Detection technology firm acquires competitor in bid to expand offerings. (Media & Technology).

OSI Systems Inc., the Hawthorne-based manufacturer of airport X-ray scanners whose fortunes skyrocketed after the Sept. 11 attacks, has agreed to acquire a firm developing technology to detect dangerous substances in large cargo containers.

The deal with Ancore Corp. of Santa Clara, for $2 million in cash and 347,915 shares of OSI stock, could be worth as much as $7.5 million and was set to close late last week.

OSI's stock was trading at $5 per share before the terrorist attacks, but spiked to $25 in January 2002. It has since backed off, closing at $15.70 on Nov. 5.

Ancore is developing what it calls Pulsed Fast Neutron Analysis technology for determining the contents of large containers. Most existing scanners use X-rays to create images of container contents, but cannot determine which kinds of chemicals are inside.

Once advances in miniaturization are made, Ancore wants to replace scanners now used in some airports to detect explosives in small packages.

OSI agreed to pay a bonus of $2 million in cash and $4.7 million in cash or stock to Ancore's investors if the company secures and fulfills undisclosed government contracts by next May. OSI also agreed to pay Ancore investors 6 percent of all revenues from the sale of Pulsed Fast Neutron Systems for five years, with payments capped at $34 million. A typical cargo installation would cost from $10 million to $15 million.

"Since homeland security is a core business for us, we wanted to make sure we own that technology," said OSI Chief Executive Deepak Chopin.

Ancore was funded by $100 million in government and venture capital financing from Stone Technologies Corp., AMT Capital Ltd. and Nippon Investment & Finance Co. Ltd.

The price was substantially lower than the amount invested in Ancore because not all of the research and development has resulted in marketable technology, according to OSI spokesman Sanjay Sabnani.

The company's revenues in 2002 were less than $5 million, said Ancore's president, Tsahi Gozani.

In making the deal, OSI broadens its product base. The company focuses on manufacturing and marketing while Ancore specializes in research and development, though the two were competing for some of the same cargo bids after Sept. 11.

Ancore and OSI have worked together in the past, winning joint bids of $6 million contracts to provide large cargo inspection systems for customs agencies in Romania and Taiwan.

Two products that use Thermal Neutron Analysis are currently in a demonstration phase. The Vehicular Explosive Detection System can be driven beside parked cars or trucks to detect concealed explosives and drugs. The Small Parcel Explosive Detection System detects explosives in hand-carried items and packages.

Citing security restrictions, Sabnani would not disclose which government agencies are interested in the two products.

OSI's subsidiary, Rapiscan, has a baggage X-ray system currently in use at airports, courthouses, schools and prisons. New substance-detecting scanners would at first be extremely large and most useful at ports and border crossings, Sabnani said, and are not likely to appear at airport passenger terminals any time soon because installing them would require a major rebuilding.