##### Table of Contents



SECURITIES AND EXCHANGE
    COMMISSION
 Washington, 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 June 30, 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)
  Delaware

94-3125814(State or other jurisdiction
    of
    incorporation or organization)

(IRS Employer
    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:




---



##### 



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


24Item
    4.

Controls and
    Procedures


25PART
    II. OTHER INFORMATIONItem
    1.

Legal
    Proceedings


26Item
    1A.

Risk
    Factors


26Item
    2.

Unregistered Sales
    of Equity Securities and Use of Proceeds


36Item
    3.

Defaults Upon
    Senior Securities


36Item
    4.

Submission of
    Matters to a Vote of Security Holders


37Item
    5.

Other
    Information


37Item
    6.

Exhibits


37SIGNATURES


38EXHIBIT 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
  June 30,


December 31,2007


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

$
30,442


$
39,440Short term investments


74,993



55,595Trade and other accounts
    receivable, net of allowances of $152 and $143 at June 30,
    2007 and December 31, 2006


38,981



39,927Inventories


27,870



37,942Prepaid expenses and other current
    assets


2,044



2,506Deferred tax assets


4,100



3,269Total current assets


178,430



178,679Property, plant and equipment, net


15,004



13,546Long-term investments


12,000



8,000Investment in 601 California
    Avenue LLC


2,431



2,431Goodwill


5,434



Other intangible assets, net of
    amortization of $153


247



Deferred income taxes and other
    long term assets


3,497



3,347Total assets

$
217,043


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

$
1,945


$
Accounts payable


9,815



15,994Accrued payroll and related
    liabilities


8,541



11,769Other accrued liabilities


7,467



6,612Customer advances


15,387



26,243Total current liabilities


43,155



60,618Other long-term liabilities


934



1,075Long-term notes payable


1,853



Shareholders equity:Common stock, no par value


101,346



99,468Additional paid in capital


10,825



7,319Accumulated other comprehensive
    income


364



354Retained earnings


58,566



37,169Total shareholders equity


171,101



144,310Total liabilities and
    shareholders equity

$
217,043


$
206,003      2




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##### Table of Contents



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


Six Months EndedJune 30,


July 1,


June 30,


July 1,2007


2006


2007


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

$
69,603


$
56,843


$
143,196


$
104,917Technology development


2,502



2,699



5,283



4,245Total net revenues


72,105



59,542



148,479



109,162Cost of net revenues:Systems and components


39,808



35,838



81,937



67,178Technology development


1,383



1,909



2,890



2,861Inventory provisions


87



533



43



555Total cost of net revenues


41,278



38,280



84,870



70,594Gross profit


30,827



21,262



63,609



38,568Operating expenses:Research and development


9,648



6,290



21,840



11,851Selling, general and administrative


7,839



5,004



15,352



10,118Total operating expenses


17,487



11,294



37,192



21,969Operating profit


13,340



9,968



26,417



16,599Interest income and other, net


1,538



729



2,858



1,327Income before income taxes


14,878



10,697



29,275



17,926Provision for income taxes


3,326



1,364



7,878



1,582Net income

$
11,552


$
9,333


$
21,397


$
16,344Other comprehensive income:Foreign currency translation
    adjustments


(11
)


34



10



63Total comprehensive income

$
11,541


$
9,367


$
21,407


$
16,407Basic income per share:Net income

$
0.54


$
0.44


$
1.00


$
0.78Shares used in per share amounts


21,396



20,987



21,345



20,910Diluted income per share:Net income

$
0.52


$
0.42


$
0.97


$
0.75Shares used in per share amounts


22,146



21,972



22,167



21,883    3




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##### Table of Contents



INTEVAC,
    INC.
  CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
  Six Months EndedJune 30,


July 1,2007


2006(Unaudited)(In thousands)Operating activitiesNet income

$
21,397


$
16,344Adjustments to reconcile net
    income to net cash and cash equivalents used in operating
    activities:Depreciation and amortization


2,187



1,240Inventory provisions


43



555Equity-based compensation


2,739



1,180Loss on disposal of equipment






5Changes in operating assets and
    liabilities


(9,127
)


