**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

 

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**FORM10-Q**

 

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**ý****QUARTERLY REPORTPURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**

 

**For thequarterly period ended March 31, 2006**

 

**OR**

 

**o****TRANSITION REPORT PURSUANTTO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**

 

**For thetransition period from            to**

 

**Commissionfile number 000-51642**

 

**AvizaTechnology, Inc.**

(Exact name of Registrantas Specified in its Charter)

 

| **Delaware**                                                    | ** ** | **20-1979646**                           |
|-----------------------------------------------------------------|------------|------------------------------------------|
| (State or Other  Jurisdiction of Incorporation or Organization) |       | (I.R.S. Employer  Identification Number) |

 

**440Kings Village Road**

**ScottsValley, California    95066**

(Address of PrincipalExecutive Offices including Zip Code)

 

**(831)438-2100**

(Registrant’s TelephoneNumber, Including Area Code)

 

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Indicate by check markwhether the registrant (1) has filed all reports required to be filed bySection 13 or 15 (d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or for such shorter period that the registrant wasrequired to file reports), and (2) has been subject to such filing requirementsfor the past 90 days.
| YES   o       NO   ý |
|------------------------------------------------------------------------|

 

Indicate by check mark whether the registrant is a large acceleratedfiler, an accelerated filer, or a non-accelerated filer.  See definitionof “accelerated filer and large accelerated filer” in Rule 12b-2 of theExchange Act.  (Check one):

 
| Large accelerated filer    o | Accelerated filer    o | Non-accelerated filer    ý |
|---------------------------------------------|---------------------------------------|------------------------------------------------|

 

Indicate by check mark whether the registrant is a shell company (asdefined in Rule 12b-2 of the Exchange Act).
| YES   o       NO   ý |
|------------------------------------------------------------------------|

 

As of May 12, 2006, the registrant had 16,134,438 shares of its commonstock, par value $0.0001 per share, outstanding.

 

 

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**AvizaTechnology, Inc.**

 

**Table ofContents**

 
| ** **                                                                                          | **Page********No.**                                                                                                             |
|-----------------------------------------------------------------------------------------------------|---------------------------------------------------------------------------------------------------------------------------------|
| **PART I. FINANCIAL INFORMATION**                                                                   |                                                                                                                            |
| Item 1.  Financial Statements (unaudited):                                                          |                                                                                                                            |
|                                                                                                | Condensed  Consolidated Balance Sheets — at March 31, 2006 and September 30, 2005                                          | 1 |
|                                                                                                | Condensed  Consolidated Statements of Operations — for the Three and Six Months Ended  March 31, 2006   and March 25, 2005 | 2 |
|                                                                                                | Condensed  Consolidated Statements of Cash Flows — for the Six Months Ended March 31,  2006 and March 25, 2005             | 3 |
|                                                                                                | Notes  to Condensed Consolidated Financial Statements                                                                           | 4 |
| Item 2. Management’s  Discussion and Analysis of Financial Condition and Results of Operations | 16                                                                                                                              |
| Item 3.  Quantitative and Qualitative Disclosures About Market Risk                                 | 24                                                                                                                              |
| Item 4. Controls  and Procedures                                                                    | 24                                                                                                                              |
| **PART II. OTHER  INFORMATION**                                                                     |                                                                                                                            |
| Item 1. Legal  Proceedings                                                                          | 25                                                                                                                              |
| Item  1A. Risk Factors                                                                              | 25                                                                                                                              |
| Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds                                | 35                                                                                                                              |
| Item 3.  Defaults Upon Senior Securities                                                            | 35                                                                                                                              |
| Item 4.  Submission of Matters to a Vote of Security Holders                                        | 35                                                                                                                              |
| Item 5. Other  Information                                                                          | 35                                                                                                                              |
| Item  6. Exhibits                                                                                   | 35                                                                                                                              |

 

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**PART I — FINANCIAL INFORMATION**

 

** ITEM1. FINANCIAL STATEMENTS**

 

**AVIZATECHNOLOGY, INC.**

**CONDENSED CONSOLIDATED BALANCE SHEETS**

**(inthousands, except par amounts and number of shares)**

**(unaudited)** 

 
| ** **                                                                                                                                                                                                                                                                                                       | ** ** | **March 31,  2006** | ** ** | **September 30,  2005** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------|------------|------------------------------|------------|
| **ASSETS**                                                                                                                                                                                                                                                                                                       |       |                     |       |                         |       |
|                                                                                                                                                                                                                                                                                                             |       |                     |       |                         |       |
| CURRENT ASSETS:                                                                                                                                                                                                                                                                                                  |       |                     |       |                         |       |
| Cash and cash  equivalents                                                                                                                                                                                                                                                                                       |       | $                        | 3,862      |                         | $          | 7,437 |   |
| Accounts  receivable, net of allowance of $364 and $564, respectively                                                                                                                                                                                                                                            |       | 33,685                   |       | 23,630                       |       |
| Inventory                                                                                                                                                                                                                                                                                                        |       | 38,294                   |       | 24,253                       |       |
| Prepaid expenses  and other current assets                                                                                                                                                                                                                                                                       |       | 8,561                    |       | 11,632                       |       |
|                                                                                                                                                                                                                                                                                                             |       |                     |       |                         |       |
| Total current  assets                                                                                                                                                                                                                                                                                            |       | 84,402                   |       | 66,952                       |       |
|                                                                                                                                                                                                                                                                                                             |       |                     |       |                         |       |
| PROPERTY, PLANT  AND EQUIPMENT - net                                                                                                                                                                                                                                                                             |       | 23,096                   |       | 19,569                       |       |
|                                                                                                                                                                                                                                                                                                             |       |                     |       |                         |       |
| INTANGIBLE  ASSETS – net                                                                                                                                                                                                                                                                                    |       | 5,013                    |       | 4,000                        |       |
|                                                                                                                                                                                                                                                                                                             |       |                     |       |                         |       |
| OTHER ASSETS –  net                                                                                                                                                                                                                                                                                         |       | 521                      |       | 388                          |       |
|                                                                                                                                                                                                                                                                                                             |       |                     |       |                         |       |
| TOTAL                                                                                                                                                                                                                                                                                                            |       | $                        | 113,032    |                         | $          | 90,909 |   |
|                                                                                                                                                                                                                                                                                                             |       |                     |       |                         |       |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY (DEFICIT)**                                                                                                                                                                                                                                                         |       |                     |       |                         |       |
|                                                                                                                                                                                                                                                                                                             |       |                     |       |                         |       |
| CURRENT  LIABILITIES:                                                                                                                                                                                                                                                                                            |       |                     |       |                         |       |
| Bank borrowing -  short term                                                                                                                                                                                                                                                                                     |       | $                        | 28,189     |                         | $          | 30,724 |   |
| Accounts payable                                                                                                                                                                                                                                                                                                 |       | 23,832                   |       | 19,397                       |       |
| Warranty  liability                                                                                                                                                                                                                                                                                              |       | 12,978                   |       | 13,599                       |       |
| Accrued  liabilities                                                                                                                                                                                                                                                                                             |       | 13,949                   |       | 8,814                        |       |
|                                                                                                                                                                                                                                                                                                             |       |                     |       |                         |       |
| Total current  liabilities                                                                                                                                                                                                                                                                                       |       | 78,948                   |       | 72,534                       |       |
|                                                                                                                                                                                                                                                                                                             |       |                     |       |                         |       |
| Mandatorily  redeemable preferred stock, Series B and B-1, $100 par value - 110,000 shares  authorized; 110,000 shares issued and outstanding at March 31, 2006 and  September 30, 2005, respectively (liquidation preference of $11,536 and  $11,097 at March 31, 2006 and September 30, 2005, respectively)    |       | 11,000                   |       | 11,000                       |       |
|                                                                                                                                                                                                                                                                                                             |       |                     |       |                         |       |
| NOTE PAYABLE -  Long term                                                                                                                                                                                                                                                                                        |       | 6,323                    |       | 6,463                        |       |
|                                                                                                                                                                                                                                                                                                             |       |                     |       |                         |       |
| Total  liabilities                                                                                                                                                                                                                                                                                               |       | 96,271                   |       | 89,997                       |       |
|                                                                                                                                                                                                                                                                                                             |       |                     |       |                         |       |
| COMMITMENTS AND  CONTINGENCIES (NOTE 8)                                                                                                                                                                                                                                                                          |       |                     |       |                         |       |
|                                                                                                                                                                                                                                                                                                             |       |                     |       |                         |       |
| PREFERRED STOCK,  SERIES A, $0.001 PAR VALUE – 0 and 10,000,000 shares authorized at March 31,  2006 and September 30, 2005, respectively; 0 and 5,226,496 shares issued and  outstanding at March 31, 2006 and September 30, 2005, respectively  (liquidation preference of $32,650 at September 30, 2005) |       | —                   |       | 32,650                       |       |
|                                                                                                                                                                                                                                                                                                             |       |                     |       |                         |       |
| STOCKHOLDERS’  EQUITY (DEFICIT):                                                                                                                                                                                                                                                                            |       |                     |       |                         |       |
| Preferred stock,  $0.0001 par value – 5,000,000 shares authorized; none outstanding                                                                                                                                                                                                                         |       |                     |       | —                       |       |
| Common stock, $0.0001  par value - 100,000,000 shares authorized; 10,315,189 and 475,065 shares  issued and outstanding at March 31, 2006 and September 30, 2005, respectively                                                                                                                                   |       | 1                        |       | 1                            |       |
| Additional paid  in capital                                                                                                                                                                                                                                                                                      |       | 62,498                   |       | 4,040                        |       |
| Accumulated  other comprehensive loss                                                                                                                                                                                                                                                                            |       | (126                     | )          | (110                         | )          |
| Accumulated  deficit                                                                                                                                                                                                                                                                                             |       | (45,612                  | )          | (35,669                      | )          |
|                                                                                                                                                                                                                                                                                                             |       |                     |       |                         |       |
| Total  stockholders’ equity (deficit)                                                                                                                                                                                                                                                                       |       | 16,761                   |       | (31,738                      | )          |
|                                                                                                                                                                                                                                                                                                             |       |                     |       |                         |       |
| TOTAL                                                                                                                                                                                                                                                                                                            |       | $                        | 113,032    |                         | $          | 90,909 |   |

 

The accompanying notesare an integral part of these condensed consolidated financial statements.

 

1

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**AVIZATECHNOLOGY, INC.**

**CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS**

**(inthousands, except share and per share amounts)**

**(unaudited)**

 
| ** **                           | ** ** | **Quarter Ended**   | ** ** | **Six Months Ended** | ** ** |
|--------------------------------------|------------|--------------------------|------------|--------------------------------|------------|
| ** **                           | ** ** | **March 31,  2006** | ** ** | **March 25,  2005**       | ** ** | **March 31,  2006** | ** ** | **March 25,  2005** | ** ** |
| NET SALES                            |       | $                        | 36,241     |                           | $          | 32,374 |   | $ | 65,184 |   | $ | 94,893 |   |
|                                 |       |                     |       |                           |       |   |   |   |   |
| COST OF GOODS  SOLD                  |       | 27,050                   |       | 25,637                         |       | 48,858 |   | 81,441 |   |
|                                 |       |                     |       |                           |       |   |   |   |   |
| GROSS PROFIT                         |       | 9,191                    |       | 6,737                          |       | 16,326 |   | 13,452 |   |
|                                 |       |                     |       |                           |       |   |   |   |   |
| OPERATING EXPENSES:                  |       |                     |       |                           |       |   |   |   |   |
| Research and  development            |       | 6,553                    |       | 4,836                          |       | 11,196 |   | 9,087 |   |
| Selling, general  and administrative |       | 6,482                    |       | 4,376                          |       | 11,597 |   | 7,845 |   |
| In-process  research and development |       | 9                        |       | —                         |       | 402 |   | — |   |
|                                 |       |                     |       |                           |       |   |   |   |   |
| Total operating  expenses            |       | 13,044                   |       | 9,212                          |       | 23,195 |   | 16,932 |   |
|                                 |       |                     |       |                           |       |   |   |   |   |
| LOSS FROM  OPERATIONS                |       | (3,853                   | )          | (2,475                         | )          | (6,869 | ) | (3,480 | ) |
|                                 |       |                     |       |                           |       |   |   |   |   |
| OTHER INCOME  (EXPENSE):             |       |                     |       |                           |       |   |   |   |   |
| Interest income                      |       | 13                       |       | 5                              |       | 53 |   | 10 |   |
| Interest expense                     |       | (1,356                   | )          | (967                           | )          | (2,742 | ) | (1,807 | ) |
| Other income  (expense) - net        |       | 2                        |       | 14                             |       | (145 | ) | 16 |   |
|                                 |       |                     |       |                           |       |   |   |   |   |
| Total other  income (expense)        |       | (1,341                   | )          | (948                           | )          | (2,834 | ) | (1,781 | ) |
|                                 |       |                     |       |                           |       |   |   |   |   |
| LOSS BEFORE  INCOME TAXES            |       | (5,194                   | )          | (3,423                         | )          | (9,703 | ) | (5,261 | ) |
|                                 |       |                     |       |                           |       |   |   |   |   |
| INCOME TAXES                         |       | 118                      |       | 136                            |       | 240 |   | 276 |   |
|                                 |       |                     |       |                           |       |   |   |   |   |
| NET LOSS                             |       | $                        | (5,312     | )                              | $          | (3,559 | ) | $ | (9,943 | ) | $ | (5,537 | ) |
|                                 |       |                     |       |                           |       |   |   |   |   |
| Loss per share:                      |       |                     |       |                           |       |   |   |   |   |
| Basic and  diluted                   |       | $                        | (0.52      | )                              | $          | (11.45 | ) | $ | (1.42 | ) | $ | (19.76 | ) |
|                                 |       |                     |       |                           |       |   |   |   |   |
| Weighted average  common shares:     |       |                     |       |                           |       |   |   |   |   |
| Basic and  diluted                   |       | 10,305,831               |       | 310,828                        |       | 7,011,864 |   | 280,233 |   |

 

The accompanying notesare an integral part of these condensed consolidated financial statements.

 

2

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**AVIZATECHNOLOGY, INC.**

**CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS**

**(inthousands)**

**(unaudited)**

 
| ** **                                                                                                | ** ** | **Six Months Ended** | ** ** |
|-----------------------------------------------------------------------------------------------------------|------------|--------------------------------|------------|
| ** **                                                                                                | ** ** | **March 31,  2006**       | ** ** | **March 25,  2005** | ** ** |
| CASH FLOWS FROM  OPERATING ACTIVITIES:                                                                    |       |                           |       |   |   |
| Net loss                                                                                                  |       | $                              | (9,943     | ) | $ | (5,537 | ) |
| Adjustments to  reconcile net loss to net cash used in operating activities:                              |       |                           |       |   |   |
| Depreciation                                                                                              |       | 1,603                          |       | 1,049 |   |
| Amortization                                                                                              |       | 1,454                          |       | 857 |   |
| Fair value of  common stock warrants issued in exchange for loan guarantee                                |       | 251                            |       | — |   |
| Stock based  compensation                                                                                 |       | 639                            |       | — |   |
| Preferred stock  dividend accrued                                                                         |       | 439                            |       | — |   |
| Provision for  allowance for doubtful accounts                                                            |       | (200                           | )          | (272 | ) |
| Changes in  assets and liabilities:                                                                       |       |                           |       |   |   |
| Accounts  receivable                                                                                      |       | 4,466                          |       | (747 | ) |
| Inventories                                                                                               |       | 659                            |       | (3,513 | ) |
| Prepaid and  other assets                                                                                 |       | 3,649                          |       | (4,916 | ) |
| Accounts payable                                                                                          |       | 249                            |       | 7,885 |   |
| Warranty  liability                                                                                       |       | (2,004                         | )          | (267 | ) |
| Accrued  liabilities                                                                                      |       | 1,855                          |       | 1,294 |   |
|                                                                                                      |       |                           |       |   |   |
| Net cash  provided by (used in) operating activities                                                      |       | 3,117                          |       | (4,167 | ) |
|                                                                                                      |       |                           |       |   |   |
| CASH FLOWS FROM  INVESTING ACTIVITIES:                                                                    |       |                           |       |   |   |
| Cash acquired  from Trikon merger net of direct merger costs                                              |       | 7,366                          |       | — |   |
| Purchases of  technology license                                                                          |       | —                         |       | (4,000 | ) |
| Purchases of  property and equipment, net                                                                 |       | (2,700                         | )          | (2,786 | ) |
|                                                                                                      |       |                           |       |   |   |
| Net cash  provided by (used in) investing activities                                                      |       | 4,666                          |       | (6,786 | ) |
|                                                                                                      |       |                           |       |   |   |
| CASH FLOWS FROM  FINANCING ACTIVITIES:                                                                    |       |                           |       |   |   |
| Net proceeds  (payments) from credit lines                                                                |       | (2,532                         | )          | 6,067 |   |
| Proceeds from  issuance of common stock                                                                   |       | 40                             |       | 238 |   |
| Proceeds from  issuance of Series B preferred stock                                                       |       | —                         |       | 2,000 |   |
| Payments on  mortgage loan                                                                                |       | (140                           | )          | (116 | ) |
| Payment on  capital lease obligations                                                                     |       | (21                            | )          | — |   |
| Payments on  short term borrowings                                                                        |       | (8,658                         | )          | — |   |
|                                                                                                      |       |                           |       |   |   |
| Net cash  provided by (used in) financing activities                                                      |       | (11,311                        | )          | 8,189 |   |
|                                                                                                      |       |                           |       |   |   |
| NET DECREASE IN  CASH AND CASH EQUIVALENTS                                                                |       | (3,528                         | )          | (2,764 | ) |
|                                                                                                      |       |                           |       |   |   |
| CASH AND CASH  EQUIVALENTS:                                                                               |       |                           |       |   |   |
| Beginning of  period                                                                                      |       | 7,437                          |       | 9,429 |   |
|                                                                                                      |       |                           |       |   |   |
| Effect of  exchange rates on foreign cash balances                                                        |       | (47                            | )          | (1,109 | ) |
|                                                                                                      |       |                           |       |   |   |
| End of period                                                                                             |       | $                              | 3,862      |   | $ | 5,556 |   |
|                                                                                                      |       |                           |       |   |   |
| SUPPLEMENTAL  DISCLOSURE OF CASH FLOW INFORMATION:                                                        |       |                           |       |   |   |
| Cash paid for  interest                                                                                   |       | $                              | 1,438      |   | $ | 904 |   |
| Income taxes  paid                                                                                        |       | $                              | 63         |   | $ | — |   |
| Noncash  investing and financing activities:                                                              |       |                           |       |   |   |
| Fair value of  common stock, options and warrants issued in the acquisition of Trikon  Technologies, Inc. |       | $                              | 24,442     |   | $ | — |   |
| Fair value of  common stock warrants issued in exchange for loan guarantee                                |       | $                              | 251        |   | $ | — |   |
| Property and  equipment included in accounts payable at quarter end                                       |       | $                              | 200        |   | $ | — |   |

 

The accompanying notesare an integral part of these condensed consolidated financial statements.

 

3

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**AVIZATECHNOLOGY, INC.**

**NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**March31, 2006**

***(Unaudited)***

 

**1.  Basis of Presentation**

 

The accompanying unaudited condensed consolidated financial statementshave been prepared in accordance with United States (U.S.) generally acceptedaccounting principles for interim financial information and applicableregulations of the Securities and Exchange Commission. Certain information andfootnote disclosures normally included in financial statements prepared inaccordance with accounting principles generally accepted in the United Statesof America have been condensed or omitted pursuant to such rules andregulations. In the opinion of management, all adjustments (consisting only ofnormal recurring adjustments) considered necessary for a fair statement offinancial position and operations have been included. Operating results for thequarter and six months ended March 31, 2006 are not necessarily indicative ofthe results that may be expected for future quarters and the fiscal year endedSeptember 29, 2006.  The accompanying unaudited condensed consolidatedfinancial statements should be read in conjunction with the auditedconsolidated financial statements of Aviza Technology, Inc. (the “Company” or “Aviza”)for the year ended September 30, 2005, which are included in the Company’sAnnual Report on Form 10-K and the risk factors contained herein and therein.

 

The preparation of the accompanying unaudited condensed consolidatedfinancial statements requires the use of estimates that affect the reportedamounts of assets, liabilities, revenues, expenses and contingencies. These estimates include, but are not limited to, estimates related to revenuerecognition, allowance for doubtful accounts, inventory valuation, tangible andintangible long-term asset valuation, warranty and other obligations,contingent liabilities and litigation.  Estimates are updated on anongoing basis and are evaluated based on historical experience and currentcircumstances.  Changes in facts and circumstances in the future may giverise to changes in these estimates which may cause actual results to differfrom current estimates.

 

The Company’s current fiscal year will end on September 29, 2006 andincludes 52 weeks. The Company closes its fiscal quarters on the lastFriday of December, March, June and September.

 

On December 1, 2005, Aviza, Inc.,formerly Aviza Technology, Inc. (“Former Aviza”) completed its consolidationthrough merger with Trikon Technologies, Inc. (“Trikon”). The mergertransaction was effected through the formation of a new company originallynamed New Athletics, Inc., which issued shares of common stock in exchange foroutstanding shares of common stock of Trikon and outstanding shares of commonand series A preferred stock of Former Aviza. For accounting purposes, FormerAviza is deemed to have acquired Trikon because, immediately after the mergertransaction, former stockholders of Former Aviza owned approximately 56% of thecombined company and former stockholders of Trikon owned approximately 44% ofthe combined company. Each outstanding share of Former Aviza common and seriesA preferred stock was exchanged for .90043 of a share of New Athletics, Inc.common stock. All common stock and series A preferred stock and per shareamounts for Former Aviza in these financial statements have been adjusted togive retroactive effect to this exchange ratio for all periods presented.Shares of series B and B-1 preferred stock of Former Aviza were not exchangedin the merger transaction and, accordingly, the related share and per shareamounts have not been adjusted.

