##### Table of Contents



SECURITIES AND EXCHANGE
    COMMISSIONWashington, DC
    20549
  Form 10-Q
   (Mark One)þ

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
    SECURITIES EXCHANGE ACT OF 1934For the quarterly period ended
    March 31, 2007ORo

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
    SECURITIES EXCHANGE ACT OF 1934For the transition period
    from          to   Commission file number 0-26946
  INTEVAC, INC.
 (Exact name of registrant as
    specified in its charter)
  California

94-3125814(State or other jurisdiction
    of

(IRS Employerincorporation or
    organization)

Identification
    No.)   3560 Bassett Street
    Santa Clara, California 95054 (Address of principal
    executive office, including Zip Code)
   Registrants telephone number, including area code:
 (408) 986-9888
   þ o
  Rule 12b-2
 o þ o
  Rule 12b-2 o þ
  APPLICABLE ONLY TO CORPORATE ISSUERS:




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##### 



INTEVAC,
    INC.
  INDEX
  
  No.



PagePART I.
    FINANCIAL INFORMATIONItem 1.


Financial
    Statements (unaudited)Condensed
    Consolidated Balance Sheets


2Condensed
    Consolidated Statements of Income and Comprehensive
    Income


3Condensed
    Consolidated Statements of Cash Flows


4Notes to Condensed
    Consolidated Financial Statements


5Item 2.


Managements
    Discussion and Analysis of Financial Condition and Results of
    Operations


16Item 3.


Quantitative and
    Qualitative Disclosures About Market Risk


22Item 4.


Controls and
    Procedures


23PART II.
    OTHER INFORMATIONItem 1.


Legal
    Proceedings


24Item 1A.


Risk
    Factors


24Item 2.


Unregistered Sales
    of Equity Securities and Use of Proceeds


34Item 3.


Defaults Upon
    Senior Securities


34Item 4.


Submission of
    Matters to a Vote of Security Holders


34Item 5.


Other
    Information


34Item 6.


Exhibits


35SIGNATURES


36EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32.1   1




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##### Table of Contents



PART I.
    FINANCIAL INFORMATION  Item 1.
    Financial
    Statements  INTEVAC,
    INC.
  CONDENSED CONSOLIDATED BALANCE SHEETS
  March 31,


December 31,2007


2006(Unaudited)(In thousands)ASSETSCurrent assets:Cash and cash equivalents

$
30,796


$
39,440Short-term investments


71,700



55,595Trade and other accounts
    receivable, net of allowances of $149 and $143 at March 31,
    2007 and December 31, 2006


33,298



39,927Inventories


33,926



37,942Prepaid expenses and other current
    assets


2,134



2,506Deferred tax assets


4,100



3,269Total current assets


175,954



178,679Property, plant and equipment, net


14,511



13,546Long-term investments


12,000



8,000Investment in 601 California
    Avenue LLC


2,431



2,431Goodwill


5,434



Other intangible assets, net


299



Deferred income taxes and other
    long term assets


3,666



3,347Total assets

$
214,295


$
206,003LIABILITIES AND
    SHAREHOLDERS EQUITYCurrent liabilities:Notes payable

$
1,921


$
Accounts payable


16,287



15,994Accrued payroll and related
    liabilities


5,189



11,769Other accrued liabilities


9,796



6,612Customer advances


20,404



26,243Total current liabilities


53,597



60,618Other long-term liabilities


1,062



1,075Long-term notes payable


1,830



Shareholders equity:Common stock, no par value


101,096



99,468Additional paid-in capital


9,321



7,319Accumulated other comprehensive
    income


375



354Retained earnings


47,014



37,169Total shareholders equity


157,806



144,310Total liabilities and
    shareholders equity

$
214,295


$
206,003      2




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##### Table of Contents



INTEVAC,
    INC.
  CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND
    COMPREHENSIVE INCOME
  Three Months EndedMarch 31,


