**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

** **

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**FORM 10-Q**

 

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| **x** | ** ** | **QUARTERLY  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE  ACT OF 1934** |
|-------|------------|---------------------------------------------------------------------------------------------------------|

** **

**Forthe quarterly period ended December 28, 2007**

** **

**OR**

** **
| **o** | ** ** | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE  ACT OF 1934** |
|-------|------------|----------------------------------------------------------------------------------------------------------|

** **

**Forthe transition period from                to                **

** **

**Commissionfile number 000-51642**

** **

**AvizaTechnology, Inc.**

(Exact Name ofRegistrant as 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 ofPrincipal Executive Offices including Zip Code)

 

**(831)438-2100**

(Registrant’sTelephone Number, Including Area Code)

 

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Indicate by check markwhether the registrant: (1) has filed all reports required to be filed by Section 13or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements forthe past 90 days. YES   x   NO   o

 

Indicate by check markwhether the registrant is a large accelerated filer, an accelerated filer, or anon-accelerated filer.  See definition of “accelerated filer and largeaccelerated filer” in Rule 12b-2 of the Exchange Act.  (Check one):

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

 

Indicate by check markwhether the registrant is a shell company (as defined in Rule 12b-2 of theExchange Act). YES   o   NO   x

 

As of February 6,2008, the registrant had 21,856,473 shares of its common stock, par value$0.0001 per share, outstanding.

 

 

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**AvizaTechnology, Inc.**

** **

**Tableof Contents**

 
| ** **                                                                                                                            | ** **            | **Page  No.** |
|---------------------------------------------------------------------------------------------------------------------------------------|-----------------------|---------------|
| **PART I.****FINANCIAL  INFORMATION**                                                                                            |                  |
| Item 1.Financial Statements (unaudited):                                                                                              |                  |
| Condensed Consolidated  Balance Sheets — at December 28, 2007 and September 28, 2007                                   | 3                     |
| Condensed Consolidated  Statements of Operations — for the Three Months Ended December 28, 2007  and December 29, 2006 | 4                     |
| Condensed Consolidated  Statements of Cash Flows — for the Three Months Ended December 28, 2007  and December 29, 2006 | 5                     |
| Notes to Condensed  Consolidated Financial Statements                                                                                 | 6                     |
| Item 2.Management’s  Discussion and Analysis of Financial Condition and Results of Operations                                    | 14                    |
| Item 3.Quantitative  and Qualitative Disclosures About Market Risk                                                                    | 24                    |
| Item 4.Controls and  Procedures                                                                                                       | 24                    |
| ** **                                                                                                                            | ** **            | ** **    |
| **PART II.**                                                                                                                     | **OTHER INFORMATION** |          |
| Item 1.Legal Proceedings                                                                                                              | 24                    |
| Item 1A.Risk Factors                                                                                                                  | 24                    |
| 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                                                                                                                       | 36                    |

 

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**ITEM1. FINANCIAL STATEMENTS**

** **

**AVIZATECHNOLOGY, INC. AND SUBSIDIARIES**

**CONDENSED CONSOLIDATED BALANCE SHEETS**

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

**(unaudited)**

 
| ** **                                                                                                                                                                                         | ** ** | **December 28,** | ** ** | **September 28,** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|------------------------|------------|
| ** **                                                                                                                                                                                         | ** ** | **2007**              | ** ** | **2007**               | ** ** |
| **ASSETS**                                                                                                                                                                                         | ** ** | ** **            | ** ** | ** **             | ** ** |
| CURRENT ASSETS:                                                                                                                                                                                    |       |                  |       |                   |       |
| Cash and cash  equivalents                                                                                                                                                                         |       | $                     | 20,193     |                   | $          | 23,087 |   |
| Accounts  receivable, net of allowance of $293 and $178, respectively                                                                                                                              |       | 34,468                |       | 37,202                 |       |
| Inventory                                                                                                                                                                                          |       | 50,496                |       | 45,529                 |       |
| Prepaid expenses  and other current assets                                                                                                                                                         |       | 6,365                 |       | 5,317                  |       |
| Total current  assets                                                                                                                                                                              |       | 111,522               |       | 111,135                |       |
|                                                                                                                                                                                               |       |                  |       |                   |       |
| PROPERTY, PLANT  AND EQUIPMENT—net                                                                                                                                                            |       | 31,297                |       | 31,781                 |       |
| INTANGIBLE  ASSETS—net                                                                                                                                                                        |       | 4,996                 |       | 3,333                  |       |
| OTHER ASSETS                                                                                                                                                                                       |       | 1,650                 |       | 1,831                  |       |
| TOTAL                                                                                                                                                                                              |       | $                     | 149,465    |                   | $          | 148,080 |   |
|                                                                                                                                                                                               |       |                  |       |                   |       |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY**                                                                                                                                                     |       |                  |       |                   |       |
|                                                                                                                                                                                               |       |                  |       |                   |       |
| CURRENT  LIABILITIES:                                                                                                                                                                              |       |                  |       |                   |       |
| Short term  borrowings and current portion of notes payable                                                                                                                                        |       | $                     | 26,028     |                   | $          | 15,043 |   |
| Accounts payable                                                                                                                                                                                   |       | 22,369                |       | 22,536                 |       |
| Warranty  liability                                                                                                                                                                                |       | 9,805                 |       | 11,222                 |       |
| Accrued  liabilities                                                                                                                                                                               |       | 12,446                |       | 13,391                 |       |
| Total current  liabilities                                                                                                                                                                         |       | 70,648                |       | 62,192                 |       |
| NOTES  PAYABLE—Long term                                                                                                                                                                      |       | 13,841                |       | 14,490                 |       |
| OTHER  LIABILITIES - Long term                                                                                                                                                                     |       | 175                   |       | —                 |       |
| Total  liabilities                                                                                                                                                                                 |       | 84,664                |       | 76,682                 |       |
|                                                                                                                                                                                               |       |                  |       |                   |       |
| COMMITMENTS AND  CONTINGENCIES (Notes 7 and 9)                                                                                                                                                     |       |                  |       |                   |       |
|                                                                                                                                                                                               |       |                  |       |                   |       |
| STOCKHOLDERS’  EQUITY:                                                                                                                                                                        |       |                  |       |                   |       |
| Preferred stock,  $0.0001 par value - 5,000,000 shares authorized; none outstanding                                                                                                                |       | —                |       | —                 |       |
| Common stock,  $0.0001 par value—100,000,000 shares authorized; 21,856,473 and 20,846,549  shares issued and outstanding at December 28, 2007 and  September 28, 2007, respectively |       | 2                     |       | 2                      |       |
| Additional  paid-in capital                                                                                                                                                                        |       | 120,767               |       | 118,400                |       |
| Accumulated  deficit                                                                                                                                                                               |       | (58,494               | )          | (49,974                | )          |
| Accumulated  other comprehensive income                                                                                                                                                            |       | 2,526                 |       | 2,970                  |       |
| Total  stockholders’ equity                                                                                                                                                                   |       | 64,801                |       | 71,398                 |       |
| TOTAL                                                                                                                                                                                              |       | $                     | 149,465    |                   | $          | 148,080 |   |

 

The accompanyingnotes are an integral part of these consolidated financial statements.

 

3

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**AVIZATECHNOLOGY, INC. AND SUBSIDIARIES**

**CONDENSED CONSOLIDATED STATEMENTS OFOPERATIONS**

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

**(unaudited)**

** **
| ** **                           | ** ** | **Quarter Ended** | ** ** |
|--------------------------------------|------------|------------------------|------------|
| ** **                           | ** ** | **December 28,**  | ** ** | **December 29,** | ** ** |
| ** **                           | ** ** | **2007**               | ** ** | **2006** | ** ** |
| ** **                           | ** ** | ** **             | ** ** | ** ** | ** ** |
| NET SALES                            |       | $                      | 34,014     |   | $ | 62,192 |   |
| COST OF GOODS  SOLD                  |       | 24,283                 |       | 43,343 |   |
|                                 |       |                   |       |   |   |
| GROSS PROFIT                         |       | 9,731                  |       | 18,849 |   |
|                                 |       |                   |       |   |   |
| OPERATING  EXPENSES:                 |       |                   |       |   |   |
| Research and  development            |       | 8,039                  |       | 7,703 |   |
| Selling, general  and administrative |       | 9,574                  |       | 8,408 |   |
|                                 |       |                   |       |   |   |
| Total operating  expenses            |       | 17,613                 |       | 16,111 |   |
| INCOME(LOSS)  FROM OPERATIONS        |       | (7,882                 | )          | 2,738 |   |
|                                 |       |                   |       |   |   |
| OTHER INCOME  (EXPENSE):             |       |                   |       |   |   |
| Interest income                      |       | 52                     |       | 27 |   |
| Interest expense                     |       | (412                   | )          | (1,251 | ) |
| Other income  (expense) - net        |       | 20                     |       | 12 |   |
|                                 |       |                   |       |   |   |
| Total other  expense - net           |       | (340                   | )          | (1,212 | ) |
|                                 |       |                   |       |   |   |
| INCOME(LOSS) BEFORE  INCOME TAXES    |       | (8,222                 | )          | 1,526 |   |
| PROVISION FOR  INCOME TAXES          |       | 298                    |       | 401 |   |
|                                 |       |                   |       |   |   |
| NET INCOME(LOSS)                     |       | $                      | (8,520     | ) | $ | 1,125 |   |
|                                 |       |                   |       |   |   |
| Net income(loss)  per share:         |       |                   |       |   |   |
| Basic                                |       | $                      | (0.40      | ) | $ | 0.07 |   |
| Diluted                              |       | $                      | (0.40      | ) | $ | 0.07 |   |
| Weighted average  common shares:     |       |                   |       |   |   |
| Basic                                |       | 21,060,009             |       | 16,150,752 |   |
| Diluted                              |       | 21,060,009             |       | 16,894,582 |   |

