or the walkways or approaches to
the building, and will conform to all rules and regulations now or
hereafter made by LESSOR for parking, and for the care, use, or
alteration of the building, its facilities and approaches.b

LESSEE further warrants that LESSEE willc not permit any
employee or visitor to violate this or any other covenant
or obligation of LESSEE. No unattended parking will be
permitted between 7:00 PM and 7:00 AM without LESSOR's
prior written approval, and from December 1 through March
31 annually, such parking shall be permitted only in
those areas specifically designated for assigned
overnight parking. Unregistered or disabled vehicles, or
storage trailers of any type, may not be parked at any
time. LESSOR may tow, at LESSEE's sole risk and expense,
any misparked vehicle belonging to LESSEE or LESSEE's
agents, employees, invitees or callers, at any time.
LESSOR shall not be responsible for providing any
security services for the leased premises.

15. b), provided the same (i) do not derogate from LESSEE's
rights hereunder and (ii) are applied uniformly to all tenants in
the building.

16. LIABILITY. LESSEE shall be solely responsible as between
LESSOR and LESSEE for death or personal injuries to all persons
whomsoever occuring in or on the leased premises (including any
common areas that are considered part of the leased premises
hereunder)a from whatever cause arising, and damage to property to
whomsoever belonging arising out of the use, control, condition or
occupation of the leased premises by LESSEE; andc LESSEE agrees to
indemnity and save harmeless LESSOR and OWNER from any and all
liability, including but not limited to costs, expenses, damages,
causes of action, claims, judments and attorney's fees caused by or
in any way growing out of any matters aforesaid, except for death,
personal injuries or property damage resulting from the sole
negligence of LESSOR. b).b a) as described in Section 15 b) or
its agents c) subject to Paragraph G of the Rider

17. INSURANCE. LESSEE will secure and carry at its own expense a
commercial general liability policy insuring LESSEE, LESSOR and
OWNER against any claims based on bodily injury (including death)
or property damage arising out of the condition of the leased
premises (including any common areas that are considered part of
the leased premises hereunder) or their use by LESSEE, such policy
to insure LESSEE, LESSOR and OWNER against any claim up to One
Million (1,000,000) Dollars in the case of any one accident
involving bodily injury (including death), and up to One Million
(1,000,000) Dollars against any claim for damage to property.
LESSOR and OWNER shall be included in each such policy as
additional insureds using ISO Form CG 20 26 11 85 or some other
form approved by LESSOR. LESSEE will file LESSOR prior to
occupancy certificates and any aplicable riders or endorsments
showing that such insurance is in force, and thereafter will file
renewal certificates prior to the expiration of any such policies.
All such insurance certificates shall provide that such policies
shall not be cancelled without at least ten (10) days prior written
notice to each insured. In the event LESSEE shall fail to provide
or maintain such insurance at any time during the term of this
lease, then LESSOR may elect to contract for such insurance at
LESSEE's expense

18. SIGNS. LESSOR authorizes, and LESSEE at LESSEE's expensea
erect, signageb for the leased premises in accordance with LESSOR's
building standards for style, size, location, etc. LESSEE shall
obtain the prior written consent of LESSOR before erecting any sign
on the leased premises, which consent shall include approval as to
size, wording, design and location. LESSOR may remove and dispose
of any sign not approved, erected or displayed in conformance with
this lease.
a) may b) similar to LESSEE's current sign

19. BROKERAGE. LESSEE warrants and represents to LESSOR that
LESSEE has dealt with no broker or third person with respect to
this lease, and LESSEE agrees to indemnify LESSOR against any
brokerage claims arising by virtue of this lease. LESSOR warrants
and represents to LESSEE that LESSOR has employed no exclusive
broker or agent in connection with the letting of the leased
premises.
10. d) upon 30 days notice
16. d) Except for claims resulting from the sole
negligence, act or omission of LESSOR or its agents,
14. a) except for claims arising out of LESSOR's
negligence to the extent covered by LESSEE's insurance
required to be maintained hereunder.