April 1,2007


2006(Unaudited)(In thousands, except per share amounts)Net revenues:Systems and components

$
73,593


$
48,074Technology development


2,781



1,546Total net revenues


76,374



49,620Cost of net revenues:Systems and components


42,129



31,340Technology development


1,507



952Inventory provisions (reversal of
    reserve)


(44
)


22Total cost of net revenues


43,592



32,314Gross profit


32,782



17,306Operating expenses:Research and development


12,192



5,561Selling, general and administrative


7,513



5,114Total operating expenses


19,705



10,675Operating income


13,077



6,631Interest expense


(46
)


(4
)Interest income and other, net


1,366



602Income before income taxes


14,397



7,229Provision for income taxes


4,552



218Net income

$
9,845


$
7,011Other comprehensive income:Foreign currency translation
    adjustments


21



29Total comprehensive income

$
9,866


$
7,040Basic income per share:Net income

$
0.46


$
0.34Shares used in per share amounts


21,293



20,832Diluted income per share:Net income

$
0.44


$
0.32Shares used in per share amounts


22,188



21,920    3




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##### Table of Contents



INTEVAC,
    INC.
  CONDENSED CONSOLIDATED STATEMENTS OF CASH
    FLOWS
  Three Months EndedMarch 31,


April 1,2007


2006(Unaudited)(In thousands)Operating activitiesNet income

$
9,845


$
7,011Adjustments to reconcile net
    income to net cash and cash equivalents provided by (used in)
    operating activities:Depreciation and amortization


1,163



601Inventory provisions (reversal of
    reserve)


(44
)


22Equity-based compensation


1,357



460Loss on disposal of equipment






1Changes in operating assets and
    liabilities


5,258



(12,863
)Total adjustments


3,351



(11,779
)Net cash and cash equivalents
    provided by (used in) operating activities


13,196



(4,768
)Investing activitiesPurchases of investments


(43,700
)


(33,631
)Proceeds from sales and maturities
    of investments


23,500



38,500Acquisition of DeltaNu LLC, net of
    cash acquired


(5,803
)


Purchases of leasehold
    improvements and equipment


(1,856
)


(1,152
)Net cash and cash equivalents
    provided by (used in) investing activities


(27,859
)


3,717Financing activitiesNet proceeds from issuance of
    common stock


1,645



1,708Issuance of notes payable


3,738



Tax benefit from equity-based
    compensation


645



Net cash and cash equivalents
    provided by financing activities


6,028



1,708Effect of exchange rate changes on
    cash


(9
)


19Net increase (decrease) in cash
    and cash equivalents


(8,644
)


676Cash and cash equivalents at
    beginning of period


39,440



15,255Cash and cash equivalents at end
    of period

$
30,796


$
15,931Supplemental Schedule of Cash
    Flow InformationCash paid for:Income taxes

$
1,500


$
    4




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##### Table of Contents



INTEVAC,
    INC.
  NOTES TO
    CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
  1.
    Business
    Activities and Basis of Presentation          Form 10-Q Regulation S-X. Form 10-K
      ® ® ®
  2.
    Concentrations      3.
    New
    Accounting Pronouncements   5




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##### Table of Contents



INTEVAC,
    INC.
  NOTES TO
    CONDENSED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
        4.
    Inventories  first-in,
  March 31,


December 31,2007


2006(In thousands)Raw materials

$
20,501


$
19,906Work-in-progress


13,054



12,271Finished goods


371



5,765$
33,926


$
37,942     Work-in-progress
    Three Months EndedMarch 31,


April 1,2007


2006(In thousands)Beginning balance

$
9,128


$
10,988New provisions (reversal of
    reserve) in cost of sales


(44
)


22New provisions for refurbishment
    of consigned products


6



5Disposals of inventory


(547
)