 

Theaccompanying notes are an integral part of these consolidated financialstatements.

 

4

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**AVIZATECHNOLOGY, INC. AND SUBSIDIARIES**

**CONDENSED CONSOLIDATED STATEMENTS OFCASH FLOWS**

**(inthousands)**

**(unaudited)**

 
| ** **                                                                                          | ** ** | **Quarter Ended** | ** ** |
|-----------------------------------------------------------------------------------------------------|------------|------------------------|------------|
| ** **                                                                                          | ** ** | **December 28,**  | ** ** | **December 29,** | ** ** |
| ** **                                                                                          | ** ** | **2007**               | ** ** | **2006** | ** ** |
| CASH FLOWS FROM  OPERATING ACTIVITIES:                                                              |       |                   |       |   |   |
| Net income(loss)                                                                                    |       | $                      | (8,520     | ) | $ | 1,125 |   |
| Adjustments to  reconcile net income(loss) to net cash provided by (used in) operating  activities: |       |                   |       |   |   |
| Depreciation                                                                                        |       | 1,430                  |       | 924 |   |
| Amortization                                                                                        |       | 133                    |       | 514 |   |
| Fair value of  common stock issued for prototype materials                                          |       | 125                    |       | — |   |
| Stock-based  compensation                                                                           |       | 528                    |       | 437 |   |
| Gain on disposal  of equipment                                                                      |       | (303                   | )          | — |   |
| Provision for  allowance for doubtful accounts                                                      |       | 115                    |       | 67 |   |
| Tax benefit from  use of acquired net operating losses                                              |       | —                 |       | 150 |   |
| Changes in  assets and liabilities:                                                                 |       |                   |       |   |   |
| Accounts  receivable                                                                                |       | 2,317                  |       | (3,859 | ) |
| Inventory                                                                                           |       | (5,360                 | )          | 2,447 |   |
| Prepaid expenses  and other assets                                                                  |       | (163                   | )          | (526 | ) |
| Accounts payable                                                                                    |       | 399                    |       | (3,567 | ) |
| Warranty  liability                                                                                 |       | (1,384                 | )          | 1,218 |   |
| Accrued  liabilities                                                                                |       | (768                   | )          | 1,697 |   |
| Net cash (used  in) provided by operating activities                                                |       | (11,451                | )          | 627 |   |
|                                                                                                |       |                   |       |   |   |
| CASH FLOWS FROM  INVESTING ACTIVITIES:                                                              |       |                   |       |   |   |
| Purchases of  property, plant and equipment                                                         |       | (1,464                 | )          | (1,279 | ) |
| Purchase of  technology license                                                                     |       | (48                    | )          | — |   |
| Proceeds from  sale of equipment                                                                    |       | 324                    |       | — |   |
| Net cash used in  investing activities                                                              |       | (1,188                 | )          | (1,279 | ) |
|                                                                                                |       |                   |       |   |   |
| CASH FLOWS FROM  FINANCING ACTIVITIES:                                                              |       |                   |       |   |   |
| Net proceeds  from credit lines                                                                     |       | 10,275                 |       | 6,150 |   |
| Proceeds from  the issuance of common stock                                                         |       | 9                      |       | — |   |
| Payments on  mortgage loan                                                                          |       | (83                    | )          | (70 | ) |
| Payments on  other borrowings                                                                       |       | (256                   | )          | (356 | ) |
| Payments on  equipment loan                                                                         |       | (311                   | )          | — |   |
| Payments on  capital lease obligations                                                              |       | (70                    | )          | (63 | ) |
| Net cash  provided by financing activities                                                          |       | 9,564                  |       | 5,661 |   |
| Effect of  exchange rates on foreign cash balances                                                  |       | 181                    |       | (194 | ) |
| NET (DECREASE)  INCREASE IN CASH AND CASH EQUIVALENTS                                               |       | (2,894                 | )          | 4,815 |   |
| CASH AND CASH  EQUIVALENTS:                                                                         |       |                   |       |   |   |
| Beginning of  period                                                                                |       | 23,087                 |       | 10,722 |   |
| End of period                                                                                       |       | $                      | 20,193     |   | $ | 15,537 |   |
| SUPPLEMENTAL  DISCLOSURE OF CASH FLOW INFORMATION:                                                  |       |                   |       |   |   |
| Cash paid for  interest                                                                             |       | $                      | 354        |   | $ | 875 |   |
| Income taxes  paid                                                                                  |       | $                      | 235        |   | $ | 180 |   |
| Noncash  investing and financing activities:                                                        |       |                   |       |   |   |
| Notes payable  issued for services to be rendered                                                   |       | $                      | 784        |   | $ | 1,737 |   |
| Fair value of  common stock issued in the acquisition of technology license                         |       | $                      | 1,715      |   | $ | — |   |
| Property and  equipment purchases included in accounts payable at end of period                     |       | $                      | 6          |   | $ | 139 |   |
| Equipment  acquired under capital lease                                                             |       | $                      | —     |   | $ | 715 |   |

 

The accompanying notes are an integral part of these consolidatedfinancial statements

 

5

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AVIZA TECHNOLOGY, INC. AND SUBSIDIARIESNOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

December 28,2007*(Unaudited)*

* *

**1.  Basis of Presentation**

** **

The accompanying unaudited condensedconsolidated financial statements have been prepared in accordance with UnitedStates (U.S.) generally accepted accounting principles for interim financialinformation and applicable regulations of the U.S. Securities and ExchangeCommission.  Certain information andfootnote disclosures normally included in financial statements prepared inaccordance with accounting principles generally accepted in the United Stateshave been condensed or omitted pursuant to such rules and regulations. Inthe opinion of management, all adjustments (consisting only of normal recurringadjustments) considered necessary for a fair statement of financial positionand results of operations have been included. Our operating results for the quarter ended December 28, 2007 arenot necessarily indicative of the results that may be expected for futurequarters and the fiscal year ending September 26, 2008.  Theaccompanying unaudited condensed consolidated financial statements should beread in conjunction with our audited consolidated financial statements for theyear ended September 28, 2007, which are included in our Annual Report on Form 10-Kand the risk factors contained herein and therein.

 

The preparation of the accompanying unauditedcondensed consolidated financial statements requires the use of estimates thataffect the reported amounts of assets, liabilities, revenues, expenses andcontingencies.  These estimates include, but are not limited to, estimatesrelated to revenue recognition, allowance for doubtful accounts, inventoryvaluation, tangible and intangible long-term asset valuation, warranty andother obligations, contingent liabilities and litigation.  Estimates areupdated on an ongoing basis and are evaluated based on historical experienceand current circumstances.  Changes in facts and circumstances in thefuture may give rise to changes in these estimates which may cause actualresults to differ from current estimates.

 

Aviza Technology Inc.’s (the “Company” or “Aviza”)current fiscal year will end on September 26, 2008 and includes52 weeks. We close our fiscal quarters on the last Friday of December,March, June and September.

 

The condensed consolidated financialstatements include the accounts of the Company and its subsidiaries. Allsignificant intercompany accounts and transactions have been eliminated inconsolidation.

