##### 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
    September 30, 2006ORo

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
    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:




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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

17Item 3.


Quantitative and
    Qualitative Disclosures About Market Risk

25Item 4.


Controls and
    Procedures

26PART II. OTHER
    INFORMATIONItem 1.


Legal
    Proceedings

27Item 1A.


Risk
    Factors

27Item 2.


Unregistered Sales
    of Equity Securities and Use of Proceeds

37Item 3.


Defaults Upon
    Senior Securities

38Item 4.


Submission of
    Matters to a Vote of Security Holders

38Item 5.


Other
    Information

38Item 6.


Exhibits

38SIGNATURES

39EXHIBIT 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
  September 30,


December 31,2006


2005(Unaudited)(In thousands)ASSETSCurrent assets:Cash and cash equivalents

$
9,890


$
15,255Short term investments


75,967



34,476Trade and other accounts
    receivable, net of allowances of $170 and $154 at
    September 30, 2006 and December 31, 2005


33,999



42,847Inventories


41,372



24,837Prepaid expenses and other current
    assets


2,272



1,814Deferred tax assets


2,479



Total current assets


165,979



119,229Property, plant and equipment, net


11,392



7,980Long term investments


4,000



Investment in 601 California
    Avenue LLC


2,431



2,431Other long term assets


1,770



804Total assets

$
185,572


$
130,444LIABILITIES AND
    SHAREHOLDERS EQUITYCurrent liabilities:Accounts payable

$
17,924


$
7,049Accrued payroll and related
    liabilities


8,026



5,509Other accrued liabilities


6,383



6,182Customer advances


33,849



23,136Total current liabilities


66,182



41,876Other long-term liabilities


955



694Shareholders equity:Common stock, no par value


100,193



97,165Additional paid in capital


2,119



Accumulated other comprehensive
    income


295



238Retained earnings (accumulated
    deficit)


15,828



(9,529
)Total shareholders equity


118,435



87,874Total liabilities and
    shareholders equity

$
185,572


$
130,444      2




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##### Table of Contents



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


Nine Months EndedSept. 30,


Oct. 1,


Sept. 30,


Oct. 1,2006


2005


2006


2005(Unaudited)(In thousands, except per share amounts)Net revenues:Systems and components

$
52,089


$
41,862


$
157,006


$
79,001Technology development


2,740



1,645



6,985



5,529Total net revenues


54,829



43,507



163,991



84,530Cost of net revenues:Systems and components


29,755



29,277



96,933



55,098Technology development


1,673



1,411



4,534



4,203Inventory provisions


121



(735
)


676



19Total cost of net revenues


31,549



29,953



102,143



59,320Gross profit


23,280



13,554



61,848



25,210Operating expenses:Research and development


8,571



3,897



20,422



10,435Selling, general and administrative


5,565



3,746



15,683



9,678Total operating expenses


14,136



7,643



36,105



20,113Operating profit


9,144



5,911



25,743



5,097Interest income and other, net


1,113



438



2,440



1,292Income before income taxes


10,257



6,349



28,183



6,389Provision for income taxes


1,244



158



2,826



168Net income

$
9,013


$
6,191



25,357



6,221Other comprehensive income (loss):Foreign currency translation
    adjustments


(6
)


13



57



(24
)Total comprehensive income

$
9,007


$
6,204


$
25,414


$
6,197Basic income per share:Net income

$
0.43


$
0.30


$
1.21


$
0.30Shares used in per share amounts


21,082



20,567



20,967



20,400Diluted income per share:Net income

$
0.41


$
0.29


$
1.16


$
0.29Shares used in per share amounts


21,889



21,438



21,888



21,138    3




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##### Table of Contents



INTEVAC,
    INC.
  CONDENSED
    CONSOLIDATED STATEMENTS OF CASH FLOWS
  Nine Months EndedSept. 30,


Oct. 1,2006


2005(Unaudited)(In thousands)Operating activitiesNet income

$
25,357


$
6,221Adjustments to reconcile net
    income to net cash and cash equivalents used in operating
    activities:Depreciation and amortization


1,881



1,537Inventory provisions


676



19Equity-based compensation


2,119



19Loss on disposal of equipment


30



6Changes in operating assets and
    liabilities


12,311



(12,174
)Total adjustments


17,017



(10,593
)Net cash and cash equivalents
    provided by (used in) operating activities


42,374



(4,372
)Investing activitiesPurchases of investments


(377,925
)


(44,658
)Proceeds from maturities of
    investments


332,575



35,900Purchases of leasehold
    improvements and equipment


(5,462
)