 

In connection with the merger transaction, New Athletics, Inc. changedits name to Aviza Technology, Inc. (“Aviza”), the common stock of which ispublicly traded on the NASDAQ National Market under the symbol “AVZA.”

 

The following table details the impact of the exchange of sharesassociated with the merger on December 1, 2005:

 
| ** **                  | ** ** | **Pre Exchange  Shares** | ** ** | **Exchange  Ratio** | ** ** | **Post Exchange  Aviza Technology, Inc.  Common Shares** | ** ** |
|-----------------------------|------------|-------------------------------|------------|---------------------|------------|------------------------------------------------------------------------------|------------|
| Former Aviza:               |       |                          |       |                |       |                                                                         |       |
| Preferred stock,  Series A  |       | 5,804,446                     |       | 0.90043             |       | 5,226,496                                                                    |       |
| Common stock                |       | 559,889                       |       | 0.90043             |       | 504,140                                                                      |       |
|                        |       | 6,364,335                     |       |                |       |                                                                         |       |
|                        |       |                          |       |                |       |                                                                         |       |
| Trikon:                     |       |                          |       |                |       |                                                                         |       |
| Common stock                |       | 15,754,985                    |       | 0.29                |       | 4,568,946                                                                    |       |
|                        |       |                          |       |                |       |                                                                         |       |
| Total post  exchange shares |       |                          |       |                |       | 10,299,582                                                                   |       |

 

4

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Trikon and Former Aviza continue as subsidiaries of the Company. The financial information presented in this report represents:

 

1)     thefinancial position of the Company and its subsidiaries as of March 31, 2006;

 

2)     thefinancial position of Former Aviza as of September 30, 2005;

 
| 3) |   | the results of operations of the Company and its  subsidiaries for the quarter and six months ended March 31, 2006, including  Trikon from December 2, 2005 through March 31, 2006; |
|----|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 
| 4) |   | the changes in cash flow of the Company and its  subsidiaries for the six months ended March 31, 2006, including Trikon from  December 2, 2005 through March 31, 2006; |
|----|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

 

5)     theresults of operations of Former Aviza for the quarter and six months endedMarch 25, 2005; and

 

6)     thechanges in cash flow of Former Aviza for the six months ended March 25, 2005.

 

See Note 5 for additional information related to the mergertransaction.

 

The consolidated financial statements include the accounts of theCompany and its subsidiaries. All significant intercompany accounts andtransactions have been eliminated in consolidation.

 

**2**. **Recent Accounting Pronouncements**

 

Effective October 1, 2005, the Company adopted the provisions ofStatement of Financial Accounting Standards (“SFAS”) No. 123(R), “Share-Based Payment” (“SFAS 123(R)”).  SFAS 123(R) establishesaccounting for stock-based awards exchanged for employee services. Accordingly, stock-based compensation cost is measured at grant date, based onthe fair value of the award, and is recognized as an expense over the employee’srequisite service period.  The Company previously applied AccountingPrinciples Board (“APB”) Opinion No. 25, “*Accounting for StockIssued to Employees*,” and related Interpretations and provided thepro forma disclosures of SFAS No. 123, “*Accounting for Stock-BasedCompensation*” (“SFAS 123”).  The Company adopted the modifiedprospective application method as provided by SFAS 123(R).  Under thismethod, SFAS 123R was applied to new awards and to awards modified, repurchasedor cancelled after the effective date.  Additionally, compensation costfor the portion of awards for which the requisite service has not beenrendered, such as unvested stock options, that are outstanding as of the dateof adoption will be recognized as the remaining requisite services arerendered.  The compensation cost relating to unvested awards on October 1,2005 was based on the grant-date fair value for those awards granted after June24, 2005, the date of the Company’s initial filing of its Form S-4 registrationstatement relating to the Trikon merger as discussed in Note 5, and based onthe intrinsic values as previously recorded under APB Opinion No. 25 for awardsgranted prior to that date.

 

In November 2004, the Financial Accounting Standards Board (“FASB”)issued SFAS No. 151,*Inventory Costs,an Amendment of ARB No. 43, Chapter 4* (“SFAS 151”). Theamendments made by SFAS 151 are intended to improve financial reporting byclarifying that abnormal amounts of idle facility expense, freight, handlingcosts and wasted materials (spoilage) should be recognized as current-periodcharges and by requiring the allocation of fixed production overheads toinventory based on the normal capacity of the production facilities. Theguidance is effective for inventory costs incurred during fiscal yearsbeginning after June 15, 2005. Earlier application is permitted forinventory costs incurred during fiscal years beginning after November 23,2004.  The provisions of SFAS 151 will be applied prospectively. Aviza’shistorical treatment of inventory costs is consistent with SFAS 151, andtherefore adoption of SFAS 151 did not have an effect on its consolidatedfinancial statements.

 

In March 2005, the FASB issued FASB Interpretation No. 47,*Accounting for Conditional Asset RetirementObligations, an Interpretation of FASB Statement No. 143* (“FIN 47”).FIN 47 clarifies that the term “conditional asset retirement obligation”as used in FASB Statement No. 143, refers to a legal obligation to performan asset retirement activity in which the timing and (or) method of settlementare conditioned on a future event that may or may not be within the control ofthe entity. An entity is required to recognize a liability for the fair valueof a “conditional asset retirement obligation” if the fair value of theliability can be reasonably estimated. This interpretation also clarifies whenan entity would have sufficient information to reasonably estimate the fairvalue of a “conditional asset retirement obligation.” FIN 47 is effectiveno later than the end of fiscal years ending after December 15, 2005.Aviza does not believe the adoption of this interpretation will have an impacton its results of operations.

 

5

----

 

**3.  Balance Sheet Details**

 
| ** **                                      | ** ** | **March 31,  2006** | ** ** | **September 30,  2005** | ** ** |
|-------------------------------------------------|------------|--------------------------|------------|------------------------------|------------|
| ** **                                      | ** ** | **(in thousands)**  | ** ** |
| **Inventories:**                                |       |                     |       |                         |       |
| Raw materials                                   |       | $                        | 21,169     |                         | $          | 14,149 |   |
| Work-in-process                                 |       | 11,556                   |       | 10,104                       |       |
| Finished goods and  evaluation systems          |       | 5,569                    |       | —                       |       |
| Total                                           |       | $                        | 38,294     |                         | $          | 24,253 |   |
|                                            |       |                     |       |                         |       |
| **Prepaid  expenses and other current assets:** |       |                     |       |                         |       |
| Debt issuance  costs                            |       | $                        | 1,615      |                         | $          | 2,079 |   |
| Deferred  installation costs                    |       | 3,285                    |       | 3,685                        |       |
| Acquisition  costs                              |       | —                   |       | 4,112                        |       |
| Other                                           |       | 3,661                    |       | 1,756                        |       |
| Total                                           |       | $                        | 8,561      |                         | $          | 11,632 |   |
|                                            |       |                     |       |                         |       |
| **Property,  plant and equipment, net:**        |       |                     |       |                         |       |
| Land                                            |       | $                        | 1,839      |                         | $          | 1,839 |   |
| Buildings and  improvements                     |       | 11,198                   |       | 11,330                       |       |
| Machinery and  equipment                        |       | 9,685                    |       | 6,677                        |       |
| Office  furnishings, fixtures and equipment     |       | 2,452                    |       | 1,420                        |       |
| Leasehold  improvement                          |       | 1,229                    |       | —                       |       |
| Construction in  process                        |       | 2,208                    |       | 2,213                        |       |
| Total                                           |       | 28,611                   |       | 23,479                       |       |
| Accumulated  depreciation                       |       | (5,515                   | )          | (3,910                       | )          |
| Net property,  plant and equipment              |       | $                        | 23,096     |                         | $          | 19,569 |   |
|                                            |       |                     |       |                         |       |
| **Intangible  assets, net:**                    |       |                     |       |                         |       |
| Licenses                                        |       | $                        | 4,027      |                         | $          | 4,000 |   |
| Developed  technology                           |       | 696                      |       | —                       |       |
| Brands and  trademarks                          |       | 97                       |       | —                       |       |
| Customer  relationships                         |       | 222                      |       | —                       |       |
| Patents                                         |       | 78                       |       | —                       |       |
| Total                                           |       | 5,120                    |       | 4,000                        |       |
| Accumulated  amortization                       |       | (107                     | )          | —                       |       |
| Net intangible  assets                          |       | $                        | 5,013      |                         | $          | 4,000 |   |
|                                            |       |                     |       |                         |       |
| **Accrued  liabilities:**                       |       |                     |       |                         |       |
| Accrued payroll  and payroll taxes              |       | $                        | 4,172      |                         | $          | 2,766 |   |
| Deferred revenue                                |       | 3,893                    |       | 545                          |       |
| Customer advance  payments                      |       | 483                      |       | —                       |       |
| Other                                           |       | 5,401                    |       | 5,503                        |       |
| Total                                           |       | $                        | 13,949     |                         | $          | 8,814 |   |

 

 **4. Stock-Based Compensation**

 

Effective October 1, 2005, the Company adopted the provisions ofStatement of Financial Accounting Standards (“SFAS”) No. 123(R), “*Share-Based Payment*” (“SFAS 123(R)”). SFAS 123(R) establishes accounting for stock-based awards exchanged foremployee services.  Accordingly, stock-based compensation cost is measuredat grant date, based on the fair value of the award, and is recognized as anexpense over the employee’s requisite service period.  The Companypreviously applied Accounting Principles Board (“APB”) Opinion No. 25, “*Accounting for Stock Issued to Employees*,” and relatedInterpretations and provided the pro forma disclosures of SFAS No. 123, “*Accounting for Stock-Based Compensation*” (“SFAS 123”).

 

The Company adopted the modified prospective application method asprovided by SFAS 123(R).  Under this method, SFAS 123R was applied to newawards and to awards modified, repurchased or cancelled after the effectivedate.  Additionally, compensation cost for the portion of awards for whichthe requisite service has not been rendered, such as unvested stock options,that were outstanding as of the date of adoption are being recognized as theremaining requisite services are rendered.  The compensation cost relatingto unvested awards at the date of adoption were based on the grant-date fairvalue for those awards granted after June 24, 2005, the date of the Company’sinitial filing of a Form S-4 registration statement relating to the mergertransaction as discussed in Note 5, and based on the intrinsic values aspreviously recorded under APB Opinion No. 25 for awards granted prior to thatdate.

 

6

----

 

The fair value of each option is estimated at the date of grant usingthe Black-Scholes option valuation model.  The Company estimates expectedstock price volatility based on historical volatility within a representativepeer group.  The Company uses historical data to estimate expected lifeand forfeiture rates.  The risk-free interest rate for periods within the expectedlife of the option is based on the U.S. Treasury yield.

 

Under Aviza’s stock option plans, Aviza may grant options to purchaseup to a maximum of 4,120,290 shares of common stock, including outstandingoptions, to employees, directors, and consultants at prices not less than thefair market value on the date of grant. These options generally vest over fourto five years and generally expire seven to ten years from the date of grant.

 

The Company recognized stock-based compensation expense of $532,000 and$639,000 during the quarter and six months ended March 31, 2006.  There isno related income tax benefit recognized in the condensed consolidatedstatements of operations recorded for the quarter and six months ended March31, 2006.  The estimated fair value of the Company’s stock options, lessexpected forfeitures, is amortized over the awards’ vesting period on astraight-line basis.

 

The modified prospective transition method of SFAS 123(R) requires thepresentation of pro forma information, for periods presented prior to theadoption of SFAS 123(R), regarding net loss and net loss per share as if theCompany had accounted for its stock plans under the fair value method of SFAS123(R).  For pro forma purposes, the fair value of stock options was estimatedusing the Black-Scholes option valuation model and amortized on a straight-linebasis.  The pro forma amounts are as follows:

 

| ** **                                                                                    | ** ** | **Quarter Ended  March 25, 2005**                   | ** ** | **Six Months Ended  March 25, 2005** | ** ** |
|-----------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------|------------|----------------------------------------------------------|------------|
| ** **                                                                                    | ** ** | **(in thousands, except per share data)** | ** ** |
| Net loss - as  reported                                                                       |       | $                                                                  | (3,559     | )                                                        | $          | (5,537 | ) |
| Deduction:  Stock-based employee compensation expense determined under the fair value  method |       | (62                                                                | )          | (63                                                      | )          |
| Net loss - pro  forma                                                                         |       | $                                                                  | (3,621     | )                                                        | $          | (5,600 | ) |
|                                                                                          |       |                                                               |       |                                                     |       |
| Loss per share:                                                                               |       |                                                               |       |                                                     |       |
| Basic and  diluted - as reported                                                              |       | $                                                                  | (11.45     | )                                                        | $          | (19.76 | ) |
| Basic and  diluted - pro forma                                                                |       | $                                                                  | (11.65     | )                                                        | $          | (19.98 | ) |

 

The fair value of the Company’s stockoptions granted in the quarter and six month periods ended March 31, 2006 andMarch 25, 2005 was estimated at the date of grant using the following weightedaverage assumptions:

 

| ** **               | ** ** | **Quarter Ended**   | ** ** | **Six Months Ended** | ** ** |
|--------------------------|------------|--------------------------|------------|--------------------------------|------------|
| ** **               | ** ** | **March 31,  2006** | ** ** | **March 25,  2005**       | ** ** | **March 31,  2006** | ** ** | **March 25,  2005** | ** ** |
| Expected life  (years)   |       | 4.8                      |       | 5.0                            |       | 5.4 |   | 5.0 |   |
| Risk-free  interest rate |       | 4.6                      | %          | 4.2                            | %          | 4.5 | % | 4.2 | % |
| Stock price  volatility  |       | 73.7                     | %          | 0.0                            | %          | 74.8 | % | 0.0 | % |
| Dividend yield           |       | 0.0                      | %          | 0.0                            | %          | 0.0 | % | 0.0 | % |

 

The following table summarizes the Company’s stock option activityunder its stock plans as of March 31, 2006 and changes during the six monthsended March 31, 2006:

 

7

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| ** **                             | ** ** | **Shares** | ** ** | **Weighted Average  Exercise Price** | ** ** |
|----------------------------------------|------------|------------|------------|------------------------------------------------|------------|
| Outstanding at  September 30, 2005     |       | 1,554,444  |       | $                                              | 0.96       |   |
| Options assumed  in merger with Trikon |       | 512,401    |       | $                                              | 21.57      |   |
| Granted                                |       | 815,000    |       | $                                              | 5.60       |   |
| Exercised                              |       | (30,276    | )          | $                                              | 0.87       |   |
| Forfeited                              |       | (16,940    | )          | $                                              | 16.42      |   |
| Outstanding at  December 30, 2005      |       | 2,834,629  |       | $                                              | 5.93       |   |
| Granted                                |       | 1,069,000  |       | $                                              | 4.94       |   |
| Exercised                              |       | (14,406    | )          | $                                              | 0.97       |   |
| Forfeited                              |       | (91,170    | )          | $                                              | 28.65      |   |
| Outstanding at  March 31, 2006         |       | 3,798,053  |       | $                                              | 5.12       |   |

 

As of March 31, 2006, there was $5.5 million of unrecognizedcompensation cost related to unvested stock options granted and outstanding,net of estimated forfeitures.  The cost is expected to be recognized overa weighted average period of approximately two and a half years.

 

The following table details total stock-based compensation expense forthe quarter and six months ended March 31, 2006:

 
| ** **                                | ** ** | **Quarter Ended  March 31, 2006** | ** ** | **Six Months Ended  March 31, 2006** | ** ** |
|-------------------------------------------|------------|--------------------------------------------------|------------|----------------------------------------------------------|------------|
| ** **                                | ** ** | **(in thousands)**                          | ** ** |
| Cost of goods  sold                       |       | $                                                | 75         |                                                     | $          | 87 |   |
| Research and  development                 |       | 129                                              |       | 143                                                      |       |
| Selling, general  and administrative      |       | 328                                              |       | 409                                                      |       |
| Pre-tax  stock-based compensation expense |       | 532                                              |       | 639                                                      |       |
| Income tax  benefits                      |       | —                                           |       | —                                                   |       |
| Net stock-based  compensation expense     |       | $                                                | 532        |                                                     | $          | 639 |   |

 

The options outstanding and exercisable at March 31, 2006 were in thefollowing exercise price ranges:

 
| ** **                              | ** ** | **Options Outstanding**            | ** ** | **Options Exercisable**                                         | ** ** |
|-----------------------------------------|------------|-----------------------------------------|------------|----------------------------------------------------------------------|------------|
| **Range of Exercise  Prices** | ** ** | **Number of  Shares  Outstanding** | ** ** | **Weighted  Average  Remaining  Contractual  Term  (in years)** | ** ** | **Weighted  Average  Exercise  Price** | ** ** | **Aggregate  Intrinsic Value  (in thousands)** | ** ** | **Number Vested  and Exercisable** | ** ** | **Weighted  Average  Exercise  Price** | ** ** | **Aggregate  Intrinsic Value  (in thousands)** | ** ** |
| $0.83 - $0.83                           |       | 1,136,540                               |       | 7.88                                                                 |       | $ | 0.83 |   | $ | 3,898 |   | 639,127 |   | $ | 0.83 |   | $ | 2,192 |   |
| $0.84 - $5.41                           |       | 1,542,716                               |       | 7.45                                                                 |       | $ | 4.13 |   | $ | 201 |   | 158,586 |   | $ | 1.76 |   | $ | 396 |   |
| $5.42 - $5.60                           |       | 815,000                                 |       | 9.73                                                                 |       | $ | 5.60 |   | $ | — |   | 50,623 |   | $ | 5.60 |   | $ | — |   |
| $5.61 - $10.69                          |       | 154,478                                 |       | 7.92                                                                 |       | $ | 8.64 |   | $ | — |   | 115,286 |   | $ | 8.26 |   | $ | — |   |
| $10.70 - $87.07                         |       | 149,319                                 |       | 5.63                                                                 |       | $ | 41.68 |   | $ | — |   | 121,955 |   | $ | 44.10 |   | $ | — |   |
|                                    |       |                                    |       |                                                                 |       |   |   |   |   |   |   |   |   |   |   |
| $0.83 - $87.07                          |       | 3,798,053                               |       | 8.02                                                                 |       | $ | 5.12 |   | 4,099 |   | 1,085,577 |   | $ | 6.84 |   | 2,588 |   |

 

The aggregate intrinsic value in the table above represents the totalpre-tax intrinsic value, based on the Company’s closing stock price on March31, 2006 of $4.26. The weighted average remaining contractual term for optionsexercisable as of March 31, 2006 was 7.71 years.

 

The weighted average fair value of options on the grant date, asdetermined under SFAS No. 123(R), granted during the six months ended March 31,2006 and March 25, 2005 was $3.42 and $0.17 per share, respectively

 

The total intrinsic value of options exercised during the six monthsended March 31, 2006 and March 25, 2005 was $118,000 and $1,000, respectively.The total cash received from employees as a result of employee stock optionexercises during the six months ended March 31, 2006 and March 25, 2005 was$40,000 and $228,000, respectively.

 

8

----

 

**5.  Merger and Other Transactionswith Trikon Technologies, Inc.**

 

On December 1, 2005, the stockholders of Trikon approved the merger ofTrikon with the Company.  Trikon designs, manufactures and services waferprocessing semiconductor manufacturing equipment primarily for semiconductordevices.  Its products are used for chemical and physical vapor depositionand for etch applications and are sold to semiconductor manufacturersworldwide.  The Company believes that the addition of Trikon broadens theCompany’s product portfolio and its ability to provide a wider suite ofsolutions for customer applications.  In accordance with the provisions ofSFAS No. 141, Aviza is treated as the acquirer for financial reportingpurposes.  In the merger transaction, a wholly owned subsidiary of theCompany was merged with and into Trikon.  Trikon stockholders received0.29 of a share of Aviza common stock in exchange for each share of Trikoncommon stock they owned.  A total of 4,568,946 shares of Aviza commonstock were issued in exchange for the outstanding common stock of Trikon as ofDecember 1, 2005.  The common stock issued in the transaction was valuedusing the average closing price of Trikon’s common stock on November 30 andDecember 1, 2005.

 

In connection with the merger transaction, Aviza assumed a warrantissued by Trikon to an investor for the purchase of 101,500 shares of commonstock (“investor warrants”) with an exercise price of $21.55 per share. Inaddition, further warrants for the purchase of 15,225 shares of common stock (“placementagent warrants”) were issued to the placement agent. The warrants expireOctober 22, 2007. The warrants may be redeemed at the option of Trikon for$0.34 at any time after the first anniversary of the closing date provided thatfor any 20 trading days in a 30-day trading period the closing market priceexceeds $38.79 for the investor warrants, and $40.34 for the placement agentwarrants, and the average daily trading volume of Aviza common stock exceeds43,500 shares.