 

**2.  Recent AccountingPronouncements**

** **

During the quarter ended December 28,2007 the Financial Accounting Standards Board (“FASB”) issued FASB Statement No. 141(revised 2007), *Business Combinations*(“FASB 141R”).  FASB 141R changes the accounting for theacquisition of a business in fiscal years beginning after December 15,2008.  When effective, FASB 141R willreplace existing FASB 141 in its entirety.  FASB 141R will apply to a broad range of transactions, provides for newmeasurement and recognition requirements and provides new disclosurerequirements for certain elements of an acquisition.  FASB 141R will apply prospectively tobusiness combinations with an acquisition date on or after the first annualreporting period beginning after December 15, 2008.  Both early adoption and retrospectiveapplications are prohibited.

 

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**3.  Balance Sheet Details**

 
| ** **                                      | ** ** | **December 28,**   | ** ** | **September 28,** | ** ** |
|-------------------------------------------------|------------|-------------------------|------------|------------------------|------------|
| ** **                                      | ** ** | **2007**                | ** ** | **2007**               | ** ** |
| ** **                                      | ** ** | **(in thousands)** | ** ** |
|                                            |       |                    |       |                   |       |
| **Inventory:**                                  |       |                    |       |                   |       |
| Raw materials                                   |       | $                       | 30,977     |                   | $          | 28,667 |   |
| Work-in-process                                 |       | 13,823                  |       | 13,692                 |       |
| Finished goods  and evaluation systems          |       | 5,696                   |       | 3,170                  |       |
| Total                                           |       | $                       | 50,496     |                   | $          | 45,529 |   |
|                                            |       |                    |       |                   |       |
| **Prepaid  expenses and other current assets:** |       |                    |       |                   |       |
| Insurance                                       |       | $                       | 839        |                   | $          | 96 |   |
| Deferred  installation costs                    |       | 427                     |       | 385                    |       |
| Taxes                                           |       | 2,895                   |       | 2,621                  |       |
| Other                                           |       | 2,204                   |       | 2,215                  |       |
| Total                                           |       | $                       | 6,365      |                   | $          | 5,317 |   |
|                                            |       |                    |       |                   |       |
| **Property,  plant and equipment - net:**       |       |                    |       |                   |       |
| Land                                            |       | $                       | 1,839      |                   | $          | 1,839 |   |
| Buildings and  improvements                     |       | 12,203                  |       | 12,198                 |       |
| Machinery and  equipment                        |       | 20,523                  |       | 18,659                 |       |
| Office  furnishings, fixtures and equipment     |       | 6,533                   |       | 6,564                  |       |
| Construction in  process                        |       | 2,631                   |       | 3,820                  |       |
| Total                                           |       | 43,729                  |       | 43,080                 |       |
| Accumulated  depreciation                       |       | (12,432                 | )          | (11,299                | )          |
| Property, plant  and equipment                  |       | $                       | 31,297     |                   | $          | 31,781 |   |
|                                            |       |                    |       |                   |       |
| **Accrued  liabilities:**                       |       |                    |       |                   |       |
| Accrued payroll  and payroll taxes              |       | $                       | 5,492      |                   | $          | 5,660 |   |
| Deferred revenue                                |       | 630                     |       | 1,076                  |       |
| Other taxes  payable                            |       | 3,078                   |       | 3,557                  |       |
| Other                                           |       | 3,246                   |       | 3,098                  |       |
| Total                                           |       | $                       | 12,446     |                   | $          | 13,391 |   |

 

**4.  Stock-Based Compensation**

** **

Effective October 1, 2005, we adoptedthe provisions of Statement of Financial Accounting Standards, or SFAS,  No. 123(R), *Share-Based Payment*,or SFAS 123(R).  SFAS 123(R) establishes standards for theaccounting for transactions in which an entity exchanges its equity instrumentsfor goods or services.  It also addresses transactions in which an entityincurs liabilities in exchange for goods or services that are based on the fairvalue of the entity’s equity instruments or that may be settled by the issuanceof those equity instruments.  Accordingly, stock-based compensation costis measured at grant date, based on the fair value of the award, and isrecognized as expense over the employee’s requisite service period.  Themeasurement of stock-based compensation cost is based on several criteriaincluding, but not limited to, the valuation model used and associated inputfactors such as expected term of the award, stock price volatility, dividendrate, risk-free interest rate and award cancellation rate.  The inputfactors used in the valuation model are based on subjective future expectationscombined with management judgment.  If there is a difference between theassumptions used in determining stock-based compensation costs and the actualfactors, which become known over time, we may change future input factors usedin determining stock-based compensation costs.  These changes maymaterially impact our results of operations in the periods over which suchcosts are expensed.

 

7

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We adopted the modified prospectiveapplication method as provided by SFAS 123(R).  Under this method, SFAS123(R) was applied to new awards and to awards modified, repurchased orcancelled after the effective date. Additionally, compensation cost for theportion of awards for which the requisite service had not been rendered, suchas unvested stock options, that were outstanding as of the date of adoption arebeing recognized as the remaining requisite services are rendered.  Thecompensation cost relating to unvested awards at the date of adoption was basedon the grant-date fair value for those awards granted after June 24, 2005,the date of the Company’s initial filing of a Form S-4 registrationstatement relating to our merger transaction with Trikon Technologies Inc., andbased on the intrinsic values as previously recorded under AccountingPrinciples Board, or APB, Opinion No. 25 for awards granted prior to thatdate.

 

The fair value of each option is estimated atthe date of grant using the Black-Scholes option valuation model.  Weestimate the expected stock price volatility and expected life at our options basedon historical data and representative peer group data.  We use historicaldata to estimate forfeiture rates.  Therisk-free interest rate for periods within the contractual life of the optionis based on the U.S. Treasury yield with similar expected life.

 

Under our stock option plans, we may grant optionsto purchase up to a maximum of 6,644,000 shares of common stock, includingoutstanding options to employees, directors and consultants at a price not lessthan the fair market value on the date of the grant. These options generallyvest over three to five years and generally expire seven to ten years from thedate of the grant.

 

We recognized stock-based compensationexpense of $528,000 and $437,000 during the quarters ended December 28,2007 and December 29, 2006, respectively.  Due to uncertaintysurrounding the realization of the income tax benefit related to stock basedcompensation expense, there is no related income tax benefit recognized in theconsolidated statements of operations for the quarters ended December 28,2007 and December 29, 2006, respectively, as a full valuation allowancehas been provided against the deferred tax asset.

 

The fair value of our stock options grantedin the quarters ended December 28, 2007 and December 29, 2006 wasestimated at the date of grant using the following weighted averageassumptions:

 
| ** **               | ** ** | **Quarter Ended** | ** ** |
|--------------------------|------------|------------------------|------------|
| ** **               | ** ** | **December 28,**  | ** ** | **December 29,** | ** ** |
| ** **               | ** ** | **2007**               | ** ** | **2006** | ** ** |
| Expected life  (years)   |       | 4.8                    |       | 4.8 |   |
| Risk-free  interest rate |       | 3.4                    | %          | 4.6 | % |
| Stock price  volatility  |       | 53.5                   | %          | 64.6 | % |
| Dividend yield           |       | 0.0                    | %          | 0.0 | % |

 

The following table summarizes our stockoption activity under the stock plans during the quarter ended December 28,2007:

 
| ** **                                                        | ** ** | **Number of  Shares** | ** ** | **Weighted Average  Exercise Price** | ** ** | **Weighted Average  Remaining Contractual  Term (Years)** | ** ** | **Aggregate Intrinsic  Values** | ** ** |
|-------------------------------------------------------------------|------------|----------------------------|------------|------------------------------------------------|------------|--------------------------------------------------------------------------|------------|--------------------------------------|------------|
|                                                              |       |                       |       |                                           |       |                                                                     |       |                                 |       |
| Outstanding at  September 28, 2007                           |       | 4,202,499                  |       | $                                              | 5.01       |                                                                     | 6.51       |                                 | $          | 3,496,801 |   |
| Granted                                                           |       | 410,000                    |       | 1.78                                           |       |                                                                     |       |                                 |       |
| Exercised                                                         |       | (9,924                     | )          | 0.95                                           |       |                                                                     |       |                                 |       |
| Forfeited                                                         |       | (35,932                    | )          | 12.78                                          |       |                                                                     |       |                                 |       |
| Outstanding at  December 28, 2007                            |       | 4,566,643                  |       | 4.66                                           |       | 6.27                                                                     |       | 1,266,487                            |       |
|                                                              |       |                       |       |                                           |       |                                                                     |       |                                 |       |
| Options vested  and expected to vest at at December 28, 2007 |       | 4,013,236                  |       | 4.69                                           |       | 6.26                                                                     |       | 1,249,056                            |       |
|                                                              |       |                       |       |                                           |       |                                                                     |       |                                 |       |
| Options vested  at December 28, 2007                         |       | 2,582,177                  |       | 4.86                                           |       | 6.18                                                                     |       | 1,200,444                            |       |
|                                                                   |            |                            |            |                                                |            |                                                                          |            |                                      |            |  |  |

 

8

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The aggregate intrinsic value representstotal pre-tax intrinsic value based on the closing stock price of $1.81 and$3.45 per share at December 28, 2007 and September 28, 2007respectively.