(70
)Ending balance

$
8,543


$
10,945  6




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##### Table of Contents



INTEVAC,
    INC.
  NOTES TO
    CONDENSED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  5.
    Stock-Based
    Compensation        Compensation
    Expense
    Three Months


Three MonthsEnded


EndedMarch 31, 2007


April 1, 2006Stock-based compensation by type
    of award:Stock options

$
1,145


$
344Employee stock purchase plan


213



116Amounts capitalized as inventory


(4
)


(32
)Total stock-based compensation


1,354



428Tax effect on stock-based
    compensation


(428
)


(13
)Net effect on net income

$
926


$
415Effect on earnings per share:Basic

$
0.04


$
0.02Diluted

$
0.04


$
0.02     Valuation
    Assumptions
     7




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##### Table of Contents



INTEVAC,
    INC.
  NOTES TO
    CONDENSED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    Three Months EndedMarch 31,


April 1,2007


2006Stock Options:Expected volatility


67.42
%


77.04
%Risk free interest rate


4.49
%


4.83
%Expected term of options (in years)


4.5



4.8Dividend yield


None



NoneStock Purchase Rights:Expected volatility


63.48
%


61.47
%Risk free interest rate


4.84
%


4.64
%Expected term of purchase rights
    (in years)


1.5



0.5Dividend yield


None



None      8




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##### Table of Contents



INTEVAC,
    INC.
  NOTES TO
    CONDENSED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
   Stock
    Plan Activity
  2004
    Equity Incentive Plan
    WeightedAverageWeighted


RemainingAverage


Contractual


AggregateExercise


Term


IntrinsicShares


Price


(Years)


ValueOptions outstanding at
    December 31, 2006


2,354,215


$
11.47



7.93


$
34,107,462Options granted


73,500


$
28.14Options forfeited


(9,016
)

$
11.72Options exercised


(158,517
)

$
6.14Options outstanding at
    March 31, 2007


2,260,182


$
12.39



7.90


$
31,776,661Vested and expected to vest at
    March 31, 2007


1,931,137


$
11.87



7.42


$
28,120,443Options exercisable at
    March 31, 2007


844,310


$
8.47



6.48


$
15,113,902Available to grant at
    March 31, 2007


221,886       2003
    Employee Stock Purchase Plan
      6.
    Business
    Combinations     9




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##### Table of Contents



INTEVAC,
    INC.
  NOTES TO
    CONDENSED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    Net liabilities assumed, net of
    cash of $4

$
(31
)Goodwill


5,434Backlog


120Trademarks/names


120Customer relationships


60Non-compete agreements


100Total

$
5,803       7.
    Warranty        Three Months EndedMarch 31,


April 1,2007


2006(In thousands)Beginning balance

$
5,283


$
3,399Expenditures incurred under
    warranties


(1,235
)


(1,123
)Accruals for product warranties
    issued during the reporting period


1,074



965Adjustments to previously existing
    warranty accruals


107



332Ending balance

$
5,229


$
3,573  10




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##### Table of Contents



INTEVAC,
    INC.
  NOTES TO
    CONDENSED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    March 31,


December 31,2007


2006(In thousands)Other accrued liabilities

$
4,167


$
4,208Other long-term liabilities


1,062



1,075Total warranty provision

$
5,229


$
5,283   8.
    Guarantees    9.
    Cash,
    Cash Equivalents and Investments in Debt Securities    available-for-sale held-to-maturity. Available-for-sale Held-to-maturity available-for-sale
  11




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##### Table of Contents



INTEVAC,
    INC.
  NOTES TO
    CONDENSED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  March 31,


December 31,2007


2006(In thousands)Amortized Principal Amount:Debt securities issued by the US
    government and its agencies

$
12,000


$
8,000Auction rate securities


71,700



53,595Corporate debt securities






2,000Total investments in debt
    securities

$
83,700


$
63,595Short-term investments

$
71,700


$
55,595Long-term investments


12,000



8,000Total investments in debt
    securities

$
83,700


$
63,595Approximate fair value of
    investments in debt securities

$
83,699


$
63,585   03-01, other-than-temporarily
    10.
    Net
    Income Per Share    Three Months EndedMarch 31,


