We are the world’s leading providersupplier of thin-film disk sputtering equipment for the thin-filmused to manufacturer magnetic media used in hard disk industrydrives and a developer and provider of leading technology foradvanced extreme low-lightlow light imaging sensors, cameras and systems. We operate two businesses: Equipment and Imaging.

     Our Equipment business designs, manufactures, markets and services complex capital equipment used in the sputtering,that deposits, or deposition, ofsputters, highly engineered thin-films of material onto magnetic disks which are used in hard disk drives. Hard disk drives are the primary storage medium for digital data and function by storing data on magnetic disks. These thin-film disks are created in a sophisticated manufacturing process involving many steps, including plating, annealing, polishing, texturing, sputtering and lubrication.

     Our Imaging business develops and manufactures electro-optical sensors, cameras, and systems that permit highly sensitive detection of photons in the visible and near infrared portions of the spectrum, allowing vision in extreme low light situations. These efforts are aimed at creating new productsWe currently develop night-vision technology and equipment for both military and commercial applications.

     The financial information at AprilJuly 2, 2005 and for the three-monththree- and six-month periods ended AprilJuly 2, 2005 and March 27,June 26, 2004 is unaudited, but includes all adjustments (consisting only of normal recurring accruals) that we consider necessary for a fair presentation of the financial information set forth herein, in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information, the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, it does not include all of the information and footnotes required by U.S. GAAP for annual financial statements. For further information, refer to the Consolidated Financial Statements and footnotes thereto included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2004.

     The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and reported amounts of revenue and expenses during the reporting period. Actual results inevitably will differ from those estimates, and such differences may be material to the financial statements.

     The results for the three-month periodthree- and six-month periods ended AprilJuly 2, 2005 are not considered indicative of the results to be expected for any future period or for the entire year.

     Historically, a significant portion of our revenues in any particular period has been attributable to sales to a limited number of customers. Our largest customers tend to change from period to period.

     We evaluate the collectibility of trade receivables on an ongoing basis and provide reserves against potential losses when appropriate.

     Inventories are priced using standard costs, which approximate cost under the first-in, first-out method and are stated at the lower of cost or market. Inventories consist of the following:

     Finished goods inventory consists primarily of completed systems at customer sites that are undergoing installation and acceptance testing.

     Inventory reserves included in the above numbers were $10.7$10.6 million and $9.9 million at AprilJuly 2, 2005 and December 31, 2004, respectively. Each quarter, we analyze our inventory (raw materials, WIPwork-in-progress and finished goods) against the forecast demand for the next 12 months. Raw materials with no forecast requirements in that period are considered excess and inventory provisions are established to write those items down to zero net book value. Work-in-progress and finished goods inventories with no forecast requirements in that period are typically written down to the lower of cost or market. During this process, some inventory is identified as having no future use or value to us and is disposed of against the reserves.

     During the threesix months ended AprilJuly 2, 2005, $720,000$754,000 was added to the inventory reserves based on the quarterly analysis and a net $87,000 of inventory was recovered and credited against the reserve. During the six months ended June 26, 2004, $753,000 was added to inventory reserves based on the quarterly analysis and a net $88,000 of inventory was recovered and credited against the reserve. During the three months ended March 27, 2004, $566,000 was added to inventory reserves based on the quarterly analysis and a net $86,000$261,000 of inventory was disposed of and charged to the reserve.

     At AprilJuly 2, 2005, we had two stock-based employee compensation plans. We account for those plans under the recognition and measurement principles of APB Opinion No. 25, “Accounting for Stock Issued to Employees”, and related Interpretations. No stock-based employee compensation cost is reflected in net income, as all options granted under those plans had an exercise price equal to the market value of the underlying common stock on the date of grant. We plan to adopt the fair value requirements of SFAS No. 123R beginning in 2006.

     The following table illustrates the effects on net income and earnings per share if Intevac had applied the fair value-recognition provisions of FASB Statement No. 123, “Accounting for Stock-Based Compensation”, to stock-based employee compensation.

     The fair value of each stock option is estimated on the date of grant using the Black-Scholes option-pricing model, with the following weighted-average assumptions for grants made in the three and six months ended AprilJuly 2, 2005 and March 27,June 26, 2004:

     The weighted-average fair value of stock options granted during the period was $6.37$7.65 and $6.98$6.67 for the three and six months ended AprilJuly 2, 2005, respectively, and March 27, 2005,$5.04 and $5.76 for the three and six months ended June 26, 2004, respectively.