 

As of December 28, 2007, there was $3.8million of unrecognized compensation cost related to unvested stock optionsgranted and outstanding, net of estimated forfeitures.  The cost isexpected to be recognized over a weighted average period of approximately 3.2years.

 

The following table details total stock-basedcompensation expense for the quarters ended December 28, 2007 and December 29,2006:

 
| ** **                                | ** ** | **Quarter Ended**      | ** ** |
|-------------------------------------------|------------|-----------------------------|------------|
| ** **                                | ** ** | **December 28,  2007** | ** ** | **December 29,  2006** | ** ** |
| ** **                                | ** ** | **(in thousands)**     | ** ** |
|                                      |       |                        |       |   |   |   |   |
| Cost of goods  sold                       |       | $                           | 51         |   | $ | 49 |   |
| Research and  development                 |       | 122                         |       | 114 |   |
| Selling, general  and administrative      |       | 355                         |       | 274 |   |
|                                      |       |                        |       |   |   |
| Pre-tax stock-based  compensation expense |       | 528                         |       | 437 |   |
| Income tax  benefits                      |       | —                      |       | — |   |
|                                      |       |                        |       |   |   |
| Stock-based  compensation expense         |       | $                           |  528  |   | $ |  437 |   |
|                                           |            |                             |            |  |  |  |  |  |  |

 

The options outstanding and vested at December 28,2007 were in the following exercise price ranges:

 
| ** **                            | ** ** | **Options Outstanding** | ** ** | **Options Vested**                                          | ** ** |
|---------------------------------------|------------|------------------------------|------------|------------------------------------------------------------------|------------|
| **Range of   Exercise   Prices** | ** ** | **Number  Outstanding**      | ** ** | **Weighted  Average  Remaining  Contractual  Life (Years)** | ** ** | **Weighted  Average  Exercise  Price** | ** ** | **Number  Vested and  Exercisable** | ** ** | **Weighted  Average  Exercise  Price** | ** ** |
| ** **                            | ** ** | ** **                   | ** ** | ** **                                                       | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| $ 0.83 - $0.83                   |       | 1,099,071                    |       | 6.13                                                             |       | $ | 0.83 |   | 1,089,182 |   | $ | 0.83 |   |
| $ 0.84 -$4.98                    |       | 1,859,132                    |       | 5.78                                                             |       | 3.65 |   | 625,738 |   | 3.66 |   |
| $ 4.99 - $5.60                   |       | 890,110                      |       | 7.88                                                             |       | 5.57 |   | 476,976 |   | 5.58 |   |
| $ 5.61 - $87.07                  |       | 718,330                      |       | 5.77                                                             |       | 12.02 |   | 390,281 |   | 17.14 |   |
| $ 0.83 - $87.07                  |       | 4,566,643                    |       | 6.27                                                             |       | 4.66 |   | 2,582,177 |   | 4.86 |   |
|                                       |            |                              |            |                                                                  |            |  |  |  |  |  |  |  |  |

 

The weighted average fair value of options onthe grant date, as determined under SFAS 123(R), granted during the quartersended December 28, 2007 and December 29, 2006 was $0.87 and $2.62 pershare, respectively.

 

The total intrinsic value of optionsexercised during the quarters ended December 28, 2007 and December 29,2006, was $14,000 and $0, respectively. The total cash received from employeesas a result of employee stock options exercises during the quarters ended December 28,2007 and December 29, 2006 was $9,000 and $0, respectively.

 

9

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**5.  BorrowingFacilities**

** **

Borrowings consist of the following (inthousands):

 
| ** **                                       | ** ** | **December 28,** | ** ** | **September 28,** | ** ** |
|--------------------------------------------------|------------|-----------------------|------------|------------------------|------------|
| ** **                                       | ** ** | **2007**              | ** ** | **2007**               | ** ** |
|                                             |       |                  |       |                   |       |
| Bank loan  (revolving line of credit)            |       | $                     | 23,212     |                   | $          | 12,937 |   |
| Equipment note  payable                          |       | 3,292                 |       | 3,603                  |       |
| Mortgage note  payable                           |       | 11,701                |       | 11,785                 |       |
| Other notes  payable                             |       | 1,100                 |       | 572                    |       |
| Capital lease  obligations                       |       | 564                   |       | 636                    |       |
| Total                                            |       | 39,869                |       | 29,533                 |       |
| Less: short-term  borrowings and current portion |       | 26,028                |       | 15,043                 |       |
| Long term  portion                               |       | $                     | 13,841     |                   | $          | 14,490 |   |

 

**6. Intangible Assets**

** **

During the quarter ended December 28,2007, we acquired prototype materials and a license to certain technology inexchange for 1,000,000 shares of our common stock and potential future royaltypayments based on net revenue generated from future sales of products developedutilizing the technology. A summary of the total consideration given at closingis as follows (in thousands):

 
| Issuance of  common stock (1,000,000 shares at $1.83 per share) |   | $  | 1,830  |   |
|-----------------------------------------------------------------|--------|----|--------|--------|
| Direct  acquisition costs                                       |   | 58 |   |
| Total  consideration                                            |   | $  | 1,888  |   |

 

The price per share used for valuationpurposes was the closing price per common share per the NASDAQ Global Market onDecember 7, 2007, the date the shares were transferred.  Direct acquisition costs represent legalcosts and use tax liability accrued on the transaction.

 

The total consideration issued in thetransaction was allocated based on the estimated fair values of the assetsacquired as of the closing date.  Theallocation is as follows (in thousands):

 
| License              |   | $   | 1,763  |   |
|----------------------|--------|-----|--------|--------|
| Prototype  materials |   | 125 |   |
| Total  consideration |   | $   | 1,888  |   |

 

The prototype materials were expensed asresearch and development costs during the quarter ended December 28,2007.  The cost of the license will beamortized over a 10-year useful life commencing January 2008.

 

Intangible assets are recorded at cost, netof accumulated amortization, and are amortized over their estimated useful livesusing the straight-line method.   At December 28,2007 and September 29, 2007 our intangible assets consisted of licenseswhich we have acquired. The estimated useful lives of the licenses are tenyears.

 

We evaluate intangible assets for indicatorsof possible impairment when events or changes in circumstances indicate thecarrying amount of the asset may not be recoverable.

 

10

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Amortization expense relating to allintangible assets was $100,000 and $128,000 for the quarters ended December 28,2007 and December 29, 2006.  Basedon the intangible assets recorded at December 28, 2007, and assuming nosubsequent additions to, or impairment of the underlying assets, the remainingamortization expense is expected to be as follows (in thousands):

 
| September 26,  2008 (remaining 9 months) |   | $     | 432    |   |
|-----------------------------------------------|--------|-------|--------|--------|
| September 25,  2009                      |   | 576   |   |
| September 24,  2010                      |   | 576   |   |
| September 30,  2011                      |   | 576   |   |
| September 28,  2012                      |   | 576   |   |
| Thereafter                                    |   | 2,260 |   |
| Total                                         |   | $     | 4,996  |   |

 

**7.  Warranty and Guarantees**

** **

***Warranty***—Weaccrue for the estimated cost of the warranty on our systems, which includesthe cost of the labor and parts necessary to repair systems during the warrantyperiod. The amounts recorded in the warranty accrual are estimated based onactual historical costs incurred and on estimated probable future expensesrelated to current sales. The warranty accrual is adjusted over the warrantyperiod based on actual cost incurred. Systems typically have warranty periodsranging from one to three years. The components of the warranty accrual are asfollows:

 
| ** **                                                                        | ** ** | **Quarter Ended** | ** ** |
|-----------------------------------------------------------------------------------|------------|------------------------|------------|
| ** **                                                                        | ** ** | **December 28,**  | ** ** | **December 29,** | ** ** |
| ** **                                                                        | ** ** | **2007**               | ** ** | **2006** | ** ** |
|                                                                              |       |                   |       |   |   |
| Beginning  warranty accrual                                                       |       | $                      | 11,222     |   | $ | 10,816 |   |
| Additional  accruals for new shipments                                            |       | 625                    |       | 3,040 |   |
| Warranty costs  incurred                                                          |       | (2,042                 | )          | (1,839 | ) |
| Expiration and  change in liability for pre-existing warranties during the period |       | —                 |       | 82 |   |
| Ending warranty  accrual                                                          |       | $                      | 9,805      |   | $ | 12,099 |   |

 

***Guarantees***—Inaddition to product warranties, we, from time to time, in the normal course ofbusiness, indemnify certain customers against third-party claims that ourproducts, when used for their intended purposes, infringe the intellectualproperty rights of such third party or other claims made against certainparties. It is not possible to determine the maximum potential amount ofliability under these indemnification obligations due to the limited history ofprior indemnification claims and the unique facts and circumstances that arelikely to be involved in each particular claim. Historically, we have nevermade payments under these obligations and no liabilities have been recorded forthese obligations on the balance sheet at December 28, 2007 and September 28,2007, respectively.

