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FORM 10-K

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

OR

Commission file number 0-15963

INVIVO CORPORATION

Registrant’s telephone number, including area code: 925-468-7600

Securities registered pursuant to Section 12(b) of the Act:
NONE

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

Indicate by check mark whether the issuer (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 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 in Part III of this Form 10-K or any amendment to this Form 10-K. [X]

Based on the closing sales price of $13.88 on September 19, 2002, the aggregate market value of registrant’s voting Common Stock held by non-affiliates of the registrant was approximately $54,905,948.

There were 4,477,399 shares of the registrant’s Common Stock, $.01 par value, outstanding on September 19, 2002.

DOCUMENTS INCORPORATED BY REFERENCE:

Portions of the Registrant’s definitive proxy statement to be filed pursuant to Regulation 14A not later than 120 days after the end of the fiscal year June 30, 2002 are incorporated by reference in Part III.

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PART I

ITEM 1. BUSINESS

OVERVIEW

     Invivo Corporation designs, manufactures and markets monitoring systems that measure and display vital signs of patients in medical settings. The Company’s systems simultaneously monitor heart function, respiration, heart rate, blood oxygen levels, invasive and non-invasive blood pressure and exhaled carbon dioxide levels.

     The Company developed the first multi-parameter vital sign patient monitoring system for use during magnetic resonance imaging (“MRI”). Based on the Company’s reputation in the MRI patient monitoring field and its technological expertise, it enhanced its focus into the general patient monitoring market in the mid-1990s with the introduction of new portable multi-parameter vital signs products.

     The Company has established relationships with most of the world’s largest MRI equipment manufacturers. It presently maintains distribution agreements or other original equipment manufacturers (“OEM”) vendor relationships with Siemens A.G. Medical Engineering Group (“Siemens Medical”), Philips Medical Systems (“Philips Medical”), Hitachi Medical Corporation, and GE Medical Systems (“GE Medical”). GE Medical, Siemens Medical and Philips Medical have approved the use of the Company’s monitors for incorporation into their MRI equipment. The Company is currently working with Philips Medical to develop an integrated MRI compatible patient vital signs monitoring system for use with Philips’ MRI scanner designed for cardiovascular disease diagnosis.

     On May 10, 2002, Invivo Corporation completed its sale of substantially all of the assets and the transfer of certain liabilities of Sierra Precision, a wholly-owned subsidiary of the Company, to 3D Instruments, LLC. Sierra Precision is a manufacturer of gauges that monitor and control oxygen flow for safety, industrial and governmental markets. Sierra Precision represented approximately 12% of Invivo Corporation’s consolidated revenues for the first nine months of fiscal year 2002.

     On May 30, Invivo Corporation sold substantially all of the assets and transferred certain liabilities of Lumidor Safety Corporation; a wholly-owned subsidiary of the Company, to Zellweger Analytics, Inc. Lumidor is a manufacturer of portable and fixed gas detection instrumentation for worker safety. Lumidor Safety represented approximately 13% of Invivo Corporation’s consolidated revenues for the first nine months of fiscal year 2002.

     With the sale of Sierra Precision and Lumidor Safety, the Company’s non-medical business consists of a line of industrial instrumentation products representing approximately 4% of sales. The percentage of sales contributed by the Company’s medical line of products, excluding the discontinued operations, was 90%, 93% and 96% for fiscal years 2000, 2001 and 2002, respectively.

INDUSTRY

MEDICAL

     MRI

     MRI is a non-invasive diagnostic tool that uses magnetic fields and radio frequencies to produce images of internal organs and structures of the body. As a result, MRI scanners are used worldwide, and are located principally in hospitals and stand-alone imaging centers. The Company believes that roughly half of these MRI scanners are located in the United States.

     The Company believes the MRI marketplace will continue to grow as new uses for MRI are developed. The Company estimates that over 2,200 new MRI units were sold worldwide in 2001.

     MRI patient monitoring technology enables physicians to track vital signs while the patient is undergoing an MRI procedure. While not every MRI use requires a patient monitor, as uses continue to expand the Company believes patient monitoring during the MRI procedure has become increasingly important. The MRI environment presents unique challenges for patient monitoring. A monitor must not interfere with the MRI in a manner that degrades the image. In addition, the monitor signal must be protected from the MRI’s magnetic field and radio frequencies in order to maintain the accurate performance of the monitor. In light of these challenges, the Company is aware of only two other companies currently manufacturing MRI patient monitors. The Company believes it is the market leader.

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     The Company expects that growth in the MRI monitoring market will come from new MRI unit placements, outfitting existing MRI equipment not presently equipped with monitoring devices, and replacing existing MRI patient monitors.

     GENERAL PATIENT MONITORING

     General patient monitoring products measure, display and document vital signs information obtained from sensors attached to the patient. The principal customers of patient monitoring products include hospitals and outpatient surgery centers.

     The Company estimates the worldwide market for patient monitoring products that measure multiple vital signs, including MRI and general patient monitoring, was approximately $2.0 billion in 2001. This market consists of three segments identified by their environments. The first segment is the portable monitoring market that includes the emergency room, bedsides, cath labs and neo-natal care units of hospitals. The second segment is the inpatient and outpatient operating room market. The final segment includes intensive and critical care units in hospitals.

     The general patient monitoring market is mature and therefore highly competitive.

INDUSTRIAL INSTRUMENTATION

     The Company’s industrial instrumentation product line consists of pressure and infrared sensor instrumentation that are utilized in industrial settings. The Company does not expect the industrial instrumentation segment in which it competes to experience growth in the foreseeable future.

PRODUCTS

MRI PATIENT MONITORS

     Through its patented technologies and proprietary shielding techniques, the Company is able to monitor a patient’s vital signs without disrupting the MRI process.

     OMNI-TRAK 3100. In the late 1980s, the Company pioneered the development of vital signs monitoring during magnetic resonance imaging with the introduction of the Omni-Trak 3100. The Omni-Trak 3100 provides continuous monitoring of all key aspects of a patient’s vitality, including electrocardiograph, respiration, heart rate, blood oxygen levels, invasive and non-invasive blood pressure and expired carbon dioxide levels.

     OMNI-TRAK 3150. In April 1998, the Company introduced its next-generation MRI monitor. The Omni-Trak 3150 incorporates all of the features of the Omni-Trak 3100 plus it is compact, mobile and easy to use. Through state-of-the-art radio transmission, the Omni-Trak 3150 communicates with our Millennia remote display controller, allowing critical data to be viewed by physicians and technicians in both the MRI room and the control room.