 

In addition, 629,570 shares of common stock were reserved for issuanceupon exercise of Trikon common stock options and warrants assumed at December1, 2005.  The fair value of the common stock options and warrants wasestimated to be $810,000.  The options and warrants were valued using theBlack-Scholes option-pricing model with the following assumptions:

 
| ** **                     | ** ** | **Common Stock** | ** ** |
|--------------------------------|------------|-----------------------|------------|
| ** **                     | ** ** | **Options**           | ** ** | **Warrants** | ** ** |
| Dividend yield                 |       | 0.0                   | %          | 0.0 | % |
| Stock price  volatility        |       | 72.4                  | %          | 60.5 | % |
| Expected life  (months)        |       | 56                    |       | 21 |   |
| Risk-free  interest rate       |       | 4.4                   | %          | 4.4 | % |
| Market value per  common share |       | $                     | 5.17       |   | $ | 5.17 |   |
|                                |            |                       |            |  |  |  |  |

 

A summary of the total considerationis as follows (in thousands):

 
| Issuance of  Aviza common stock                                                                                                                           |   | $      | 23,632 |   |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------|--------|--------|
| Value of  substitute options and warrants to acquire 629,570 shares of Aviza common  stock in exchange for all outstanding options and warrants of Trikon |   | 810    |   |
|                                                                                                                                                      |   |   |   |
| Total equity  consideration                                                                                                                               |   | 24,442 |   |
| Direct merger  costs                                                                                                                                      |   | 6,116  |   |
|                                                                                                                                                      |   |   |   |
| Total  consideration                                                                                                                                      |   | $      | 30,558 |   |

 

Direct costs related to the merger totaled $6.1 million.  Thisamount consisted of $2.7 million for legal services, $1.5 million foraccounting and finance services, $1.0 million for services from investmentbankers, and $0.9 million of other direct costs related to the merger. Directcosts reflect a $100,000 increase in estimated merger costs recorded during thequarter ended March 31, 2006. This increase is included in the totalconsideration issued in the merger and the related purchase price allocationsfor property, plant and equipment and intangible assets have been adjusted by$61,000 and $39,000, respectively.

 

Under the purchase method of accounting, the total consideration issuedfor Trikon common stock, options and warrants as shown in the table above isallocated to the Trikon tangible and intangible assets, and liabilities basedon their estimated fair values as of the date of the merger transaction. The unaudited information is based on management’s estimates of fair valuessupported as necessary by valuations performed by external valuationprofessionals.  The allocation of total consideration to Trikon’s tangibleand intangible assets is set forth in the following table (in thousands):

 
| Trikon  historical net book value                      |   |   |   | $       | 30,565 |   |
|--------------------------------------------------------|--------|--------|--------|---------|--------|--------|
| Estimated fair  value adjustments:                     |   |   |   |    |   |
| Inventory to  fair value                               |   | 1,492  |   |    |   |
| Property, plant  and equipment                         |   | 13,439 |   |    |   |
| Deferred income,  net of related costs                 |   | 3,524  |   |    |   |
| Deferred rent                                          |   | 583    |   |    |   |
| Accrued  liabilities                                   |   | (241   | )      |    |   |
| Intangible  assets:                                    |   |   |   |    |   |
| Customer  relationships                                |   | 2,126  |   |    |   |
| Brands and  trademarks                                 |   | 940    |   |    |   |
| Patents                                                |   | 744    |   |    |   |
| Developed  technology                                  |   | 6,673  |   |    |   |
| In-process  research and development                   |   | 3,615  |   |    |   |
| Licenses                                               |   | 253    |   |    |   |
| Total estimated  fair value of intangible assets       |   | 14,351 |   |    |   |
|                                                   |   |   |   |    |   |
| Total fair value  adjustments                          |   |   |   | 33,148  |   |
|                                                   |   |   |   |    |   |
| Fair value of  net assets acquired                     |   |   |   | 63,713  |   |
| Excess of fair  value of net assets over consideration |   |   |   | (33,155 | )      |
| Total  consideration allocated                         |   |   |   | $       | 30,558 |   |

 

9

----

 

In accordance with generally accepted accounting principles, the excessof the fair value of Trikon’s net assets over the consideration given has beenallocated as a pro rata reduction of the amounts that would otherwise have beenallocated to Trikon’s non-current assets acquired.  The allocation of theexcess fair value is as follows (in thousands):

 
| Property, plant  and equipment                             |   | $      | 20,402 |   |
|------------------------------------------------------------|--------|--------|--------|--------|
|                                                       |   |   |   |
| Customer  relationships                                    |   | 1,889  |   |
| Brands and  trademarks                                     |   | 835    |   |
| Patents                                                    |   | 661    |   |
| Developed  technology                                      |   | 5,930  |   |
| In-process  research and development                       |   | 3,213  |   |
| Licenses                                                   |   | 225    |   |
|                                                       |   |   |   |
| Allocation of  excess fair market value to intangibles     |   | 12,753 |   |
|                                                       |   |   |   |
| Excess fair  market value of net assets over consideration |   | $      | 33,155 |   |

 

After allocation of the excess fairmarket value, the value of the intangibles acquired via the merger is asfollows (in thousands):

 
| Customer  relationships              |   | $   | 237    |   |
|--------------------------------------|--------|-----|--------|--------|
| Brands and  trademarks               |   | 105 |   |
| Patents                              |   | 83  |   |
| Developed  technology                |   | 743 |   |
| In-process  research and development |   | 402 |   |
| Licenses                             |   | 28  |   |
| Total  intangibles acquired          |   | $   | 1,598  |   |

 

A portion of the merger consideration was allocated to identifiableintangible assets.  After allocation of the excess fair market valuerelated to the transaction, the identifiable intangibles acquired totaled $1.6million. Of the intangibles acquired, $402,000, as adjusted during the quarterended March 31, 2006, was allocated to in-process research anddevelopment.  The value of the in-process research and development writtenoff to in-process research and development expense was $393,000 and $9,000during the quarters ended December 30, 2005 and March 31, 2006, respectively.

 

The intangible assets are being amortized over their estimated usefullives.  With the exception of in-process research and development, theuseful lives of the intangibles range from ten to fifteen years. In-process research and development consists of research and development inprocess at the time of the merger that had not demonstrated its technologicalfeasibility and does not have an alternative future use.

 

As a result of the merger transaction, Aviza recorded a restructuringliability of $241,000 primarily relating to building closures of $96,000 andemployee severance and related payments of $145,000.  These costs wereincluded in determination of the fair value of the net assets acquired in themerger transaction.

 

The write-ups and write-downs of Trikon’s assets to fair value forfinancial reporting purposes resulted in a difference for income taxreporting.  This fair value write-up of inventory and intangibles, as wellas the reduction of deferred income, deferred rent and certain accruedliabilities, was not recorded for tax purposes due to the merger transactionbeing a tax-free transaction.  This will cause Aviza to have less revenueand more expenses for financial statement purposes than for tax purposes withrespect to these items.   As a result, Aviza recorded a net currentdeferred tax liability of $1.6 million relating to these items. Similarly, the write-down of Trikon’s

 

10

----

 

property, plant, and equipment, as well as the reduction of certainaccrued liabilities to fair value for financial reporting purposes results in adifference for income tax reporting. This will cause Aviza to have lessdepreciation and other expenses for financial statement purposes than for taxpurposes with respect to these items.   As a result, Aviza recorded adeferred tax asset of $1.6 million relating to these items.

 

A deferred tax asset of $31.8 millionwas recorded as part of the merger representing future tax deductions(primarily net operating loss carry forwards), which can only be realized tothe extent of future taxable income.  At March 31, 2006, management isunable to assert that it is more likely than not that the Company will generatesufficient taxable income to realize its net deferred tax assets in excess ofthe deferred tax liabilities recorded in relation to the write-up of inventoryand intangibles to fair value at the merger date described above. Accordingly, the net deferred tax assets have been offset in full by avaluation allowance at March 31, 2006.

 

On March 14, 2005, the Company entered into a joint developmentagreement with Trikon related to the development of control software to be usedin certain of the Company’s products.  As part of the agreement, the Companypaid a $4.0 million license fee and agreed to pay royalties based on sales ofthe licensed product.  The license has an estimated life of 10 years. Inconnection with the merger transaction, no royalty payments are made, and the$4.0 million license fee is amortized over the 10-year estimated life of thelicense.

 

Amortization expense relating to all intangibles was $98,000 and$107,000 during the quarter and six months ended March 31, 2006.  Therewas no amortization of intangibles during the quarter and six months endedMarch 25, 2005.   Based on the intangible assets recorded at March31, 2006, and assuming no subsequent additions to, or impairment of theunderlying assets, the remaining estimated amortization expense is expected tobe as follows (in thousands):

 
| **Fiscal year ending:**        | ** ** | ** ** | ** ** |
|------------------------------------------|------------|------------|------------|
|                                     |       |       |       |
| September 29,  2006 (remaining 6 months) |       | $          | 255        |   |
| September 28,  2007                      |       | 511        |       |
| September 26,  2008                      |       | 511        |       |
| September 25,  2009                      |       | 511        |       |
| September 24,  2010                      |       | 511        |       |
| Thereafter                               |       | 2,714      |       |
| Total                                    |       | $          | 5,013      |   |

 

**Pro Forma Financial Information forthe Acquisition of Trikon**

 

The results of operations of Trikonhave been included in the results of operations of Aviza from the December 1,2005 merger date.  The following unaudited pro forma financial informationpresents the results of operations for the quarter and six months ended March31, 2006 as if the acquisition of Trikon had occurred on October 1, 2005, thebeginning of the Company’s fiscal year 2006.  The pro forma financialinformation for the combined entities has been prepared for comparativepurposes only and is not necessarily indicative of what actual results may havebeen if the acquisition had in fact occurred at the beginning of fiscal 2006 orof future results.

 

| ** **           | ** ** | **Quarter Ended  March 31, 2006**                   | ** ** | **Six Months Ended  March 31, 2006** | ** ** |
|----------------------|------------|--------------------------------------------------------------------|------------|----------------------------------------------------------|------------|
| ** **           | ** ** | **(in thousands, except per share data)** | ** ** |
| Net sales            |       | $                                                                  | 36,241     |                                                     | $          | 74,359 |   |
| Net loss             |       | $                                                                  | (5,312     | )                                                        | $          | (10,056 | ) |
|                 |       |                                                               |       |                                                     |       |
| Net loss per  share: |       |                                                               |       |                                                     |       |
| Basic and  diluted   |       | $                                                                  | (0.52      | )                                                        | $          | (0.98 | ) |

 

**6.  Borrowing Facilities**

 

As of March 31, 2006, the Company has a line of credit agreement with abank under which it may borrow up to $40,000,000.  A total of $20,000,000of the line is secured by first priority liens on all of Aviza’s existing andfuture acquired assets, and the remaining portion of the line is guaranteed bythe Company’s majority shareholder, VantagePoint Venture Partners (“VPVP”). The credit facility has a stated maturity of August 11, 2007.  Borrowingsunder the line of credit accrue interest at the bank’s prime rate plus 0.5%,which is payable monthly.  The terms of the line of credit agreementprohibit the Company from paying cash dividends on its common stock. Under the terms of the line of credit agreement, Aviza is required to meetcertain financial operating covenants.

 

Aviza was in compliance with thesecovenants as of March 31, 2006. At September 30, 2005, the Company was inviolation of these covenants. Based on VPVP’s guarantee that it would notrequire reimbursement from the Company prior to September 30, 2006,

 

11

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should VPVP be required to makepayment under the guarantee, on December 20, 2005, the bank waivednon-compliance under the agreement as of September 30, 2005.  Theagreement has subsequently been amended to include Aviza as obligor and thecovenants reset.  In connection with the merger transaction with Trikon,VPVP continued its guarantee under the line of credit on behalf of theCompany.  The Company issued VPVP additional warrants to purchase 290,000shares of common stock in connection with its continued guarantee. Borrowings under this credit line were $27.0 million at March 31, 2006.

 

A subsidiary of the Company has a revolving line of credit for200,000,000 Japanese Yen (approximately $1,702,000 at the exchange rate onMarch 31, 2006) under which there were $553,000 of borrowings at March 31,2006. The credit line bears interest at 1.375% per annum.

 

***Notes Payable***

 

***Mortgage***—Aviza’smortgage line of credit is secured by a mortgage on Aviza’s land and buildingsand matures on September 30, 2007. The debt carries interest calculated asthe sum of LIBOR rates plus a margin of 5.25% and is repayable in monthlyprincipal installments of $23,333 plus interest. The effective interest rate atMarch 31, 2006 and September 30, 2005 was 10.0% and 9.0%, respectively.

 

Under the provisions of the revolving line of credit and the mortgageline of credit note payable, Aviza is required to maintain interest rateprotection on a portion of its indebtedness. To satisfy this obligation, inAugust 2004 and September 2004, Aviza entered into interest rate cap agreementswith financial institutions for a total notional amount of $17,000,000,expiring on August 6, 2007 and October 10, 2006, respectively. Under therevolving line of credit agreement, Aviza continues to pay interest at the bank’sprime rate plus 0.50% (8.25% at March 31, 2006); however, the maximum rate isset at 8.25%. Under the note payable, Aviza continues to pay interest at LIBORrates plus a margin of 5.25%; however, the maximum rate for the LIBOR componentis 6.75%. Any changes in the fair value of the interest rate caps is charged toor credited to interest expense. At March 31, 2006 and September 30, 2005, thefair value of the interest rate caps was $18,000 and $14,000, respectively.

 

***Loan Guarantee —Warrants***

 

Prior to the merger transaction, Former Aviza granted warrants to VPVPto purchase an aggregate of $20 million of preferred stock at a price of $5.625per share.  Former Aviza allocated approximately $3.5 million of the lineof credit to the warrants and is amortizing the amount to interest expense overthe term of the debt.  These warrants were canceled as part of the mergertransaction.

 

In exchange for its continued guarantee of a portion of the Company’sbank line of credit, on December 1, 2005, Aviza issued warrants to purchase290,000 shares of common stock of $31.03 per share to VPVP.  The warrantshave a term of four years.  The warrants were valued using theBlack-Scholes option valuation model using with the following assumptions:

 
| Stock price               |   | $    | 5.21   |   |
|---------------------------|--------|------|--------|--------|
| Expected life  (in years) |   | 4.0  |   |
| Exercise price            |   | $    | 31.03  |   |
| Risk-free  interest rate  |   | 4.4  | %      |
| Stock price  volatility   |   | 70.8 | %      |
| Dividend yield            |   | 0.0  | %      |

 

Based on the preceding assumptions and the fair value of the relateddebt, the warrants issued on December 1, 2005 were valued at $251,000 atDecember 1, 2005.  The fair value of the warrants will be amortized tointerest expense over the remaining term of the bank line of credit.

 

The total amount allocated to the debt associated with the abovementioned warrants, as determined using the Black-Scholes option valuationmethod, was $3.8 million. In addition, an aggregate fee of $1,147,000 was paidto lenders for the revolving line of credit and the property mortgage. Theseamounts are being charged to interest expense on a straight-line basis over thelives of the related loans. The unamortized portion of these costs is recordedas prepaid expenses and other current assets and other assets of $1,549,000 and$66,000 at March 31, 2006 and $2,079,000 and $131,000 at September 30,2005.

 

Aviza recorded $438,000 and $400,000 during the quarters ended March31, 2006 and March 25, 2005, respectively, and $851,000 and $802,000 during thesix months ended March 31, 2006 and March 25, 2005, respectively, of expenserelated to amortization of the debt issuance and warrant costs. Theamortization is recorded in interest expense. Estimated future amortization ofthese charges consists of the following (in thousands):

 
| **Fiscal Years Ending**        | ** ** | ** ** | ** ** |
|------------------------------------------|------------|------------|------------|
| September 29,  2006 (remaining 6 months) |       | $          | 889        |   |
| September 28,  2007                      |       | 726        |       |
|                                     |       |       |       |
| Total                                    |       | $          | 1,615      |   |

 

12

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**7.  Warranty and Guarantees**

 

***Warranty***—TheCompany accrues for the estimated cost of the warranty on its systems, whichincludes the cost of the labor and parts necessary to repair systems during thewarranty period. The amounts recorded in the warranty accrual are estimatedbased on actual historical costs incurred and on estimated probable futureexpenses related to current sales. The warranty accrual is spread over thewarranty period on a straight-line basis. Systems typically have warrantyperiods ranging from one to three years. The components of the warranty accrualare as follows:

 

 
| ** **                                                                         | ** ** | **Quarter Ended**   | ** ** | **Six Months**      | ** ** |
|------------------------------------------------------------------------------------|------------|--------------------------|------------|--------------------------|------------|
| ** **                                                                         | ** ** | **March 31,  2006** | ** ** | **March 25,  2005** | ** ** | **March 31,  2006** | ** ** | **March 25,  2005** | ** ** |
| ** **                                                                         | ** ** | **(in thousands)**  | ** ** |
| Beginning  warranty accrual                                                        |       | $                        | 13,774     |                     | $          | 14,063 |   | $ | 13,599 |   | $ | 13,533 |   |
| Additional  accruals for new shipments                                             |       | 1,400                    |       | 1,645                    |       | 2,711 |   | 3,942 |   |
| Warranty  liability assumed in merger                                              |       | —                   |       | —                   |       | 1,386 |   | — |   |
| Warranty costs  incurred                                                           |       | (1,942                   | )          | (2,327                   | )          | (3,228 | ) | (4,094 | ) |
| Expirations and  change in liability for pre-existing warranties during the period |       | (254                     | )          | —                   |       | (1,490 | ) | — |   |
| Ending warranty  accrual                                                           |       | $                        | 12,978     |                     | $          | 13,381 |   | $ | 12,978 |   | $ | 13,381 |   |

 

***Guarantees***—Inaddition to product warranties, the Company, from time to time, in the normalcourse of business, indemnifies certain customers against third-party claimsthat the Company’s products, when used for their intended purposes, infringethe intellectual property rights of such third party or other claims madeagainst certain parties. It is not possible to determine the maximum potentialamount of liability under these indemnification obligations due to the limitedhistory of prior indemnification claims and the unique facts and circumstancesthat are likely to be involved in each particular claim. Historically, theCompany has not made payments under these obligations and no liabilities havebeen recorded for these obligations on the balance sheet at March 31, 2006 andSeptember 30, 2005, respectively.

 

**8.  Commitments andContingencies**

 

The Company’s Scotts Valley location is a federal Superfund site.Chlorinated solvent and other contamination was identified at the site in theearly 1980’s, and by the late 1980’s Watkins Johnson Corporation (“WJ”) (aprevious owner of the Company) had installed a groundwater extraction andtreatment system. In 1991, WJ entered into a consent decree with the UnitedStates Environmental Protection Agency providing for remediation of the site.In July 1999, WJ signed a remediation agreement with an environmentalconsulting firm, ARCADIS Geraghty and Miller (“ARCADIS”). Pursuant to thisremediation agreement, WJ paid approximately $3 million in exchange forwhich ARCADIS agreed to perform the work necessary to assure satisfactorycompletion of WJ’s obligation under the consent decree. The agreement alsoincludes a cost overrun guaranty from ARCADIS up to a total project cost of$15 million. In addition, the agreement included procurement of aten-year, claims-made insurance policy to cover overruns of up to$10 million from American International Specialty (“AIS”), along with aten-year, claims-made $10 million policy to cover unknown pollutionconditions at the site.

 

Failure of WJ, ARCADIS, or AIS to fulfill their obligations may subjectthe Company to substantial fines, and the Company could be forced to suspendproduction, alter manufacturing processes or cease business operations, any ofwhich could have a material negative effect on the sales, income and businessoperations.

 

Management believes that the likelihood of the failure of WJ, ARCADISor AIS is remote and that any remaining or uninsured environmental liabilities willnot have a material effect on the Company’s results of operations or financialposition.

 

In the merger transaction, Aviza assumed Trikon’s leases, commitmentsand contingencies.  Trikon leases certain equipment under capitalleases.  Trikon also leases its offices, manufacturing facilities andcertain equipment under non-cancelable operating lease agreements. Certain leases are subject to escalation clauses based on applicable inflationindexes.

 

Other than operating leases for certain equipment and real assets,Aviza has no significant off-balance sheet transactions or unconditionalpurchase obligations.

 

As of March 31, 2006, Aviza’s cash obligations and commitments relatingto its debt obligations and lease payments were as follows:

 

13

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| ** **                            | ** ** | **Payments due by period** | ** ** |
|---------------------------------------|------------|-------------------------------------------|------------|
| ** **                            | ** ** | **Total**                                 | ** ** | **Less Than  One Year** | ** ** | **One to  Three Years** | ** ** | **Three to  Five Years** | ** ** | **Greater than  Five Years** | ** ** |
| ** **                            | ** ** | **(in thousands)**                   | ** ** |
| Bank Loan  (revolving line of credit) |       | $                                         | 27,524     |   | $ | 27,524 |   | $ | — |   | $ | — |   | $ | — |   |
| Note Payable                          |       | 6,603                                     |       | 280 |   | 6,323 |   | — |   | — |   |
| Other Short-Term  Borrowings          |       | 385                                       |       | 385 |   | — |   | — |   | — |   |
| Operating Lease  Obligations          |       | 7,127                                     |       | 2,527 |   | 3,421 |   | 1,179 |   | — |   |
| Capital Lease  Obligations            |       | 73                                        |       | 73 |   | — |   | — |   | — |   |
|                                       |            |                                           |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

Prior to the merger transaction, Trikon was a party to an employmentlawsuit in France.  On March 10, 2004 Dr. Jihad Kiwan departedTrikon as Director and Chief Executive Officer. On March 29, 2004 andApril 2, 2004 Trikon received letters from a United Kingdom law firm andfrom a French law firm respectively, on behalf of Dr. Kiwan, detailingcertain monetary claims for severance amounts due to Dr. Kiwan withrespect to his employment with Trikon. On April 28, 2004 Dr. Kiwanfiled a lawsuit in France and on June 10, 2004 filed similar proceedingsin the United Kingdom. Dr. Kiwan has subsequently withdrawn theproceedings in the United Kingdom. Trikon and the Company are in the process ofvigorously defending against the French claim. Trikon and the Company do notbelieve that the outcome of these claims will be material to the results ofoperations or the financial condition of the Company.