April 1,2007


2006(In thousands)Numerator:Numerator for diluted earnings per
    share  income available to common stockholders

$
9,845


$
7,011Denominator:Denominator for basic earnings per
    share  weighted-average shares


21,293



20,832Effect of dilutive securities:Employee stock options(1)


895



1,088Dilutive potential common shares


895



1,088Denominator for diluted earnings
    per share  adjusted weighted-average shares and
    assumed conversions


22,188



21,920     (1)
    
    Potentially dilutive securities, consisting of shares issuable
    upon exercise of employee stock options, are excluded from the
    calculation of diluted EPS when their effect would be
    anti-dilutive. The weighted average number of employee stock
    options excluded for the three-month periods ended
    March 31, 2007 and April 1, 2006 was 249,850 and
    65,753 respectively. 12




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##### Table of Contents



INTEVAC,
    INC.
  NOTES TO
    CONDENSED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
   11.
    Segment
    Reporting  Segment
    Description
      Segment
    Profit or Loss and Segment Assets
    Business
    Segment Net Revenues
  Three Months EndedMarch 31,


April 1,2007


2006(In thousands)Equipment

$
72,446


$
47,573Imaging


3,928



2,047Total

$
76,374


$
49,620   Business
    Segment Profit & Loss
  Three Months EndedMarch 31,


April 1,2007


2006(In thousands)Equipment

$
14,989


$
8,480Imaging


(1,600
)


(1,869
)Corporate activities


(312
)


20Operating income


13,077



6,631Interest expense


(46
)


(4
)Interest income


1,238



492Other income and expense, net


128



110Income before income taxes

$
14,397


$
7,229  13




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##### Table of Contents



INTEVAC,
    INC.
  NOTES TO
    CONDENSED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  Business
    Segment Net Assets
  March 31,


December 31,2007


2006(In thousands)Equipment

$
72,071


$
84,366Imaging


15,657



7,379Corporate activities


126,567



114,258Total

$
214,295


$
206,003   Geographic
    Area Net Trade Revenues
  Three Months EndedMarch 31,


April 1,2007


2006(In thousands)United States

$
7,000


$
8,556Asia


69,004



41,064Europe


370



Total

$
76,374


$
49,620   12.
    Income
    Taxes        non-U.S. income
   14




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##### Table of Contents



INTEVAC,
    INC.
  NOTES TO
    CONDENSED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
   13.
    Contingencies            14.
    Capital
    Transactions    15.
    Financial
    Presentation   15




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##### Table of Contents



Item 2.
    Managements
    Discussion and Analysis of Financial Condition and Results of
    Operations  This Quarterly Report on
    Form 10-Q
    contains forward-looking statements, which involve risks and
    uncertainties. Words such as believes,
    expects, anticipates and the like
    indicate forward-looking statements. These forward looking
    statements include comments related to our shipments, projected
    revenue recognition, product costs, gross margin, operating
    expenses, interest income, cash balances and financial results
    in 2007; our projected customer requirements for new capacity
    and for technology upgrades for their installed base of our
    thin-film disk sputtering equipment, and when, and if, our
    customers will place orders for these products; Imagings
    ability to proliferate its technology into major military
    weapons programs and to develop and introduce commercial imaging
    products; and the timing of delivery
    and/or
    acceptance of the systems and products that comprise our backlog
    for revenue. Our actual results may differ materially from the
    results discussed in the forward-looking statements for a
    variety of reasons, including those set forth under Risk
    Factors and in other documents we file from time to time
    with the Securities and Exchange Commission, including
    Intevacs Annual Report on
    Form 10-K
    filed in March 2007,
    Form 10-Qs
    and
    Form 8-Ks.
  Critical
    Accounting Policies and Estimates
  Form 10-K.
        Revenue
    Recognition
   16