(3,584
)Total adjustments


(4,158
)


(604
)Net cash and cash equivalents
    provided by operating activities


17,239



15,740Investing activitiesPurchases of investments


(71,661
)


(81,303
)Proceeds from maturities of
    investments


48,200



70,550Acquisition of DeltaNu LLC, net of
    cash acquired


(5,803
)


Purchases of leasehold
    improvements and equipment


(3,406
)


(2,196
)Net cash and cash equivalents used
    in investing activities


(32,670
)


(12,949
)Financing activitiesNet proceeds from issuance of
    common stock


1,861



2,223Issuance of notes payable


3,798



Tax benefit from equity-based
    compensation


767



Net cash and cash equivalents
    provided by financing activities


6,426



2,223Effect of exchange rate changes on
    cash


7



52Net increase (decrease) in cash
    and cash equivalents


(8,998
)


5,066Cash and cash equivalents at
    beginning of period


39,440



15,255Cash and cash equivalents at end
    of period

$
30,442


$
20,321Supplemental Schedule of Cash
    Flow InformationCash paid for:Income taxes

$
6,544


$
2,723    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
      ® ® ® tm ®
  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,
  June 30,


December 31,2007


2006(In thousands)Raw materials

$
17,361



19,906Work-in-progress


8,311



12,271Finished goods


2,198



5,765$
27,870


$
37,942     work-in-progress Work-in-progress
 6




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##### Table of Contents



INTEVAC,
    INC.
  NOTES TO
    CONDENSED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    Six Months EndedJune 30,


July 1,2007


2006(In thousands)Beginning balance

$
9,128


$
10,988New provisions in cost of sales


43



555New provisions for refurbishment
    of consigned products


23



7Disposals of inventory


(1,636
)


(2,058
)Ending balance

$
7,558


$
9,492   5.
    Stock-Based
    Compensation        Compensation
    Expense
    Three Months Ended


Six Months EndedJune 30,


July 1,


June 30,


July 1,2007


2006


2007


2006Stock-based compensation by type
    of award:Stock options

$
1,169


$
552


$
2,314


$
896Employee stock purchase plan


214



167



427



283Amounts capitalized as inventory


(68
)


(24
)


(72
)


(56
)Total stock-based compensation


1,315



695



2,669



1,123Tax effect on stock-based
    compensation


(290
)


(61
)


(718
)


(99
)Net effect on net income


1,025



634



1,951



1,024Effect on earnings per share:Basic

$
0.05


$
0.03


$
0.09


$
0.05Diluted

$
0.05


$
0.03


$
0.09


$
0.04  7




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##### Table of Contents



INTEVAC,
    INC.
  NOTES TO
    CONDENSED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  Valuation
    Assumptions
      Three Months Ended


Six Months EndedJune 30,


July 1,


June 30,


July 1,2007


2006


2007


2006Stock Options:Expected volatility


68.30
%


81.71
%


67.93
%


77.91
%Risk free interest rate


4.67
%


5.09
%


4.59
%


4.88
%Expected term of options (in years)


4.4



5.8



4.5



5.0Dividend yield


None



None



None



None   Six Months EndedJune 30,


July 1,2007


2006Stock 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


Remaining


AggregateAverage Exercise


Contractual


IntrinsicShares


Price


Term (years)


ValueOptions outstanding at
    December 31, 2006


2,354,215


$
11.47



7.93


$
34,107,462Options granted


175,000


$
23.52Options forfeited


(78,966
)

$
17.98Options exercised


(184,564
)

$
6.45Options outstanding at
    June 30, 2007


2,265,685


$
12.59



7.51


$
20,551,997Vested and expected to vest at
    June 30, 2007


1,871,807


$
11.98



7.27


$
18,015,062Options exercisable at
    June 30, 2007


834,513


$
8.71



5.66


$
10,514,679Available to grant at
    June 30, 2007


1,090,336       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 Ended


Six Months EndedJune 30,


July 1,


June 30,


July 1,2007


2006


2007


2006(In thousands)Beginning balance

$
5,229


$
3,573


$
5,283


$
3,399Expenditures incurred under
    warranties


(1,189
)