 

**9.  Geographic Information andMajor Customers**

 

Aviza’s business consists of multiple products and services whichoperate in multiple operational segments that are aggregated into onereportable segment due to similar economic characteristics and 1) the nature ofthe products and services being the same, 2) the nature of the productionprocesses being the same, 3) the type or class of customer being similar, and4) the distribution process for products and services being similar. Allproducts and services are marketed within the geographic regions in which theCompany operates.

 

The Company operates in three geographical regions: Asia Pacific,Europe and the United States. For geographical reporting, revenues areattributed to the geographical locations in which the customers’ facilities arelocated while long-lived tangible assets are attributed to the geographiclocation in which they are located. The following details Company sales andlong-lived assets by geographical region:
| ** **      | ** ** | **Quarter Ended**   | ** ** | **Six Months**      | ** ** |
|-----------------|------------|--------------------------|------------|--------------------------|------------|
| ** **      | ** ** | **March 31,  2006** | ** ** | **March 25,  2005** | ** ** | **March 31,  2006** | ** ** | **March 25,  2005** | ** ** |
| ** **      | ** ** | **(in thousands)**  | ** ** |
| Net sales:      |       |                     |       |                     |       |   |   |   |   |
| Asia Pacific    |       | $                        | 23,653     |                     | $          | 21,218 |   | $ | 40,655 |   | $ | 65,231 |   |
| Europe          |       | 7,493                    |       | 5,067                    |       | 13,122 |   | 20,936 |   |
| United States   |       | 5,095                    |       | 6,089                    |       | 11,407 |   | 8,726 |   |
| Total net sales |       | $                        | 36,241     |                     | $          | 32,374 |   | $ | 65,184 |   | $ | 94,893 |   |

 
| ** **                        | ** ** | **March 31,  2006** | ** ** | **September 30,  2005** | ** ** |
|-----------------------------------|------------|--------------------------|------------|------------------------------|------------|
| ** **                        | ** ** | **(in thousands)**  | ** ** |
| Long-lived  tangible assets:      |       |                     |       |                         |       |
| Asia Pacific                      |       | $                        | 248        |                         | $          | 300 |   |
| Europe                            |       | 2,670                    |       | 162                          |       |
| United States                     |       | 20,178                   |       | 19,107                       |       |
| Total long-lived  tangible assets |       | $                        | 23,096     |                         | $          | 19,569 |   |

 

 

During the quarter ended March 31, 2006, three customers accounted for19%, 12% and 10% of total net sales, respectively, and during the six monthsended March 31, 2006, three customers accounted for 20%, 16% and 13% of totalnet sales, respectively.

 

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**10.  Comprehensive Loss**

 

The components of comprehensive loss are as follows:

 

| ** **                       | ** ** | **Quarter Ended**   | ** ** | **Six Months**      | ** ** |
|----------------------------------|------------|--------------------------|------------|--------------------------|------------|
| ** **                       | ** ** | **March 31,  2006** | ** ** | **March 25,  2005** | ** ** | **March 31,  2006** | ** ** | **March 25,  2005** | ** ** |
| ** **                       | ** ** | **(in thousands)**  | ** ** |
| Net loss                         |       | $                        | (5,312     | )                        | $          | (3,559 | ) | $ | (9,943 | ) | $ | (5,537 | ) |
| Currency  translation adjustment |       | (28                      | )          | 83                       |       | (16 | ) | (144 | ) |
| Total  comprenhensive loss       |       | $                        | (5,340     | )                        | $          | (3,476 | ) | $ | (9,959 | ) | $ | (5,681 | )  |

 

**11.  Loss Per Share**

 

Basic loss per share has beencomputed based upon the weighted average number of common shares outstandingfor the periods presented. For diluted loss per share, shares used in the pershare computation include weighted average common and potentially dilutiveshares outstanding. Potentially dilutive shares during the quarter and six monthsended March 31, 2006 consist of the Company’s Series B and B-1 preferred stockaggregating 110,000 shares, which on April 24, 2006 converted into 2.5 millionshares of the Company’s common stock, and 3.8 million shares of common stock issuableupon the assumed exercise of all outstanding stock options and 407,000 sharesof common stock issuable upon assumed exercise of all outstanding warrants.During the quarter and six months ended March 25, 2005, potentially dilutiveshares consisted of the Company’s Series A preferred stock exercisable into 5.2million shares of common stock and shares issuable upon the assumed exercise ofdilutive stock options.  Because the Company recorded a net loss duringthe quarters and six months ended March 31, 2006 and March 25, 2005,respectively, the calculation of dilutive loss per share excludes potentiallydilutive shares as they were anti-dilutive and would have reduced the loss pershare.  The following details the calculation of net loss per share forthe periods presented (in thousands except share and per share data):

 

| ** **                                      | ** ** | **Quarter Ended**   | ** ** | **Six Months**      | ** ** |
|-------------------------------------------------|------------|--------------------------|------------|--------------------------|------------|
| ** **                                      | ** ** | **March 31,  2006** | ** ** | **March 25,  2005** | ** ** | **March 31,  2006** | ** ** | **March 25,  2005** | ** ** |
| Numerator:                                      |       |                     |       |                     |       |   |   |   |   |
| Net loss                                        |       | $                        | (5,312     | )                        | $          | (3,559 | ) | $ | (9,943 | ) | $ | (5,537 | ) |
|                                            |       |                     |       |                     |       |   |   |   |   |
| Denominator:                                    |       |                     |       |                     |       |   |   |   |   |
| Weighted average  shares, basic                 |       | 10,305,831               |       | 310,828                  |       | 7,011,864 |   | 280,233 |   |
| Dilutive effect  of options and preferred stock |       | —                   |       | —                   |       | — |   | — |   |
| Total diluted                                   |       | 10,305,831               |       | 310,828                  |       | 7,011,864 |   | 280,233 |   |
|                                            |       |                     |       |                     |       |   |   |   |   |
| Basic and  diluted net loss per share           |       | $                        | (0.52      | )                        | $          | (11.45 | ) | $ | (1.42 | ) | $ | (19.76 | ) |

 

###### **12. Subsequent Events**

###### ** **

On April 11, 2006, IPS, Ltd. filed a lawsuit against theCompany in the United States District Court for the Central District ofCalifornia. The complaint alleges that the Company used confidentialinformation of IPS to develop a single-wafer-processing type atomic layerdeposition (ALD) system. The complaint is for unspecified monetary damages,injunctive relief and an order rescinding the settlement and distributoragreements that the Company and IPS entered into in May 2004 insettlement of a prior lawsuit that IPS filed against ASML U.S., Inc.and the Company in March 2004 relating to assets that theCompany acquired from ASML in October 2003. The Company believesthat it has complied with the settlement agreement and that the allegationscontained in IPS’s complaint are without merit.

 

On April 24, 2006, the Company sold 3,282,275 shares of its commonstock for $15,000,000 in a private placement. In connection with the closing ofthe private placement, all outstanding shares of Series B and Series B-1preferred stock of the Company’s subsidiary, Aviza, Inc., and accrued butunpaid dividends on those shares converted into an aggregate of 2,536,974shares of the Company’s common stock, representing the same per-share purchaseprice as in the private placement.

 

15

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**ITEM 2.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OFOPERATIONS**

 

**CautionaryStatement Regarding Forward-Looking Statements**

 

*The statements in this report includeforward-looking statements. These forward-looking statements are based on ourmanagement’s current expectations and beliefs and involve numerous risks anduncertainties that could cause actual results to differ materially fromexpectations. You should not rely upon these forward-looking statements aspredictions of future events because we cannot assure you that the events orcircumstances reflected in these statements will be achieved or will occur. Youcan identify forward-looking statements by the use of forward-lookingterminology, including the words “believes,” “expects,” “may,” “will,” “should,”“seeks,” “intends,” “plans,” “estimates” or “anticipates” or the negative ofthese words and phrases or other variations of these words and phrases or comparableterminology. These forward-looking statements relate to, among other things:our sales, results of operations and anticipated cash flows; capitalexpenditures; depreciation and amortization expenses; research and developmentexpenses; sales, general and administrative expenses; the development andtiming of the introduction of new products and technologies; our ability tomaintain and develop relationships with our existing and potential futurecustomers and our ability to maintain the level of investment in research anddevelopment and capacity that is required to remain competitive.  Manyfactors could cause our actual results to differ materially from thoseprojected in these forward-looking statements, including, but not limited to:whether we will be able to integrate Trikon’s business successfully and achieveanticipated synergies; variability of our revenues and financial performance;risks associated with product development and technological changes; theacceptance of our products in the marketplace by existing and potential futurecustomers; disruption of operations or increases in expenses caused by civil orpolitical unrest or other catastrophic events; general economic conditions andconditions in the semiconductor industry in particular; the continuedemployment of our key personnel and risks associated with competition.*

 

*For a discussion of the factors thatcould cause actual results to differ materially from the forward-lookingstatements, see the “Risk Factors” set forth in Item 1A of Part II of thisreport, the “Liquidity and Capital Resources” section under “Management’sDiscussion and Analysis of Financial Condition and Results of Operations” inthis item of this report and the other risks and uncertainties that are setforth elsewhere in this report or detailed in our other Securities and ExchangeCommission reports and filings. We assume no obligation to update theseforward-looking statements.*

* *

The following discussion and analysis of the financial condition andresults of operations of Aviza should be read together with the condensedconsolidated financial statements of Aviza and related notes that are includedelsewhere in this report and the consolidated financial statements and relatednotes included in our Annual Report on Form 10-K for the fiscal year endedSeptember 30, 2005.

 

**Overview**

 

Aviza Technology, Inc. (“Aviza”), formerly New Athletics, Inc., wasincorporated in 2004 for the purpose of effecting the merger of Aviza, Inc.,formerly Aviza Technology, Inc., and Trikon Technologies, Inc.  Thefinancial condition, results of operations and changes in cash flows forperiods prior to December 2, 2005 presented in the condensed consolidatedfinancial statements included in this report represent the activities of Aviza,Inc.

 

On December 1, 2005, Aviza completed its consolidation through mergerwith Trikon Technologies, Inc.  Aviza’s common stock became publiclytraded on the Nasdaq National Market under the symbol “AVZA” upon thecompletion of the merger.  Aviza accounted for the merger transaction as apurchase of Trikon by Aviza, using the purchase method of accounting.  Asa result of the completion of the merger transaction, Aviza’s results ofoperations will include Trikon’s results of operations for all periods afterDecember 1, 2005.  We believe that the combined product lines of Aviza andTrikon will present a more competitive suite of products to customers in thesemiconductor industry.

 

Aviza develops, manufactures, markets and services integrated circuitfabrication process equipment for the global semiconductor, compoundsemiconductor, nanotechnology and other related industries.  Customers forthese products include wafer manufacturers and semiconductor integratedcircuit, or IC, manufacturers, who either use the ICs for their own captiveproducts or sell them to other companies. Aviza’s equipment is primarily usedby IC manufacturers in the beginning of the semiconductor manufacturingprocess, commonly known as front end of line, or FEOL, manufacturing. Aviza hasdeveloped a variety of distinct product lines, including thermal processingfurnaces, atomic layer deposition, or ALD, low-pressure chemical vapordeposition, or LPCVD, and atmospheric pressure chemical vapor deposition, orAPCVD, products. To date, more than 2,500 Aviza systems have been installedworldwide.

 

As part of its focus on the ALD market, Aviza acquired a licenseagreement with IPS, Ltd., under which Aviza distributed single wafer ALDproducts manufactured by IPS. As a result of a disagreement as to interpretationof the rights of the parties under the license agreement and how best toapproach the ALD market, Aviza and IPS agreed in May 2004, as subsequentlyamended, to terminate the license agreement and Aviza agreed not to ship anysuch products after December 31, 2005. As a result, Aviza will notrecognize any revenue attributable to these products after December 31,2005, other than the remaining contractual revenue attributable to productspreviously shipped and revenue attributable to a recent customer order expectedto ship before the end of fiscal year 2006, for which Aviza and IPS havereached an agreement. Aviza and IPS will review future orders of these productson a case-by-case basis. Aviza recognized net sales of $2.4 million and $6.5million in the quarters ended March 31, 2006 and March 25, 2005, respectively,$5.3 million and $14.1 million in the six months ended March 31, 2006 and March25, 2005, respectively, and $21.6

 

16

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million in the fiscal year ended September 30, 2005 attributable tothese products. Aviza is currently in the process of developing its ownproducts to address the ALD market.

 

Aviza’s customers are primarily IC manufacturers. The semiconductorindustry is cyclical and has experienced significant fluctuations. Aviza’srevenue is impacted by these broad industry trends. Moreover, Aviza has ahighly concentrated customer base.

 

Aviza is often required to develop products in advance of its customers’demand for those products, and Aviza undertakes significant product developmentefforts in advance of any of its customers expressly indicating demand forAviza’s products. Aviza’s product development efforts typically span six monthsto two years.

 

As a result of the length of Aviza’s sales cycles, Aviza’s net salesfor any period are generally weighted toward products that Aviza had introducedfor sale in prior years. For purposes of revenue recognition, Aviza classifiesits products into two categories, “proven technology” and “new technology.”Proven technology systems are those systems with respect to which Aviza has ahistory of successful installations within a reasonable time frame of deliveryand the costs to complete installation do not vary materially from one instanceto another. New technology systems are those systems with respect to whichAviza cannot demonstrate that it can meet the provisions of customer acceptanceat the time of shipment.

 

Aviza typically sells equipment and installation services as a bundledarrangement.  In accordance with EITF 00-21, “Accounting for RevenueArrangements with Multiple Deliverables”, the fair value of installation isdetermined as the price Aviza charges for similar installation servicesprovided to its customers without regard to the warranty provisions. Uponshipment of Aviza’s proven technology, Aviza records revenue at the lesser of(i) the residual amount after deducting the fair value of undeliveredservices from the contractual value or (ii) the non-contingent amount. Theremaining contractual revenue is recorded upon successful installation of theproduct. Cost of the equipment relating to proven technology is recorded uponshipment. To the extent a loss is calculated on shipment due to the foregoingdeferral of revenue, a portion of the cost is also deferred to reflect zerogross profit at the time of shipment. The residual revenue, deferred costs andinstallation costs are recorded upon successful installation of the product.Revenue and cost of equipment relating to new technology is deferred untilinstallation and acceptance at the customer’s premises is completed.

 

The result of these accounting policies is that for new technology,Aviza’s recognition of both revenue and cost of goods sold is delayed untilcustomer acceptance, at which time both revenue and cost of goods sold arerecognized in full in determining Aviza’s gross margin. However, for proventechnology, Aviza’s cost of goods sold may be recognized in full upon shipment,but recognition of a portion of Aviza’s revenue is delayed until successfulinstallation of the product. This can result in diminished gross margins at thetime of shipment.

 

Aviza intends to pursue strategic acquisitions of other semiconductorequipment companies and other complementary technologies that it believes willenable it to expand its product offerings in the IC fabrication equipmentmarket.

 

**Critical Accounting Policies**

 

Aviza’s discussion and analysis of its financial condition and resultsof operations is based on Aviza’s consolidated financial statements that havebeen prepared in accordance with accounting principles generally accepted inthe United States of America. The preparation of these financial statementsrequires Aviza to make estimates and judgments that affect the reported amountsof assets, liabilities, revenue and expenses. Aviza bases its estimates onhistorical experience and on various other assumptions that it believes to bereasonable under the circumstances, the results of which form the basis formaking judgments about the carrying values of assets and liabilities that arenot readily apparent from other sources. Actual results may differ from theseestimates under different assumptions or conditions.

 

Aviza believes that the following critical accounting policies affectits more significant judgments used in the preparation of its consolidatedfinancial statements:

 

***Acquisition ofTrikon Technologies, Inc.***

 

In connection with Aviza’s acquisition of the business of Trikon, Avizaallocated the purchase price associated with the acquisition to the tangibleand intangible assets acquired and liabilities assumed based on their estimatedfair values. The valuations of these intangible assets required Aviza to makesignificant estimates and assumptions.

 

The critical estimates Aviza used in allocating the purchase priceincluded future expected cash flows from customer contracts, distributionagreements and acquired developed technologies, as well as assumptions aboutthe periods of time the products would continue to be used in Aviza’s productportfolio. Aviza’s estimates of fair value at the time they were made werebased upon assumptions that Aviza believed to be reasonable, but which areinherently uncertain and unpredictable.

 

***Revenue Recognition***

 

Aviza recognizes revenue in accordance with SAB 104 and EITF 00-21.These accounting standards require that four basic criteria

 

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must be met before revenue can be recognized: (1) persuasiveevidence of an arrangement exists; (2) delivery has occurred or serviceshave been rendered; (3) the price is fixed or determinable; and(4) collectibility is reasonably assured. Determination of criteria foritems (3) and (4) above is based on Aviza’s judgment regarding thefixed nature of the amounts charged for the products delivered and thecollectibility of those amounts.

 

For purposes of revenue recognition, Aviza classifies its products intotwo categories, “proven technology” and “new technology.” Proven technologywith respect to a single customer means that Aviza has a history of at leastthree successful installations within a reasonable time frame of delivery tothat customer and the costs to complete installation for that customer do notvary materially from one instance to another. A given product becomes proventechnology for all of Aviza’s customers when Aviza has successfully installedthe product within a reasonable time frame of delivery for at least threedifferent customers and the costs to complete installation do not vary materiallyfrom one instance to another. New technology systems are those systems withrespect to which Aviza cannot demonstrate that it can meet the provisions ofcustomer acceptance at the time of shipment.

 

Aviza typically sells equipment andinstallation services as a bundled arrangement. The fair value of installationis determined as the price Aviza charges for similar services provided to itscustomers without regard to the warranty provisions. Upon shipment of Aviza’sproven technology, Aviza records revenue upon shipment at the lesser of(i) the residual amount after deducting the fair value of undeliveredservices from the contractual value or (ii) the non-contingent amount. Theremaining contractual revenue is recorded upon successful installation of theproduct. Cost of the equipment relating to proven technology is recorded uponshipment. To the extent a loss is calculated on shipment due to the foregoingdeferral of revenue, a portion of the cost is also deferred to reflect zerogross profit at the time of shipment. The residual revenue, deferred costs andinstallation costs are recorded upon successful installation of the product.

 

Revenue on new technology is deferred until installation and acceptanceat the customer’s premises is completed, as these sales do not meet theprovisions of customer acceptance at the time of shipment under SAB 104 untilthis occurs. Cost of the equipment relating to new technology is also recordedupon customer acceptance. Upon the transition of a product from new technologyto proven technology, Aviza accounts for the product as proven technology fromthat point forward.

 

Revenue from services is recognized as the services are performed.Revenue from prepaid service contracts is recognized ratably over the life ofthe contract. Revenue from spare parts is recorded upon shipment.

 

Aviza assesses collectibility based on the creditworthiness of itscustomers and past transaction history. Aviza performs ongoing creditevaluations of its customers. In addition, Aviza requires collateral fromcertain of its customers in the form of letters of credit. Aviza has notexperienced significant collection losses in the past. However, a significantchange in the liquidity or financial position of any one of Aviza’s customers,especially one or more of Aviza’s most significant customers, could make itmore difficult for Aviza to assess creditworthiness, which could result in afinancial loss to Aviza.

 

***Stock-BasedCompensation***

 

Effective October 1, 2005, Aviza adopted the provisions of Statement ofFinancial Accounting Standards (“SFAS”) No. 123(R), “Share-Based Payment” (“SFAS123(R)”).  SFAS 123(R) establishes standards for the accounting fortransactions in which an entity exchanges its equity instruments for goods orservices.  It also addresses transactions in which an entity incursliabilities in exchange for goods or services that are based on the fair valueof the entity’s equity instruments or that may be settled by the issuance ofthose equity instruments.  Accordingly, stock-based compensation cost ismeasured at grant date, based on the fair value of the award, and is recognizedas expense over the employee’s requisite service period.  The measurementof stock-based compensation cost is based on several criteria including, but notlimited to, the valuation model used and associated input factors such asexpected term of the award, stock price volatility, dividend rate, risk-freeinterest rate, and award cancellation rate.  The input factors to use inthe valuation model are based on subjective future expectations combined withmanagement judgment.  If there is a difference between the assumptionsused in determining stock-based compensation costs and the actual factors,which become known over time, Aviza may change the input factors used indetermining stock-based compensation costs.  These changes may materiallyimpact Aviza’s results of operations in the period such changes are made.

 

***Inventory Valuation***

 

Aviza assesses the recoverability of its inventory at the end of eachquarter based on assumptions about customer demand and market conditions.Obsolete inventory or inventory in excess of Aviza’s estimated usage is writtendown to its estimated market value less costs to sell. The inventorywrite-downs are recorded as an inventory valuation allowance established on thebasis of obsolete inventory or specifically identified inventory in excess ofestablished usage. Inherent in Aviza’s estimates of market value in determininginventory valuation are estimates related to economic trends, future demand forits products and technological obsolescence of its products. If actual marketconditions are less favorable than Aviza’s projections, Aviza may be requiredto write down additional inventory.