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percentage-of-completion
  Inventories
  first-in, cost-to-market work-in-progress
  Warranty
    Income
    Taxes
   17




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##### Table of Contents



Results
    of Operations
  Three
    Months Ended March 31, 2007 and April 1,
    2006.
  Net
    revenues
  Three Months Ended


Change OverMarch 31,


April 1,


Prior Period2007


2006


Amount


%(In thousands, except percentages)Equipment net revenues

$
72,446


$
47,573


$
24,873



52
%Imaging net revenues


3,928



2,047



1,881



92
%Total net revenues

$
76,374


$
49,620


$
26,754



54
%     ®
       18




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##### Table of Contents



Gross
    margin
  Three Months EndedMarch 31,


April 1,2007


2006


% Change(In thousands, except percentages)Equipment gross profit

$
31,345


$
16,769



87
%% of Equipment net revenues


43.3
%


35.2
%Imaging gross profit

$
1,437


$
537



168
%% of Imaging net revenues


36.6
%


26.2
%Total gross profit

$
32,782


$
17,306



89
%% of net revenues


42.9
%


34.9
%         Research
    and development
  Three Months Ended


Change OverMarch 31,


April 1,


Prior Period2007


2006


Amount


%(In thousands, except percentages)Research and development expense

$
12,192


$
5,561


$
6,631



119
%% of net revenues


16.0
%


11.2
%      19




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##### Table of Contents



Selling,
    general and administrative
  Three Months Ended


Change OverMarch 31,


April 1,


Prior Period2007


2006


Amount


%(In thousands, except percentages)Selling, general and
    administrative expense

$
7,513


$
5,114


$
2,399



47
%% of net revenues


9.8
%


10.3
%       Interest
    income and other, net
  Three Months Ended


Change OverMarch 31,


April 1,


Prior Period2007


2006


Amount


%(In thousands, except percentages)Interest income and other, net

$
1,320


$
598


$
722



121
%     Provision
    for income taxes
  Three Months Ended


Change OverMarch 31,


April 1,


Prior Period2007


2006


Amount


%(In thousands, except percentages)Provision for income taxes

$
4,552


$
218


$
4,334



1988
%  20




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##### Table of Contents



Stock-Based
    Compensation
        Liquidity
    and Capital Resources
           21




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##### Table of Contents



Contractual
    Obligations
    Payments Due by PeriodTotal


< 1 Year


1-3 Years


3-5 Years


> 5 Years(In thousands)Operating lease obligations

$
11,672


$
2,228


$
4,632


$
4,617


$
195Purchase obligations


22,333



22,333











Total

$
34,005


$
24,561


$
4,632


$
4,617


$
195   Item 3.
    Quantitative
    and Qualitative Disclosures About Market Risk  Interest rate risk.
    2007


2008


2009


Beyond


Total


Fair Value(In thousands, except percentages)Cash equivalentsFixed rate amounts

$
5,176














$
5,176


$
5,176Weighted-average rate


5.26
%Variable rate amounts

$
10,961














$
10,961


$
10,961Weighted-average rate


5.24
%Short-term investmentsFixed rate amounts

$
71,700














$
71,700


$
71,700Weighted-average rate


5.24
%Long-term investmentsFixed rate amounts





$
8,000


$
4,000






$
12,000


$
11,999Weighted-average rate






5.28
%


5.48
%Total investment portfolio

$
87,837


$
8,000


$
4,000






$
99,837


$
99,836     Foreign exchange risk.
 22




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Item 4.
    Controls
    and Procedures  Evaluation
    of disclosure controls and procedures.
  Form 10-Q Rule 13a-15(b)
  Rule 13a-14
  Definition
    of Disclosure Controls
    Limitations
    on the Effectiveness of Controls
    Changes
    in internal controls over financial reporting
  Form 10-Q
 23