     The pro forma net loss and net loss per share data listed above includes expense related to the Employee Stock Purchase Plan (“ESPP”). The fair value of purchase rights granted under the ESPP is estimated on the date of grant using the Black-Scholes option-pricing model, with the following weighted-average assumptions:

     The weighted-average fair value of purchase rights granted duringwas $4.42 for the period was $4.42six months ended July 2, 2005, and $9.47 for the threesix months ended April 2, 2005 and March 27, 2004, respectively.June 26, 2004.

     Our standardtypical warranty is 12 months from customer acceptance. We also sell extended warranties beyond 12 months to someour customers. During this warranty period any defectivenecessary non-consumable parts are replacedsupplied and installed at no charge to the customer.installed. The warranty period on consumable parts is limited to their reasonable usable life. A provision for the estimated warranty cost is recorded at the time revenue is recognized.

     On the condensed consolidated balance sheet, the short-term portion of the warranty is included in other accrued liabilities, while the long-term portion is included in other long-term liabilities.

     The following table displays the activity in the warranty provision account, which is included in other accrued liabilities on our balance sheet, for the three-monththree and six-month periods ending AprilJuly 2, 2005 and March 27,June 26, 2004:

     The following table displays the balance sheet classification of the warranty provision account at AprilJuly 2, 2005 and at December 31, 2004:

     We have entered into agreements with customers and suppliers that include limited intellectual property indemnification obligations that are customary in the industry. These guaranteesobligations generally require us to compensate the other party for certain damages and costs incurred as a result of third party intellectual property claims arising from these transactions. The nature of the intellectual property indemnification obligations prevents us from making a reasonable estimate of the maximum potential amount we could be required to pay our customers and suppliers. Historically, we have not made any significant indemnification payments under such agreements, and no amount has been accrued in the accompanying consolidated financial statements with respect to these indemnification obligations.

     Our investment portfolio consists of cash, cash equivalents and investments in debt securities. We consider all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents. Investments in

debt securities consists principally of highly rated debt instruments with maturities generally between one and 25 months.

     In accordance with Statement of Accounting Standards No. 115 “Accounting for Certain Investments in Debt and Equity Securities,” and based on our intentions regarding these instruments, we have classified our investments in debt securities as held-to-maturity and account for these investments at amortized cost. Interest income is recorded using an effective interest rate, with the associated premium or discount amortized to interest income. Realized gains and losses are included in earnings. The table below presents the amortized principal amount, major security type and maturities for our investments in debt securities.

     Cash and cash equivalents represent cash accounts and money market funds. Included in accounts payable is $1,753,000$2,994,000 and $188,000 of book overdraft at AprilJuly 2, 2005 and December 31, 2004, respectively.

     In December 2004, FASB issued SFAS No. 123 (Revised 2004), “Share-Based Payment”. SFAS 123R addresses all forms of share-based payment (“SBP”) awards, including shares issued under certain employee stock purchase plans, stock options, restricted stock and stock appreciation rights. SFAS 123R will require us to expense SBP awards with compensation cost for SBP transactions measured at fair value. Although we are in the process of evaluating the impact of applying the various provisions of SFAS 123R, we expect that this statement will have a material impact on our financial statements. On April 14, 2005, the U.S. Securities and Exchange Commission announced a deferral of the effective date of SFAS 123R until the first interim period beginning after December 15, 2005.

     In March 2005, the SEC issued Staff Accounting Bulletin (“SAB”) No. 107. SAB 107 provides guidance related to share-based payment transactions with non-employees, the transition from nonpublic to public entities status, valuation methods (including assumptions such as expected volatility and expected term), the accounting for certain redeemable financial instruments issued under share-based payment arrangements, the classification of compensation expense, non-GAAP financial measures, first-time adoption of SFAS 123R in an interim period, capitalization of compensation costs related to share-based payment arrangements, the accounting for income tax effects of share-based payment arrangements upon adoption of SFAS 123R, the modification of employee share options prior to the adoption of SFAS 123R and disclosures

     In March 2005, the FASB issued Interpretation No. 47 (“FIN 47”), “Accounting for Conditional Asset Retirement Obligations —– An Interpretation of FASB Statement No. 143”, to clarify the requirement to record liabilities stemming from a legal obligation to clean up and retire fixed assets, such as a plant or factory, when an asset retirement depends on a future event. We plan to adopt the FIN 47 in the first quarter of fiscal 2006. We do not expect the application of FIN 47 to have a material effect on our financial statements.

     We have two reportable operating segments: Equipment and Imaging. Our reportable segments are business units that offer different products and are each managed separately, under the direction of our Chief Executive Officer. Our Equipment business designs, manufactures, markets and services complex capital equipment used in the sputtering,that deposits, or deposition, ofsputters, highly engineered thin-films of material onto magnetic disks which are used in hard disk drives. Our Imaging business develops and manufactures electro-optical sensors, cameras and systems that permit highly sensitive detection of photons in the visible and near infrared portions of the spectrum, allowing vision in extreme low light situations.