20. a) Thirty (30) c) by process of law d) up
to a maximum of two years rent

20. DEFAULT AND ACCERLARATION OF RENT. In the event that : (a)
any assignment for the benefit of creditors, trust mortgage,
receivership or other insolvency proceeding shall be made or
instituted with respect to LESSEE or LESSEE's property; (b) LESSEE
shall default in the observance or performance of any of LESSEE's
covenants, agreements, or obligations hereunder, other than
substantial monetary payments as provided below, and such default
shall not be corrected withina days after written notice thereofb;
then LESSOR shall have the right thereafter, while such default
continues and without demand or further notice, to re-enter and
take possession of the leased premises, to declare the term of this
lease ended, and to remove LESSEE's effectsc, without being guilty
of any manner of trespass, and without prejudice to any remedies
which might be otherwise used for arrears of rent or other default
or breach of the lease. If LESSEE shall default in the payment of
the security deposit, rent, taxes, substantial invoice from LESSOR
or LESSOR's agent for goods and/or services or other sum herein
specified, and such default shall continue for ten (10) days after
written notice thereof, and, because both parties agree that
nonpayment of said sums when due is a substantial breach of the
lease, and, because the payment of rent in monthly installments is
for the sole benefit and convenience of LESSEE, then in addition to
the foregoing remedies the entire balance of rent which is due
hereunderd shall become immediately due and payable as liquidated
damages. LESSOR, without being under any obligation to do so and
without thereby waiving any default, may remedy same for the
account and at the expense of LESSEE. If LESSOR pays or incurs any
obligations for the payment of money in connection therewith, such
sums paid or obligations incurred plus interest and costs, shall be
paid to LESSOR by LESSEE as additional rent. Any sums received by
LESSOR from or on behalf of LESSEE at any time shall be applied
first to any unamortized improvements completed for LESSEE's
occupancy, then to offset any outstanding invoice or other payment
due to LESSOR, with the balance applied to outstanding rent.
LESSEE agrees to pay reasonable attorney's fees and/or
administrative costs incurred by LESSOR in enforcing any or all
obligations of LESSEE under this lease at any time. LESSEE shall
pay LESSOR interest at the rate or eighteen (18) percent per annum
on any payment from LESSEE to LESSOR which is past due.
b) or more if LESSEE is diligently prosecuting a cure
but is unable to complete within said 30 day period

21. NOTICE. Any notice from LESSOR to LESSEE relating to the
leased premises or to the occupancy thereof shall be deemed duly
served when left at the leased premises addressed to LESSEE, or
served by constable, or sent to the leased premises by certified
mail, return receipt requested, postage prepaid, addressed to
LESSEE. Any notice from LESSEE to LESSOR relating to the leased
premises or to the occupancy thereof shall be deemed duly served
when served by constable, or delivered to LESSOR by certified mail,
return receipt requested, postage prepaid, addressed to LESSOR at
200 West Cummings Park, Woburn, MA 01801 or at LESSOR's last
designated address. Nor oral notice or representation shall have
any force or effect. Time is of the essence in the service of any
notice.

22. OCCUPANCY. In the event that Lessee takes possession of said
leased premises prior to the start of the lease term, LESSEE will
perform and observe all of LESSEE's covenants from the date upon
which LESSEE takes possession except the obligation for the payment
of rent. In the event that LESSEE continues to occupy or control
all or any part of the leased premises after the agreed termination
of this lease without the written permission of LESSOR, then LESSEE
shall be liable to LESSOR for any and all loss, damages or expenses
incurred by LESSOR, and all other terms of this lease shall
continue to apply except that rent shall be due in full monthly
installments at a rate of one hundred fifty (150) percent of that
which would otherwise be due under this lease, it being understood
between the parties that such extended occupancy is as a tenant at
sufferance and is solely for the benefit and convenience of LESSEE.
LESSEE's control or occupancy of all or any part of the leased
premises beyond noon on the last day of any monthly rental period
shall constitute LESEE's occupancy for an entire additional month,
and increased rent as provided in this section shall be due and
payable immediately in advance. LESSOR's acceptance of any
payments from LESSEE during such extended occupancy shall not alter
LESSEE's status as a tenant at sufferance.