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##### Table of Contents



PART II.
    OTHER INFORMATION  Item 1.
    Legal
    Proceedings  Patent
    Infringement Complaint against Unaxis
          Other
    Legal Matters
    Item 1A.
    Risk
    Factors  Demand
    for capital equipment is cyclical, which subjects our business
    to long periods of depressed revenues interspersed with periods
    of unusually high revenues.
     24




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If the
    projected growth in demand for hard disk drives does not
    materialize and our customers do not replace or upgrade their
    installed base of disk sputtering systems, then future sales of
    our disk sputtering systems will suffer.
          Our
    operating results fluctuate significantly from quarter to
    quarter, which may cause the price of our stock to
    decline.
    
    changes in the demand, due to seasonality, cyclicality and other
    factors, for computer systems, storage subsystems and consumer
    electronics containing disks our customers produce with our
    systems; and
    delays or problems in the introduction and acceptance of our new
    products, or delivery of existing products;
    our business is inherently subject to fluctuations in revenue
    from quarter to quarter due to factors such as timing of orders,
    acceptance of new systems by our customers or cancellation of
    those orders;
    new products, services or technological innovations by our
    competitors or us.  quarter-to-quarter
 25




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##### Table of Contents



We are
    exposed to risks associated with a highly concentrated customer
    base.
    Our
    long-term revenue growth is dependent on new products. If these
    new products are not successful, then our results of operations
    will be adversely affected.
           26




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We may
    not be successful in maintaining and obtaining the necessary
    export licenses to conduct operations abroad, and the United
    States government may prevent proposed sales to foreign
    customers.
    Our
    products are complex, constantly evolving and often must be
    customized to individual customer requirements.
    Our
    sales cycle is long and unpredictable, which requires us to
    incur high sales and marketing expenses with no assurance that a
    sale will result.
   27




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##### Table of Contents



state-of-the-art
    We
    operate in an intensely competitive marketplace, and our
    competitors have greater resources than we do.
    We
    experienced significant growth in our business and operations
    and if we do not appropriately manage this growth and any future
    growth, our operating results will be negatively
    affected.
     28




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Our
    Imaging business depends heavily on government contracts, which
    are subject to immediate termination and are funded in
    increments. The termination of or failure to fund one or more of
    these contracts could have a negative impact on our
    operations.
        Unexpected
    increases in the cost to develop or manufacture our products
    under fixed-price contracts may cause us to experience
    un-reimbursed cost overruns.
    Our
    sales of disk sputtering systems are dependent on substantial
    capital investment by our customers, far in excess of the cost
    of our products.
    Our
    stock price is volatile.
   29




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##### Table of Contents




    our perceived prospects;
    hard disk drive market expectations;
    variations in our operating results and whether we achieve our
    key business targets;
    sales or purchases of large blocks of our stock;
    changes in, or our failure to meet, our revenue and earnings
    estimates;
    changes in securities analysts buy or sell recommendations;
    differences between our reported results and those expected by
    investors and securities analysts;
    announcements of new contracts, products or technological
    innovations by us or our competitors;
    market reaction to any acquisitions, joint ventures or strategic
    investments announced by us or our competitors;
    our high fixed operating expenses, including research and
    development expenses;
    developments in the financial markets; and
    general economic, political or stock market conditions in the
    United States and other major regions in which we do business.    Changes
    in tax rates or tax liabilities could affect future
    results.
      Our
    future success depends on international sales and the management
    of global operations
    
    varying regional and geopolitical business conditions and
    demands;
    global trade issues;
    variations in protection of intellectual property and other
    legal rights in different countries; 30