     MAGNITUDE. In fiscal 2001, the Company introduced its full featured, high-end MRI monitor. The Magnitude provides all of the features of the Omni-Trak 3150 along with Digital Signal Processing (DSP) of the electrocardiogram (“ECG”) signal for enhanced ECG performance and removal of MRI gradient artifact. The Magnitude also offers automatic identification and measurement of five anesthetic agents.

GENERAL PATIENT MONITORING

     MILLENNIA. The Millennia portable patient monitor is a compact multi-parameter vital signs monitor. Hospitals maximize the use of these monitors because they can easily be moved with a patient or between locations. The Company also developed a modified version of the Millennia for incorporation into GE Medical ‘s CT scanners for use in cardiology.

     M12. The Company’s recently introduced M12 patient monitor, the next generation of the Millennia, offers a large 12-inch color display with comprehensive vital signs monitoring including the second generation automatic five anesthetic agent identification and measurement.

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     CENTURION 2000. The Company’s Centurion 2000 is a PC-based central station monitoring system that networks Millennia or M12 patient monitors, allowing a single healthcare professional to monitor up to forty patients simultaneously. The main monitoring screen provides for rapid interpretation of vital signs information by a single health care professional and complies with new FCC-WMTS (Wireless Medical Telemetry Service) 608-614 MHz frequencies.

     OTHER. Other monitors include:

	•		a non-invasive blood pressure monitor that uses digital signal processing for fast and consistent measurements
	•		an inexpensive multi-parameter vital signs monitor designed specifically for the international market
	•		a stand-alone unit to measure blood oxygen levels
	•		a monitor for blood pressure and blood oxygen levels
	•		a portable, hand-held blood oxygen level monitor offering a low-cost, transportable monitoring unit

INDUSTRIAL INSTRUMENTATION

     The Company’s industrial sensor and instrumentation products consist of pressure sensors and infrared non-contact temperature measuring devices.

     The infrared non-contact temperature measuring products are used in a wide variety of industrial instrumentation situations. These include the fabrication of semiconductors, the manufacturing of metals and glass, and miscellaneous automotive, plant maintenance, construction and food preparation applications. The Company’s quickTemp is a hand-held, pocket-sized, infrared non-contact thermometer.

     The Company sells its pressure sensing devices primarily to plastic extrusion equipment manufacturers who use these devices in their production processes. Manufacturers in the food, beverage, synthetic fiber and pharmaceutical industries also use these devices to measure the pressure of processing ingredients.

SALES AND MARKETING

     Unlike many other medical device companies its size, the Company sells its patient monitoring products in the United States through a direct sales force. The domestic sales force includes 32 salespersons organized into five regions in the United States. Distributors, assisted by the Company’s eight international sales personnel located in Europe and in the Far East, handle sales throughout the rest of the world.

     The Company sells its patient monitoring products primarily to hospitals and, to a lesser degree, to stand-alone imaging centers, outpatient surgery centers and OEM customers. The Company has OEM or worldwide distribution agreements with Siemens A.G. Medical Engineering Group, Philips Medical Systems, Hitachi Medical Corporation and GE Medical Systems for its MRI monitoring equipment. These relationships facilitate the sale of monitors with the MRI equipment manufactured by these companies. GE Medical Systems accounted for 13.4% of revenues in fiscal 2002.

     The Company has also established relationships with hospital group purchasing organizations such as HealthTrust, Premier Inc., AmeriNet, Inc., Broadlane, Inc., HealthSouth and MedAssets/Insource.

     The Company markets its industrial instrumentation products mostly through distributors and its own sales personnel. The Company sells the products primarily to various industrial users.

     Foreign sales represented 26%, 27% and 27% of the Company’s total sales in fiscal 2002, 2001 and 2000. The Company is actively trying to expand its international presence, especially in the patient monitoring business. See Note 16 of the Notes to Consolidated Financial Statements for additional information regarding foreign sales.

     The Company’s backlog of unfilled purchase orders for all its products was approximately $7.9 million as of June 30, 2002. The Company’s backlog of unfilled purchase orders for all its products including those of its discontinued operations was approximately

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$11.3 million as of June 30, 2001 and approximately $10.1 million as of June 30, 2000. Within the next 12 months, the Company expects to ship all of its current backlog. Because of customer changes in delivery schedules and the possible cancellation of orders, backlog as of any particular date may not be representative of the Company’s actual sales for any succeeding fiscal period. Historically, order cancellations have not been significant. The Company’s businesses are not inherently seasonal, although for some of its businesses orders and shipments in the first and second fiscal quarters have been historically lower than the third and fourth quarters.

MANUFACTURING AND ASSEMBLY

     Other companies manufacture components and subassemblies to the Company’s specifications. The Company then assembles its products at its facilities in California and Florida. The medical device manufacturing facility in Florida is ISO 9001 certified. The Company generally obtains the materials and supplies that it uses to produce its products from a wide variety of suppliers. The Company has not experienced any significant shortages. Although certain materials that the Company uses in the manufacture of medical devices are available from only a few suppliers, the Company does not anticipate any significant difficulties in obtaining any of these materials in the foreseeable future.

COMPETITION

     The medical markets in which the Company competes include MRI and general monitoring. The Company is aware of three current competitors in the worldwide MRI monitoring market. The general patient monitoring market is highly competitive and includes companies that are much larger than the Company with significantly greater financial resources. The Company estimates there are approximately 15 to 20 competitors in the general patient monitoring market.

     In the medical device business, price is an important factor in hospital purchasing patterns as a result of cost containment pressures on the health care industry. To the extent that healthcare reform measures negatively affect the financial condition of hospitals and thereby reduce their capital purchases, the Company expects price to continue to be a very important competitive factor. The Company also competes on the basis of product reliability, quality, technical features, performance and service. The Company’s products are priced competitively with others in the market and the Company is comparable on quality, technical features, performance and service.

     The markets for the Company’s non-medical products are, in general, characterized by a relatively limited number of competitors; however, these markets are highly competitive. The Company estimates there are generally five to ten competitors in each of these markets. The Company competes on price, product reliability, quality, technical features, performance and service in these markets.

GOVERNMENTAL REGULATION

     The patient monitoring devices the Company manufactures and markets are subject to regulation by the FDA and, in some instances, corresponding state and foreign governmental agencies.