 

***Warranty***

 

Aviza accrues for the estimated cost of the warranty on its systems ascost of goods sold, which includes the cost of the labor and parts

 

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necessary to repair systems during the warranty period. The amountsrecorded in the warranty accrual are estimated based on actual historicalexpenses incurred and on estimated probable future expenses related to Aviza’scurrent sales. The warranty service is generally incurred ratably over thewarranty period, therefore, the warranty accrual is spread over the warrantyperiod on a straight-line basis. Aviza’s systems typically have warrantyperiods ranging from one to three years. Aviza’s actual warranty costs in thefuture may vary from Aviza’s historical warranty costs, which could result inadjustments to Aviza’s warranty reserves in future periods.

 

***Income Taxes***

 

As part of the process of preparing its financial statements, Aviza isrequired to estimate its income tax provision (benefit) in each of thejurisdictions in which it operates. This process requires Aviza to estimate itscurrent income tax provision (benefit) and assess temporary differencesresulting from differing treatment of items for tax and accounting purposes.These differences result in deferred tax assets and liabilities, which areincluded in Aviza’s balance sheet.

 

Aviza records a valuation allowance to reduce its deferred tax assetsto the amount that is more likely than not to be realized. While Aviza hasconsidered future taxable income and any ongoing prudent and feasible taxplanning strategies in assessing the need for the valuation allowance, if Avizawere to determine that it would be able to realize its deferred tax assets inthe future in excess of its net recorded amount, an adjustment to the deferredtax asset would increase income in the period such determination was made.Likewise, if Aviza were to determine that it would not be able to realize allor part of a net deferred tax asset in the future, an adjustment to thedeferred tax asset would be charged to income in the period such determinationwas made. As of March 31, 2006, Aviza had a full valuation allowance for itsnet deferred tax assets.

 

***Resultsof Operations***

*** ***

The financial information in the table below is for the quarters andsix months ended March 31, 2006 and March 25, 2005:

 

| ** **                           | ** ** | **Quarter Ended**   | ** ** | **Six Months**      | ** ** |
|--------------------------------------|------------|--------------------------|------------|--------------------------|------------|
| ** **                           | ** ** | **March 31,  2006** | ** ** | **March 25,  2005** | ** ** | **March 31,  2006** | ** ** | **March 25,  2005** | ** ** |
|                                 |       |                     |       |                     |       |   |   |   |   |
| Net sales                            |       | 100                      | %          | 100                      | %          | 100 | % | 100 | % |
| Cost of goods  sold                  |       | 75                       | %          | 79                       | %          | 75 | % | 86 | % |
| Gross margin                         |       | 25                       | %          | 21                       | %          | 25 | % | 14 | % |
| Operating  expenses:                 |       |                     |       |                     |       |   |   |   |   |
| Research and  development            |       | 18                       | %          | 15                       | %          | 17 | % | 10 | % |
| Selling, general  and administrative |       | 17                       | %          | 14                       | %          | 18 | % | 8 | % |
| In-process  research and development |       | 0                        | %          | 0                        | %          | 1 | % | 0 | % |
| Total operating  expenses            |       | 35                       | %          | 29                       | %          | 36 | % | 18 | % |
| Loss from  operations                |       | (10                      | )%         | (8                       | )%         | (11 | )% | (4 | )% |
| Other income  (expense):             |       |                     |       |                     |       |   |   |   |   |
| Interest income                      |       | 0                        | %          | 0                        | %          | 0 | % | 0 | % |
| Interest expense                     |       | (4                       | )%         | (3                       | )%         | (4 | )% | (2 | )% |
| Other income  (expense), net         |       | 0                        | %          | 0                        | %          | 0 | % | 0 | % |
| Total other  income (expense)        |       | (4                       | )%         | (3                       | )%         | (4 | )% | (2 | )% |
| Loss before income  taxes            |       | (14                      | )%         | (11                      | )%         | (15 | )% | (6 | )% |
| Income taxes                         |       | 0                        | %          | 0                        | %          | 0 | % | 0 | % |
| Net loss                             |       | (14                      | )%         | (11                      | )%         | (15 | )% | (6 | )% |

 

***Net Sales***

 

Net sales consist of revenue recognized upon shipment or installationof proven technology and upon acceptance for new technology. In addition, spareparts sales are recognized upon shipment. Service revenue is recognized uponcompletion of the service activity or ratably over the term of the servicecontract.

 

| ** ** | ** ** | **Quarter Ended**   | ** ** | **Six Months**      | ** ** |
|------------|------------|--------------------------|------------|--------------------------|------------|
| ** ** | ** ** | **March 31,  2006** | ** ** | **March 25,  2005** | ** ** | **March 31,  2006** | ** ** | **March 25,  2005** | ** ** |
| ** ** | ** ** | **(in thousands)**  | ** ** |
| Net sales  |       | $                        | 36,241     |                     | $          | 32,374 |   | $ | 65,184 |   | $ | 94,893 |   |
|            |            |                          |            |                          |            |  |  |  |  |  |  |  |  |

 

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Net sales for the quarter ended March 31, 2006 increased by $3.9million, or 12%, from the quarter ended March 25, 2005. This increase isattributable to an increase of approximately $0.8 million in spares and servicesales during the quarter ended March 31, 2006 as compared to the quarter endedMarch 25, 2005 as well as a contribution from the operations of the mergedTrikon subsidiary of approximately $9.0 million in revenue for the quarterended March 31, 2006, which was primarily offset by lower systemrevenue of $1.8 million of APCVD products and $4.1 million ofALD products during the quarter ended March 31, 2006.

 

Net sales for the six months ended March 31, 2006 decreased by $29.7million, or 31%, from the six months ended March 25, 2005. This decrease wasprimarily due to the change in status of Aviza’s RVP-300 and ALD products from “new”to “proven” technology during the quarter ended December 24, 2004, whichresulted in recognition of $29.3 million of revenue on previously shipped “new”systems during the six months ended March 31, 2005. The change in status wasdue to sufficient customer acceptances of these products in accordance withAviza’s revenue recognition policy.

 

Aviza’s net sales for fiscal 2006 may be adversely affected by Aviza’sinability to sell certain ALD products.  As a result of a disagreement asto the interpretation of the rights of the parties to a license agreementbetween Aviza and IPS, under which Aviza distributed single wafer ALD productsmanufactured by IPS, the parties agreed to terminate the license agreement andAviza agreed not to ship any such products subsequent to December 31,2005.  As a result, Aviza will not recognize any revenue attributable tothese products after December 31, 2005 other than the remaining contractualrevenue attributable to products previously shipped and revenue attributable toa recent customer order expected to ship before the end of fiscal 2006, forwhich Aviza and IPS have reached an agreement. Aviza and IPS will review futureorders of these products on a case-by-case basis. Aviza recognized net sales of$2.4 million and $6.5 million in the quarters ended March 31, 2006 and March25, 2005, respectively, $5.3 million and $14.1 million in the six months endedMarch 31, 2006 and March 25, 2005, respectively, and $21.6 million in thefiscal year ended September 30, 2005 attributable to these products. Aviza iscurrently in the process of developing its own products to address the ALDmarket.

 

***Gross Profit andGross Margin***

 

Gross profit is the difference between net sales and cost of goodssold. Cost of goods sold consists of purchased material, labor and overhead tomanufacture equipment or spare parts and the cost of service and factory andfield support to customers for warranty, installation and paid service calls.In addition, the cost of outsourcing the assembly or manufacturing of systemsand subsystems to third parties is included in cost of goods sold. Gross marginis gross profit as a percentage of net sales.

 

| ** **   | ** ** | **Quarter Ended**               | ** ** | **Six Months**      | ** ** |
|--------------|------------|--------------------------------------|------------|--------------------------|------------|
| ** **   | ** ** | **March 31,  2006**             | ** ** | **March 25,  2005** | ** ** | **March 31,  2006** | ** ** | **March 25,  2005** | ** ** |
| ** **   | ** ** | **(dollars in thousands)** | ** ** |
| Gross profit |       | $                                    | 9,191      |                     | $          | 6,737 |   | $ | 16,326 |   | $ | 13,452 |   |
| Gross margin |       | 25                                   | %          | 21                       | %          | 25 | % | 14 | % |
|              |            |                                      |            |                          |            |  |  |  |  |  |  |  |  |

 

The increase in gross profit of $2.5million, or 36%, for the quarter ended March 31, 2006 versus the quarter endedMarch 25, 2005, was primarily a result of higher average selling prices on theRVP-300 product line, improvements in RVP-300 product line configurations,higher gross margins recognized on a greater number of product installations,and increased gross margins generated by a change in product mix with a largerproportion of shipments relating to the Etch and PVD product lines of ourmerged Trikon subsidiary. Spares and service margins remained consistent on aquarter-over-quarter basis. Increases in gross margins were offset slightly byhigher manufacturing costs related to a lower number of shipments among whichto allocate manufacturing costs during the quarter ended March 31, 2006.

 

The increase in gross profit of $2.9 million, or 21%, for the sixmonths ended March 31, 2006 versus the six months ended March 25, 2005 wasprimarily a result of “new” technology becoming “proven” during the six monthsended March 25, 2005. Aviza records revenue upon shipment at the lesser of (i)the residual amount after deducting the fair value of undelivered services fromthe contractual value or (ii) the non-contingent amount, and only records theremaining contractual revenue upon successful installation of theproduct.  During the quarter ended December 24, 2004, the Company’sRVP-300 and ALD products became “proven” technology.  Approximately $29.3million in revenue recognized on “proven” technology in the six months endedMarch 31, 2006 related to systems shipped during previous quarters as “new”technology.  While this resulted in higher net sales for the six monthsended March 25, 2005 compared to the six months ended March 31, 2006, the grossmargin attributable to this revenue was less than 10%, which resulted in lowergross margins during the six months ended March 25, 2005. The increase in grossprofit for the six months ended March 31, 2006 versus the six months endedMarch 25, 2005 was also a result of higher average selling prices on theRVP-300 product line, improvements in RVP-300 product line configurations,higher gross margins recognized on a greater number of product installationsand increased gross margins generated by a change in product mix with a largerproportion of shipments relating to the Etch and PVD product lines of themerged Trikon subsidiary.

 

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***Research and Development***

 

Research and developmentexpense consists of employment costs attributable to employees, consultants andcontractors who primarily spend their time on product design, engineering andprocess development; materials and supplies used in product prototyping,including wafers, chemicals and process gases; depreciation and amortizationexpense allocable to research and development activities and facilities; directcharges for repairs to research equipment and laboratories; and costs ofoutside services for facilities, process engineering support and waferanalytical services. Aviza also includes in research and development expensesassociated with the preparation, filing and prosecution of patents and otherintellectual property.

 

| ** **                | ** ** | **Quarter Ended**          | ** ** | **Six Months**      | ** ** |
|---------------------------|------------|----------------------------|------------|---------------------|------------|
| ** **                | ** ** | **March 31,  2006**        | ** ** | **March 25,  2005** | ** ** | **March 31,  2006** | ** ** | **March 25,  2005** | ** ** |
| ** **                | ** ** | **(dollars in thousands)** | ** ** |
| Research and  development |       | $                          | 6,553      |                | $          | 4,836 |   | $ | 11,196 |   | $ | 9,087 |   |
| Percent of net  sales     |       | 18                         | %          | 15                  | %          | 17 | % | 10 | % |
|                           |            |                            |            |                     |            |  |  |  |  |  |  |  |  |

 

The increases in researchand development costs of $1.8 million and $2.1 million during the quarter andsix months ended March 31, 2006, respectively, as compared to the quarter andsix months ended March 25, 2005 was due primarily to our inclusion of costsrelated to our merged Trikon subsidiary subsequent to the consummation of ourmerger transaction with Trikon.

 

While spending by FormerAviza on research and development remained relatively constant from quarter toquarter, the distribution of the costs and expenses during the three and sixmonths ended March 31, 2006 was directed more toward advancement of Aviza’s ALDand variable batch thermal programs than during the comparable periods in theprior fiscal year.

 

***Selling, General and Administrative***

 

Selling, general andadministrative expense consists of employment costs attributable to employees,consultants and contractors who primarily spend their time on sales, marketingand order administration and corporate administrative services; occupancy costsattributable to employees performing these functions; sales commissions;promotional marketing expenses; and legal and accounting expenses.

 

| ** **                           | ** ** | **Quarter Ended**          | ** ** | **Six Months**      | ** ** |
|--------------------------------------|------------|----------------------------|------------|---------------------|------------|
| ** **                           | ** ** | **March 31,  2006**        | ** ** | **March 25,  2005** | ** ** | **March 31,  2006** | ** ** | **March 25,  2005** | ** ** |
| ** **                           | ** ** | **(dollars in thousands)** | ** ** |
| Selling, general  and administrative |       | $                          | 6,482      |                | $          | 4,376 |   | $ | 11,597 |   | $ | 7,845 |   |
| Percent of net  sales                |       | 17                         | %          | 14                  | %          | 18 | % | 8 | % |
|                                      |            |                            |            |                     |            |  |  |  |  |  |  |  |  |

 

The increase in selling,general and administrative expenses in the quarter ended March 31, 2006 overthe quarter ended March 25, 2005 was due to increased stock compensationexpense of $0.3 million attributable to our adoption of SFAS 123(R), increasedlegal expense of $0.3 million and incremental costs of $1.6 million relating toselling, general and administrative activities of the Trikon subsidiary subsequentto the consummation of our merger transaction with Trikon.

 

The increase in selling,general and administrative expenses in the six months ended March 31, 2006 overthe six months ended March 25, 2005 was primarily due to increases in salescommissions to third-party representatives, primarily in China, increasedstock-based compensation costs related to the adoption of SFAS 123(R) duringthe six months ended March 31, 2006 and increased legal costs. In addition, theexpenses related to the selling, general and administrative activities of theTrikon subsidiary were incremental costs during the six months ended March 31,2006 over the six months ended March 25, 2005.

 

***In-process Research and Development***

 

| ** **                           | ** ** | **Quarter Ended**          | ** ** | **Six Months**      | ** ** |
|--------------------------------------|------------|----------------------------|------------|---------------------|------------|
| ** **                           | ** ** | **March 31,  2006**        | ** ** | **March 25,  2005** | ** ** | **March 31,  2006** | ** ** | **March 25,  2005** | ** ** |
| ** **                           | ** ** | **(dollars in thousands)** | ** ** |
| In-process  research and development |       | $                          | 9          |                | $          | — |   | $ | 402 |   | $ | — |   |
| Percent of net  sales                |       | 0                          | %          | 0                   | %          | 1 | % | 0 | % |
|                                      |            |                            |            |                     |            |  |  |  |  |  |  |  |  |

 

In-process research anddevelopment costs incurred during the six months ended March 31, 2006 were theresult of the merger with Trikon in December 2005, and represent the write-offof technology that had not reached technological feasibility at the time of themerger.

 

21

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***Interest Expense***

 

| ** **            | ** ** | **Quarter Ended**          | ** ** | **Six Months**      | ** ** |
|-----------------------|------------|----------------------------|------------|---------------------|------------|
| ** **            | ** ** | **March 31,  2006**        | ** ** | **March 25,  2005** | ** ** | **March 31,  2006** | ** ** | **March 25,  2005** | ** ** |
| ** **            | ** ** | **(dollars in thousands)** | ** ** |
| Interest expense      |       | $                          | 1,356      |                | $          | 967 |   | $ | 2,742 |   | $ | 1,807 |   |
| Percent of net  sales |       | 4                          | %          | 3                   | %          | 4 | % | 2 | % |
|                       |            |                            |            |                     |            |  |  |  |  |  |  |  |  |

 

Aviza’s interest expensefor the quarters and six months ended March 31, 2006 and March 25, 2005consisted primarily of interest incurred on its revolving lines of credit, itsmortgage line of credit, which is secured by a mortgage on Aviza’s land andbuildings, amortization of debt issuance costs and amortization of the fairvalue of the warrants issued to affiliates of VantagePoint Venture Partners, orVPVP, in consideration for VPVP’s agreement to guarantee a portion of Aviza’srevolving line of credit.  Aviza’s aggregate borrowings under itsrevolving lines of credit and mortgage line of credit were $34.1 million as ofMarch 31, 2006 and $33.7 million as of March 25, 2005.  Aviza recordedamortization of debt issuance costs and the fair value of warrants of $438,000and $400,000 during the quarters ended March 31, 2006 and March 25, 2005,respectively, and $851,000 and $802,000 during the six months ended March 31,2006 and March 25, 2005, respectively.

 

During the quarter andsix months ended March 31, 2006, accrued but unpaid dividends of $219,000 and$439,000, respectively, on the mandatory redeemable Series B and B-1 preferredstock of Aviza, Inc. were charged to interest expense.  There was nocharge to interest expense for dividends in the quarter and six months endedMarch 25, 2005. In connection with the closing of the private placement of3,282,275 shares of Aviza’s common stock on April 24, 2006, all outstandingshares of Aviza, Inc.’s Series B and B-1 preferred stock converted into sharesof Aviza’s common stock. As a result of this conversion, dividends will nolonger accrue after April 24, 2006.

 

***Income Taxes***

 

Because Aviza hasincurred significant operating losses, no material federal or state incometaxes have been recorded. Aviza recorded income taxes relating to certainprofitable international subsidiaries.

 

**Liquidityand Capital Resources**

 

At Aviza’s inception,affiliates of VPVP funded Aviza with a cash investment of $32.7 million toacquire the business from ASML and to fund Aviza’s initial operations. Sincethen, Aviza has funded its operations through borrowings under its revolvingline of credit and its mortgage line of credit as well as from the proceeds ofthe issuance of preferred stock. As of March 31, 2006, Aviza had $13.0 millionavailable for additional borrowings under its revolving credit facility,subject to certain conditions, and $5.0 million available for additionalborrowings under its mortgage line of credit, subject to Aviza’s ability tomeet certain financial or property zoning criteria.

 

At March 31, 2006, Aviza’scash and cash equivalents were $3.9 million as compared to $7.4 million atSeptember 30, 2005.  The decrease in cash and cash equivalents of $3.5million during the six months ended March 31, 2006 was due primarily to netpayments of $11.2 million on the Company’s revolving lines of credit andshort-term borrowings and $2.7 million of cash used to purchase equipment forAviza’s development and demonstration laboratories, which were partially offsetby $7.4 million of cash acquired in our merger transaction with Trikon and $3.1million of cash provided by operating activities.

 

Aviza’s revolving line ofcredit with Bank of America contains certain financial and operating covenants.Aviza was in compliance with these covenants as of March 31, 2006. Aviza was inviolation of these covenants at September 30, 2005. Bank of America has waivedAviza’s non-compliance under the line of credit agreement through amendments tothe credit facility.

 

***Cash Flows from Operating Activities***

 

Aviza’s cash provided byoperating activities was $3.1 million for the six months ended March 31,2006.  This consisted primarily of cash used to fund net losses of $9.9million, which was offset in part by non-cash expense adjustments(depreciation, amortization, bad debt, common stock warrants, preferred stockdividend and stock-based compensation) aggregating $4.1 million. Net changes inassets and liabilities during the six months ended March 31, 2006 provided $8.9million of cash.  This increase in cash was primarily provided bydecreases in accounts receivable of $4.5 million, inventory of $0.7 million andprepaid and other assets of $3.6 million and an increase in accounts payable of$0.2 million and accrued liabilities of $1.9 million, which was partially offsetby a decrease in warranty liabilities of $2.0 million.

 

Aviza’s cash used inoperating activities for the six months ended March 25, 2005 was $4.2million.  This consisted primarily of cash used to fund net losses of$5.5 million, which was offset in part by non-cash expense adjustments,depreciation, amortization and bad debt aggregating $1.6 million. Net changesin assets and liabilities during the six months ended March 25, 2005 used $0.3million of

 

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cash. Increases inaccounts receivable of $0.8 million, inventory of $3.5 million and prepaid andother assets of $4.9 million and a decrease in warranty liability of $0.3million consumed approximately $9.5 million of cash, which was partially offsetby increases in accounts payable of $7.9 million and accrued liabilities of$1.3 million which provided cash of $9.2 million.

 

***Cash Flows from Investing Activities***

 

Aviza’s cash provided byinvesting activities for the six months ended March 31, 2006 was $4.6 million.This consisted of $13.4 million of cash acquired in the merger transaction withTrikon, reduced by direct merger costs incurred by Aviza of $6.1 million Avizaand $2.7 million used to purchase equipment primarily for Aviza’s developmentand demonstration laboratories.

 

Aviza’s cash used ininvesting activities for the six months ended March 25, 2005 was $6.8 million.This consisted of a $4.0 million  licensefee paid to Trikon and $2.8 million to purchase property and equipment,primarily equipment to be used in Aviza’s development and demonstrationlaboratories.

 

***Cash Flows from Financing Activities***

 

Aviza’s net cash used infinancing activities for the six months ended March 31, 2006 was $11.3 million.Net repayment of borrowings under Aviza’s revolving and mortgage lines ofcredit were approximately $2.5 million during the six months ended March 31,2006. Aviza paid $8.7 million in repayment of borrowings assumed in our mergertransaction with Trikon.

 

Aviza’s cash provided byfinancing activities for the six months ended March 25, 2005 was approximately$8.2 million. This cash consisted of approximately $6.0 million in netborrowings under Aviza’s lines of credit and approximately $2.2 million inproceeds from the issuance of common and Series B preferred stock.