(2,414
)Net cash and cash equivalents used
    in investing activities


(50,812
)


(11,172
)Financing activitiesNet proceeds from issuance of
    common stock


3,028



2,133Net cash and cash equivalents
    provided by financing activities


3,028



2,133Effect of exchange rate changes on
    cash


45



(19
)Net decrease in cash and cash
    equivalents


(5,365
)


(13,430
)Cash and cash equivalents at
    beginning of period


15,255



17,455Cash and cash equivalents at end
    of period

$
9,890


$
4,025Supplemental Schedule of Cash
    Flow InformationCash paid for:Income taxes

$
4,222


$
2    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
  No. 03-01, Other-Than-Temporary No. 03-01 No. 03-01;
 5




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##### Table of Contents



INTEVAC, INC.
  NOTES TO CONDENSED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
          4.  Inventories
  first-in,
  September 30,


December 31,2006


2005(In thousands)Raw materials

$
21,294


$
15,070Work-in-progress


13,249



6,303Finished goods


6,829



3,464$
41,372


$
24,837     work-in-progress Work-in-progress
 6




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##### Table of Contents



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


October 1,2006


2005(In thousands)Beginning balance

$
10,988


$
9,863New provisions in cost of sales


676



19New provisions for refurbishment
    of consigned products


7



133Disposals of inventory


(2,873
)


(178
)Miscellaneous adjustments


(42
)


281Ending balance

$
8,756


$
10,118   5.  Stock-Based
    Compensation
         7




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##### Table of Contents



INTEVAC, INC.
  NOTES TO CONDENSED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    Descriptions
    of Plans
  2004
    Equity Incentive Plan
    2003
    Employee Stock Purchase Plan
    Impact
    of the Adoption of SFAS 123(R)
    Three Months


Nine MonthsEnded


EndedSept. 30, 2006


Sept. 30, 2006(In thousands, except per share amounts)Stock-based compensation by type
    of award:Stock options

$
791


$
1,687Employee stock purchase plan


148



432Amounts capitalized as inventory


(61
)


(85
)Total stock-based compensation


878



2,034Tax effect on stock-based
    compensation


(106
)


(203
)Net effect on net income

$
772


$
1,831Effect on earnings per share:Basic

$
0.04


$
0.09Diluted

$
0.04


$
0.08  8




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##### Table of Contents



INTEVAC, INC.
  NOTES TO CONDENSED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    Valuation
    Assumptions
      Three Months EndedSeptember 30, 2006Employee StockStock Options


Purchase PlanExpected volatility


72.34
%


59.12
%Risk free interest rate


4.54
%


4.67
%Expected term of options and
    purchase rights (in years)


4.55



2.0Dividend yield


None



None   Nine Months EndedSeptember 30, 2006Employee StockStock Options


Purchase PlanExpected volatility


74.82
%


59.25
%Risk free interest rate


4.69
%


4.67
%Expected term of options and
    purchase rights (in years)


4.73



1.92Dividend yield


None



None    9




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##### Table of Contents



INTEVAC, INC.
  NOTES TO CONDENSED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    Expense
    Information Under SFAS 123(R)
  2004
    Equity Incentive Plan
    WeightedAverageRemaining


AggregateWeighted


Contractual


IntrinsicShares


Average Exercise Price


Term (years)


ValueOptions outstanding at
    December 31, 2005


1,867,570


$
7.19



7.55


$
11,482,717Options granted


868,600


$
17.72Options forfeited


(48,320
)

$
9.17Options exercised


(295,450
)

$
7.46Options outstanding at
    September 30, 2006


2,392,400


$
10.94



8.09


$
15,222,090Options exercisable at
    September 30, 2006


933,650


$
7.39



6.69


$
8,789,262       Options OutstandingWeighted AverageNumber of


Remaining





Options ExercisableShares


Contractual Term


Weighted Average


Number Vested


Weighted AverageRange of Exercise Prices

Outstanding


(In Years)


Exercise Price


and Exercisable


Exercise Price$ 2.63 - $ 3.98


349,580



5.17


$
2.88



298,545


$
2.83$ 3.99 - $ 6.38


267,470



7.05


$
4.56



134,680


$
4.64$ 6.39 - $ 7.84


343,550



7.80


$
7.57



56,775


$
7.30$ 7.85 - $10.01


313,950



8.14


$
9.03



200,400


$
9.62$10.02 - $15.81


414,750



8.57


$
13.87



243,250


$
12.68$15.82 - $16.13


384,100



9.92


$
16.13






$
$16.14 - $28.55


319,000



9.59


$
20.55






$
$ 2.63 - $28.55


2,392,400



8.09


$
10.94



933,650


$
7.39     2003
    Employee Stock Purchase Plan
   10




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##### Table of Contents



INTEVAC, INC.
  NOTES TO CONDENSED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  Prior
    to the Adoption of SFAS No. 123(R)
    Three Months