 

**8.  Income Taxes**

** **

Aspart of the process of preparing our financial statements, we are required toestimate our income tax provision (benefit) in each of the jurisdictions inwhich we operate. This process requires us to estimate our current income taxprovision (benefit) and assess temporary differences resulting from differingtreatment of items for tax and accounting purposes. These differences result indeferred tax assets and liabilities, which are included in our balance sheet**.**

** **

Werecorded a valuation allowance to reduce our deferred tax assets to the amountthat is more likely than not to be realized. While we have considered futuretaxable income and any ongoing prudent and feasible tax planning strategies inassessing the need for the valuation allowance, if we were to determine that wewould be able to realize our deferred tax assets in the future in excess of ournet recorded amount, an adjustment to the deferred tax asset would increaseincome in the period such determination was made. Likewise, if were todetermine that we would not be able to realize all or part of a net deferredtax asset in the future, an adjustment to the deferred tax asset would becharged to income in the period such determination was made.  Wehave recorded a 100% valuation allowance against our domestic and UnitedKingdom net deferred tax assets, due to the uncertainty regarding futuretaxable income.

 

11

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Income tax expenseprimarily relates to our foreign operations as we continue to incur losses fromdomestic operations.  We recorded incometax expense of $298,000 and $401,000****for the threemonths ended December 28, 2007 and December 29, 2006, respectively.

 

We adopted theprovisions of Financial Standards Accounting Board Interpretation No. 48, “*Accounting for Uncertainty in Income Taxes*,”or FIN 48, an interpretation of FASB Statement No. 109, or SFAS 109, on September 29,2007. As a result of the implementation of FIN 48, we recognized no materialadjustment in the liability for unrecognized income tax benefits. At theadoption date of September 29, 2007, we had approximately$3.5 million of unrecognized tax benefits, **$**2.1million****of which would affect our effectivetax rate if recognized****and $1.4million would be offset by valuation allowance. At December 28, 2007, we had $3.6 million of unrecognized taxbenefits.

 

In addition, werecognized interest and penalties related to uncertain tax positions in incometax expense. At the adoption date of September 29, 2007, we hadapproximately $124,000 of accrued interest and penalties for uncertain taxpositions primarily from our foreign operations. We do not anticipate thattotal unrecognized tax benefits will significantly change due to the settlementof audits and the expiration of statute of limitations prior to December 26,2008.

 

At September 29,2007, we had approximately $56.6 million and $8.3 million of federaland California net operating loss carryforwards, respectively. We and oursubsidiaries have had multiple ownership changes, as defined by Section 382of the Internal Revenue Code, or IRC, due to significant stock transactions inprevious years that will limit the future realization of its net operating losscarryforwards. Section 382 will result in the forfeiture of approximately$24.6 million of net operating loss carryforwards for federal income taxpurposes. The net operating loss carryforwards begin to expire in 2014 forfederal and 2013 for California income tax purposes.

 

As of September 29,2007, we had federal and California research and development tax creditcarryforwards of approximately $1.7 million and $1.6 million,respectively.  Due to Section 382ownership changes under IRC Section 383, $1.1 million of the federalresearch tax credit carryforwards will be subject to forfeiture.  Federal research and development tax creditcarryforwards will expire beginning in fiscal 2011.  California research and development taxcredits will carry forward indefinitely.

 

**9.  Commitments and Contingencies**

** **

On April 11, 2006, IPS, Ltd. filed a lawsuitagainst us in the United States District Court for the Central District ofCalifornia. The complaint alleges that we improperly used IPS’s confidentialinformation to develop our Celsior single-wafer processing type atomic layerdeposition technology. The complaint is for unspecified monetary damages,injunctive relief and an order rescinding the settlement and distributoragreements that we and IPS entered into in May 2004 in settlement of aprior lawsuit that IPS filed against ASML U.S., Inc. and us in March 2004relating to assets that we acquired from ASML in October 2003. In May 2007,we successfully moved the dispute to arbitration. Discovery commenced in June 2007.The arbitration hearing is currently scheduled for October 2008. We intendto contest the lawsuit vigorously. We do not believe that the outcome ofthis lawsuit will have a material impact on our business, financial conditionor results of operations.

 

Prior to our merger transaction with TrikonTechnologies, Inc., Trikon was a party to an employment lawsuit in France.On March 10, 2004, Dr. Jihad Kiwan departed Trikon as Director andChief Executive Officer. On March 29, 2004 and April 2, 2004, Trikonreceived letters from a United Kingdom law firm and from a French law firm,respectively, on behalf of Dr. Kiwan, detailing certain monetary claimsfor severance amounts due to Dr. Kiwan with respect to his employment withTrikon. On April 28, 2004, Dr. Kiwan filed a lawsuit in France and onJune 10, 2004, filed similar proceedings in the United Kingdom. Dr. Kiwanhas subsequently withdrawn the proceedings in the United Kingdom.  On January 7, 2008, the FrenchCommercial Court in Grenoble rejected certain of Dr. Kiwan’s claims butordered us to pay monetary awards with respect to certain other of Dr. Kiwan’sclaims. We intend to appeal the decision and do not believe that the outcome ofthe dispute will have a material impact on our business, financial condition orresults of operations.

 

Our Scotts Valley location is a federalSuperfund site. Chlorinated solvent and other contamination was identified atthe site in the early 1980’s, and by the late 1980’s Watkins JohnsonCorporation (“WJ”) (a previous 

 

12

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owner of the Company) had installed agroundwater extraction and treatment system. In 1991, WJ entered into a consentdecree with the United States Environmental Protection Agency providingfor remediation of the site. In July 1999, WJ signed a remediationagreement with an environmental consulting firm, ARCADIS Geraghty and Miller (“ARCADIS”).Pursuant to this remediation agreement, WJ paid approximately $3 millionin exchange for which ARCADIS agreed to perform the work necessary to assuresatisfactory completion of WJ’s obligation under the consent decree. Theagreement also includes a cost overrun guaranty from ARCADIS up to a totalproject cost of $15 million. In addition, the agreement includedprocurement of a ten-year, claims-made insurance policy to cover overruns of upto $10 million from American International Specialty (“AIS”), along with aten-year, claims made $10 million policy to cover unknown pollutionconditions at the site.

 

Failureof WJ, ARCADIS, or AIS to fulfill their obligations may subject the Company tosubstantial fines, and the Company could be forced to suspend production, altermanufacturing processes or cease business operations, any of which could have amaterial negative effect on the Company’s sales, income and businessoperations.

 

Managementbelieves that the likelihood of the failure of WJ, ARCADIS or AIS is remote andthat any remaining or uninsured environmental liabilities will not have amaterial effect on the Company’s results of operations or financial position.

 

**10.  Major Customers**

** **

During the quarter ended December 28,2007 three customers accounted for 17%, 12% and 12% of total net sales,respectively. During the quarter ended December 29, 2006, one customeraccounted for 42% of total net sales.

 

**11.  Comprehensive Income(Loss)**

** **

The components of comprehensive income(loss)are as follows:

 
| ** **                         | ** ** | **Quarter Ended** | ** ** |
|------------------------------------|------------|------------------------|------------|
| ** **                         | ** ** | **December 28,**  | ** ** | **December 29,** | ** ** |
| ** **                         | ** ** | **2007**               | ** ** | **2006** | ** ** |
| Net income(loss)                   |       | $                      | (8,520     | ) | $ | 1,125 |   |
| Currency  translation adjustment   |       | (444                   | )          | 1,006 |   |
| Total comprehensive  (loss) income |       | $                      | (8,964     | ) | $ | 2,131 |   |

 

**12.  Net Income(Loss) Per Share**

** **

Basic income(loss) per share has beencomputed based upon the weighted average number of common shares outstandingfor the periods presented.  Dilutedincome(loss) per share is calculated as though all potentially dilutive shareswere outstanding during the period, based upon the application of the treasurystock method.