23. FIRE PREVENTION. LESSEE agrees to use every reasonable
precaution against fire and agrees to provide and maintain
approved, labeled fire extinguishers, emergency lighting equipment,
and exit signs and complete any other modifications within the
leased premisesa as required or recommended by the Insurance
Services Office (or successor organization), OSHA, the local Fire
Department, or any similar body.
a) resulting from LESSEE's specific use

24. OUTSIDE AREA. Any goods, equipment, or things of any type
or description held or stored in any common area without LESSOR's
prior written consent shall be deemed abandoned and may be
removed by LESSOR at LESSEE's expense without notice. LESSEE
shall maintain a building standard size dumpster in a location
approved by LESSOR, which dumpster shall be provided and serviced
at LESSEE's expense by whichever disposal firm may from time to
time be designated by LESSORa. Alternatively, if a shared
dumpster or compactor is provided by LESSOR, LESSEE shall pay its
proportionate share of any costs associated therewith. a)
provided such rates are reasonably competitive

25. ENVIRONMENT. LESSEE will so conduct and operate the leased
premises as not to interfere in any way with the use and enjoyment
of other portions of the same or neighboring buildings by others by
reason of odors, smoke exhaust, smells, noise, pets, accumulation
of garbage or trash, vermin or other pests, or otherwise, and will
at its expense employ a professional pest control service if
necessary.a LESSEE agrees to maintain efficient and effective
devices for preventing damage to heating equipment from solvents,
degreasers, cutting oils, propellants, etc. which may be present at
the leased premises. No hazardous materials or wastes shall be
stored, disposed of, or allowed to remain at the leased premises at
any time,b and LESSEE shall be solely responsible for any and all
corrosion or other damage associated with the use, storage and/or
disposal of same by LESEE. a) as a result of LESSEE's operations
b) except in compliance with any applicable statutes, regulations,
ordinances and the like

26. RESPONSIBILTY. aNeither LESSOR nor OWNER shall be held liable
to anyone for loss or damage b caused in any way by the use,
leakage, seepage or escape of water from any source, or for the
cessation of any service rendered customarily to said premises or
buildings, agreed to by the terms of this lease, due to any
accident, the making of repairs, alterations or improvements, labor
difficulties, weather conditions, mechanical breakdowns, trouble or
scarcity in obtaining fuel, electricity, service or supplies from
the sources from which they are usually obtained for said building,
or any cause beyond LESSOR'sd control.
a) Subject to the provisions of Sections 9 and 16 and
Paragraphs G and I of the Rider b) at the leased
premises

27. SURRENDER. LESSEE shall at the termination of this lease
remove all of LESSEE's goods and effects from the leased premises.
LESSEE shall deliver to LESSOR the leased premises and all keys and
locks thereto, all fixtures and equipment connected therewith, and
all alterations, additions and improvements made to or upon the
leased premises, whether completed by LESSEE, LESSOR or others,
including but not limited to any offices, partitions, window
blindsa, floor coverings (including computer floors), plumbing and
plumbing fixtures, air conditioning equipment and ductwork of any
type, exhaust fans or heaters, water coolers, burglar alarms,
telephone wiring, air or gas distribution piping, compressors,
overhead cranes, hoists, trolleys or conveyors, counters, all
electrical work, including but not limited to lighting fixtures of
any type, wiring, conduit, EMT, transformers, distribution panels,
bus ducts, raceways, outlets and disconnects, and furnishings or
equipment which have been welded to any wall, floor, ceiling, roof,
pavement or ground, or which have been plumbed to the water supply,
drainage or venting systems serving the leased premises. LESSEE
shall deliver the leased premises sanitized from any chemicals or
other contaminants, and broom clean and in the same condition as
they were at the commencement of this lease or any prior lease
between the parties for the leased premises, or as they were
modified during said term with LESSOR's written consent, reasonable
wear and tear and damage by fire or other casualtyb only excepted.
In the event of LESSEE's failure to remove any of LESSEE's property
from the leased premises upon termination of the lease, LESSOR is
hereby authorized, without liability to LESSEE for loss or damage
thereto, and at the sole risk of LESSEE, to remove and store any
such property at LESSEE's expense, or to retain same under LESSOR's
control, or to sell at public or private sale (without notice), any
or all of the property not so removed and to apply the net proceeds
of such sale to the payment of any sum due hereunder, or to destroy
such abandoned property. In no case shall the leased premises be
deemed surrendered to LESSOR until the termination date provided
herein or such other date as may be specified in a written
agreement between the parties, notwithstanding the delivery of any
keys to LESSOR.
27. a) affixed b) or the act or omissin of LESSOR
or its agents
26. c) as d) reasonable