(720
)


(2,424
)


(1,844
)Accruals for product warranties
    issued during the reporting period


674



1,102



1,748



2,077Adjustments to previously existing
    warranty accruals


(156
)


89



(49
)


412Ending balance

$
4,558


$
4,044


$
4,558


$
4,044  10




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##### Table of Contents



INTEVAC,
    INC.
  NOTES TO
    CONDENSED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    June 30,


December 31,2007


2006(In thousands)Other accrued liabilities

$
3,624


$
4,208Other long-term liabilities


934



1,075Total warranty provision

$
4,558


$
5,283   8.
    Guarantees    9.  Cash,
    Cash Equivalents and Investments in Debt Securities
      11




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##### Table of Contents



INTEVAC,
    INC.
  NOTES TO
    CONDENSED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  June 30,


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


72,000



53,595Corporate debt securities


2,993



2,000Total investments in debt
    securities

$
86,993


$
63,595Short-term investments

$
74,993


$
55,595Long-term investments


12,000



8,000Total investments in debt
    securities

$
86,993


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

$
86,983


$
63,585   EITF 03-01,
    10.
    Net
    Income Per Share    Three Months Ended


Six Months EndedJune 30,


July 1,


June 30,


July 1,2007


2006


2007


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

$
11,552


$
9,333


$
21,397


$
16,344Denominator:Denominator for basic earnings per
    share  weighted-average shares


21,396



20,987



21,345



20,910Effect of dilutive securities:Employee stock options(1)


750



985



822



973Dilutive potential common shares


750



985



822



973Denominator for diluted earnings
    per share  adjusted


22,146



21,972



22,167



21,883     (1)
    
    Potentially dilutive securities, consisting of shares issuable
    upon exercise of employee stock options and weighted-average
    unamortized compensation expense, are excluded from the
    calculation of diluted EPS when their effect is anti-dilutive.
    The weighted average number of employee stock options excluded
    for the three-month periods ended June 30, 2007 and
    July 1, 2006 was 455,217 and 196,000, respectively, and the
    number of 12




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##### Table of Contents



INTEVAC,
    INC.
  NOTES TO
    CONDENSED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  employee stock options excluded for the six-month periods ended
    June 30, 2007 and July 1, 2006 was 352,534 and
    196,640, respectively.  11.
    Segment
    Reporting  Segment
    Description
      Segment
    Profit or Loss and Segment Assets
    Business
    Segment Net Revenues
  Three Months Ended


Six Months EndedJune 30,


July 1,


June 30,


July 12007


2006


2007


2006(In thousands)Equipment

$
68,519


$
56,465


$
140,965


$
104,038Imaging


3,586



3,077



7,514



5,124Total

$
72,105


$
59,542


$
148,479


$
109,162   Business
    Segment Profit & Loss
  Three Months Ended


Six Months EndedJune 30,


July 1,


June 30,


July 1,2007


2006


2007


2006(In thousands)Equipment

$
15,842


$
10,974


$
30,831


$
19,454Imaging


(1,515
)


(1,159
)


(3,115
)


(3,028
)Corporate activities


(987
)


153



(1,299
)


173Operating income


13,340



9,968



26,417



16,599Interest income and other, net


1,538



729



2,858



1,327Income before income taxes

$
14,878


$
10,697


$
29,275


$
17,926  13




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##### Table of Contents



INTEVAC,
    INC.
  NOTES TO
    CONDENSED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  Business
    Segment Assets
  June 30,


December 31,2007


2006(In thousands)Equipment

$
71,944


$
84,366Imaging


15,143



7,379Corporate activities


129,956



114,258Total

$
217,043


$
206,003     Geographic
    Area Net Trade Revenues
  Three Months Ended


Six Months EndedJune 30,


July 1,


June 30,


July 1,2007


2006


2007


2006(In thousands)United States

$
8,941


$
8,073


$
15,941


$
16,629Asia


63,068



51,452



132,072



92,516Europe


96



17



466



17Total

$
72,105


$
59,542


$
148,479


$
109,162     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, income taxes, cash balances and
    financial results in 2007; projected customer requirements for
    our new and existing products,, 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; legal proceedings; and internal controls. 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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##### Table of Contents