 

13

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The following details the calculation of thenet income(loss) per share for the periods presented (in thousands, exceptshare and per share data):

 
| ** **                                    | ** ** | **Quarter Ended** | ** ** |
|-----------------------------------------------|------------|------------------------|------------|
| ** **                                    | ** ** | **December 28,**  | ** ** | **December 29,** | ** ** |
| ** **                                    | ** ** | **2007**               | ** ** | **2006** | ** ** |
|                                          |       |                   |       |   |   |
| Numerator:                                    |       |                   |       |   |   |
| Net income(loss)                              |       | $                      | (8,520     | ) | $ | 1,125 |   |
|                                          |       |                   |       |   |   |
| Denominator:                                  |       |                   |       |   |   |
| Basic weighted  average shares outstanding    |       | 21,060,009             |       | 16,150,752 |   |
| Effect of  potentially dilutive securities:   |       |                   |       |   |   |
| Stock options                                 |       | —                 |       | 743,830 |   |
|                                          |       |                   |       |   |   |
| Dilutive  weighted average shares outstanding |       | 21,060,009             |       | 16,894,582 |   |
|                                          |       |                   |       |   |   |
| Net income(loss)  per share - basic           |       | $                      | (0.40      | ) | $ | 0.07 |   |
|                                          |       |                   |       |   |   |
| Net income(loss)  per share - diluted         |       | $                      | (0.40      | ) | $ | 0.07 |   |

 

For the quarters ended December 28, 2007and December 29, 2006, we had securities outstanding that couldpotentially dilute basic earnings per share in the future, but were excludedfrom the computation of diluted net income(loss) per share in the periodspresented as their effect would have been anti-dilutive.  The weighted average shares of common stockissuable upon conversion or exercise of such outstanding securities consist ofthe following:

 
| ** **             | ** ** | **Quarter Ended** | ** ** |
|------------------------|------------|------------------------|------------|
| ** **             | ** ** | **December 28,**  | ** ** | **December 29,** | ** ** |
| ** **             | ** ** | **2007**               | ** ** | **2006** | ** ** |
|                   |       |                   |       |   |   |
| Stock options          |       | 4,293,767              |       | 2,361,347 |   |
| Common stock  warrants |       | 320,785                |       | 406,725 |   |

 

**ITEM 2. MANAGEMENT’S DISCUSSION ANDANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

** **

**Cautionary Statement RegardingForward-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 orcomparable terminology. These forward-looking statements relate to, among otherthings: 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:variability of our revenues and financial performance; risks associated withproduct development and technological changes; the acceptance of our productsin the marketplace by existing and potential future customers; disruption ofoperations or increases in*

 

14

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*expenses due to our involvement in litigationor caused by civil or political unrest or other catastrophic events; generaleconomic conditions and conditions in the semiconductor industry in particular;the continued employment of our key personnel and risks associated withcompetition.*

* *

*For a discussion of the factors that couldcause actual results to differ materially from the forward-looking statements,see the “Risk Factors” set forth in Item 1A of Part II of this report, the“Liquidity and Capital Resources” section under “Management’s Discussionand Analysis of Financial Condition and Results of Operations” in this item ofthis report and the other risks and uncertainties that are set forth elsewherein this report or detailed in our other Securities and Exchange Commissionreports and filings. We assume no obligation to update these forward-lookingstatements.*

* *

**Overview**

** **

We design, manufacture, sell and supportadvanced semiconductor capital equipment and process technologies for theglobal semiconductor industry and related markets. We offer bothfront-end-of-line and back-end-of-line systems and process technologies used ina variety of segments of the semiconductor market using critical thin filmformation technologies, including ALD, PVD, CVD, Etch and thermal processingsystems.

 

Our customer base is geographically diverseand includes both integrated device manufacturers and foundry-basedmanufacturers. We have a broad installed base, with approximately2,500 systems in active operation for which we are providing ongoing partsand services worldwide. We sell our systems globally primarily through a directsales force and in some instances through local independent salesrepresentatives.  For the quarter ended December 28,2007, three customers, Qimonda AG, WIN Semiconductors Corp. andSTMicroelectronics accounted for 17%, 12% and 12% of our net sales,respectively, and approximately 74% of our net sales were attributable to ourtop ten customers.  For the fiscal yearended September 28, 2007, two customers, Inotera Memories, Inc. andNanya Technology Corp., accounted for 29% and 12% of our net sales,respectively, and approximately 67% of our net sales in fiscal 2007 wereattributable to our top ten customers. For the fiscal year ended September 29,2006, two customers, Winbond Electronics Corp. and Inotera Memories, Inc.,accounted for 24% and 11% of our net sales, respectively, and approximately 74%of our net sales in fiscal 2006 were attributable to our top tencustomers.  Our largest customers mayvary from year to year depending upon, among other things, the customer’sannual budget for capital expenditures, plans for new fabrication facilitiesand expansions and new system introductions by us. We expect sales of oursystems to relatively few customers will continue to account for a highpercentage of net sales during future periods.

 

Aviza Technology, Inc. was incorporatedon December 8, 2004 to facilitate the merger transaction of oursubsidiaries, Aviza, Inc. and Trikon Technologies, Inc. Aviza, Inc.was incorporated on September 18, 2003 by affiliates of VantagePoint asThermal Acquisition Corporation, a Delaware corporation, for the purpose ofacquiring the business of the Thermal Division of ASML Holding, N.V., aNetherlands corporation, which division of ASML is referred to in thisdiscussion as the Predecessor. On October 10, 2003, Thermal AcquisitionCorporation acquired the business of the Predecessor and changed its name toAviza Technology, Inc., which name was subsequently changed to Aviza, Inc.in connection with the merger transaction with Trikon.

 

On December 1, 2005, we completed themerger transaction with Trikon, and our common stock is publicly traded on theNasdaq Global Market under the symbol “AVZA.”

 

We are often required to develop systems inadvance of our customers’ demand for those systems, and we undertakesignificant system development efforts in advance of any of our customersexpressly indicating demand for our systems. Our system development effortstypically span six months to two years.

 

We intend to pursue strategic acquisitions ofother semiconductor equipment companies and other complementary technologiesthat we believe will enable us to expand our system offerings in the ICfabrication equipment market.

 

**Critical Accounting Policies**

** **

Our discussion and analysis of our financialcondition and results of operations is based on our consolidated financialstatements that have been prepared in accordance with accounting principlesgenerally accepted in the 

 

15

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United States of America. The preparationof these financial statements requires us to make estimates and judgments thataffect the reported amounts of assets, liabilities, revenue and expenses. Webase our estimates on historical experience and on various other assumptionsthat we believe to be reasonable under the circumstances, the results of whichform the basis for making judgments about the carrying values of assets andliabilities that are not readily apparent from other sources. Actual resultsmay differ from these estimates under different assumptions or conditions.

 

We believe that the following criticalaccounting policies affect our more significant judgments used in thepreparation of our consolidated financial statements:

 

***Revenue Recognition***

*** ***

We recognize revenue in accordance with StaffAccounting Bulletin No. 104 and Emerging Issues Task Force No. 00-21(“EITF 00-21”). These accounting standards require that four basiccriteria 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) collectabilityis reasonably assured. Determination of criteria for items (3) and (4) aboveis based on our judgment regarding the fixed nature of the amounts charged forthe systems delivered and the collectability of those amounts.

 

We often undertake significant systemdevelopment efforts in advance of any of our customers expressly indicatingdemand for our systems. As a result of the length of our sales cycles, our netsales for any period are generally weighted toward systems that we introducedfor sale in prior years. For purposes of revenue recognition, we classify oursystems into two categories, “proven technology” and “new technology.” “Proventechnology” systems are those systems with respect to which we have a historyof successful installations within a reasonable time frame of delivery and thecosts to complete installation do not vary materially from one instance toanother. “New technology” systems are those systems with respect to which wecannot demonstrate that we can meet the provisions of customer acceptance atthe time of shipment.

 

We typically sell equipment and installationservices as a bundled arrangement. In accordance with EITF 00-21, the fairvalue of installation is determined as the price we charge for similarinstallation services provided to our customers without regard to the warrantyprovisions. Upon shipment of “proven technology,” we record revenue uponshipment at the lesser of (i) the residual amount after deducting the fairvalue of undelivered services from the contractual value or (ii) thenon-contingent amount. The remaining contractual revenue is recorded uponsuccessful installation of the system. Cost of the equipment relating to “proventechnology” is recorded upon shipment. To the extent a loss is calculated onshipment due to the foregoing deferral of revenue, a portion of the cost isalso deferred to reflect zero gross profit at the time of shipment. The residualrevenue, deferred costs and installation costs are recorded upon successfulinstallation of the system. Revenue and cost of equipment relating to “newtechnology” is deferred until installation and acceptance at the customer’spremises is completed.