     Included in corporate activities are general corporate expenses, less an allocation of corporate expenses to operating units equal to 3% of net revenues. Assets of corporate activities include unallocated cash and short-term investments, deferred income tax assets (which are fully offset by a valuation allowance) and other assets.

     We evaluate performance and allocate resources based on a number of factors including, profit or loss from operations and future revenue potential. The accounting policies of the reportable segments are the same as those described in the summary of significant accounting policies.

     For the three months ended July 2, 2005, we accrued income tax using an effective tax rate of 2.5% of pretax income. This rate is based on the estimated annual tax rate complying with Statement of Financial Accounting Standards No. 109, “Accounting for Income Taxes”. We also paid the minimum Franchise Tax to the State of California. We did not accrue a tax benefitprovision for either of the three-month periods ended April 2, 2005 or March 27, 2004, due to the inability to realize additional refunds from loss carry-backs. We recorded $7,000 of income tax expense during the three-month period ended April 2, 2005 related to a claim we received fromJune 26, 2004 as the California Franchise Tax Boardprofits for a portion of the income tax credits we claimed in prior years. The $12,000 credit to income tax expense during the three-monththis period ended March 27, 2004 related to a revised estimate of 2003 taxes owedwere offset by our Singapore subsidiary.net operating loss carry-forwards. Our $21.3$19.9 million deferred tax asset is fully offset by a $21.3$19.9 million valuation allowance, resulting in a net deferred tax asset of zero at AprilJuly 2, 2005.

     During the three-monthsix-month period ending AprilJuly 2, 2005, we sold stock to our employees under Intevac’s Stock Option and Employee Stock Purchase Plans. A total of 117,486290,503 shares were issued under these plans, for which Intevac received $517,000.$1.4 million.

     Certain prior year amounts in the Condensed Consolidated Financial Statements have been reclassified to conform to 20052004 presentation.

     This Quarterly Report onForm 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, system revenue recognition, product costs, gross margin, operating expenses, interest income, cash balances and improved financial results in 2005; our projected customer requirements for new capacity and technology upgrades for our installed base of thin-film disk manufacturing 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 “Certain Factors Which May Affect Future Operating Results” and in other documents we file from time to time with the Securities and Exchange Commission, including Intevac’s Annual Report onForm 10-K filed in March 2005, Form 10-Q’s and Form 8-K’s.

     The preparation of financial statements and related disclosures in conformity with accounting principles generally accepted in the United States of America (“US GAAP”) requires management to make judgments, assumptions and estimates that affect the amounts reported. Our significant accounting policies are described in Note 2 to the consolidated financial statements included in Item 8 of our Annual Report on Form 10-K. Certain of these significant accounting policies are considered to be critical accounting policies, as defined below.

     A critical accounting policy is defined as one that is both material to the presentation of our financial statements and requires management to make difficult, subjective or complex judgments that could have a material effect on our financial conditions and results of operations. Specifically, critical accounting estimates have the following attributes: 1) We are required to make assumptions about matters that are highly uncertain at the time of the estimate; and 2) different estimates we could reasonably have used, or changes in the estimate that are reasonably likely to occur, would have a material effect on our financial condition or results of operations.

     Estimates and assumptions about future events and their effects cannot be determined with certainty. We base our estimates on historical experience and on various other assumptions believed to be applicable and reasonable under the circumstances. These estimates may change as new events occur, as additional information is obtained and as our operating environment changes. These changes are included in the consolidated financial statements as soon as they become known. In addition, management is periodically faced with uncertainties, the outcomes of which are not within its control and will not be known for prolonged periods of time. These uncertainties are discussed in the section entitled “Certain Factors Which May Affect Future Operating Results.” Based on a critical assessment of our accounting policies and the underlying judgments and uncertainties affecting the application of those policies, management believes that our consolidated financial statements are fairly stated in accordance with US GAAP, and provide a meaningful presentation of our financial condition and results of operation.

     We believe the following critical accounting policies affect the more significant judgments and estimates we make in preparing our consolidated financial statements. We also have other key accounting policies and accounting estimates related to the collectibility of trade receivables, valuation of deferred tax assets and prototype product costs. We believe that these other accounting policies and other accounting estimates either do not generally require us to make estimates and judgments that are as difficult or subjective or would be less likely to have a material impact on our reported results of operation for a given period.