     The Company’s existing medical devices were cleared for marketing in the United States through the FDA’s section 510(k) premarket notification process. The 510(k) premarket notification process is available where the new product being submitted to the FDA can be compared to a pre-existing commercially available product that performs functions the FDA considers to be substantially equivalent. If a product does not meet the eligibility requirements for the 510(k) process, then its application must be submitted, instead, under the more time consuming and costly premarket approval procedure.

     The Company’s manufacturing facilities and the manufacture of its products are subject to FDA regulations regarding registration of manufacturing facilities, compliance with FDA good manufacturing practices and the reporting of adverse events. The FDA’s good manufacturing practices, titled “Quality System Regulation”, require preproduction design controls and implementation of a full quality assurance system along with standards for manufacturing processes and facilities and record keeping for device failure and complaint investigations. The Company is subject to periodic on-site inspection for compliance with such regulations. The FDA may also conduct investigations and evaluations of the Company’s products at its own initiative or in response to customer complaints or reports of malfunctions. If the FDA believes that its regulations have been violated, it has extensive enforcement authority including the power to seize, embargo or restrain entry of products from the market and to prohibit the operation of manufacturing facilities until the noted deficiencies are corrected to their satisfaction.

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     The Company seeks, where appropriate, to comply with the certification and safety standards of organizations such as Underwriters’ Laboratories and the various safety and test regulations of the European Community.

     The manufacture and testing of the Company’s medical devices requires it to handle and store small quantities of a wide variety of chemicals, some of which are highly toxic. Certain of these chemicals pose a serious threat to workers and others who may come in contact with them if improperly used or handled. Most municipalities, including those in which the Company is presently located, now require that the proposed storage and use of dangerous chemicals receive local approval. State air quality boards, or similar agencies, must also approve the venting, and certain other aspects of handling, of these types of chemicals. These municipal and state agencies may, as a condition to the granting of approvals and permits, impose certain procedural limitations on the Company’s storage and handling of these chemicals and structural requirements on the facilities where these chemicals are stored and used. They also impose record keeping and reporting requirements on the users of these chemicals.

     Compliance with these requirements has not, to date, had a material effect on the Company’s capital expenditures, earnings or competitive position. Nonetheless, environmental regulation at the local, state and national levels continues to evolve, and the possibility exists that more stringent limitations and requirements may become applicable to the Company.

RESEARCH AND EXPERIMENTAL

     During fiscal years 2002, 2001, and 2000 the Company’s research and experimental expenses were approximately $3.0 million, $2.6 million, and $2.3 million, respectively. Most of these expenditures relate to the patient safety monitoring business.

INTELLECTUAL PROPERTY

     The Company’s success and competitive position depends upon its continued ability to develop new proprietary technology while protecting the Company’s existing intellectual property. As of June 30, 2002, the Company held nine US patents expiring at different times between 2002 and 2018.

     There is no assurance that any of the Company’s current or future patent applications will result in patents, and the Company’s existing or future patents may be circumvented, declared invalid or challenged as to scope or ownership. For these and other reasons, the Company may not realize any competitive advantage from the Company’s existing patents and any patents that the Company may be granted in the future. Furthermore, others may develop technologies that are similar or superior to the Company’s proprietary technologies or design around any patents that the Company may hold. In addition, the Company has not secured patent protection in foreign countries and the Company cannot be certain that the steps the Company takes to prevent misappropriation of its intellectual property abroad will be effective, or that the application of foreign laws to technology developed abroad will not adversely effect the validity or enforceability of the Company’s U.S. patents.

EMPLOYEES

     As of June 30, 2002 the Company had 213 employees. The Company is not a party to any collective bargaining agreement and has not experienced a strike or work stoppage. The Company considers its relations with its employees to be good.

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ITEM 2. PROPERTIES

     The following table sets forth information with respect to the real property owned or leased by the Company which it considers material to its business.

From time to time, the Company leases smaller facilities as its needs dictate. The Company considers its facilities to be sufficient for its current operations.

ITEM 3. LEGAL PROCEEDINGS

     The Company’s medical device subsidiary, Invivo Research, was one of two third-party defendants named in a lawsuit in June of 1994 by Southern Nevada Surgical Center and Surgex Southern Nevada, Inc. in Nevada State District Court. The underlying action in this matter stemmed from an incident involving a surgical patient undergoing a procedure at the Southern Nevada Surgical Center. The patient suffered a serious permanent brain injury. A lawsuit was filed on behalf of the patient against the surgical center and the anesthesiologist who monitored the patient. The defendants in that action made a substantial settlement to the patient. Southern Nevada Surgical Center (“SNSC”) and Surgex were seeking indemnity and contribution of approximately $14 million from the manufacturer of the anesthetic gas machine and Invivo Research, which manufactured the vital signs monitor used in this procedure. SNSC and Surgex alleged that both the anesthetic gas machine and the vital signs monitor were defective. The Company believes that the vital signs monitor operated properly and was properly designed for its intended function.

     On August 18, 1999, the Nevada District Court granted the Company’s Motion to Dismiss for Failure to Prosecute. The Order granted dismissal of the SNSC and Surgex contribution claims, without prejudice, based upon Nevada law that provides that an action must be brought to trial within five years of the date of the filing of the original action. The dismissal is being appealed.

     In April of 1997, the plaintiff’s insurer, CNA, filed an action with identical causes in the same Nevada State Court. This second action was removed by the Company to U.S. District Court. The action by CNA was dismissed by the District Court on January 19, 2000 as the District Court found CNA did not have standing as the real party of interest. CNA appealed the decision to the Ninth Circuit Court of Appeals. A three-member panel of the Ninth Circuit reversed the dismissal and remanded the case back to Federal District Court on July 30, 2001. The Company appealed this decision and requested a decision from the full panel of the Ninth Circuit. The Ninth Circuit, without issuing an opinion, unanimously voted to deny the Petition for Rehearing in this matter. The action has been remanded to the U.S. District Court for further proceedings.

     Any judgment against the Company that exceeds the amount that its insurer is required to pay could have a material adverse effect on its business and results of operations.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

     None.

ITEM 4(A). EXECUTIVE OFFICERS OF THE COMPANY

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     The executive officers and directors as of June 30, 2002 are listed below, together with brief accounts of their business experience and certain other information.