 

The result of these accounting policies isthat for “new technology,” our recognition of both revenue and cost of goodssold is delayed until customer acceptance, at which time both revenue and costof goods sold are recognized in full in determining our gross margin. However,for “proven technology,” our cost of goods sold may be recognized in full uponshipment, but recognition of a portion of our revenue is delayed untilsuccessful installation of the system. This can result in diminished grossmargins at the time of shipment.

 

Revenue from services is recognized as theservices are performed. Revenue from prepaid service contracts is recognizedratably over the life of the contract. Revenue from spare parts is recordedupon shipment.

 

We assess collectability based on thecreditworthiness of our customers and past transaction history. We performongoing credit evaluations of our customers. In addition, we require collateralfrom certain of our customers in the form of letters of credit. We have notexperienced significant collection losses in the past. However, a significantchange in the liquidity or financial position of any one of our customers,especially one or more of our most significant customers, could make it moredifficult for us to assess creditworthiness, which could result in afinancial loss.

 

16

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***Inventory Valuation***

*** ***

We assess the recoverability of our inventoryat the end of each quarter based on assumptions about customer demand andmarket conditions. Obsolete inventory or inventory in excess of our estimatedusage is written down to its estimated market value less costs to sell. Theinventory write-downs are recorded as an inventory valuation allowanceestablished on the basis of obsolete inventory or specifically identifiedinventory in excess of established usage. Inherent in our estimates of marketvalue in determining inventory valuation are estimates related to economictrends, future demand for our systems and technological obsolescence of oursystems. If actual market conditions are less favorable than our projections,we may be required to write down additional inventory. However, if marketconditions become favorable, we may have the opportunity to sell thewritten-down inventory at a favorable margin.

 

***Warranty***

*** ***

We accrue for the estimated cost of thewarranty on our systems as cost of goods sold, which includes the cost of thelabor and parts necessary to repair systems during the warranty period. Theamounts recorded in the warranty accrual are estimated based on actualhistorical expenses incurred and on estimated probable future expenses relatedto our current sales. The cost of warranty service is generally incurredratably over the warranty period. Our systems typically have warranty periodsranging from one to three years. Our actual warranty costs in the future mayvary from our historical warranty costs, which could result in adjustments toour warranty reserves in future periods.

 

***Income Taxes***

*** ***

As part of the process of preparing ourfinancial statements, we are required to estimate our income tax provision(benefit) in each of the jurisdictions in which we operate. This processrequires us to estimate our current income tax provision (benefit) and assesstemporary differences resulting from differing treatment of items for tax andaccounting purposes. These differences result in deferred tax assets andliabilities, which are included in our balance sheet.

 

We record a valuation allowance to reduce ourdeferred tax assets to the amount that is more likely than not to be realized.While we have considered future taxable income and any ongoing prudent andfeasible tax planning strategies in assessing the need for the valuationallowance, if we were to determine that we would be able to realize ourdeferred tax assets in the future in excess of our net recorded amount, anadjustment to the deferred tax asset would increase income in the period suchdetermination was made. Likewise, if we were to determine that we would not beable to realize all or part of a net deferred tax asset in the future, anadjustment to the deferred tax asset would be charged to income in the periodsuch determination was made.

 

We adopted the provisionsof Financial Standards Accounting Board Interpretation No. 48, “*Accounting for Uncertainty in Income Taxes*,”or FIN 48, an interpretation of FASB Statement No. 109, or SFAS 109, on September 29,2007. As a result of the implementation of FIN 48, we recognized no materialadjustment in the liability for unrecognized income tax benefits.

 

17

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***Stock-Based Compensation***

*** ***

Effective October 1, 2005, we adoptedthe provisions of Statement of Financial Accounting Standards, or SFAS, No. 123(R),*Share-Based Payment*, orSFAS 123(R). SFAS 123(R) establishes accounting for stock-basedawards exchanged 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. Themeasurement of stock-based compensation cost is based on several criteriaincluding, but not limited to, the valuation model used and associated inputfactors such as the expected term of the award, stock price volatility, dividendrate, risk-free interest rate and award cancellation rate.  The inputfactors used in the valuation model are based on subjective future expectationscombined with management judgment.  If there is a difference between theassumptions used in determining stock-based compensation costs and the actualfactors, which become known over time, we may change future input factors usedin determining stock-based compensation costs.  These changes maymaterially impact our results of operations in the period such changes aremade.  We previously applied AccountingPrinciples Board (“APB”) Opinion No. 25, “*Accountingfor Stock Issued to Employees*,” or APB Opinion No. 25, andrelated Interpretations and provided the pro forma disclosures ofSFAS No. 123, *Accountingfor Stock-Based Compensation,* or SFAS 123.

 

We adopted the modified prospectiveapplication method as provided by SFAS 123(R). Under this method,SFAS 123(R) was applied to new awards and to awards modified,repurchased or cancelled after the effective date. Additionally, compensationcost for the portion of awards for which the requisite service had not beenrendered, such as unvested stock options, that were outstanding as of the dateof adoption are being recognized as the remaining requisite services arerendered. The compensation cost relating to unvested awards on the date ofadoption was based on the grant-date fair value for those awards granted after June 24,2005, the date of our initial filing of our Form S-4 registrationstatement relating to our merger transaction with Trikon, and based on theintrinsic values as previously recorded under APB Opinion No. 25for awards granted prior to that date.

 

The fair value of each option is estimated atthe date of grant using the Black-Scholes option valuation model.  Weestimate the expected stock price volatility and expected life of our options basedon historical data and representative peer group data.  We use historicaldata to estimate forfeiture rates.  Therisk-free interest rate for periods within the contractual life of the optionis based on the U.S. Treasury yield with similar expected life.

 

18

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***Results of Operations***

*** ***

The information in the table below presentsour statements of operations data as a percentage of net sales for the quartersended December 28, 2007 and December 29, 2006.

 
| ** **                           | ** ** | **Quarter Ended** | ** ** |
|--------------------------------------|------------|------------------------|------------|
| ** **                           | ** ** | **December 28,**  | ** ** | **December 29,** | ** ** |
| ** **                           | ** ** | **2007**               | ** ** | **2006** | ** ** |
|                                 |       |                   |       |   |   |
| Net sales                            |       | 100                    | %          | 100 | % |
| Cost of goods  sold                  |       | 71                     | %          | 70 | % |
| Gross margin                         |       | 29                     | %          | 30 | % |
|                                 |       |                   |       |   |   |
| Operating  expenses:                 |       |                   |       |   |   |
| Research and  development            |       | 24                     | %          | 12 | % |
| Selling, general  and administrative |       | 28                     | %          | 14 | % |
| Total operating  expenses            |       | 52                     | %          | 26 | % |
| Income(loss)  from operations        |       | (23                    | )%         | 4 | % |
| Other income  (expense):             |       |                   |       |   |   |
| Interest income                      |       | 0                      | %          | 0 | % |
| Interest expense                     |       | (1                     | )%         | (2 | )% |
| Other income  (expense), net         |       | 0                      | %          | 0 | % |
| Total other  expense - net           |       | (1                     | )%         | (2 | )% |
| Income(loss)  before income taxes    |       | (24                    | )%         | 2 | % |
| Provision for  income taxes          |       | 1                      | %          | 0 | % |
| Net income(loss)                     |       | (25                    | )%         | 2 | % |

 

***Net Sales***

 
| ** ** | ** ** | **Quarter Ended**  | ** ** |
|------------|------------|-------------------------|------------|
| ** ** | ** ** | **December 28,**   | ** ** | **December 29,** | ** ** |
| ** ** | ** ** | **2007**                | ** ** | **2006** | ** ** |
| ** ** | ** ** | **(in thousands)** | ** ** |
| Net sales  |       | $                       | 34,014     |   | $ | 62,192 |   |
|            |            |                         |            |  |  |  |  |

 

Net sales for the quarter ended December 28,2007 decreased by $28.2 million, or 45%, from the quarter ended December 29,2006.  The decrease was due primarily tothe following:

 

·                  An approximate$25.4 million decrease in net sales related to our deposition and thermalprocessing systems.  Sales recognized onshipment decreased by approximately $22.0 million.  Overall unit shipments of our deposition andthermal processing systems decreased by 76% during the quarter ended December 28,2007 from the quarter ended December 29, 2006.  Net sales recognized upon customer acceptanceof our systems decreased by approximately $2.5 million due to fewer *RVP-300plus* system acceptances.  Service and spare parts sales during thequarter ended December 28, 2007 decreased by approximately 9% from thequarter ended December 29, 2006. The decline in net sales related to our deposition and thermalprocessing systems was attributable to the slowdown in demand and timing oforders from our DRAM customers.  Wecurrently anticipate that the current softness in the DRAM market willcontinue.