 

At March 31, 2006, Avizahas a revolving line of credit which consists of a $20.0 million revolvingcredit facility that is guaranteed by affiliates of VPVP and a separaterevolving credit facility that provides for borrowings up to $20.0 millionbased upon a defined borrowing base. The borrowings under this revolving lineof credit accrue interest at a rate of the bank’s prime rate plus a margin of0.50%, of which $10.0 million is subject to an interest rate cap of 8.25%,which is payable monthly. This revolving line of credit has a stated maturityof August 11, 2007. Outstanding borrowings under this revolving line ofcredit were $27.0 million at March 31, 2006 and $30.4 million at September 30,2005.

 

At March 31, 2006, Avizahas a $12.0 million line of credit secured by a mortgage on its land andbuildings. The borrowings under Aviza’s mortgage line of credit accrue interestat a rate of LIBOR plus a margin of 5.25%, of which $7.0 million issubject to a LIBOR rate capped at 6.75%, and is repayable in monthly principalinstallments of $23,333 plus interest. Aviza’s mortgage line of credit matureson September 30, 2007. Outstanding borrowings under Aviza’s mortgage lineof credit were $6.6 million and $6.7 million at March 31, 2006 andSeptember 30, 2005, respectively.  The remaining availability of$5.0 million, which does not increase to reflect repayments under theterms of Aviza’s mortgage line of credit, may be available in the future ifAviza meets certain financial or property zoning criteria.

 

At March 31, 2006, asubsidiary of the Company has a revolving line of credit for $200 millionJapanese Yen (approximately $1,702,000 at the exchange rate on March 31, 2006)under which there were borrowings of $553,000 at March 31, 2006. Borrowingsunder the credit line bear interest at 1.375% per annum.

 

On April 24, 2006, the Company sold 3,282,275 shares of its commonstock for $15,000,000 in a private placement. In connection with the closing ofthe private placement, all outstanding shares of Series B and Series B-1preferred stock of the Company’s subsidiary, Aviza, Inc., and accrued butunpaid dividends on those shares converted into an aggregate of 2,536,974shares of the Company’s common stock, representing the same per-share purchaseprice as in the private placement.

 

Aviza currentlyanticipates that its existing cash balances, the cash that it expects togenerate from its operating activities and available borrowings under itsexisting lines of credit will be sufficient to meet its anticipated cash needsfor at least the next 12 months.  However, Aviza may need to raiseadditional capital from the sale of debt or equity securities or from othersources in order to support its operations and expansion plans.  Aviza maynot be able to obtain any additional capital on acceptable terms, if at all.

 

**Off-BalanceSheet Arrangements**

 

As of March 31, 2006,Aviza had no off-balance sheet arrangements as defined in Item 303(a)(4) ofRegulation S-K promulgated by the Securities and Exchange Commission.

 

**ContractualObligations**

 

Other than operatingleases for certain equipment and real estate, Aviza has no significantoff-balance sheet transactions or unconditional purchase obligations.  SeeNote 8 of the Condensed Consolidated Financial Statements for a table of Aviza’scash obligations and commitments relating to its debt obligations and leasecommitments as of March 31, 2006.

 

**RecentAccounting Pronouncements**

 

Effective October 1,2005, the Company adopted the provisions of Statement of Financial AccountingStandards (“SFAS”) No. 123(R),

 

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“Share-Based Payment” (“SFAS123(R)”).  SFAS 123(R) establishes accounting for stock-based awardsexchanged for employee services.  Accordingly, stock-based compensationcost is measured at grant date, based on the fair value of the award, and isrecognized as an expense over the employee’s requisite service period. The Company previously applied Accounting Principles Board (“APB”) Opinion No.25, “Accounting for Stock Issued to Employees,” and related Interpretations andprovided the pro forma disclosures of SFAS No. 123, “Accounting for Stock-BasedCompensation” (“SFAS 123”).  The Company elected to adopt the modifiedprospective application method as provided by SFAS 123(R), and, accordingly,the Company recorded compensation costs as the requisite service rendered forthe unvested portion of previously issued awards that remain outstanding at theinitial date of adoption and any awards issued, modified, repurchased, orcancelled after the effective date of SFAS 123(R).  Under the modifiedprospective transition method, results for prior periods are notrestated.  See Note 4 to the Condensed Consolidated Financial Statementsfor additional disclosures.

 

In May 2003, theFinancial Accounting Standards Board (“FASB”) issued SFAS No. 150,*Accounting for Certain Instruments withCharacteristics of both Liabilities and Equity.* SFAS No. 150clarifies the accounting for certain financial instruments with characteristicsof both liabilities and equity and requires that those instruments beclassified as liabilities in statements of financial position. Previously, manyof those financial instruments were classified as equity. SFAS No. 150 iseffective for financial instruments entered into or modified afterDecember 15, 2003 and otherwise is effective at the beginning of the firstinterim period beginning after June 15, 2003. The adoption of SFAS No. 150did not have a significant impact on Aviza’s financial statements.

 

In November 2004, theFASB issued SFAS No. 151,*InventoryCosts, an Amendment of ARB No. 43, Chapter 4* (“SFAS 151”).The amendments made by SFAS 151 are intended to improve financialreporting by clarifying that abnormal amounts of idle facility expense, freight,handling costs and wasted materials (spoilage) should be recognized ascurrent-period charges and by requiring the allocation of fixed productionoverheads to inventory based on the normal capacity of the productionfacilities. The guidance is effective for inventory costs incurred duringfiscal years beginning after June 15, 2005. Earlier application ispermitted for inventory costs incurred during fiscal years beginning afterNovember 23, 2004.  The provisions of SFAS 151 will be applied prospectively. Aviza’shistorical treatment of inventory costs is consistent with SFAS 151, andtherefore adoption of SFAS 151 did not have an effect on its consolidatedfinancial statements.

 

In March 2005, the FASBissued FIN 47,*Accounting forConditional Asset Retirement Obligations, an Interpretation of FASB StatementNo. 143* (“FIN 47”). FIN 47 clarifies that the term “conditionalasset retirement obligation” as used in FASB Statement No. 143, refers toa legal obligation to perform an asset retirement activity in which the timingand (or) method of settlement are conditioned on a future event that may or maynot be within the control of the entity. An entity is required to recognize aliability for the fair value of a “conditional asset retirement obligation” ifthe fair value of the liability can be reasonably estimated. Thisinterpretation also clarifies when an entity would have sufficient informationto reasonably estimate the fair value of a “conditional asset retirementobligation.” FIN 47 is effective no later than the end of fiscal yearsending after December 15, 2005. Aviza does not believe the adoption ofthis interpretation will have an impact on its results of operations.

 

**ITEM3.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**

 

Forquantitative and qualitative disclosures about market risk currently affectingAviza, see Item 7A: “Quantitative and Qualitative Disclosures About Market Risk”included in our Annual Report on Form 10-K for the fiscal year ended September30, 2005.  The Company’s exposure to market risk has not changedmaterially since September 30, 2005.

 

**ITEM4.    CONTROLS AND PROCEDURES**

 

***Disclosure Controls and Procedures***

 

Aviza maintainsdisclosure controls and procedures that are designed with the objective ofproviding reasonable assurance that information required to be disclosed in itsExchange Act reports is recorded, processed, summarized and reported within thetime periods specified in the SEC’s rules and forms, and that such informationis accumulated and communicated to its management, including its ChiefExecutive Officer and Chief Financial Officer, as appropriate, to allow timelydecisions regarding required disclosure. In designing and evaluating itsdisclosure controls and procedures, management recognizes that any controls andprocedures, no matter how well designed and operated, can provide onlyreasonable assurance of achieving the desired control objectives, and ourmanagement is required to apply its judgment in evaluating the cost-benefitrelationship of possible controls and procedures.

 

As of March 31, 2006, theend of the period covered by this report, based on the evaluation of the ChiefExecutive Officer and Chief Financial Officer of the effectiveness of thedesign and operation of its disclosure controls and procedures, the ChiefExecutive Officer and Chief Financial Officer concluded that Aviza’s disclosurecontrols and procedures were effective at the reasonable assurance level.

 

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***Changes in Internal Control Over Financial Reporting***

 

There has been no changein Aviza’s internal control over financial reporting during the first sixmonths of fiscal 2006 that has materially affected, or is reasonably likely tomaterially affect, its internal control over financial reporting.

 

**PART II.  OTHER INFORMATION**

 

**ITEM 1. LEGAL PROCEEDINGS**

 

On April 11, 2006, IPS,Ltd. filed a lawsuit against Aviza in the United States District Court for theCentral District of California. The complaint alleges that Aviza usedconfidential information of IPS to develop a single-wafer-processing typeatomic layer deposition (ALD) system. The complaint is for unspecified monetarydamages, injunctive relief and an order rescinding the settlement anddistributor agreements that Aviza and IPS entered into in May 2004 insettlement of a prior lawsuit that IPS filed against ASML U.S., Inc. and Avizain March 2004 relating to assets that Aviza acquired from ASML in October 2003.Aviza believes that it has complied with the settlement agreement and that theallegations contained in IPS’s complaint are without merit.

 

**ITEM1A.  RISK FACTORS**

 

There are no materialchanges to the risk factors described in the section entitled “Risk Factors” inItem 1A in Part II of our Quarterly Report on Form 10-Q for the fiscal quarterended December 30, 2005, except as follows:

 

(a)          Thefollowing paragraph is hereby added to the end of the risk factor entitled “Claimsor litigation regarding its intellectual property rights could adversely harmAviza’s business or require Aviza to incur significant costs”:

 

“On April 11,2006, IPS, Ltd. filed a lawsuit against Aviza in the United States DistrictCourt for the Central District of California. The complaint alleges that Avizaused confidential information of IPS to develop a single-wafer-processing typeatomic layer deposition (ALD) system. The complaint is for unspecified monetarydamages, injunctive relief and an order rescinding the settlement anddistributor agreements that Aviza and IPS entered into in May 2004 insettlement of a prior lawsuit that IPS filed against ASML U.S., Inc. and Avizain March 2004 relating to assets that Aviza acquired from ASML in October 2003.While Aviza believes that it has complied with the settlement agreement andthat the allegations contained in IPS’s complaint are without merit, a negativeoutcome in the litigation could harm Aviza’s business.”

 

(b)         Therisk factor entitled “Aviza is a ‘controlled company’ within the meaning of therules of the Nasdaq National Market, and as a result qualifies for, and iscurrently relying on, exemptions from certain corporate governance requirements”is hereby deleted in its entirety because Aviza is no longer a “controlledcompany” within the meaning of the rules of the Nasdaq National Market.

 

***Aviza may need to raise additional capital in order tosupport its operations and expansion plans, which capital may not be availableon terms acceptable to Aviza, or at all.***

 

As of March 31, 2006,Aviza had cash and cash equivalents of approximately $3.9 million andshort-term debt of approximately $28.2 million. In the future, Aviza may needto raise capital from the sale of debt or equity securities or other sources inorder to support its operations and expansion plans. Aviza may not be able to obtainthis capital on acceptable terms, or at all. If Aviza issues additional equityor convertible debt securities to raise this capital, current stockholders’percentage ownership of Aviza will be reduced, and they may experiencesignificant dilution. In addition, new investors in Aviza may demand rights,preferences or privileges that differ from, or are senior to, those of existinginvestors, including warrants in addition to the securities purchased andprotection against future dilutive transactions.

 

***Aviza has incurred losses over the last few years, and Avizamay not be able to achieve profitability.***

 

Aviza incurred net lossesof $5.3 million and $9.9 million for the quarter and six months ended March 31,2006, respectively, and $16.0 million and $19.7 million for the fiscal yearsended September 30, 2005 and September 24, 2004, respectively. As aresult, Aviza will need to increase sales and reduce costs in order to achieveprofitability. However, Aviza may never generate sufficient revenues or reduce costssufficiently to achieve profitability. Even if Aviza does achieveprofitability, it may not sustain or increase profitability on a quarterly orannual basis in the future. If Aviza is unable to achieve profitability, it maybe forced to implement expense reduction measures, including selling itsassets, consolidating its operations, reducing its workforce or delaying,canceling or reducing certain product development, marketing or otheroperational programs, any of which could harm its business.

 

***Aviza’s net sales in calendar 2006 may be adversely affectedby the loss of Aviza’s Pantheon ALD product line.***

 

When Aviza acquired theThermal Division of ASML Holding, N.V., which we refer to in this report as thePredecessor, Aviza acquired a license agreement with IPS, Ltd. pursuant towhich Aviza distributed single-wafer atomic layer deposition, or single-waferALD, products manufactured by IPS. Aviza recognized net sales of $5.3 million,or approximately 8% of its net sales, and $14.1 million, or approximately 15%of its net sales, attributable to these products in the six months ended March31, 2006 and March 25, 

 

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2005, respectively.During fiscal 2005, Aviza recognized net sales of $21.6 million, or approximately13% of its net sales, attributable to these products.  Aviza and IPSagreed in May 2004 that Aviza would not ship any such products afterDecember 31, 2005. As a result, Aviza will not recognize any revenueattributable to these products after December 31, 2005, other than theremaining contractual revenue attributable to products previously shipped andrevenue attributable to a recent customer order expected to ship before the endof fiscal year 2006, for which Aviza and IPS have reached an agreement. Avizaand IPS will review future orders for these products on a case-by-case basis.If Aviza is unable to develop its own products to address the ALD market inlieu of these products, its net sales may decline and its business may beharmed.

 

***Aviza expects to receive a substantial portion of itsrevenues from a small number of customers, and the loss of, or a significantreduction or fluctuation in, orders from those customers could harm Aviza’sbusiness.***

 

During the six monthsended March 31, 2006, approximately 49% of Aviza’s net sales were attributableto three customers and approximately 74% of Aviza’s net sales were attributableto its top ten customers.  Winbond Electronics Corp., InfineonTechnologies, Inc. and Inotera Memories, Inc. accounted for 20%, 13% and 16% ofAviza’s net sales, respectively, for the six months ended March 31, 2006. For the fiscal year ended September 30, 2005, approximately 69% of Aviza’s netsales were attributable to three customers and approximately 84% of Aviza’s netsales were attributable to its top ten customers. Inotera Memories, Inc.,Infineon Technologies, Inc. and Winbond Electronics Corp. accounted for 43%,15% and 11% of Aviza’s net sales, respectively, for the fiscal year endedSeptember 30, 2005. As a result, Aviza expects to receive a substantial portionof its revenues from a small number of customers. Sales to any single customermay vary significantly from quarter to quarter. If Aviza’s largest customersdelay, cancel or do not place orders, Aviza may not be able to replace theseorders with new orders. As Aviza expects to configure its products to customerspecifications, changing, rescheduling or canceling orders may result insignificant non-recoverable costs. The loss of, or a decline or fluctuation insales to, any of Aviza’s major customers would negatively impact its business.

 

***Aviza may not achieve the benefits expected from its mergertransaction with Trikon, which may harm its business and could result in theloss of key customers and personnel.***

 

Achieving the benefits ofAviza’s merger transaction with Trikon will depend in part on whether Avizawill be able to successfully integrate Trikon’s technology, operations andpersonnel in a timely and efficient manner to minimize the impact on customers,employees and management. The integration of Trikon and Aviza will be acomplex, time-consuming and expensive process and may harm Aviza’s business,financial condition and results of operations. The challenges involved in thisintegration include, but are not limited to, the following:

 

•                                          retainingexisting customers of both Trikon and Aviza;

 

•                                          retainingand integrating management and other key employees of both Trikon and Aviza;

 

•                                          coordinatingfunctions between Aviza’s geographically separate primary offices located inScotts Valley, California and Newport, South Wales, U.K.;

 

•                                          consolidatingAviza’s and Trikon’s sales and marketing efforts so that the industry receivesuseful information about     Aviza’sproducts;

 

•                                          identifyingand eliminating redundant operations and assets;

 

•                                          coordinatingresearch and development activities to integrate existing technologies andenhance introduction of new products and technologies;

 

•                                          integratingpurchasing and procurement operations in multiple locations;

 

•                                          combiningproduct offerings effectively and quickly;

 

•                                          integratingsales and service efforts so that customers can do business easily with Aviza;

 

•                                          persuadingemployees that the business cultures of Trikon and Aviza are compatible;

 

•                                          offeringproducts and services of Trikon and Aviza to each other’s customers; and

 

•                                          developingand maintaining uniform standards, controls, procedures and policies, includinginternal controls and procedures that Aviza will be required to maintain underthe Sarbanes-Oxley Act of 2002.

 

Aviza cannot assure youthat Aviza and Trikon can successfully integrate their businesses in a timelymanner or that all or any of the anticipated benefits of the merger transactionwill be realized.

 

The merger transactioninvolves the integration of two companies that previously have operated independently.Risks to the successful

 

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integration of the twocompanies include:

 

•                                          theimpairment of relationships with employees, customers, distributors, strategicpartners and suppliers;

 

•                                          thepotential disruption of Aviza’s business and distraction of its management;

 

•                                          thedifficulty of incorporating acquired technology into Aviza’s product offerings;

 

•                                          notachieving expected synergies; and

 

•                                          unanticipatedexpenses related to integrating Aviza and Trikon.

 

Aviza may not succeed inaddressing these risks or any other problems encountered in connection with themerger transaction.

 

***The semiconductor industry is highly cyclical andunpredictable.***

 

Aviza’s business andoperations depend upon the capital expenditures of semiconductor manufacturers,which in turn depend on the current anticipated market demand for integratedcircuits. The semiconductor industry has historically been cyclical due to suddenchanges in manufacturing capacity. These changes in capacity have affected thetiming and amounts of Aviza’s customers’ capital equipment purchases andinvestments in technology, and continue to affect orders, net sales, grossmargins and results of operations.

 

During periods ofdecreasing demand for integrated circuit manufacturing equipment, Aviza must beable to appropriately align cost structure with prevailing market conditionsand effectively motivate and retain key employees. Conversely, during periodsof increasing demand, Aviza must have sufficient manufacturing capacity andinventory to meet customer demand and must be able to attract, retain andmotivate a sufficient number of qualified individuals. If Aviza is unable totimely adjust cost structure with business conditions and to manage resourcesand production capacity effectively during changes in demand, this inabilitycould harm Aviza’s business, financial condition or results of operations.

 

***Aviza’s operating results may be unpredictable and couldvary dramatically from period to period.***

 

Aviza’s products aretechnologically complex. Prospective customers generally must commitsignificant resources to test and evaluate these products and to install andintegrate them into their manufacturing lines. In addition, customers oftenrequire a significant number of product presentations and demonstrations, insome instances evaluating equipment on-site, before reaching a sufficient levelof confidence in the product’s performance and compatibility with theirrequirements to place an order. As a result, the sales process is often subjectto delays associated with lengthy approval processes that typically accompanythe design and testing of new products. The sales cycles of Aviza’s productsoften have lasted for many months or even years. Longer sales cycles require aninvestment of significant resources in attempting to make sales and delay thegeneration of revenues. In addition, Aviza may incur significant costs insupporting evaluation equipment at customers’ facilities, and orders expectedin one quarter could shift to another quarter because of the timing of Aviza’scustomers’ purchase decisions.

 

Furthermore, individualorders for Aviza’s products and services will have large unit prices and lowvolumes. In addition, gross margins and sales terms may vary greatly acrossAviza’s product and service offerings. As such, a loss or delay or change inthe product and services mix of even a single customer could have a significanteffect on the earnings per share that Aviza reports in any given period.

 

Aviza’s revenues may alsofluctuate greatly from period to period as the products sold by Aviza changefrom “new technology” to “proven technology,” as discussed in more detail inthe subsection entitled “*Revenue Recognition*”in the section entitled “Management’s Discussion and Analysis of FinancialCondition and Results of Operations” in Item 2 of Part I of this report.

 

***Aviza’s deferred revenue and orders backlog may not resultin future net sales.***

 

Revenue recognitionguidance requires that revenues and any associated profit from the sale ofnewly introduced systems that are subject to contractual customer acceptanceprovisions and substantive installation obligations be deferred until thecustomer has acknowledged its acceptance of the system or the installation workis completed. If the system does not meet the agreed specifications and thecustomer refuses to accept the system, the deferred revenue and any associateddeferred profit will not be realized and Aviza may be required to refund anycash payments previously received from the customer, which may harm Aviza’sbusiness, financial condition, results of operations and cash flows.

 

Order backlog does notnecessarily include all sales needed to achieve net revenue expectations for asubsequent period. Aviza will schedule the production of its systems based inpart upon order backlog. Due to possible customer changes in delivery schedulesand cancellations of orders, Aviza’s backlog at any particular date will notnecessarily be indicative of actual sales for any succeeding period. Inaddition, while Aviza will evaluate each customer order on a case-by-case basisto determine qualification for inclusion in backlog, Aviza cannot assure youthat amounts included in backlog will ultimately result in future sales. Areduction in backlog during any particular period, or the failure of Aviza’sbacklog to result in future sales, could harm Aviza’s business, financialcondition, results of operations and cash flows.

 

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***Aviza’s backlog orders may be subject to cancellation ordelay.***

 

Although Aviza expects tomaintain a backlog of customer orders with expected shipment dates within12 months, Aviza’s customers may request cancellations or delivery delays.As a result, Aviza’s backlog may not be a reliable indication of its futurerevenues. If shipments of orders in backlog are cancelled or delayed, Aviza’srevenues could fall below its expectations and the expectations of marketanalysts and investors.