28. GENERAL. (a) The invalidity or unenforceability of any
provision of this lease shall not affect or render invalid or
unenforceable any other provision hereof. (b) The obligations of
this lease shall run with the land, and this lease shall be
binding upon and inure to the benefit of the parties hereto and
their respective successors and assigns, except that LESSOR and
OWNER shall be liable only for obligations occuring or arising
while lessor, owner, or master lessee of the premises. (c) Any
action or proceeding arising out of the subject matter of this
lease shall be brought by LESSEE only in a court of the
Commonwealth of Massachusetts. (d) If LESSOR is acting under or
as agent for any trust or corporation, the obligations of LESSOR
shall be binding upon the trust or corporation, but not upon any
trustee, officer, director, shareholder, or beneficiary of the
trust or corporation individually. (e) If LESSOR is not the owner
(OWNER) of the leased premises, LESSOR represents that said OWNER
has agreed to be bound by the terms of this lease (f) This lease
is made and delivered in the Commonwealth of Massachusetts, and
shall be interpreted, construed, and enforced in accordance with
the laws thereof. (g) This lease was the result of negotiations
between parties of equal bargaining strength, and when executed
by both parties shall constitute the entire agreement between the
parties, superseding all prior oral and written agreements,
representations, statements and negotiations relating in any way
to the subject matter herein. This lease may not be extended or
amended except by written agreement signed by both parties or as
otherwise provided herein, and no other subsequent oral or
written representation shall have any effect hereon. (h) Except
as otherwise expressly set forth herein, LESSOR makes no
warranty, express or implied, concerning the suitability of the
leased premises for LESSEE's intended use. (i) LESSEE agrees
that if LESSOR does not deliver posession of the leased premises
as herein provided for any reason, LESSOR shall not be liable for
any damages to LESSEE for such failure, but LESSOR agrees to use
reasonable efforts to deliver possesion to LESSEE at the earliest
possible date. A proportionate abatement of rent, excluding the
cost of any amortized improvements to the leased premises, for
such time as LESSEE may be deprived of possession of the leased
premises, except where a delay in delivery in caused in any way
by LESSEE, shall be LESSEE's sole remedy. (j) Neither the
submission of this lease form, nor the prospective acceptance of
the security deposit and/or rent shall constitute a reservation
of or option for the leased premises, or an offer to lease, it
being expressly understood and agreed that this lease shall not
bind either party in any matter whatsoever until it has been
executed by both parties. (k) LESSEE shall not be entitled to
exercise any option contained herein if LESSEE is at that time in
default of any terms or conditions hereof beyond any applicable
cure period. (l) Except as otherwise provided herein, LESSOR,
OWNER and LESSEE shall not be liable for any special, incidental,
indirect or consequential damages, including but not limited to
lost profits or loss of bussiness, arising out of or in any
manner connected with performance or nonperformance under this
lease, even if any party has knowledge of the posibility of such
damages. (m) The headings in this lease are for convience only
and shall not be considered part of the terms hereof. (n) No
endorsment by LESSEE on any check shall bind LESSOR in any way.
(o) LESSOR and LESSEE hereby waive any and all rights to a jury
trial in any proceeding in any way arising out of this lease.