Inventories
  first-in, work-in-progress
  Warranty
    Income
    Taxes
   17




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##### Table of Contents



Results
    of Operations
  Three
    Months Ended June 30, 2007 and July 1,
    2006.
  Net
    revenues
  Change OverThree Months Ended


Prior PeriodJune 30,


July 1,2007


2006


Amount


%(In thousands, except percentages)Equipment net revenues

$
68,519


$
56,465


$
12,054



21
%Imaging net revenues


3,586



3,077



509



17
%Total net revenues

$
72,105


$
59,542


$
12,563



21
%          18




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##### Table of Contents



Gross
    margin
  Three Months EndedJune 30,


July 1,2007


2006


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

$
29,433


$
20,528



43
%% of Equipment net revenues


43.0
%


36.4
%Imaging gross profit

$
1,394


$
782



78
%% of Imaging net revenues


38.9
%


25.4
%Total gross profit

$
30,827


$
21,262



45
%% of net revenues


42.8
%


35.7
%         Research
    and development
  Three Months Ended


Change OverJuly 1,


July 2,


Prior Period2006


2005


Amount


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

$
9,648


$
6,290


$
3,358



53
%% of net revenues


13.4
%


10.6
%    19




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##### Table of Contents



tm
    Selling,
    general and administrative.
  Change OverThree Months Ended


Prior PeriodJune 30,


July 1,2007


2006


Amount


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

$
7,839


$
5,004


$
2,835



57
%% of net revenues


10.9
%


8.4
%       Interest
    income and other, net
  Change OverThree Months Ended


Prior PeriodJune 30,


July 1,2007


2006


Amount


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

$
1,538


$
729


$
809



111
%    20




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##### Table of Contents



Provision
    for income taxes.
  Change OverThree Months Ended


Prior PeriodJune 30,


July 1,2007


2006


Amount


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

$
3,326


$
1,364


$
1,962



144
%       Six
    Months Ended June 30, 2007 and June 1,
    2006.
  Net
    revenues
  Change OverSix Months Ended


Prior PeriodJune 30,


July 1,2007


2006


Amount


%(In thousands, except percentages)Equipment net revenues

$
140,965


$
104,038


$
36,927



35
%Imaging net revenues


7,514



5,124



2,390



47
%Total net revenues

$
148,479


$
109,162


$
39,317



36
%       Gross
    margin
  Six Months EndedJune 30,


July 1,2007


2006


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

$
60,778


$
37,297



63
%% of Equipment net revenues


43.1
%


35.8
%Imaging gross profit

$
2,831


$
1,319



115
%% of Imaging net revenues


37.7
%


25.7
%Total gross profit

$
63,609


$
38,568



65
%% of net revenues


42.8
%


35.3
%  21




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##### Table of Contents



Research
    and development
  Change OverSix Months Ended


Prior PeriodJune 30,


July 1,2007


2006


Amount


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

$
21,840


$
11,851


$
9,989



84
%% of net revenues


14.7
%


10.9
%   tm
    Selling,
    general and administrative
  Change OverSix Months Ended


Prior PeriodJune 30,


July 1,2007


2006


Amount


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

$
15,352


$
10,118


$
5,234



52
%% of net revenues


10.3
%


9.3
%     Interest
    income and other, net
  Change OverSix Months Ended


Prior PeriodJune 30,


July 1,2007


2006


Amount


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

$
2,858


$
1,327


$
1,531



115
%    22




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##### Table of Contents



Provision
    for income taxes.
  Change OverSix Months Ended


Prior PeriodJune 30,


July 1,2007


2006


Amount


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

$
7,878


$
1,582


$
6,296



398
%       Stock-Based
    Compensation
        Liquidity
    and Capital Resources
         23




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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

$
11,108


$
2,244


$
4,659


$
4,063


$
142Purchase obligations


9,204



9,204











Total

$
20,312


$
11,448


$
4,659


$
4,063


$
142  Item 3.Quantitative
    and Qualitative Disclosures About Market Risk  Interest rate risk.
    Fair2007