 

***Aviza’s results of operations may suffer if it fails toeffectively manage its inventory.***

 

Avizaneeds to manage its inventory of component parts, work-in-process and finishedgoods effectively to meet customer delivery demands at an acceptable risk andcost. Customers are increasingly requiring very short lead times for delivery,which may require Aviza to purchase and carry additional inventory. For boththe inventories that will support manufacturing of Aviza’s products and Aviza’sspare parts inventories, if the customer demand Aviza anticipates does notmaterialize in a timely manner, Aviza will incur increased carrying costs andsome inventory could become unsellable or obsolete, resulting in write-offswhich would adversely affect the results of Aviza’s operations.

 

***Warranty claims in excess of Aviza’s projections couldseriously harm its business.***

 

Aviza offers a warrantyon its products. The cost associated with this warranty will be significant,and in the event that Aviza’s projections and estimates of this cost areinaccurate, Aviza’s financial performance could be seriously harmed.

 

***If Aviza delivers systems with defects, its credibility maybe harmed, sales and market acceptance of its systems may decrease and Avizamay incur liabilities associated with those defects.***

 

Aviza’ssystems are complex and sometimes have contained errors, defects and bugs whenintroduced. If Aviza delivers systems with errors, defects or bugs, itscredibility and the market acceptance and sales of its systems could be harmed.Further, if Aviza’s systems contain errors, defects or bugs, Aviza may berequired to expend significant capital and resources to alleviate theseproblems. Defects could also lead to commercial or product liability as aresult of lawsuits against Aviza or against its customers. Aviza has agreed toproduct liability indemnities, and its product and commercial liabilityinsurance policies currently provide only limited coverage per claim. In theevent of a successful product liability or commercial claim, Aviza could beobligated to pay damages that may not be covered by insurance or that aresignificantly in excess of its insurance coverage.

 

***Aviza’s employment costs in the short-term will be fixed toa large extent, and therefore any unexpected revenue shortfall could adverselyaffect its operating results.***

 

Aviza’s operating expenselevels are based in significant part on its headcount, which generally will bedriven by longer-term revenue goals. For a variety of reasons, particularly thehigh cost and disruption of layoffs and the costs of recruiting and training,Aviza’s headcount in the short term is fixed to a large extent. As a result,Aviza may be unable to reduce its employment costs in a timely manner to compensatefor any unexpected revenue or gross margin shortfalls, which could adverselyaffect Aviza’s operating results.

 

***Aviza’s high spending levels on research and development andits need to maintain a high level of customer service and support could harmits results of operations.***

 

In order to remaincompetitive, Aviza will need to maintain high levels of investment in researchand development, marketing and customer service, while at the same timecontrolling its operating expenses.

 

Theindustry in which Aviza operates is characterized by the need for continuedinvestment in research and development as well as a high level of worldwidecustomer service and support. As a result of Aviza’s need to maintain spendinglevels in these areas, its operating results could be harmed if its net salesfall below expectations. In addition, because of the emphasis that Aviza placeson research and development and technological innovation, Aviza’s operatingcosts may increase further in the future, which could have a negative impact onits results of operations and cash flows in any given period.

 

Aviza cannot assure youthat it will have sufficient resources to make a high level of investment inresearch and development, marketing and customer service while controlling itsoperating expenses or that Aviza’s products will be viewed as competitive as aresult of technological advances by its competitors or changes in semiconductorprocessing technology. Any such competitive pressures may require Aviza tosignificantly reduce prices or result in lost customer orders, which could harmAviza’s business, financial condition, results of operations and cash flows.

 

***A disruption of Aviza’s manufacturing operations could harmits business.***

 

Although Aviza isincreasingly outsourcing the manufacturing for certain of its products orsub-assemblies to third parties, Aviza produces most of its products at itsmanufacturing facilities in Scotts Valley, California and Newport, SouthWales.  Aviza will have

 

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very limited ability tointerchangeably produce its products at either facility, and in the event of adisruption of operations at its facilities, Aviza’s third-party manufacturerswould not be able to make up the capacity loss. Aviza’s manufacturingoperations could be subject to disruption for a variety of reasons, includingnatural disasters, work stoppages, operational facility constraints andterrorism. Any such disruption could cause delays in shipments of products toAviza’s customers, result in cancellation of customer orders or loss ofcustomers and seriously harm Aviza’s business.

 

***Aviza is increasingly outsourcing manufacturing andlogistics activities to third-party service providers, which decreases itscontrol over the performance of these functions.***

 

Aviza has already outsourced certain manufacturing and spare partslogistics functions to third party service providers, and Aviza may outsourcemore of those functions in the future. While Aviza expects to achieve operationalflexibility and cost savings as a result of this outsourcing, outsourcing has anumber of risks and reduces our control over the performance of the outsourcedfunctions. Significant performance problems by these third-party serviceproviders could result in cost overruns, delayed deliveries, shortages, qualityissues or other problems that could result in significant customerdissatisfaction and could harm Aviza’s business, financial condition andresults of operations.

 

If for any reason one ormore of these third-party service providers becomes unable or unwilling tocontinue to provide services of acceptable quality, at acceptable costs and ina timely manner, Aviza’s ability to deliver its products or spare parts to itscustomers could be severely impaired. Aviza would quickly need to identify andqualify substitute service providers or increase its internal capacity, whichcould be expensive, time consuming and difficult, and could result inunforeseen operations problems. Substitute service providers might not beavailable or, if available, might be unwilling or unable to offer services onacceptable terms.

 

If customer demand forAviza’s products increases, it may be unable to secure sufficient additionalcapacity from its current service providers on commercially reasonable terms,if at all.

 

Aviza’s requirements areexpected to represent a small portion of the total capacities of itsthird-party service providers, and these third-party service providers maypreferentially allocate capacity to other customers, even during periods ofhigh demand for Aviza’s products. In addition, these third-party serviceproviders could suffer financial difficulties or disruptions in theiroperations due to causes beyond Aviza’s control.

 

***Aviza will not be able to compete effectively if it fails toaddress the technology needs of its customers.***

 

Aviza operates in ahighly competitive environment, and its future success is heavily dependent oneffective development, commercialization and customer acceptance of new productscompared to its competitors. In addition, Aviza’s future success is dependentupon its ability to timely and cost-effectively:

 

•                                          developand market new products and technologies;

 

•                                          improveexisting products and technologies;

 

•                                          expandinto or develop equipment solutions for new markets for integrated circuitproducts;

 

•                                          achievemarket acceptance and accurately forecast demand for products and technologies;

 

•                                          achievecost efficiencies across product offerings;

 

•                                          qualifynew or improved products for volume manufacturing with customers; and

 

•                                          lowercustomers’ cost of ownership.

 

Aviza will also need todevelop technology and other applications, and it cannot assure you that suchdevelopments will be consistent with the needs of customers.

 

Aviza may not be able toforecast or respond accurately to the technological trends in the semiconductorindustry or respond to specific product announcements by competitors who may bedeveloping technologies and products that are more effective or that achievemore widespread acceptance. In addition, Aviza may incur substantial costs toensure the functionality and reliability of current and future products. Ifnewly developed products are unreliable or do not meet Aviza’s customers’expectations, then reduced orders, higher manufacturing costs, delays incollecting accounts receivable or additional service and warranty expense couldresult. Any delays in meeting customer demands could limit the potential forfollow-on sales for manufacturing. Any of these events could negatively affectthe ability to generate the return that Aviza would expect to achieve on itsinvestments in these new products.

 

If Aviza fails to developsolutions to achieve all of the specifications required by device manufacturersand the device manufacturers fail to integrate these technologies successfullywith their other processes, or competitors develop competing solutions, thenAviza’s ability to grow revenues from these products could be negativelyaffected.

 

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***Aviza’s operating results could be negatively affected bycurrency fluctuations.***

 

Although Aviza’s revenuesare generally denominated in U.S. dollars and Aviza will report its financialresults in U.S. dollars, Aviza’s Newport, South Wales operation is based in theUnited Kingdom and most of its operating expenses are incurred in Britishpounds.  As a result, a significant portion of Aviza’s costs will besubject to currency fluctuations.  Accordingly, if the British poundincreases in value against the U.S. dollar, Aviza’s expenses as a percentage ofrevenues will increase and Aviza’s gross margins will be reduced.  Inaddition, Aviza’s sales in Japan and other foreign service revenue aredenominated in local currency. As a result, fluctuations in those localcurrencies could also have an impact on Aviza’s operating results.

 

***The semiconductor industry is global and is expanding withinAsia. If Aviza is unable to penetrate this market, its ability to grow revenuescould be restricted.***

 

The percentage ofworldwide semiconductor production that is based in Asia is growing morerapidly than in other regions. Although Aviza derived approximately 62% and 69%of its net sales for the six months ended March 31, 2006 and March 25, 2005,respectively, and 66% and 46% of its net sales for the fiscal years endedSeptember 30, 2005 and September 24, 2004, respectively, from its sales inthe Asia Pacific region, its brand recognition is limited. In order to grow itsbusiness, it will be necessary for Aviza to penetrate the region with theaddition of new customers and the expansion of its relationships with existingcustomers. Aviza has traditionally sold its products primarily through itsdirect sales force. As a result, retaining and attracting key sales and servicepersonnel will be of critical importance to Aviza. These markets are typicallysubject to growth rates that are higher than worldwide growth rates. AlthoughAviza has a direct sales force in this region, we cannot assure you that wewill be able to continue penetrating markets in the Asia Pacific region.Failure to penetrate these markets, or failure to attract the additionalpersonnel necessary to service new and existing customers, may harm Aviza’scompetitive position and adversely affect our future business prospects.

 

***Aviza’s competitors have greater financial resources andgreater name recognition and therefore may compete more successfully.***

 

Aviza faces competitionor potential competition from many companies with greater resources. If Avizais unable to compete effectively with these companies, market share may declineand Aviza’s business could be harmed. Virtually all of Aviza’s primarycompetitors are substantially larger companies and some of them have broaderproduct lines. These competitors have well-established reputations in themarkets in which Aviza competes, greater experience with high-volumemanufacturing, broader name recognition, substantially larger customer basesand substantially greater financial, technical, manufacturing and marketingresources. Aviza will also face potential competition from new market entrants,including established manufacturers in other segments of the semiconductorcapital equipment market who may decide to diversify and develop and marketproducts that compete with Aviza’s product offerings.

 

***Semiconductor manufacturers are typically loyal to theirexisting semiconductor equipment suppliers, which may make it difficult forAviza to obtain new customers.***

 

Because semiconductormanufacturers must make a substantial investment to install and integratecapital equipment into a semiconductor fabrication facility, thesemanufacturers tend to choose semiconductor equipment manufacturers based onestablished relationships, product compatibility and proven system performance.

 

Once a semiconductormanufacturer selects a particular vendor’s capital equipment, the manufacturergenerally relies for a significant period of time upon the equipment from thisvendor of choice for the specific production line application. To do otherwisecreates risk for the manufacturer because manufacturing a semiconductorrequires many process steps and a fabrication facility will contain manydifferent types of machines that must work cohesively to produce products thatmeet the customers’ specifications. If any piece of equipment fails to performas expected, the customer could incur significant costs related to defectiveproducts, production line downtime or low production yields.

 

Since most newfabrication facilities are similar to existing ones, semiconductormanufacturers tend to continue using equipment that has a proven track record.Based on experience with major customers such as Infineon, Aviza has observedthat once a particular piece of equipment is selected from a vendor, thecustomer is likely to continue purchasing that same piece of equipment from thevendor for similar applications in the future. Aviza’s customer lists, thoughlimited, increased in fiscal 2005. However, broadening market share remainsdifficult due to choices made by customers that continue to be influenced bypre-existing bases installed by competing vendors. As a result, Aviza’s abilityto obtain new customers and additional orders may be limited.

 

A semiconductormanufacturer frequently will attempt to consolidate its other capital equipmentrequirements with the same vendor. As a result, Aviza may face narrow windowsof opportunity to be selected as the “vendor of choice” by potential newcustomers. It may be difficult for Aviza to sell to a particular customer for asignificant period of time once that customer selects a competitor’s product,and Aviza may not be successful in obtaining broader acceptance of its systemsand technology. If Aviza is not able to achieve broader market acceptance of itssystems and technology, Aviza may be unable to grow its business and operatingresults, and Aviza’s financial condition may be harmed.

 

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***Aviza depends upon sole suppliers for certain keycomponents.***

 

Substantially all ofAviza’s revenues have come from the sale of products that contain keycomponents that are available only from a single source or limited sources. Asa result, Aviza depends on a number of sole suppliers for key components usedin the manufacturing of its products. If Aviza is unable to obtain timelydelivery of sufficient quantities of these components, it will be unable tomanufacture products to meet customer demand on a timely basis. Mostsignificantly, certain product lines are designed around automation modulessupplied by sole suppliers. Due to the high cost of these modules, Aviza keepsvery few in inventory. Although Aviza has never been unable to manufacture orship a product due to its inability to obtain a component sourced from a solesupplier, if a sole supplier fails to deliver the component on a timely basis,delivery of certain products could be delayed. If a sole supplier is unable todeliver any such modules for a prolonged period of time, Aviza may have toredesign certain products.

 

Aviza cannot assure youthat it will be able to do so, or that customers will adopt the redesignedsystems.

 

***If Aviza is unable to hire and retain a sufficient number ofqualified personnel, its results of operations will be negatively affected.***

 

Aviza’s business andfuture operating results will depend in part upon the ability to attract andretain qualified management, technical, sales and support personnel for itsoperations on a worldwide basis. Competition for qualified personnel is intense,particularly in the San Francisco Bay Area, where Aviza’s headquarters arelocated, and Aviza cannot assure you that it will be able to continue toattract and retain qualified personnel. Aviza’s results of operations could benegatively affected by its loss of key executives or employees or its inabilityto attract and retain skilled executives and employees as needed.

 

***Aviza’s ability to compete could be jeopardized by itsinability to protect intellectual property rights from challenges by thirdparties.***

 

Aviza’s success andability to compete depend in large part upon protecting proprietary technology.Aviza has relied on a combination of patent, trade secret, copyright andtrademark laws, non-disclosure and other contractual agreements and technical measuresto protect its proprietary rights.

 

Aviza cannot assure youthat patents will be issued on pending patent applications or that competitorswill not be able legitimately to ascertain proprietary information embedded inAviza’s products that is not covered by patent or copyright. If this happens,Aviza may not be able to prevent the competitor from using this information.

 

In addition, if Avizaasserts patent rights against a competitor’s product, Aviza cannot assure youthat any claim in any patent will be sufficiently broad nor, if sufficientlybroad, that the patent will not be challenged, invalidated or circumvented, orthat Aviza will have sufficient resources to prosecute its rights. Failure toprotect its intellectual property rights could have an adverse effect on Aviza’sbusiness.

 

***Claims or litigation regarding its intellectual propertyrights could seriously harm Aviza’s business or require Aviza to incursignificant costs.***

 

In recent years, therehas been significant litigation in the semiconductor equipment industryinvolving patents and other intellectual property rights. Infringement claimsmay be asserted against Aviza in the future and, if such claims are made, Avizamay not be able to defend against such claims successfully or, if necessary,obtain licenses on reasonable terms. Any claim that Aviza’s products infringethe proprietary rights of others would force Aviza to defend itself andpossibly its customers against the alleged infringement. These claims and anyresulting lawsuit, if successful, could subject Aviza to significant liabilityfor damages and invalidate its proprietary rights. These lawsuits, regardlessof their outcome, would likely be time-consuming and expensive to resolve andwould divert management’s time and attention. Any potential intellectualproperty litigation could force Aviza to do one or more of the following:

 

•                                          loseor forfeit proprietary rights;

 

•                                          stopmanufacturing or selling products that incorporate the challenged intellectualproperty;

 

•                                          obtainfrom the owner of the infringed intellectual property right a license to sellor use the relevant technology, which license may not be available onreasonable terms or at all and may involve significant royalty payments;

 

•                                          paydamages, including treble damages and attorneys’ fees in some circumstances; or

 

•                                          redesignthose products that use the challenged intellectual property.

 

If Aviza is forced totake any of these actions, its business could be severely harmed. On April 11,2006, IPS, Ltd. filed a lawsuit against Aviza in the United States DistrictCourt for the Central District of California. The complaint alleges that Avizaused confidential information of IPS to develop a single-wafer-processing typeatomic layer deposition (ALD) system. The complaint is for unspecified monetarydamages, injunctive relief and an order rescinding the settlement anddistributor agreements that Aviza and IPS entered into in May 2004 insettlement of a prior lawsuit that IPS filed against ASML U.S., Inc. and Avizain March 2004 relating to assets that Aviza acquired from ASML in October 2003.While Aviza believes that it has complied with the settlement agreement and

 

31

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that the allegationscontained in IPS’s complaint are without merit, a negative outcome in thelitigation could harm Aviza’s business.

 

***Aviza’s efforts to protect its intellectual property may beless effective in some foreign countries where intellectual property rights arenot as well protected as in the United States.***

 

A significant portion ofAviza’s net sales for the six months ended March 31, 2006 and fiscal 2005 werederived from sales in foreign countries, including certain countries in Asiasuch as Singapore, Taiwan, Japan, Malaysia, China and Korea. The laws of someforeign countries do not protect proprietary rights to as great an extent as dothe laws of the United States, and many U.S. companies have encounteredsubstantial problems in protecting their proprietary rights againstinfringement in such countries, some of which are countries in which Aviza hassold and in which Aviza expects to continue to sell systems. For example,Taiwan and China are not signatories to the Patent Cooperation Treaty, which isdesigned to specify rules and methods for defending intellectual propertyinternationally. In Taiwan and China, the publication of a patent prior to itsfiling would invalidate the ability of a company to obtain a patent. Similarly,in contrast to the United States where the contents of patent applicationsremain confidential during the patent prosecution process, the contents of apatent application are published upon filing which provides competitors anadvanced view of the contents of patent applications prior to the establishmentof patent rights. There is a risk that Aviza’s means of protecting itsproprietary rights may not be adequate in these countries. Aviza’s competitorsin these countries may independently develop similar technology or duplicateAviza’s systems. If Aviza fails to adequately protect its intellectual propertyin those countries, it would be easier for Aviza’s competitors to sellcompeting products in those countries.

 

***Aviza’s operations are subject to health and safety andenvironmental laws that may expose it to liabilities for noncompliance.***

 

Aviza is subject to avariety of governmental regulations relating to the use, storage, discharge,handling, manufacture and disposal of all materials present at, or are outputfrom, Aviza’s facilities, including the toxic or other hazardous chemicalbyproducts of the manufacturing processes. Aviza is also subject togovernmental regulations affecting the content, reuse, recycling, distributionand labeling of products containing hazardous materials. Environmental claims,or failure to comply with any present or future regulations, could result insignificant costs to remediate, the assessment of damages or imposition offines, the suspension of production of certain products or the cessation ofoperations.

 

New regulations couldrequire the purchase of costly equipment or the incurrence of other significantexpenses. Failure to control the use or adequately restrict the discharge ofhazardous substances could subject Aviza to future liabilities, which couldnegatively affect Aviza’s operating results and financial condition.

 

Aviza owns and operates afacility located in Scotts Valley, California, or the Scotts Valley Site, whichis currently subject to an Administrative Order on Consent, or Consent Order,dated as of July 16, 1991 entered into by Watkins-Johnson Company (now WJCommunications, Inc.), a prior owner of the Scotts Valley Site, and theUnited States Environmental Protection Agency, or EPA. The Scotts Valley Siteis listed on the National Priorities List as the “Watkins-Johnson SuperfundSite” pursuant to the Comprehensive Environmental Response Compensation andLiability Act, or CERCLA. The contamination on the Scotts Valley Site includeschlorinated solvents in soil and groundwater. The site is being remediatedunder the terms of an agreement under which an environmental consultant,Arcadis Geraghty & Miller, has agreed to complete the work using fundsfrom an escrow account and is indemnifying Aviza for all remediation costs.Aviza is also protected from liability by an insurance policy covering theremediation and by certain indemnities from WJ Communications, Inc.At this point in time, only small amounts of groundwater contamination remain,and Arcadis Geraghty & Miller is in discussions with the EPA regardingceasing remedial activities.

 

***Aviza has had material weaknesses in internal control overfinancial reporting in the past and Aviza cannot assure you that additionalmaterial weaknesses will not be identified in the future. Aviza’s failure toimplement and maintain effective internal control over financial reportingcould result in material misstatements in Aviza’s financial statements, whichcould require Aviza to restate its financial statements, cause investors tolose confidence in Aviza’s reported financial information and have a negativeeffect on Aviza’s stock price.***

 

In connection with theaudit of Aviza’s financial statements for the period from October 7, 2003through September 24, 2004, Aviza’s independent registered publicaccounting firm identified material weaknesses in Aviza’s internal control overfinancial reporting as defined in the standards established by the PublicCompany Accounting Oversight Board (United States) that affected Aviza’sfinancial statements for its fiscal year ended September 24, 2004.

 

The material weaknessesin Aviza’s internal control over financial reporting are summarized below:

 

•                                          Afterissuance of the financial statements by the Predecessor for calendar year 2002and the period from January 1, 2003 through October 9, 2003, Avizadiscovered errors in these financial statements which required Aviza to restatethe financial statements of the Predecessor for both periods.

 

•                                          Significantadjustments were required in areas involving management judgment such aswarranty accrual, receivables allowance and in-transit inventory, andassumptions used by Aviza to record accounting entries did not initially havedetailed support.

 

•                                          Avizadid not have in its possession an interest rate cap agreement with its bank inconnection with Aviza’s revolving line

 

32

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of credit and hadnot recorded the agreement as a derivative in its financial statements. Inaddition, Aviza was not aware that it was required to record dividends underits corporate charter prior to correction of its corporate charter.