29. NON APPLICABLE

30. WAIVERS, ETC. No consent or waiver, express or implied,
by LESSOR, to or of any breach of any covenant, condition or duty
of LESSEE shall be construed as a consent or waiver to or of any
other breach of the same or any other covenant, condition or
duty. If LESSEE is several persons, several corporations or a
partnership, LESSEE's obligations are joint or partnership and
also several. Unless repugnant to the context, "LESSOR" and
"LESSEE" mean the person or persons, natural or corporate, named
above as LESSOR and as LESSEE respectively, and their respective
heirs, executors, administrators, successors and assigns.

31. AUTOMATIC FIVE-YEAR EXTENSIONS. This lease, including all
terms, conditions, escalations, etc. shall be automatically
extended for one additional successive period two years and eight
months unless LESSOR or LESSEE shall serve written notice, either
party to the other, of either party's desire not to so then
current lease period. Time is of the essence.

32. ADDITIONAL PROVISIONS. (Continued on attached rider(s) if
necessary.)

- See Attached Rider -

IN WITNESS WHEREOF, LESSOR and LESSEE have hereunto set
their hands and common seals and intend to be legally bound hereby
this 23rd day of June, 1998.

LESSOR: CUMMINGS PROPERTIES MANAGEMENT, INC.

By: W. S. Cummings
President

LESSEE: VIVID TECHNOLOGIES, INC.

By: Daniel J. Silva

Vivid Technologies, Inc.
Amended and Restated Demand Line of Credit

$5,000,000 Boston, Massachusetts
May 30, 1998

Vivid Technologies, Inc., a Delaware corporation with its
principal place of business at 10E Commerce Way, Woburn,
Massachusetts (the "Borrower"), for value received, hereby promises
to pay to BankBoston, N.A., a national banking association with its
head office at 100 Federal Street, Boston, Massachusetts (the
"Bank"), or order, on or before February 28, 1999, the principal
amount of Five Million and 00/100 dollars ($5,000,000.00) or such
lesser amount as may at the maturity hereof, whether by
acceleration or otherwise, be the aggregate unpaid principal amount
of all Demand Line of Credit Loans made by the Bank to the Borrower
hereof at the rate or rates specified in the Agreement, payable
monthly in arrears on the last day of each month, commencing on the
first such date next succeeding the date hereof (except that
interest on any LIBOR Portion shall also be payable on the last day
of the LIBOR Period applicable to such LIBOR Portion), and at
maturity (whether by acceleration or otherwise); provided that, if
the Borrower shall fail to make any payment of principal of or
interest on this Note, when due, whether at maturity or at a date
fixed for the payment of any installment or prepayment thereof or
by declaration, acceleration or otherwise, the Borrower shall pay
to the holder of this Note on demand by such holder, interest on
such unpaid principal and (to the extent permitted by law) on such
unpaid interest from the date due until paid in full at a rate per
annum equal to two percent (2%) above the rate otherwise applicable
hereunder; provided, further that in no event shall the amount
contracted for and agree to be paid by the Borrower as interest on
this Note exceed the highest lawful rate permissible under any law
applicable hereto.

This Note evidences a loan or loans under, and is subject to
the provisions of, a certain Demand Line of Credit Loan and
Security Agreement dated as of May 30, 1997 (as amended and/or
extended from time to time, the "Agreement") by and among the
Borrower and the bank (including the original payee of this Note)
named therein. This Note amends, restates, and supersedes, but is
not intended to an shall not extinguish or cancel the indebtedness
(including but not limited to accrued but unpaid interest through
the date of this Note) evidenced by that certain Demand Line of
Credit Note of the Company in favor of the Bank, dated May 30,
1997, in the original principal amount of $5,000,000.00. The
holder of this Note is entitled to the benefits of the Agreement
from time to time referred to therein. Neither this reference to
such Agreement nor any provision thereof shall affect or impair the
absolute and unconditional obligation of the Borrower to pay the
principal of and interest on this Note as provided herein. All
payments of principal of and interest on this Note shall be payable
in immediately available funds at the address of the Bank set forth
in the Agreement. Capitalized terms used herein which are defined
in the Agreement shall have the meanings ascribed to them in the
Agreement.