     Certain of our system sales with customer acceptance provisions are accounted for as multiple-element arrangements. If we have previously met defined customer acceptance levels with the specific type of system,

estimate the fair market value of the installation and acceptance services based on our actual historical experience. For systems that have generally not been demonstrated to meet product specifications prior to shipment, revenue recognition is typically deferred until customer acceptance. For example, whileWhile initial shipments of our 200 Lean system were recognized for revenue upon customer acceptance during 2004, we expect that 200 Leans will be generally be recognized for revenue upon shipment during 2005. For example, during the three months ended July 2, 2005 six 200 Leans were shipped. The fair market value of all six 200 Leans was recognized for revenue upon shipment. Installation and acceptance was completed during the quarter on one of these six 200 Lean systems. Accordingly, the fair market value of installation and acceptance services for this one system was recognized for revenue.

     In some instances, hardware that is not essential to the functioning of the system may be delivered after acceptance of the system. In these cases, we estimate the fair market value of the non-essential hardware as if it had been sold on a stand-alone basis, and defer recognizing revenue on that value until the hardware is delivered.

     We perform best efforts research and development work under various government-sponsored research contracts. These contracts are a mixture of cost-plus-fixed-fee (“CPFF”) and firm fixed-price (“FFP”). Revenue on CPFF contracts is recognized in accordance with contract terms, typically as costs are incurred. Revenue on FFP contracts is generally recognized on the percentage-of-completion method based on costs incurred in relation to total estimated costs. Provisions for estimated losses on government-sponsored research contracts are recorded in the period in which such losses are determined.

     Inventories are priced using standard costs, which approximate first-in, first-out, and are stated at the lower of cost or market. The carrying value of inventory is reduced for estimated excess and obsolescence by the difference between its cost and the estimated market value based on assumptions about future demand. We evaluate the inventory carrying value for potential excess and obsolete inventory exposures by analyzing historical and anticipated demand. In addition, inventories are evaluated for potential obsolescence due to the effect of known and anticipated engineering change orders and new products. If actual demand were to be substantially lower than estimated, additional inventory adjustments would be required, which could have a material adverse effect on our business, financial condition and results of operation. A cost to market reserve is established for work-in-progress and finished goods inventories when the value of the inventory plus the estimated cost to complete exceeds the net realizable value of the inventory.

     We provide for the estimated cost of warranty when revenue is recognized. Our warranty is per contract terms and is typically 12 months from customer acceptance. We also sell extended warranties beyond 12 months to some customers. We use estimated repair or replacement costs along with our actual warranty experience to determine our warranty obligation. We exercise judgment in determining the underlying estimates. Should actual warranty costs differ substantially from our estimates, revisions to the estimated warranty liability would be required, which could have a material adverse effect on our business, financial condition and results of operations.

     Net revenues consist primarily of sales of equipment used to manufacture magneticthin-film disks, related equipment and system components, andflat panel equipment technology license fees, contract research and development related to the development of electro-optical sensors, cameras and systems.systems and low light imaging products.

     The increase in Equipment revenue for the three months ending AprilJuly 2, 2005 was primarily the result of revenue recognition for six 200 Lean systems and three disk lubrication systems and the quarter including customer acceptancesale of a D STAR^® flat panel technology license for $1.5 million. The three months ended June 26, 2004 included two 200 Lean system forsystems in revenue. Revenue from disk equipment technology upgrades and spare parts decreased in the three months ending July 2, 2005. As of April 2,July 27, 2005, we have orders for elevenfifteen 200 Lean systems and foursix MDP-250B systems, all of which wesystems. We expect to ship and recognize for revenue twenty of these twenty-one systems in fiscal 2005. We expect significant growth in Equipment revenues in 2005, compared to 2004.

     The decrease in Imaging revenues was the result of decreased revenues from contract research and development. In 2005, weWe expect the Imaging business revenue to grow with increases in both contract research and development revenue and product revenue, althoughthe second half of 2005 as a result of increasing shipment of low light level cameras, but we do not expect ourthe Imaging business willto be profitable in 2005.

     Our backlog of orders at AprilJuly 2, 20052004 was $66.0$65.4 million, as compared to $10.5 million at December 31, 2004 and $52.0$46.4 million at March 27,June 26, 2004. The increase in backlog was primarily the result of orders for disk manufacturing systems and upgrades, and to a lesser extent, orders for contract research and development in the Imaging business.systems. We include in backlog the value of purchase orders for our products that have scheduled delivery dates. We do not recognize revenue on this backlog until we have met the criteria contained in our revenue recognition policy, including customer acceptance of newly developed systems.

     International sales increased by 5%310% to $3.8$27.6 million for the three months ended AprilJuly 2, 2005 from $3.6$6.8 million for the three months ended March 27,June 26, 2004. The increase in international sales was due to contract research and development revenue.higher shipments of disk sputtering systems. International sales constituted 36%91% of net revenues for the three months ended AprilJuly 2, 2005 and 57%38% of net revenues for the three months ended March 27,June 26, 2004. International revenues include products shipped to overseas operations of US companies.