 

Although the managementof Aviza believes that it has remediated each of these identified materialweaknesses, Aviza cannot assure you that it will not identify additionalmaterial weaknesses or significant deficiencies in its internal control overfinancial reporting in the future.

 

In addition, in May 2005,Trikon restated it previously issued financial statements with respect to

 

•                                          theclassification of accounts receivable and deferred revenue on contracts with aportion of the contract price that is withheld until final acceptance;

 

•                                          thetiming of recognition of costs on those contracts; and

 

•                                          theallocation of facilities costs.

 

To address the materialweaknesses in Trikon’s internal control over financial reporting evidenced bythis restatement, Trikon took remedial measures related to the selection,application and monitoring of its accounting policies.

 

Any failure to maintainor implement required new or improved controls, or any difficulties Avizaencounters in their implementation, could result in additional materialweaknesses or significant deficiencies cause Aviza to fail to meet its periodicreporting obligations or result in material misstatements in Aviza’s financialstatements. Any such failure could also adversely affect the results ofperiodic management evaluations and annual auditor attestation reportsregarding the effectiveness of Aviza’s internal control over financialreporting that will be required when the SEC’s rules under Section 404 ofthe Sarbanes-Oxley Act of 2002 become applicable to Aviza beginning with itsfirst Annual Report on Form 10-K for the fiscal year ending inSeptember 2007, which will be filed in December 2007. The existenceof a material weakness could result in errors in Aviza’s financial statementsthat could result in a restatement of financial statements, cause Aviza to failto meet its reporting obligations and cause investors to lose confidence in itsreported financial information, leading to a decline in Aviza’s stock price.

 

***Aviza will be required to spend significant time, money andother resources to ensure and determine that its internal control overfinancial reporting is effective. If Aviza is unable to achieve and maintaineffective internal control over financial reporting, the value of yourinvestment in Aviza could decline.***

 

Pursuant toSection 404 of the Sarbanes-Oxley Act of 2002, beginning with Aviza’sAnnual Report on Form 10-K for its fiscal year ending inSeptember 2007, Aviza will be required to furnish a report on its internalcontrol over financial reporting. This report will contain an assessment byAviza’s management of the effectiveness of Aviza’s internal control overfinancial reporting and a statement that Aviza’s independent registered public accountingfirm has attested to and reported on Aviza’s management’s assessment of Aviza’sinternal control over financial reporting.

 

Aviza has identifiedmaterial weaknesses in internal control over financial reporting as of the endof fiscal 2004, and Trikon restated its financial statements in May 2005 as aresult of Trikon’s identification of material weaknesses in its internalcontrol over financial reporting.  In addition, because it just recentlybecame a public company, Aviza has not been subject to Section 404 of theSarbanes-Oxley Act of 2002. As a result of Aviza’s and Trikon’s identifiedmaterial weaknesses and the fact that Aviza just recently became a publiccompany, Aviza faces a significant challenge in ensuring its operations aredesigned in a manner that is consistent with the framework of internal controlestablished by the Committee of Sponsoring Organization of the TreadwayCommission.

 

Aviza’s internal controlover financial reporting may not be considered effective if, among other things:

 

•                                          anymaterial weaknesses in Aviza’s internal control over financial reporting exist;

 

•                                          Avizafails to evaluate key controls in a timely fashion; or

 

•                                          Avizafails to remediate assessed deficiencies.

 

If Aviza’s managementasserts that Aviza’s internal control over financial reporting is ineffective,or if Aviza’s independent registered public accounting firm expresses anadverse opinion on Aviza’s management’s assessment or that Aviza’s internalcontrol over financial reporting is ineffective, the value of your investmentin Aviza could decline.

 

***Aviza will not be required to furnish a report on itsinternal control over financial reporting until December 2007.***

 

Aviza is not currentlyrequired to furnish a report on its internal control over financial reportingpursuant to the SEC’s rules under Section 404 of the Sarbanes-Oxley Act of2002 as part of the Annual Reports that it files on Form 10-K. However,these rules will apply to Aviza when it files its Annual Report onForm 10-K for its fiscal year ending in September 2007, which will befiled in December 2007.

 

33

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***Aviza’s ability to use net operating losses to offset futuretaxable income is subject to limitations.***

 

In general, under Section382 of the Internal Revenue Code, a corporation that undergoes an “ownershipchange” is subject to limitations on its ability to utilize its pre-change netoperating losses to offset future taxable income. A corporation generallyundergoes an “ownership change” if the percentage of stock of the corporationowned by one or more of its 5% stockholders has increased by more than 50percentage points over a three-year period.

 

Trikon’s net operatinglosses are subject to limitations arising from previous ownership changes andwill be subject to additional limitations as a result of the mergertransaction. In addition, if Aviza undergoes an ownership change after themerger transaction, Aviza’s ability to utilize NOLs could be limited by Section382 of the Internal Revenue Code. It is impossible for Aviza to ensure that itwill not experience an ownership change in the future because changes in itsstock ownership, some of which are outside of Aviza’s control, could result inan ownership change under Section 382 of the Internal Revenue Code.

 

Generally, thelimitations on Aviza’s ability to use either its or Trikon’s pre-mergertransaction NOLs to offset future taxable income are expected to besignificant, and thus Aviza’s liability for future U.S. federal income taxesmay be materially higher than that liability would have been absent suchlimitations. Similar rules may apply for foreign and state income tax purposesas well.

 

***Business interruptions could adversely affect Aviza’sbusiness.***

 

Aviza’s operations arevulnerable to interruption by fire, earthquake, power loss, telecommunicationsfailure and other events beyond its control. A disaster could severely damageAviza’s ability to deliver its products to its customers. In order tomanufacture its products, Aviza will need to maintain and protect itsmanufacturing facilities and computer systems, many of which will be located inor near its headquarters in Scotts Valley, California. Scotts Valley is locatednear a known earthquake fault zone. Although Aviza’s facilities are designed tobe fault tolerant, Aviza’s systems are susceptible to damage from fire, floods,earthquakes, power loss, telecommunications failures and similar events.Although Aviza will maintain general business insurance against interruptionssuch as fires and floods, there can be no assurance that the amount of coveragewill be adequate in any particular case.

 

***Any acquisitions Aviza may make could disrupt business andharm its financial condition.***

 

Aviza may invest incomplementary products, companies or technologies. Such investments involvenumerous risks, including:

 

•                                          diversion ofmanagement’s attention from other operational matters;

 

•                                          inabilityto complete acquisitions as anticipated or at all;

 

•                                          inabilityto realize synergies expected to result from an acquisition;

 

•                                          failureto commercialize purchased technologies;

 

•                                          ineffectivenessof an acquired company’s internal controls;

 

•                                          impairmentof acquired intangible assets as a result of technological advancements orworse-than-expected performance of the acquired company or its productofferings;

 

•                                          unknownand undisclosed commitments or liabilities;

 

•                                          failureto integrate and retain key employees; and

 

•                                          ineffectiveintegration of operations.

 

Mergers and acquisitionsare inherently subject to significant risks, and Aviza’s inability to managethese risks effectively could adversely affect its business, financialcondition and results of operations.

 

***If Aviza is unable to establish and build a recognizedbrand, it may be unable to grow its business.***

 

Aviza’s management hasmade the decision to use the “Aviza” brand going forward and believes thattransferring market acceptance for the “Trikon” brand to Aviza and maintaininga recognized brand for Aviza will be critical to the success of its strategy. In the near term, Aviza may face some disruption in the marketplace due to thedisappearance of the “Trikon” brand and a lack of recognition for the “Aviza”brand.  The adoption of the “Aviza” brand may prevent Aviza from takingadvantage of certain goodwill of existing customers and strategic partners ofTrikon.  Furthermore, in order to promote the “Aviza” brand in response tocompetitive pressures, Aviza may find it necessary to increase its marketingexpenditures or otherwise increase its financial commitment to building andmaintaining brand loyalty and awareness among existing and potentialclients.  If Aviza fails to promote, maintain and protect its brand, orincurs excessive expenses in an attempt to promote and maintain its brand, its business,financial condition, results of operations and prospects will be harmed.

 

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***Affiliates of VantagePoint own a large amount of Aviza’scommon stock, which will limit your ability to influence corporate activitiesof Aviza.***

 

At May 12, 2006, affiliates of VantagePointbeneficially owned approximately 47% of Aviza’s outstanding voting power.VantagePoint exercises significant influence over Aviza’s operations, businessstrategy and the outcome of votes on all matters requiring stockholderapproval, including the approval of significant corporate transactions, such asmergers or other business combinations. VantagePoint may have interests thatdiffer from the interests of other stockholders of Aviza. This concentration ofownership may also have the effect of delaying or preventing a change ofcontrol of Aviza or discouraging others from making tender offers for shares ofAviza, which could prevent the other stockholders of Aviza from receiving apremium for your shares.

 

***The price of Aviza’s common stock has fluctuated and mayfluctuate significantly in the future, which may lead to losses by investors orto securities litigation.***

 

The market price of Aviza’scommon stock has been and may become highly volatile in the future, and Aviza’sstock price may decline in the future.  For example, for the period fromDecember 2, 2005, Aviza’s first day of trading, through May 12, 2006 the pricerange of Aviza’s common stock was $3.77 to $6.56 per share.

 

In addition, in recentyears, the stock market in general, and the market for shares of hightechnology stocks in particular, have experienced extreme pricefluctuations.  The fluctuations have frequently been unrelated to theoperating performance of the affected companies.  Such fluctuations couldadversely affect the market price of Aviza’s common stock.  In the past,securities litigation has often been instituted against a company followingperiods of volatility in its stock price.  This type of litigation, iffiled against Aviza, could result in substantial costs and divert management’sattention and resources.

 

**ITEM2.  UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS**

 

On April 24, 2006, Avizasold an aggregate of 3,282,275 shares of its common stock to Caisse de dépôt etplacement du Québec, a body organized under the laws of the Province of Québec,for an aggregate purchase price of $15,000,000 in a private placement. Inconnection with and at the closing of this sale, Jerauld J. Cutini, Aviza’sPresident and Chief Executive Officer, elected to convert all 10,000 shares ofSeries B Preferred Stock of Aviza, Inc., a subsidiary of Aviza, held by himinto an aggregate of 238,482 shares of Aviza’s common stock, and affiliates ofVantagePoint Venture Partners elected to convert all 10,000 shares of Series BPreferred Stock of Aviza, Inc. and all 90,000 shares of Series B-1 PreferredStock of Aviza, Inc. held by them into an aggregate of 2,298,492 shares ofAviza’s common stock. Pursuant to the terms of Aviza, Inc.’s certificate ofincorporation, each share of Series B Preferred Stock and Series B-1 PreferredStock of Aviza, Inc. was converted into a number of shares of Aviza’s commonstock determined by dividing (a) the redemption price of such share of Series BPreferred Stock or Series B-1 Preferred Stock of Aviza, Inc. on the closingdate of the offering by (b) $4.57, which is the per-share purchase price thatCaisse de dépôt et placement du Québec paid for its shares.

 

Aviza, Inc.’s issuance ofthe securities in each of the transactions described above was exempt fromregistration under the Securities Act in reliance on Section 4(2) of theSecurities Act and Regulation D promulgated thereunder. The recipients of thesecurities in each of these transactions represented their intention to acquirethe securities for investment only and not with a view to or for sale inconnection with any distribution thereof, and appropriate legends were affixedto the share certificates and other instruments issued in such transactions.The sales of these securities were made without general solicitation oradvertising.

 

**ITEM3.  DEFAULTS UPON SENIOR SECURITIES**

 

None.

 

**ITEM4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS**

 

None.

 

**ITEM 5.OTHER INFORMATION**

 

None.

 

**ITEM 6. EXHIBITS**

 
| 2.1 |   | Agreement and Plan of Merger, dated as of  March 14, 2005, by and among Trikon Technologies, Inc., Aviza, Inc.  (formerly, Aviza Technology, Inc.), Aviza Technology, Inc. (formerly, New  Athletics, Inc.), Baseball Acquisition Corp. I and Baseball Acquisition  Corp. II, as amended, incorporated by reference to Annex A to  Amendment No. 4 to the Registration Statement on Form S-4 filed by Aviza  Technology, Inc. (formerly, New Athletics, Inc.) with the Commission on  October 28, 2005 (File No. 333-126098). |
|-----|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

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| 3.1    |   | Amended and Restated Certificate of Incorporation of  Aviza Technology, Inc. (formerly, New Athletics, Inc.), incorporated by  reference to Exhibit 3.1 to our Annual Report on Form 10-K filed with the  Commission on December 29, 2005.                                                                                                                                                                                       |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                             |
| 3.2    |   | Amended and Restated Bylaws of Aviza Technology,  Inc., incorporated by reference to Exhibit 3.2 to our Annual Report on Form  10-K filed with the Commission on December 29, 2005.                                                                                                                                                                                                                                              |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                             |
| 4.1    |   | Specimen certificate of common stock of Aviza  Technology, Inc., incorporated by reference to Exhibit 4.1 to our Annual  Report on Form 10-K filed with the Commission on December 29, 2005.                                                                                                                                                                                                                                     |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                             |
| 4.2    |   | Form of redeemable warrant to purchase shares  of common stock dated October 22, 2003 issued in connection with the  sale of common stock and warrants to Special Situations Fund III LP and  certain of its affiliate funds, incorporated by reference to Exhibit 4.1  to the Current Report on Form 8-K filed by Trikon Technologies, Inc.  with the Commission on October 23, 2003.                  |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                             |
| 10.1   |   | Agreement for Purchase And Sale Of Real Property and  Escrow Instructions, dated as of March 16, 2006, between Aviza Technology,  Inc, and KB Home South Bay Inc., incorporated by reference to Exhibit 10.1 to  our Current Report on Form 8-K filed with the Commission on March 17, 2006.                                                                                                                                     |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                             |
| 10.2   |   | Employment Agreement, dated as of December 1, 2005,  between Aviza Technology, Inc. and Jerauld J. Cutini, incorporated by  reference to Exhibit 10.1 to our Current Report on Form 8-K filed with the  Commission on April 7, 2006.                                                                                                                                                                                             |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                             |
| 10.3   |   | Employment Agreement, dated as of December 1, 2005,  between Aviza Technology, Inc. and Patrick C. O’Connor, incorporated by  reference to Exhibit 10.2 to our Current Report on Form 8-K filed with the  Commission on April 7, 2006.                                                                                                                                                                                      |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                             |
| 10.4   |   | Employment Agreement, dated as of December 1, 2005,  between Aviza Technology, Inc. and John Macneil, incorporated by reference to  Exhibit 10.3 to our Current Report on Form 8-K filed with the Commission on April  7, 2006.                                                                                                                                                                                                  |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                             |
| 10.5   |   | Stock Purchase Agreement, dated as of April 24,  2006, by and between Aviza Technology, Inc. and Caisse de dépôt et placement  du Québec, incorporated by reference to Exhibit 10.1 to our Current Report on  Form 8-K filed with the Commission on April 25, 2006.                                                                                                                                               |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                             |
| 10.6   |   | Amendment No. 5, dated as of March 31, 2006, to  Credit Agreement between Bank of America, N.A. and Aviza, Inc., incorporated  by reference to Exhibit 10.2 to our Current Report on Form 8-K filed with the  Commission on April 25, 2006.                                                                                                                                                                                      |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                             |
| 10.7   |   | Amendment to Second Amended and Restated Stockholder  Agreement, dated as of April 24, 2006, by and among the Company, Trikon  Technologies, Inc. and VantagePoint Venture Partners IV (Q), L.P.,  VantagePoint Venture Partners IV, L.P. and VantagePoint Venture Partners IV  Principals Fund, L.P., incorporated by reference to Exhibit 10.3 to our  Current Report on Form 8-K filed with the Commission on April 25, 2006. |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                             |
| 31.1   |   | Certification of the Chief Executive Officer  pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                                                                                         |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                             |
| 31.2   |   | Certification of the Chief Financial Officer  pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                                                                                         |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                             |
| 32.1   |   | Certification of the Chief Executive Officer  pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                                                                                         |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                             |
| 32.2   |   | Certification of the Chief Financial Officer  pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                                                                                         |

 

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**SIGNATURES**

 

Pursuant to therequirements of the Securities Exchange Act of 1934, the registrant has dulycaused this report to be signed on its behalf by the undersigned thereunto dulyauthorized.

 
|                | Aviza Technology, Inc.                                                                                                             |                             |
|---------------------|------------------------------------------------------------------------------------------------------------------------------------|----------------------------------|
|                | *(Registrant)*                                                                                                                     | * *                         |
| * *            | * *                                                                                                                           |
| * *            | * *                                                                                                                           |
| Dated: May 15, 2006 |                                                                                                                               |
|                | By:                                                                                                                                | **/s/ PATRICK C. O’CONNOR** |   |
|                |                                                                                                                               |
|                | **Patrick C. O’Connor***Executive Vice President  and Chief Financial  Officer  (Principal Financial and Accounting Officer)* |
|                     |                                                                                                                                    |                                  |  |  |

 

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EXHIBIT INDEX

 
| 2.1    |   | Agreement and Plan of Merger, dated as of  March 14, 2005, by and among Trikon Technologies, Inc., Aviza, Inc.  (formerly, Aviza Technology, Inc.), Aviza Technology, Inc. (formerly, New  Athletics, Inc.), Baseball Acquisition Corp. I and Baseball Acquisition  Corp. II, as amended, incorporated by reference to Annex A to  Amendment No. 4 to the Registration Statement on Form S-4 filed by Aviza  Technology, Inc. (formerly, New Athletics, Inc.) with the Commission on  October 28, 2005 (File No. 333-126098). |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| 3.1    |   | Amended and Restated Certificate of Incorporation of  Aviza Technology, Inc. (formerly, New Athletics, Inc.), incorporated by  reference to Exhibit 3.1 to our Annual Report on Form 10-K filed with the  Commission on December 29, 2005.                                                                                                                                                                                                                                                                                                        |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| 3.2    |   | Amended and Restated Bylaws of Aviza Technology,  Inc., incorporated by reference to Exhibit 3.2 to our Annual Report on Form  10-K filed with the Commission on December 29, 2005.                                                                                                                                                                                                                                                                                                                                                               |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| 4.1    |   | Specimen certificate of common stock of Aviza  Technology, Inc., incorporated by reference to Exhibit 4.1 to our Annual  Report on Form 10-K filed with the Commission on December 29, 2005.                                                                                                                                                                                                                                                                                                                                                      |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| 4.2    |   | Form of redeemable warrant to purchase shares  of common stock dated October 22, 2003 issued in connection with the  sale of common stock and warrants to Special Situations Fund III LP and  certain of its affiliate funds, incorporated by reference to Exhibit 4.1  to the Current Report on Form 8-K filed by Trikon Technologies, Inc.  with the Commission on October 23, 2003.                                                                                                                                   |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| 10.1   |   | Agreement for Purchase And Sale Of Real Property and  Escrow Instructions, dated as of March 16, 2006, between Aviza Technology,  Inc, and KB Home South Bay Inc., incorporated by reference to Exhibit 10.1 to  our Current Report on Form 8-K filed with the Commission on March 17, 2006.                                                                                                                                                                                                                                                      |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| 10.2   |   | Employment Agreement, dated as of December 1, 2005,  between Aviza Technology, Inc. and Jerauld J. Cutini, incorporated by  reference to Exhibit 10.1 to our Current Report on Form 8-K filed with the  Commission on April 7, 2006.                                                                                                                                                                                                                                                                                                              |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| 10.3   |   | Employment Agreement, dated as of December 1, 2005,  between Aviza Technology, Inc. and Patrick C. O’Connor, incorporated by  reference to Exhibit 10.2 to our Current Report on Form 8-K filed with the  Commission on April 7, 2006.                                                                                                                                                                                                                                                                                                       |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| 10.4   |   | Employment Agreement, dated as of December 1, 2005,  between Aviza Technology, Inc. and John Macneil, incorporated by reference to  Exhibit 10.3 to our Current Report on Form 8-K filed with the Commission on  April 7, 2006.                                                                                                                                                                                                                                                                                                                   |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| 10.5   |   | Stock Purchase Agreement, dated as of April 24,  2006, by and between Aviza Technology, Inc. and Caisse de dépôt et placement  du Québec, incorporated by reference to Exhibit 10.1 to our Current Report on  Form 8-K filed with the Commission on April 25, 2006.                                                                                                                                                                                                                                                                |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| 10.6   |   | Amendment No. 5, dated as of March 31, 2006, to  Credit Agreement between Bank of America, N.A. and Aviza, Inc., incorporated  by reference to Exhibit 10.2 to our Current Report on Form 8-K filed with the  Commission on April 25, 2006.                                                                                                                                                                                                                                                                                                       |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| 10.7   |   | Amendment to Second Amended and Restated Stockholder  Agreement, dated as of April 24, 2006, by and among the Company, Trikon  Technologies, Inc. and VantagePoint Venture Partners IV (Q), L.P.,  VantagePoint Venture Partners IV, L.P. and VantagePoint Venture Partners IV  Principals Fund, L.P., incorporated by reference to Exhibit 10.3 to our  Current Report on Form 8-K filed with the Commission on April 25, 2006.                                                                                                                  |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| 31.1   |   | Certification of the Chief Executive Officer  pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                                                                                                                                                                                                          |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| 31.2   |   | Certification of the Chief Financial Officer  pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                                                                                                                                                                                                          |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| 32.1   |   | Certification of the Chief Executive Officer  pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                                                                                                                                                                                                          |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| 32.2   |   | Certification of the Chief Financial Officer  pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                                                                                                                                                                                                          |

 

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