     James B. Hawkins has been President, Chief Executive Officer and a Director of Invivo and its predecessor since August 1985. He also has served as Secretary of Invivo since July 1986. He earned his undergraduate degree in Business Commerce from Santa Clara University and his MBA from San Francisco State University.

     John F. Glenn was appointed Vice President, Finance and Chief Financial Officer of Invivo in November 1990. Mr. Glenn earned his undergraduate degree in Business Administration from the University of Nevada and his MBA from the University of Santa Clara.

     Stuart Baumgarten has been President of the Invivo Research subsidiary since November 1998. From March 1996 to November 1998, Mr. Baumgarten served as Vice President of Sales and Marketing for Invivo Research.

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PART II

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY AND RELATED SHAREHOLDERS’ MATTERS

MARKET INFORMATION

     The Company’s common stock is traded on the Nasdaq National Market under the symbol “SAFE.” The following table describes, for the quarters indicated, the high and low closing sale prices for a share of the Company’s common stock as reported on the Nasdaq National Market.

     As of June 30, 2002 the Company had 54 shareholders of record of its common stock, although there are a larger number of beneficial holders.

DIVIDEND POLICY

     The Company intends to retain future earnings to finance the expansion of its business and does not anticipate paying any cash dividends on its common stock in the foreseeable future. If the Company were to declare dividends in the future, such dividends would be paid at the discretion of its board of directors after taking into account various factors, including, among other things, the Company’s financial condition, results of operations, cash flows from operations, current and anticipated cash needs and expansion plans, the income tax laws then in effect and the requirements of Delaware law. In addition, the Company’s credit facility prohibits the payment of dividends without consent from the lender.

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ITEM 6. SELECTED FINANCIAL DATA

     The operations data set forth below with respect to the fiscal years ended June 30, 2002, 2001 and 2000 and the balance sheet data at June 30, 2002 and 2001 are derived from, and are qualified by, reference to the Company’s audited consolidated financial statements included elsewhere herein and should be read in conjunction with those financial statements and the notes thereto. The operations data set forth below with respect to the fiscal years ended June 30, 1999 and 1998 and the balance sheet data at June 30, 2000, 1999 and 1998 are derived from audited consolidated financial statements not included herein.

				(IN THOUSANDS, EXCEPT PER SHARE DATA)
				FISCAL YEAR ENDED JUNE 30,
				2002				2001				2000				1999				1998
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
	Sales			$	42,088			$	38,054			$	36,633			$	34,717			$	27,969
	Gross profit				22,095				20,069				19,056				18,545				14,727
	Operating expenses
		Selling, general and administrative			15,910				15,510				13,560				12,722				11,059
		Research and experimental			3,026				2,615				2,288				2,371				1,969
	Other income (expense)				183				747				1,088				(153	)			(388	)
	Loss on Sale of G.C. Industries				—				(601	)			—				—				—
	Income tax expense				1,133				695				1,314				974				361
	Income from discontinued operations				3,416				1,658				1,984				1,492				1,313
	Net income			$	5,625			$	3,054			$	4,967			$	3,818			$	2,263
	Basic net income per common share			$	1.27			$	.69			$	1.15			$	1.07			$	.69
	Weighted average common shares outstanding (basic)				4,427				4,403				4,329				3,552				3,265
	Diluted net income per common share			$	1.23			$	.68			$	1.10			$	1.00			$	.66
	Weighted average common shares outstanding (diluted)				4,581				4,476				4,497				3,831				3,427

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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
     OPERATIONS

RESULTS OF OPERATIONS

YEAR ENDED JUNE 30, 2002 COMPARED TO YEAR ENDED JUNE 30, 2001

Sales

     Sales of $42,088,300 for fiscal 2002 increased 10.6% compared to sales of $38,053,600 for fiscal 2001. Sales at the Company’s medical business increased 13.7% for fiscal 2002. The sales increase was primarily due to the continued growth in sales volume of the Company’s MRI vital signs monitor. The continued growth in the MRI vital signs monitor can be attributed to increased acceptance and usage of MRI procedures in hospital settings as the Company continues to maintain its leadership position in this market. “Millennia” sales for fiscal 2002 increased slightly as the patient monitoring market continues to experience flat to slow growth. The Company’s industrial instrumentation products experienced a sales decline of $821,100 or 32.2% for fiscal 2002.

Gross Profit

     The gross profit margin remained stable at 52.5% as the gross profit margin at the medical device business remained strong at 54.0% with the continued sales growth in MRI vital signs monitors. The gross profit margin for fiscal 2002 was impacted by the write-off of slow moving and obsolete inventory of approximately $175,000 at the Company’s non-contact infrared thermometer business in the third quarter of fiscal 2002 as that business continues to experience a prolonged sales decline. Throughout fiscal 2002, gross margins of the industrial instrumentation product lines declined due primarily to the impact of the decreased sales relative to fixed cost of sale components.

Operating Expenses

     Selling, general and administrative expenses for fiscal 2002 increased 2.6% or $400,500 from the previous fiscal period. Selling, general and administrative expenses were 37.8% of sales for fiscal 2002 compared with 40.8% for fiscal 2001 as the growth in sales for fiscal 2002 more than offset the increase in selling, general and administrative expenses. The increase in these expenditures in aggregate for fiscal 2002 was primarily due to higher selling expenses on the higher sales volume at the medical device business along with higher facility leasing and depreciation expenses at the industrial instrumentation product line and corporate facilities. These increases offset a decrease in selling expenses on the lower sales volume at the industrial instrumentation business along with the affect of the Company’s adoption of SFAS No. 142, Goodwill and Other Intangible Assets, effective July 1, 2001 as a result of which the Company stopped amortizing its goodwill. Amortization of goodwill in fiscal 2001 was $254,400.

     Research and experimental expenses for fiscal 2002 increased 15.7% or $411,400 from the previous fiscal period. Research and experimental expenses were 7.2% of sales for fiscal 2002 compared to 6.9% in fiscal 2001. The increase in fiscal 2002 was due to increased expenditures of the medical device business on its next generation vital signs monitors which offset a decline in research and experimental expenditures at the industrial instrumentation product lines. The Company plans to continue its efforts in developing new products and enhancing its existing ones and expects future research and experimental expenditures as a percentage of sales to be in the range of the fiscal 2002 levels

Other Income and Expense

     Interest income was $290,500 for fiscal 2002 as compared to $435,200 for fiscal 2001. The decrease was due to the lower interest rates earned on the Company’s short-term investments.