Nine MonthsEnded


EndedOctober 1, 2005


October 1, 2005(In thousands, exceptper share amounts)Net income, as reported

$
6,191


$
6,221Deduct: Total stock-based employee
    compensation expense determined under fair value based method
    for all awards, net of related tax effects


(518
)


(1,627
)Pro forma net income

$
5,673


$
4,594Basic income per share:As reported

$
0.30


$
0.30Pro forma

$
0.28


$
0.23Diluted income per share:As reported

$
0.29


$
0.29Pro forma

$
0.26


$
0.22     Three Months Ended


Nine Months EndedOctober 1, 2005


October 1, 2005Employee





EmployeeStock





StockPurchase Plan


Stock Options


Purchase Plan


Stock OptionsExpected volatility


90.20
%


90.20
%


91.53
%


92.50
%Risk free interest rate


3.97
%


4.26
%


3.90
%


4.32
%Expected term of options and
    purchase rights (in years)


1.0



5.7



1.2



6.5Dividend yield


None



None



None



None     6.
    Warranty   11




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##### Table of Contents



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


Nine Months EndedSept. 30,


Oct. 1,


Sept. 30,


Oct. 1,2006


2005


2006


2005(In thousands)Beginning balance

$
4,044


$
1,677


$
3,399


$
1,116Expenditures incurred under
    warranties


(776
)


(137
)


(2,619
)


(846
)Accruals for product warranties
    issued during the reporting period


888



1,352



2,974



2,346Adjustments to previously existing
    warranty accruals


(20
)


(64
)


382



212Ending balance

$
4,136


$
2,828


$
4,136


$
2,828     September 30,


December 31,2006


2005(In thousands)Other accrued liabilities

$
3,181


$
2,705Other long-term liabilities


955



694Total warranty provision

$
4,136


$
3,399   7.
    Guarantees    8.  Cash,
    Cash Equivalents and Investments
    available-for-sale held-to-maturity. Available-for-sale
 12




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##### Table of Contents



INTEVAC, INC.
  NOTES TO CONDENSED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  Held-to-maturity available-for-sale
  September 30,


December 31,2006


2005(In thousands)Amortized Principal Amount:Debt securities issued by the US
    government and its agencies

$
4,000


$
10,991Auction rate securities


70,000



15,000Corporate debt securities


5,967



8,485Total investments in debt
    securities

$
79,967


$
34,476Short-term investments

$
75,967


$
34,476Long-term investments


4,000



Total investments

$
79,967


$
34,476Approximate fair value of
    investments in debt securities

$
79,964


$
34,408   EITF 03-01, other-than-temporarily
   13




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##### Table of Contents



INTEVAC, INC.
  NOTES TO CONDENSED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  9.
    Net
    Income Per Share    Three Months Ended


Nine Months EndedSept. 30,


Oct. 1,


Sept. 30,


Oct. 1,2006


2005


2006


2005(In thousands)Numerator:Numerator for diluted earnings per
    share  income available to common stockholders

$
9,013


$
6,191


$
25,357


$
6,221Denominator:Denominator for basic earnings per
    share  weighted-average shares


21,082



20,567



20,967



20,400Effect of dilutive securities:Employee stock options(1)


817



871



921



738Dilutive potential common shares


817



871



921



738Denominator for diluted earnings
    per share  adjusted weighted-average shares and
    assumed conversions


21,899



21,438



21,888



21,138     (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 September 30, 2006 and
    October 1, 2005 was 566,079 and 137,198, respectively, and
    the number of employee stock options excluded for the nine-month
    periods ended September 30, 2006 and October 1, 2005
    was 319,786 and 233,414, respectively.  10.
    Segment
    Reporting  Segment
    Description
      Segment
    Profit or Loss and Segment Assets
   14




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##### Table of Contents



INTEVAC, INC.
  NOTES TO CONDENSED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  Business
    Segment Net Revenues
  Three Months Ended