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
    rising raw material and energy costs;
    variations in the ability to develop relationships with
    suppliers and other local businesses;
    changes in laws and regulations of the United States (including
    export restrictions) and other countries, as well as their
    interpretation and application;
    fluctuations in interest rates and currency exchange rates;
    the need to provide sufficient levels of technical support in
    different locations;
    political instability, natural disasters (such as earthquakes,
    hurricanes or floods), pandemics, terrorism or acts of war where
    we have operations, suppliers or sales;
    cultural differences; and
    shipping delays.  Changes
    in existing financial accounting standards or practices or
    taxation rules or practices may adversely affect our results of
    operations.
    We are
    required to evaluate our internal control over financial
    reporting under Section 404 of the Sarbanes-Oxley Act of
    2002, and any adverse results from such evaluation could result
    in a loss of investor confidence in our financial reports and
    have an adverse effect on our stock price.
  Form 10-K
    Our
    dependence on suppliers for certain parts, some of them
    sole-sourced, makes us vulnerable to manufacturing interruptions
    and delays, which could affect our ability to meet customer
    demand.
  sub-assemblies
 31




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Our
    business depends on the integrity of our intellectual property
    rights and failure to protect our intellectual property rights
    adequately could have a material adverse effect on our
    business.
    
    any of our pending or future patent applications will be allowed
    or that any of the allowed applications will be issued as
    patents or will issue with claims of the scope we sought;
    any of our patents will not be invalidated, deemed
    unenforceable, circumvented or challenged;
    the rights granted under our patents will provide competitive
    advantages to us;
    other parties will not develop similar products, duplicate our
    products or design around our patents; or
    our patent rights, intellectual property laws or our agreements
    will adequately protect our intellectual property or competitive
    position.  We may
    be subject to claims of intellectual property
    infringement.
    Our
    success is dependent on recruiting and retaining a highly
    talented work force.
      Changes
    in demand caused by fluctuations in interest and currency
    exchange rates may reduce our international sales.
     32




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Difficulties
    in integrating past or future acquisitions could adversely
    affect our business.
    We use
    hazardous materials and are subject to risks of non-compliance
    with environmental and safety regulations.
    Future
    sales of shares of our common stock by our officers, directors
    and affiliates could cause our stock price to
    decline.
    Anti-takeover
    provisions in our charter documents and under California law
    could prevent or delay a change in control, which could
    negatively impact the value of our common stock by discouraging
    a favorable merger or acquisition of us.
   33




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We
    could be involved in litigation
    Business
    interruptions could adversely affect our
    operations.
    Item 2.
    Unregistered
    Sales of Equity Securities and Use of Proceeds    Item 3.
    Defaults
    upon Senior Securities    Item 4.
    Submission
    of Matters to a Vote of Security-Holders    Item 5.
    Other
    Information   34




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Item 6.
    Exhibits    ExhibitNumber

Description31
.1

Certification of President and
    Chief Executive Officer Pursuant to Section 302 of the
    Sarbanes-Oxley Act of 2002.31
.2

Certification of Vice President,
    Finance and Administration, Chief Financial Officer, Treasurer
    and Secretary Pursuant to Section 302 of the Sarbanes-Oxley
    Act of 2002.32
.1

Certification Pursuant to U.S.C.
    1350 adopted Pursuant to Section 906 of the Sarbanes- Oxley
    Act of 2002.  35




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SIGNATURES      By:
    /s/  KEVIN
    FAIRBAIRN        By:
    /s/  CHARLES
    B. EDDY III    
   36




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##### Table of Contents



Exhibit Index
  ExhibitNumber

Description31
.1

Certification of President and
    Chief Executive Officer Pursuant to Section 302 of the
    Sarbanes-Oxley Act of 2002.31
.2

Certification of Vice President,
    Finance and Administration, Chief Financial Officer, Treasurer
    and Secretary Pursuant to Section 302 of the Sarbanes-Oxley
    Act of 2002.32
.1

Certification Pursuant to U.S.C.
    1350 adopted Pursuant to Section 906 of the Sarbanes- Oxley
    Act of 2002.