2008


2009


Beyond


Total


ValueCash equivalents Fixed rate amounts

$
13,894














$
13,894


$
13,894Weighted-average rate


5.28
%Variable rate amounts

$
5,434














$
5,434


$
5,434Weighted-average rate


5.23
%Short-term investments Fixed rate
    amounts

$
74,993














$
74,993


$
74,993Weighted-average rate


5.24
%Long-term investments Fixed rate
    amounts





$
6,000


$
6,000






$
12,000


$
11,990Weighted-average rate






5.23
%


5.29
%Total investment portfolio

$
94,321


$
6,000


$
6,000






$
106,321


$
106,311     Foreign exchange risk.
 24




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##### Table of Contents



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
 25




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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.
   26




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##### Table of Contents



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.
          We are
    exposed to risks associated with a highly concentrated customer
    base.
   27




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##### Table of Contents



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.    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.
         28




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##### Table of Contents



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.
   29




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##### Table of Contents



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.
        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.
   30




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##### Table of Contents



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 equipment products are dependent on substantial capital
    investment by our customers, far in excess of the cost of our
    products.
   31




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##### Table of Contents



Our
    stock price is volatile.
    
    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.
     32




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##### Table of Contents



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;
    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
   33




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##### Table of Contents



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.
      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.
   34




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##### Table of Contents



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 Delaware 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.
   35




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##### Table of Contents



We
    could be involved in litigation
  Form 10-Q
  Business
    interruptions could adversely affect our
    operations.
   Item 2.Unregistered
    Sales of Equity Securities and Use of Proceeds   Item 3.Defaults
    upon Senior Securities   36




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##### Table of Contents



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


Negative


Votes


and BrokerVotes


Votes


Withheld


Non-Votes(a)

Election of DirectorsNorman H. Pond


17,711,149







1,578,154



2,093,525Kevin Fairbairn


18,338,660







950,643



2,093,525David S. Dury


18,341,787







947,516



2,093,525Stanley J. Hill


18,341,787







947,516



2,093,525Robert Lemos


17,829,673







1,459,630



2,093,525Ping Yang


17,829,573







1,459,730



2,093,525(b)

Proposal to approve the
    reincorporation of the Company from California to Delaware by
    means of a merger with and into a wholly owned Delaware
    subsidiary


14,734,284



1,621,571







2,933,448(c)

Proposal to approve an amendment
    to the 2004 Equity Incentive Plan to increase the number of
    shares reserved for issuance thereunder by 900,000 shares


12,846,633



3,431,595







3,011,075(d)

Ratification of Grant Thornton LLP
    as independent public accountants for the fiscal year ending
    December 31, 2007


19,230,987



50,988







7,328   Item 5.
    Other
    Information   Item 6.Exhibits    ExhibitNumber

Description31
.1

Certification of President and
    Chief Executive Officer Pursuant to Section 302 of the
    Sarbanes-Oxley Act of 200231
.2

Certification of Vice President,
    Finance and Administration, Chief Financial Officer, Treasurer
    and Secretary Pursuant to Section 302 of the Sarbanes-Oxley
    Act of 200232
.1

Certification Pursuant to U.S.C.
    1350 adopted Pursuant to Section 906 of the Sarbanes- Oxley
    Act of 2002  37




---



##### Table of Contents



SIGNATURES      Date: August 9, 2007

By: /s/  KEVIN
    FAIRBAIRNKevin
    Fairbairn
    President, Chief Executive Officer and Director
    (Principal Executive Officer)Date: August 9, 2007

By: /s/  CHARLES
    B. EDDY IIICharles
    B. Eddy III
    Vice President, Finance and Administration,
    Chief Financial Officer, Treasurer and Secretary
    (Principal Financial and Accounting Officer)  38




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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 200231
.2

Certification of Vice President,
    Finance and Administration, Chief Financial Officer, Treasurer
    and Secretary Pursuant to Section 302 of the Sarbanes-Oxley
    Act of 200232
.1

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