Provision for Income Taxes

     The effective tax rate for fiscal 2002 was 33.9% compared to 33.2% for the prior year. The slight increase was due to the effects of state income taxes and settlement of state income tax examinations. The effective rate differs from the statutory rate due principally to the benefit of a foreign sales corporation and other credits.

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Discontinued Operations

     On May 10, 2002, the Company completed the sale of Sierra Precision, a wholly-owned subsidiary of the Company, for approximately $4.9 million. On May 30, 2002, the Company sold Lumidor Safety Corporation, a wholly-owned subsidiary of the Company, for $12.0 million. In conjunction with the discontinuance of these operations, the Company recorded a gain on the disposal of the subsidiaries of $3,250,300 (net of income tax of $2,142,800). Revenue from discontinued operations for fiscal 2002 was $12,175,400. Revenue from discontinued operations for fiscal 2001 was $16,225,500. Income from discontinued operations for fiscal 2002 was $3,416,300. Income from discontinued operations for fiscal 2001 was $1,657,700.

YEAR ENDED JUNE 30, 2001 COMPARED TO YEAR ENDED JUNE 30, 2000

Sales

     Sales for fiscal 2001 were $38,053,600, an increase of 3.9% over sales of $36,633,400 for fiscal 2000. Sales at the Company’s medical device business increased 7.7% in fiscal 2001 as compared to fiscal 2000. Continued growth in sales of the Company’s MRI vital signs monitor offset a decrease in “Millennia” product sales as the general monitoring market experienced slowing market conditions. The Company’s industrial instrumentation products experienced sales declines of $1,117,100 in fiscal 2001.

Gross Profit

     The gross profit margin increased slightly in fiscal 2001 to 52.7% from 52.0% in fiscal 2000. An increase in the gross profit margin at the medical device business helped offset the deteriorating gross margins of the non-contact infrared industrial products due to price discounting and of the other industrial instrumentation product lines due to decreased sales.

Operating Expenses

     Selling, general and administrative expenses for fiscal 2001 increased 14.4% or $1,949,700 compared to fiscal 2000. Selling, general and administrative expenses were 40.8% of sales for fiscal 2001 compared with 37.0% for fiscal 2000. The increase in these expenditures in aggregate and as a percentage of sales for fiscal 2001 was primarily due to higher administrative and selling expenses at the Company’s medical device business along with the write-off of the remaining balance on a note receivable of $203,600, net of a deferred gain of $52,000, from the sale of a product line in fiscal 1996. The note receivable was deemed not collectable based on the recent non-performance of the buyer and the effect of the current economic downturn on the product line’s market. The increase in selling, general and administrative expenses at the medical device business was in anticipation of higher sales volume for fiscal 2001 than was actually achieved. The increase in selling expenses was also due to higher sales commission expenses and higher international selling expenses as the Company established a U.K. subsidiary in the first quarter of fiscal 2001.

     Research and experimental expenses were $2,615,000 or 6.9% of sales for fiscal 2001 compared to $2,287,700 or 6.2% for fiscal 2000. The increase in these expenses in aggregate and as a percentage of sales in fiscal 2001 was due to increased expenditures on behalf of the medical device business which offset a decline in research and experimental expenditures at the industrial instrumentation product lines.

Other Income and Expense

     Other income, net for fiscal 2001 of $861,400 included a gain of $450,000 on the settlement of a patent infringement lawsuit brought by the Company against a competitor in the MRI monitoring market. Other income also included interest income which was $435,200 for fiscal 2001 as compared to $388,800 for fiscal 2000. The increase in interest income was due to higher balances on the Company’s short-term investments. Interest expense decreased to $114,700 for fiscal 2001 compared with $137,000 for fiscal 2000.

     On March 2, 2001, the Company sold G.C. Industries, a gas permeation device business, for $664,000 in cash. The asset sale resulted in a loss of $600,500. G.C. Industries was a part of the safety and industrial segment and represented approximately 1% of the Company’s annual sales.

Provision for Income Taxes

     The effective tax rate for fiscal 2001 was 33.2% as compared to 39.4% for fiscal 2000. The effective rate differs from the statutory rate due principally to non-deductible goodwill, the benefit of a foreign sales corporation and other credits.

Inflation

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     The Company does not believe that inflation had a significant impact on its results of operations during any of the last three fiscal years.

LIQUIDITY AND CAPITAL RESOURCES

     Working capital at June 30, 2002 increased to $38,837,900 from $31,380,200 at June 30, 2001. Net cash provided by operating activities was $5,825,300 for fiscal 2002 compared with $1,710,600 provided by operating activities for fiscal 2001. This increase in net cash provided by operating activities was primarily the result of the increase in net income which includes the gain on the sale of two of the Company’s safety and industrial instrumentation businesses and a decrease in accounts receivable at the medical device business as the Company improved its collection efforts and days outstanding on its receivables.

     Capital expenditures were $2,013,200 for fiscal 2002 compared to $762,300 for the prior year period. Capital expenditures were primarily related to the expansion of the Company’s medical device facility and investments in manufacturing equipment and sales demonstration equipment for the medical device business along with leasehold improvements at the Company’s new facility for the industrial instrumentation product lines.

     The Company believes that its cash resources and cash flow from operations are adequate to meet its ongoing cash needs for working capital and capital expenditures. The Company’s revolving bank line of credit is collateralized by the Company’s accounts receivable, inventory, and equipment. The line of credit was renewed at the same terms for one year on December 1, 2001. At June 30, 2002, $1,000,000 was available under the line of credit.

     The Company will continue to explore opportunities for the possible acquisitions of technologies or businesses, which may require the Company to seek additional financing.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

     The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires the Company to make estimates and judgments that affect its reported amounts of assets and liabilities, revenues and expenses and related disclosures of contingent assets and liabilities. On an ongoing basis the Company evaluates its estimates, including those related to allowance for doubtful accounts, inventory reserves, warranty obligations, intangible assets, income taxes, revenue recognition and contingencies and litigation. The estimates are based on the information that is currently available to the Company and on various other assumptions that management believes to be reasonable under the circumstances. Actual results could vary from those estimates under different assumptions or conditions.

     The Company believes that the following critical accounting policies affect the more significant judgments and estimates used in the preparation of its financial statements:

Revenue Recognition

     The Company recognizes revenue from product sales when there is persuasive evidence that an arrangement exists, delivery has occurred and title has transferred, the price is fixed and determinable, and collectibility is reasonably assured. The Company accrues for estimated sales returns and other allowances at the time of recognition of revenue, which is typically upon shipment, based on historical experience. If different assumptions were employed in making these estimates, the amount of reported revenue could be affected.