Nine Months EndedSept. 30,


Oct. 1,


Sept. 30,


Oct. 1,2006


2005


2006


2005(In thousands)Equipment

$
51,625


$
41,519


$
155,663


$
78,392Imaging


3,204



1,988



8,328



6,138Total

$
54,829


$
43,507


$
163,991


$
84,530   Business
    Segment Profit & Loss
  Three Months Ended


Nine Months EndedSept. 30,


Oct. 1,


Sept. 30,


Oct. 1,2006


2005


2006


2005(In thousands)Equipment

$
9,833


$
7,177


$
29,287


$
9,178Imaging


(673
)


(1,415
)


(3,701
)


(3,874
)Corporate activities


(16
)


149



157



(207
)Operating income


9,144



5,911



25,743



5,097Interest income and other, net


1,113



438



2,440



1,292Income before income taxes

$
10,257


$
6,349


$
28,183


$
6,389   Business
    Segment Assets
  September 30,


December 31,2006


2005(In thousands)Equipment

$
78,246


$
68,672Imaging


8,739



7,665Corporate activities


98,587



54,107Total

$
185,572


$
130,444   Geographic
    Area Net Trade Revenues
  Three Months Ended


Nine Months EndedSept. 30,


Oct. 1,


Sept. 30,


Oct. 1,2006


2005


2006


2005(In thousands)United States

$
5,665


$
6,315


$
22,294


$
15,898Asia


48,937



36,971



141,453



67,938Europe


227



221



244



694Total

$
54,829


$
43,507


$
163,991


$
84,530   11.
    Income
    Taxes   15




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##### Table of Contents



INTEVAC, INC.
  NOTES TO CONDENSED CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
      12.
    Capital
    Transactions    13.
    Financial
    Presentation   16




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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 2006; 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 2006,
    Form 10-Qs
    and
    Form 8-Ks.
  Critical
    Accounting Policies and Estimates
  Form 10-K.
        Revenue
    Recognition
   17




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##### Table of Contents



®
      percentage-of-completion
  Inventories
  first-in, cost-to-market work-in-progress
  Warranty
    Income
    Taxes
     18




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##### Table of Contents



Results
    of Operations
  Three
    Months Ended September 30, 2006 and October 1,
    2005.
  Net
    revenues
  Three months ended


Change overSept. 30,


Oct. 1,


prior period2006


2005


Amount


%(In thousands, except percentages)Equipment net revenues

$
51,625


$
41,519


$
10,106



24
%Imaging net revenues


3,204



1,988



1,216



61
%Total net revenues

$
54,829


$
43,507


$
11,322



26
%            19




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##### Table of Contents



Gross
    margin
  Three months ended


Change overSept. 30,


Oct. 1,


prior period2006


2005


Amount


%(In thousands, except percentages)Equipment gross margin


42.5
%


32.0
%


10.5 pts



33
%Imaging gross margin


41.1
%


13.8
%


27.3 pts



198
%Total gross margin


42.5
%


31.2
%


11.3 pts



36
%         Research
    and development
  Three months ended


Change overSept. 30,


Oct. 1,


prior period2006


2005


Amount


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

$
8,571


$
3,897


$
4,674



120
%% of net revenues


15.6
%


9.0
%        20




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##### Table of Contents



Selling,
    general and administrative
  Three Months Ended

Change OverSept. 30,

Oct. 1,

Prior Period2006

2005

Amount

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

$
5,565


$
3,746


$
1,819



49
%% of net revenues


10.1
%


8.6
%       Interest
    income and other, net
  Three Months Ended

Change OverSept. 30,

Oct. 1,

Prior Period2006

2005

Amount

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

$
1,113


$
438


$
675



154
%     Provision
    for income taxes
  Three Months Ended

Change OverSept. 30,

Oct. 1,

Prior Period2006

2005

Amount

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

$
1,244


$
158


$
1,086



687
%    21




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##### Table of Contents



Nine
    Months Ended September 30, 2006 and October 1,
    2005
  Net
    revenues
  Nine Months Ended