This Note is subject to prepayment in whole or in part, in
certain circumstances with a premium and in other circumstances
without a premium, and to acceleration on default at the times and
in the manner specified in the Agreement. The maker and all
endorsers of this Note hereby waive presentment, demand, notice,
protest and all other demands and notices in connection with the
delivery, acceptance, performance or enforcement of this Note.

This Note is governed by the laws of the Commonwealth of
Massachusetts and is executed as a sealed instrument as of the date
first above written.

VIVID TECHNOLOGIES, INC.

By: /s/ William J. Frain

Title: Chief Financial Officer
First Amendment
To
Demand Line of Credit
Loan and Security Agreement

This FIRST AMENDMENT TO DEMAND LINE OF CREDIT LOAN AND SECURITY
AGREEMENT (this "Amendment"), dated as of May 30, 1998 is by and
among VIVID TECHNOLOGIES, INC., a Delaware corporation duly
qualified in Massachusetts and with a principal place of business
at 10E Commerce Way, Woburn, Massachusetts 01801 (the "Borrower")
and BANKBOSTON, N.A., a national banking association with its head
office at 100 Federal Street, Boston, Massachusetts 02110 (the
"Bank").

WHEREAS, the Borrower and the Bank are parties to that certain
Demand Line of Credit Loan and Security Agreement dated as of May
30, 1997 (as herein amended, the "Agreement"); and

WHEREAS, the Borrower and the Bank have agreed, subject to the
terms and conditions set forth herein, to amend certain provisions
of the Agreement as set forth herein;

NOW THEREFORE, in consideration of mutual agreements herein
contained and other good and valuable consideration, the receipt
and sufficiency of which are hereby acknowledged, the Borrower and
Bank hereby agree to amend the Agreement as follows:

1. Definitions. All capitalized terms used herein without
definition shall have the meanings ascribed to them in the
Agreement.

2. Amendment to Article 4 of the Agreement. Sections 4.01, 4.02,
4.03, 4.04, 4.05, and 4.06 are deleted in their entirety and the
following substituted in place thereof:

"4.01 The obligations herein are unsecured."

3. Amendment to Article 6 of the Agreement. Sections 6.01(B)(1)
and (3) are hereby amended by replacing all references to "monthly"
with "quarterly" and all references to "controller" with "chief
financial officer."

Section 6.01(B)(5) is hereby deleted in its entirety.

Section 6.01(U) is hereby amended to include "(3) A ratio of
Operating Cash Flow to Total Debt Service, tested at the end of the
fiscal year, of not less than 1.5 to 1.0."

Operating Cash Flow: For any period, the amount equal to (i) the
sum of (A) the earnings (or loss) from the operations of the
Borrower for such period, after payment or provisions for all
expenses and other proper charges, but before payment or provision
for any income taxes or interest expense, plus (B) depreciation and
amortization for such period, minus (ii) cash payments for all
taxes paid during such period, minus (iii) capital expenditures,
excluding capital expenditures financed by the Bank, made during
such period.

Total Debt Service: For any period, the aggregate liability of the
Borrower for interest on indebtedness, whether expensed or
capitalized including payments consisting of interest and principal
payments in respect of Indebtedness and for commitment fees,
financing fees, and other fees and expenses in connection with the
borrowing of money or obtaining of credit, determined in accordance
with GAAP.