Allowance for Doubtful Accounts

     The Company maintains an allowance for doubtful accounts for estimated losses resulting from the failure of its customers to make required payments, which results in bad debt expense. On an on-going basis, the Company evaluates the collectibility of accounts receivable based on a combination of factors. In circumstances in which it is aware of a specific customer’s inability to meet its financial obligation, it records a specific reserve of the bad debt against amounts due. In addition, the Company must make judgments and estimates of the collectibility of accounts receivables based on historical bad debt, customers’ credit worthiness, current economic trends, recent changes in customer payment trends, and deterioration in the customers’ operating results or financial position. If circumstances change adversely, additional allowances may be required.

Inventory

     Inventories are stated at lower of cost or market and with cost determined by the first-in, first-out method. The Company reviews the components of inventory on a regular basis for excess, obsolete and impaired inventory based on estimated future usage and sales.

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The Company may be required write-down inventory it is carrying at higher value due to changes in competitive conditions, new product introductions by the Company or its competitors, or rapid changes in customer demand.

Goodwill

     The Company uses assumptions in establishing the carrying value of its goodwill. The criteria used for these evaluations include management’s estimate of the asset’s continuing ability to generate positive income from operations and positive cash flow in future periods compared to the carrying value of the asset. If assets are considered to be impaired, the impairment recognized is the amount by which the carrying value of the assets exceeds the fair value of the assets. Factors that would influence the likelihood of a material change in goodwill include significant changes in the asset’s ability to generate positive cash flow, a significant decline in the economic and competitive environment on which the asset depends and significant changes in the Company’s strategic business objectives.

Warranty

     The Company provides for the estimated cost of product warranties at the time the related revenue is recognized. The amount of this provision is determined by using actual historical expenses and potential risks associated with the Company’s different products. Should actual product failure rates or estimated costs to repair those product failures differ from the Company’s estimates, revisions to the estimated warranty provision would be required.

Income Taxes

     Under SFAS No. 109, “Accounting for Income Taxes,” income taxes are recorded based on the current year amounts payable or refundable, as well as the consequences of events that give rise to deferred tax assets and liabilities based on differences in how those events are treated for tax purposes (see Note 10 of Notes to Consolidated Financial Statements). The Company bases its estimate of deferred tax assets and liabilities on current tax laws and rates. The Company’s accounting for deferred tax consequences represents management’s best estimate of future events that can be appropriately reflected in the accounting estimates.

RECENT ACCOUNTING PRONOUNCEMENTS

     In August 2001, the FASB issued Statement No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” (SFAS 144). SFAS 144 supersedes SFAS 121, “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of”, and provides new rules on asset impairment and a single accounting model for long-lived assets to be disposed of. Although retaining many of the fundamental recognition and measurement provisions of SFAS 121, the new rules significantly change the criteria that would have to be met to classify an asset as held-for-sale. The new rules also supersede the provisions of Accounting Principles and Board Opinion No. 30, “Reporting the Results of Operations-Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions”, with regard to reporting the effects of a disposal of a segment of a business and require expected future operating losses from discontinued operations to be displayed in discontinued operations in the period(s) in which the losses are incurred. SFAS 144 is effective in fiscal 2003, and is not expected to have a material impact on the Company’s consolidated financial statements.

     In April 2002, the FASB issued SFAS No. 145, “Recision of SFAS Nos. 4, 44 and 64, Amendment of SFAS 13, and Technical Corrections as of April 2000” (SFAS 145). SFAS 145 revises the criteria for classifying the extinguishments of debt as extraordinary and the accounting treatment of certain lease modifications. SFAS 145 is effective in fiscal 2003, and is not expected to have a material impact on the Company’s consolidated financial statements.

     On July 30, 2002, the FASB issued SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities” (SFAS 146). SFAS 146 establishes accounting guidelines for the recognition and measurement of a liability for the cost associated with an exit or disposal activity initially at its fair value in the period in which the liability is incurred, rather than at the date of a commitment to an exit or disposal plan. This standard is effective January 1, 2003 for all exit or disposal activities initiated after that date.

NOTE REGARDING FORWARD-LOOKING STATEMENTS

     This Annual Report on Form 10-K contains forward-looking statements regarding the Company’s plans, expectations, estimates and beliefs. Actual results could differ materially from those discussed in, or implied by, these forward-looking statements. Forward-looking statements are identified by words such as “believe,” “anticipate,” “expect,” “intend,” “plan,” “will,” “may” and other similar expressions. In addition, any statements that refer to expectations, projections or other characterizations of future events or circumstances are forward-looking statements. The Company is not obligated to update or revise these forward-looking statements to

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reflect new events or circumstances. Factors that could cause actual results, events or circumstances to differ from forward-looking statements made in this report include those set forth in the following “Risk Factors” section.

RISK FACTORS

THE COMPANY IS DEPENDENT ON A CONCENTRATED LINE OF PRODUCTS

     The Company’s future financial performance will be dependent on its patient monitor product line, which includes a limited number of products. In the MRI monitoring market, the growth of the market for its MRI monitors is heavily dependent on the continued acceptance of MRI technology as a diagnostic tool. In the general patient monitoring market, future growth of the Company’s Millennia and M12 monitors is dependent on its ability to further penetrate an already competitive market.

     In addition, the recent consolidation in the medical care provider market has resulted in a number of very large purchasers of medical devices. These large purchasers typically prefer to establish relationships with medical device manufacturers that have broad and diverse product lines.

     The failure of the Company’s products to continue to gain market acceptance or a continued consolidation of the medical care provider market could have a material adverse effect on its business and results of operations.

THE COMPANY FACES SUBSTANTIAL LEVELS OF COMPETITION

     The Company has encountered and will continue to encounter significant competition in the sale of its products. The Company’s general patient monitoring competitors include a number of large multinational corporations. Some of these competitors may be able to adapt more quickly to new or emerging technologies and changes in customer requirements, or to devote greater resources to the development, promotion and sale of their products than the Company can. In the MRI patient monitoring market, the Company has enjoyed a significant first-to-market advantage over its competitors. However, competitors have introduced products designed to compete with its MRI vital signs monitoring products. In addition, as the market for MRI vital signs monitoring products expands it may attract competitors with greater resources.