Change OverSept. 30,

Oct. 1,

Prior Period2006

2005

Amount

%(In thousands, except percentages)Equipment net revenues

$
155,663


$
78,392


$
77,271



99
%Imaging net revenues


8,328



6,138



2,190



36
%Total net revenues

$
163,991


$
84,530


$
79,461



94
%       Gross
    margin
  Nine Months Ended

Change OverSept. 30,

Oct. 1,

Prior Period2006

2005

Amount

%Equipment gross margin


38.0
%


31.2
%


6.8 pts



22
%Imaging gross margin


31.6
%


12.7
%


18.9 pts



149
%Total gross margin


37.7
%


29.8
%


7.9 pts



27
%      22




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##### Table of Contents



Research
    and development
  Nine Months Ended

Change OverSept. 30,

Oct. 1,

Prior Period2006

2005

Amount

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

$
20,422


$
10,435


$
9,987



96
%% of net revenues


12.5
%


12.3
%       Selling,
    general and administrative
  Nine Months Ended

Change OverSept. 30,

Oct. 1,

Prior Period2006

2005

Amount

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

$
15,683


$
9,678


$
6,005



62
%% of net revenues


9.6
%


11.4
%     Interest
    income and other, net
  Nine Months Ended

Change OverSept. 30,

Oct. 1,

Prior Period2006

2005

Amount

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

$
2,440


$
1,292


$
1,148



89
%     Provision
    for income taxes
  Nine months ended


Change overSept. 30,


Oct. 1,


prior period2006


2005


Amount


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

$
2,826


$
168


$
2,658



1,582
%    23




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##### Table of Contents



Stock-Based
    Compensation
            Liquidity
    and Capital Resources
    work-in-progress
 24




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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

$
11,257


$
2,792


$
3,638


$
3,703


$
1,124Purchase obligations


37,588



37,588











Total

$
48,845


$
40,380


$
3,638


$
3,703


$
1,124   Item 3.
    Quantitative
    and Qualitative Disclosures About Market Risk  Interest rate risk.
    Fair2006


2007


2008


Beyond


Total


ValueCash equivalentsFixed rate amounts

$
1,999














$
1,999


$
1,997Weighted-average rate


5.30
%Variable rate amounts

$
3,471














$
3,471


$
3,471Weighted-average rate


5.24
%Short-term investmentsFixed rate amounts

$
73,963


$
2,005










$
75,968


$
75,963Weighted-average rate


5.24
%


4.80
%Long-term investmentsFixed rate amounts









$
4,000






$
4,000


$
4,001Weighted-average rate


5.44
%Total investment portfolio

$
79,433


$
2,005


$
4,000






$
85,438


$
85,432  25




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##### Table of Contents



Foreign exchange risk.
  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
   26




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##### Table of Contents



Changes
    in internal controls over financial reporting
  Form 10-Q
 PART II.  OTHER
    INFORMATION  Item 1.
    Legal
    Proceedings  Patent
    Infringement Complaint against Unaxis
      Other
    Legal Matters
    Item 1A.
    Risk
    Factors  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 the computer systems, storage subsystems and
    consumer electronics containing disks our customers produce with
    our systems;
    delays or problems in the introduction and acceptance of our new
    products, or delivery of existing products; and
    announcements of new products, services or technological
    innovations by us or our competitors. 27




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##### Table of Contents



quarter-to-quarter
  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.
       28




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##### Table of Contents



®
    Demand
    for capital equipment is cyclical, which subjects our business
    to long periods of depressed revenues interspersed with periods
    of unusually high revenues.
      If the
    growth in demand for hard disk drives does not continue 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.
     29




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##### Table of Contents



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.
    state-of-the-art
    We
    operate in an intensely competitive marketplace, and our
    competitors have greater resources than we do.
   30




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##### Table of Contents



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.
      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.
     31




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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.
    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.
    
    our perceived prospects;
    hard disk drive market expectations;
    variations in our operating results and whether we achieve our
    key business targets; 32




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##### Table of Contents




    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;
    rising raw material and energy costs;
    variations in the ability to develop relationships with
    suppliers and other local businesses; 33




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##### Table of Contents




    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.
  fair-value-based
  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
  Form 10-K,
   34




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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.
    
    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.  Failure
    to protect our intellectual property rights adequately could
    have a material adverse effect on our business.
      Our
    success is dependent on recruiting and retaining a highly
    talented work force.
     35




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##### Table of Contents



Changes
    in demand caused by fluctuations in interest and currency
    exchange rates may reduce our international sales.
        We may
    evaluate acquisition candidates and other diversification
    strategies.
    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.
   36




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##### Table of Contents



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.
    We
    could be involved in litigation.
    Business
    interruptions could adversely affect our
    operations.
    Item 2.
    Unregistered
    Sales of Equity Securities and Use of Proceeds   37




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##### Table of Contents



Item 3.
    Defaults
    upon Senior Securities    Item 4.
    Submission
    of Matters to a Vote of Security Holders    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 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.  38




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##### Table of Contents



SIGNATURES      Date: November 8,
    2006           By:
    /s/  KEVIN
    FAIRBAIRN        Date: November 8,
    2006           By:
    /s/  CHARLES
    B. EDDY III         39




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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.