4. Amendment to Article 8 of the Agreement. Sections 8.02,
8.03, 8.04 and 8.06 are deleted in their entirety.

5. This Amendment shall become effective upon the
satisfaction of each of the following conditions:

(a) This Amendment shall have been executed and delivered by the
respective parties hereto;
(b) The Borrower shall have executed and delivered to the Bank the
Amended and Restated Demand Line of Credit Note reflecting the new
maturity date;

(c) The Borrower shall have delivered to the Bank certified copies
of corporate resolutions satisfactory to the Bank authorizing this
Amendment, the Amended and Restated Note, and all related
documents;

(d) The Borrower shall have delivered to the Bank copies,
certified by a duly authorized officer of the Borrower to be true
and complete on the date hereof, of (i) its charter or other
incorporation documents as in effect on such date of certification,
and (ii) its by-laws as in effect on such date; and

(e) The Borrower shall have delivered to the Bank an incumbency
certificate, dated as of the date hereof, singed by a duly
authorized officer of the Borrower, and giving the name and bearing
a specimen signature of each individual who shall be authorized:
(i) to sign, in the name and on behalf of such Borrower each of the
documents to which such Borrower is or is to become a party; and
(ii) to give notices and to take other action on its behalf under
the documents to which it is a party.

6. Except as expressly amended hereby, the Agreement, the other
Loan Documents and all documents, instruments and agreements
related thereto are hereby ratified and confirmed in all respects
and shall continue in full force and effect. This Amendment and
the Agreement, shall hereafter be read and construed together as a
single document, and all references in the Agreement or any related
agreement or instrument to the Agreement shall hereafter refer to
the Agreement as amended by this Agreement.

7. THIS AMENDEMENT SHALL BE GOVERNED BY AND CONSTRUED IN
ACCORDANCE WITH THE LAWS OF THE COMMONWEALTH OF MASSACHUSETTS AND
SHALL TAKE EFFECT AS A SEALED INSTRUMENT IN ACCORDANCE WITH SUCH
LAWS.

8. This Amendment may be executed in any number of counterparts
and by different parties hereto on separate counterparts, each of
which when so executed and delivered shall be an original, but all
of which counterparts taken together shall be deemed to constitute
one and the same instrument. Complete sets of counterparts shall
be held by the Bank.

IN WITNESS WHEREOF, the parties have executed this Amendment
under seal this 30th day of May, 1998.

VIVID TECHNOLOGIES, INC.

/s/ William J. Frain By: /s/ Stephen A. Reber
Witness Stephen A. Reber
President

BANKBOSTON, N.A.

By: /s/ Randall L. Kutch
Randall L. Kutch
Director

EXHIBIT 23

CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS

As independent public accountants, we hereby consent to the
incorporation of our report included in this Form 10-K, into the
Company's previously filed Form S-8 Registration Statement No. 333-
25049.

/s/ Arthur Andersen LLP
ARTHUR ANDERSEN LLP

Boston, Massachusetts
November 3, 1998

<ARTICLE> 5

<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-START> OCT-01-1997
<PERIOD-END> SEP-30-1998
<CASH> 15,555,189
<SECURITIES> 10,407,209
<RECEIVABLES> 7,316,863
<ALLOWANCES> 0
<INVENTORY> 7,874,036
<CURRENT-ASSETS> 43,353,108
<PP&E> 2,904,329
<DEPRECIATION> 1,488,893
<TOTAL-ASSETS> 45,924,489
<CURRENT-LIABILITIES> 7,024,589
<BONDS> 0
0
0
<COMMON> 99,047
<OTHER-SE> 38,800,853
<TOTAL-LIABILITY-AND-EQUITY> 45,924,489
<SALES> 38,718,041
<TOTAL-REVENUES> 38,718,041
<CGS> 16,360,872
<TOTAL-COSTS> 30,727,009
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 9,468,671
<INCOME-TAX> 2,838,389
<INCOME-CONTINUING> 6,630,282
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,630,282
<EPS-PRIMARY> .68
<EPS-DILUTED> .65

</TABLE>