     Additionally, competition may increase if new companies enter the Company’s markets or if existing competitors expand their product lines or intensify efforts within existing product lines. The introduction of competitive products may result in a decrease in the Company’s market share and in a decrease in the prices at which the Company is able to sell its products. The Company’s market share could also be adversely affected by increasing concentration in the medical care provider market. Any decrease in the Company’s market share or decrease in the prices at which the Company is able to sell its products could have a material adverse effect on its business and results of operations.

THE COMPANY’S FINANCIAL RESULTS MAY FLUCTUATE

     The Company’s financial results may fluctuate significantly from period to period because of a variety of factors, many of which is beyond its control. These factors include:

	•		increased competition, including possible future competition in the MRI monitor market
	•		changes in the Company’s pricing policies and those of its competitors
	•		changes in the Company’s operating expenses or capital expenditures
	•		timing and market acceptance of new and upgraded product introductions by the Company and its competitors
	•		introduction of alternative technologies by the Company and its competitors
	•		effect of potential acquisitions
	•		other general economic factors

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Fluctuations caused by these and other factors could have a material adverse effect on the Company’s business and results of operations.

THE COMPANY IS SUBJECT TO A SIGNIFICANT RISK OF NEW LAWS RELATED TO HEALTH CARE

     Changes in the law or new interpretations of existing laws may have a significant effect on the Company’s costs of doing business and the amount of reimbursement the Company receives from both government and third-party payors. In addition, economic forces, regulatory influences and political initiatives are subjecting the health care industry to fundamental changes. Federal, state and local government representatives are likely to continue to review and assess alternative health care delivery systems and payment methods. The Company expects ongoing public debate on these issues. Any of these efforts or reforms could have a material adverse affect on the Company’s business and results of operations.

THE COMPANY’S BUSINESS IS SUBJECT TO TECHNOLOGICAL CHANGE AND INTRODUCTION OF NEW PRODUCTS

     Technological change, evolving industry standards and new product introductions and enhancements characterize the markets for the Company’s products. Many of the Company’s products and products under development are technologically innovative, and therefore require significant planning, design, development and testing. These activities require the Company to make significant capital commitments and investments. In addition, industry standards may change on short notice and new products and technologies may render existing products and technologies uncompetitive. Additionally, the products that the Company is currently developing, and those that the Company develops in the future, may not be technologically feasible or accepted by the marketplace or they may not be completed in an acceptable time frame. Technological change could prevent the Company from achieving the benefits it expects form research initiatives and could also result in a loss from existing products.

THE COMPANY CURRENTLY IS INVOLVED IN A LEGAL PROCEEDING

     The Company’s medical device subsidiary, Invivo Research, was one of two third-party defendants named in a lawsuit in June of 1994 by Southern Nevada Surgical Center and Surgex Southern Nevada, Inc. in Nevada State District Court. The underlying action in this matter stemmed from an incident involving a surgical patient undergoing a procedure at the Southern Nevada Surgical Center. The patient suffered a serious permanent brain injury. A lawsuit was filed on behalf of the patient against the surgical center and the anesthesiologist who monitored the patient. The defendants in that action made a substantial settlement to the patient. Southern Nevada Surgical Center (“SNSC”) and Surgex were seeking indemnity and contribution of approximately $14 million from the manufacturer of the anesthetic gas machine and Invivo Research, which manufactured the vital signs monitor used in this procedure. SNSC and Surgex alleged that both the anesthetic gas machine and the vital signs monitor were defective. The Company believes that the vital signs monitor operated properly and was properly designed for its intended function.

     On August 18, 1999, the Nevada District Court granted the Company’s Motion to Dismiss for Failure to Prosecute. The Order granted dismissal of the SNSC and Surgex contribution claims, without prejudice, based upon Nevada law that provides that an action must be brought to trial within five years of the date of the filing of the original action. The dismissal is being appealed.

     In April of 1997, the plaintiff’s insurer, CNA, filed an action with identical causes in the same Nevada State Court. This second action was removed by the Company to U.S. District Court. The action by CNA was dismissed by the District Court on January 19, 2000 as the District Court found CNA did not have standing as the real party of interest. CNA appealed the decision to the Ninth Circuit Court of Appeals. A three-member panel of the Ninth Circuit reversed the dismissal and remanded the case back to Federal District Court on July 30, 2001. The Company appealed this decision and requested a decision from the full panel of the Ninth Circuit. The Ninth Circuit, without issuing an opinion, unanimously voted to deny the Petition for Rehearing in this matter. The action has been remanded to the U.S. District Court for further proceedings.

     Any judgment against the Company that exceeds the amount that its insurer is required to pay could have a material adverse effect on its business and results of operations.

THE COMPANY FACES PRODUCT LIABILITY AND PRODUCT RECALL RISKS

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     With respect to all of its products, and particularly its medical devices, the Company faces the risk of potentially large product liability claims. The malfunction or misuse of its products could potentially result in serious harm to a patient. In addition, the Company may be required to indemnify its distributors and customers for similar claims made against them.

     Claims could be made against the Company even if its products did not contribute to the injury that was sustained. Frequently, the Company’s products are used with products developed by other manufacturers. Even if its products are not the cause of the injury, the Company may not be able to prove that some other product malfunction or human error caused a claimant’s injury.

     The Company has had product liability claims made against it in the past and may have further claims made against it in the future. While the Company is insured for certain product liability claims, not all claims will be covered and the level of its insurance may not be sufficient to protect it from the full amount of a successful claim. In addition, the Company may not be able to obtain adequate amounts of insurance at an acceptable cost. Claims made against the Company that are not insured, or that exceed the amount of the Company’s coverage, could have a material adverse effect on its business and results of operations.

     Similarly, the Company’s products are subject to the potential of being recalled by government agencies for actual or potential deficiencies or problems. Any such recall would likely be expensive and would have a material adverse effect on the Company’s business and results of operations.

THE COMPANY FACES INCREASED RISKS OF INTERNATIONAL OPERATIONS

     International sales have accounted for over 20% of the Company’s sales for each of the past three years and may increase over time. International sales are subject to a number of risks, including the following:

	•		fluctuations in exchange rates may affect the demand for products and services the Company provides in foreign markets
	•		adverse changes in local economic conditions could depress the demand for the Company’s products
	•		agreements may be difficult to enforce and receivables difficult to collect through a foreign country’s legal system
	•		foreign customers may have longer payment cycles
	•		foreign countries may impose additional withholding taxes or otherwise tax the Company’s foreign income, impose tariffs, or adopt other restrictions on foreign trade
	•		U.S. export licenses may be difficult to obtain
	•		the protection of intellectual property in foreign countries may be more difficult than in the United States

     Any of these factors could have a material adverse impact on the Company’s business and results of operations.

ITEM 7(A). QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     The Company’s sales are primarily denominated in U.S. dollars and as a result, the Company has relatively little exposure to foreign currency exchange risk with respect to its sales. The Company does not currently hedge against exchange foreign currency rate fluctuations. The effect of an immediate 10% change in exchange rates would not have a material impact on the Company’s future operating results or cash flows.

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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

     Index to Consolidated Financial Statements:

		Page
		Number
Independent Auditors’ Report			19
Consolidated Balance Sheets — June 30, 2002 and 2001			20
Consolidated Statements of Income for the Years Ended June 30, 2002, 2001, and 2000			21
Consolidated Statements of Stockholders’ Equity and Comprehensive Income For the Years Ended June 30, 2002, 2001, and 2000			22
Consolidated Statements of Cash Flows for the Years Ended June 30, 2002, 2001, and 2000			23
Notes to Consolidated Financial Statements			24-35

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Independent Auditors’ Report

The Board of Directors and Stockholders
Invivo Corporation:

We have audited the accompanying consolidated balance sheets of Invivo Corporation and subsidiaries (the Company) as of June 30, 2002 and 2001, and the related consolidated statements of income, stockholders’ equity and comprehensive income, and cash flows for each of the years in the three-year period ended June 30, 2002. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted in the United States of America. 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 Invivo Corporation and subsidiaries as of June 30, 2002 and 2001, and the results of their operations and their cash flows for each of the years in the three-year period ended June 30, 2002, in conformity with accounting principles generally accepted in the United States of America.

		KPMG LLP

San Francisco, California
August 2, 2002

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INVIVO CORPORATION AND SUBSIDIARIES

Consolidated Balance Sheets
June 30, 2002 and 2001

				2002				2001
Assets
Current assets:
	Cash and cash equivalents			$	1,005,700				270,100
	Restricted cash				1,520,900				—
	Short-term investments				27,344,400				9,091,300
	Trade receivables, less allowance for doubtful accounts of $330,500 as of June 30, 2002 and $441,000 as of June 30, 2001				10,724,600				11,648,400
	Inventories				6,430,400				6,569,800
	Deferred income taxes				837,800				1,013,300
	Prepaid expenses and other current assets				236,700				389,200
	Current assets of discontinued operations				—				8,773,800
		Total current assets			48,100,500				37,755,900
Property and equipment, net					5,476,000				4,700,800
Intangible assets					7,037,000				7,037,200
Other assets					144,200				190,400
Non-current assets of discontinued operations					—				2,326,800
				$	60,757,700				52,011,100
Liabilities and Stockholders’ Equity
Current liabilities:
	Accounts payable			$	1,778,300				1,975,100
	Accrued expenses				6,045,900				3,256,500
	Current portion of long-term debt and capital leases				113,300				154,700
	Income taxes payable				1,325,100				147,000
	Current liabilities of discontinued operations				—				842,400
		Total current liabilities			9,262,600				6,375,700
Long-term debt and capital leases, excluding current portion					1,463,900				1,647,100
Deferred income taxes					550,400				279,700
		Total liabilities			11,276,900				8,302,500
Commitments and contingencies
Stockholders’ equity:
	Common stock, $.01 par value; authorized shares totaling 20,000,000; issued and outstanding shares totaling 4,434,899 as of June 30, 2002 and 4,423,249 as of June 30, 2001				44,300				44,200
	Additional paid-in capital				26,701,800				26,581,500
	Retained earnings				22,720,400				17,095,900
	Accumulated other comprehensive income (loss)				14,300				(13,000	)
		Total stockholders’ equity			49,480,800				43,708,600
				$	60,757,700				52,011,100

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INVIVO CORPORATION AND SUBSIDIARIES

Consolidated Statements of Income
Years ended June 30, 2002, 2001 and 2000

					2002				2001				2000
Sales					$	42,088,300				38,053,600				36,633,400
Cost of goods sold						19,993,600				17,984,200				17,577,000
			Gross profit			22,094,700				20,069,400				19,056,400
Operating expenses:
	Selling, general, and administrative					15,910,200				15,509,700				13,560,000
	Research and experimental					3,026,400				2,615,000				2,287,700
			Total operating expenses			18,936,600				18,124,700				15,847,700
			Income from operations			3,158,100				1,944,700				3,208,700
Other income (expense):
	Interest income					290,500				435,200				388,800
	Interest expense					(79,800	)			(114,700	)			(137,000	)
	Other, net					(27,500	)			426,300				836,400
	Loss on Sale of G.C. Industries					—				(600,500	)			—
			Income from continuing operations before income taxes			3,341,300				2,091,000				4,296,900
Income tax expense						1,133,100				694,600				1,314,300
			Net income from continuing operations		$	2,208,200				1,396,400				2,982,600
Discontinued operations:
		Income from operations of discontinued subsidiaries net of income tax of $109,400 in 2002, $923,600 in 2001 and $941,300 in 2000				166,000				1,657,700				1,984,300
		Gain on disposal of subsidiaries, net of income tax of $2,142,800 in 2002				3,250,300				—				—
			Income from discontinued operations			3,416,300				1,657,700				1,984,300
			Net income		$	5,624,500				3,054,100				4,966,900
Basic net income per share data:
Continuing operations					$	0.50				0.31				0.60
Discontinued operations						0.77				0.38				0.55
Basic net income per common share					$	1.27				0.69				1.15
Weighted-average common shares outstanding (basic)						4,427,185				4,402,760				4,328,897
Diluted net income per share data:
Continuing operations						0.48				0.31				0.58
Discontinued operations						0.75				0.37				0.53
Diluted net income per common share					$	1.23				0.68				1.10
Weighted-average common shares outstanding (diluted)						4,580,653				4,476,014				4,497,490

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INVIVO CORPORATION AND SUBSIDIARIES

Consolidated Statements of Stockholders’ Equity and Comprehensive Income
Years ended June 30, 2002, 2001 and 2000

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INVIVO CORPORATION AND SUBSIDIARIES

Consolidated Statements of Cash Flows
Years ended June 30, 2002, 2001 and 2000