 

·                  An approximate$2.8 million decrease in net sales of PVD, Etch and CVD systems due primarilyto fewer unit shipments of our PVD systems during the quarter ended December 28,2007.

 

19

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***Gross Profit and Gross Margin***

*** ***

Gross profit is the difference between netsales and cost of goods sold.  Cost of goods sold consists of purchasedmaterial, labor and overhead to manufacture equipment or spare parts and thecost of service and factory and field support to customers for warranty,installation and paid service calls.  In addition, the cost of outsourcingthe assembly or manufacturing of systems and subsystems to third parties isincluded in cost of goods sold.  Gross margin is gross profit expressed asa percentage of net sales.

 
| ** **   | ** ** | **Quarter Ended**               | ** ** |
|--------------|------------|--------------------------------------|------------|
| ** **   | ** ** | **December 28,**                | ** ** | **December 29,** | ** ** |
| ** **   | ** ** | **2007**                             | ** ** | **2006** | ** ** |
| ** **   | ** ** | **(dollars in thousands)** | ** ** |
| Gross profit |       | $                                    | 9,731      |   | $ | 18,849 |   |
| Gross margin |       | 29                                   | %          | 30 | % |
|              |            |                                      |            |  |  |  |  |

 

The decrease in gross margin of 1% during thequarter ended December 28, 2007 as compared to the quarter ended December 29,2006 was primarily the result of lower manufacturing and service costabsorption due to fewer systems manufactured and shipped during the quarterended December 29, 2007 and the impact on installation and warrantyservice demand of lower shipments during the six months ended December 29,2007.  Partially offsetting the impact oflower manufacturing and service absorption for the quarter were gross marginimprovements on our *RVP-300plus*systems due to higher average selling prices and improved product mix, due to ahigher proportion of net sales relating to PVD, Etch and CVD system shipmentsand spares and services sales.

 

***Research and Development***

*** ***

Research and development expense consists ofemployment costs attributable to employees, consultants and contractors whoprimarily spend their time on system design, engineering and processdevelopment; materials and supplies used in system prototyping, includingwafers, chemicals and process gases; depreciation and amortization expenseallocable to research and development activities and facilities; direct chargesfor repairs to research equipment and laboratories; costs of outside servicesfor facilities; and process engineering support and wafer analyticalservices.  We also include in research and development expenses associatedwith the preparation, filing and prosecution of patents and other intellectualproperty.

 
| ** **                | ** ** | **Quarter Ended**               | ** ** |
|---------------------------|------------|--------------------------------------|------------|
| ** **                | ** ** | **December 28,**                | ** ** | **December 29,** | ** ** |
| ** **                | ** ** | **2007**                             | ** ** | **2006** | ** ** |
| ** **                | ** ** | **(dollars in thousands)** | ** ** |
| Research and  development |       | $                                    | 8,039      |   | $ | 7,703 |   |
| Percent of total  revenue |       | 24                                   | %          | 12 | % |
|                           |            |                                      |            |  |  |  |  |

 

The increase in research and developmentcosts of approximately $0.3 million, or 4%, during the quarter ended December 28,2007 over the quarter ended December 29, 2006 was due primarily to thefollowing:

 

·                  During the quarter ended December 29,2006, we received government grants of approximately $0.9 million, whichpartially offset costs associated with a next-generation product developmentproject.  There were no similar grantoffsets for the quarter ended December 28, 2007.

 

·                  Increased depreciation expense ofapproximately $0.4 million related primarily to equipment installed in ourdevelopment and demonstration laboratories.

 

20

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·                  Lower prototype material and suppliescost of $1.0 million which partially offset the increases.

 

***Selling, General andAdministrative***

*** ***

Selling, general and administrative expenseconsists of employment costs attributable to employees, consultants and contractorswho primarily spend their time on sales, marketing and order administration andcorporate administrative services; occupancy costs attributable to employeesperforming these functions; sales commissions; promotional marketing expenses;and legal and accounting expenses.

 
| ** **                           | ** ** | **Quarter Ended**               | ** ** |
|--------------------------------------|------------|--------------------------------------|------------|
| ** **                           | ** ** | **December 28,**                | ** ** | **December 29,** | ** ** |
| ** **                           | ** ** | **2007**                             | ** ** | **2006** | ** ** |
| ** **                           | ** ** | **(dollars in thousands)** | ** ** |
| Selling, general  and administrative |       | $                                    | 9,574      |   | $ | 8,408 |   |
| Percent of total  revenue            |       | 28                                   | %          | 14 | % |
|                                      |            |                                      |            |  |  |  |  |

 

The increase in selling, general and administrativeexpense of $1.2 million, or 14%, in the quarter ended December 29, 2007 ascompared to the quarter ended December 29, 2006 was primarily due to anincrease of approximately $1.2 million in legal and accounting costs and a $0.2million increase in costs related to our international infrastructure.  Lower export and licensing fees of $0.4million partially offset these increases.

 

***Interest Expense***

 
| ** **                | ** ** | **Quarter Ended**               | ** ** |
|---------------------------|------------|--------------------------------------|------------|
| ** **                | ** ** | **December 28,**                | ** ** | **December 29,** | ** ** |
| ** **                | ** ** | **2007**                             | ** ** | **2006** | ** ** |
| ** **                | ** ** | **(dollars in thousands)** | ** ** |
| Interest expense          |       | $                                    | 412        |   | $ | 1,251 |   |
| Percent of total  revenue |       | 1                                    | %          | 2 | % |
|                           |            |                                      |            |  |  |  |  |

 

Our interest expense for the quarters ended December 28,2007 and December 29, 2006 consisted primarily of interest incurred on ourrevolving line of credit, equipment term loan and commercial real estateloan.  In addition, amortization of debtissuance costs impacted both quarters. During the quarter ended December 29, 2006, interest expenseincluded the amortization of the fair value of warrants issued to affiliates ofVantagePoint Venture Partners, or VantagePoint, in consideration ofVantagePoint’s agreement to guarantee a portion of our prior revolving line ofcredit.  During April 2007, weentered into a new financing agreement that did not require furtherguarantees.  Unamortized debt issuancecosts and warrant amortization related to the prior financing agreements werewritten off when our new financing was closed.

 

Aggregate borrowings under our currentrevolving line of credit, equipment term loan and commercial real estate loanwere $38.2 million at December 28, 2007. Aggregate borrowings under the prior credit facility were $40.8 millionat December 29, 2006.

 

During the quarter ended December 28,2007, interest expense decreased by $0.8 million from the quarter ended December 29,2006 due to a combination of lower average borrowings, lower average interestrates and lower debt issuance cost amortization.  In addition, warrant amortization totaled$0.3 million during the quarter ended December 29, 2006.

 

***Income Taxes***

*** ***

Because we have incurred significantoperating losses during prior periods, no material federal or state incometaxes have been recorded. We recorded income taxes relating to certainprofitable international subsidiaries and 

 

21

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provided a full valuation allowance on ournet tax benefits generated in all other jurisdictions during the respectiveperiods.

 

**Liquidity and Capital Resources**

** **

At December 28, 2007, our cash and cashequivalents were $20.2 million as compared to $23.1 million at September 28,2007.  This $2.9 million decreasein cash and cash equivalents is primarily attributable to cash used to fundoperations during the quarter ended December 28, 2007, which was partiallyoffset by increased borrowings under our revolving line of credit.

 

We currently anticipate that the currentsoftness in the DRAM market will continue, but we anticipate that our existingcash balances and available borrowings under our credit facility will besufficient to meet our anticipated cash needs for at least the next 12months.  However, we may choose to raise additional capital from the saleof debt or equity securities or from other sources in order to support ouroperations and expansion plans.   We may not be able to obtain anyadditional capital on acceptable terms, if at all.

 

***Cash Flows from OperatingActivities***

*** ***

Operating activities used $11.5 million ofthe cash in the quarter ended December 28, 2007.  Cash was used to fund losses for the quarterof approximately $8.5 million, which were partially offset by non-cashincome/expense adjustments primarily depreciation, amortization, stock basedcompensation, bad debt expense and gain on the disposal of equipmentaggregating approximately $2.0 million. Within changes in operating assets and liabilities, changes in accountsreceivables provided $2.3 million in cash for the quarter primarily due to thefact that we shipped fewer systems in the quarter ending December 28,2007.  Changes in inventory used $5.4million in the quarter to support our PVD, Etch and CVD product lines,international service support buildup and an ALD market penetration in Japan.Changes in accounts payable provided $0.4 million of cash for the quarter.  Cash was used to fund reductions in ourwarranty liability of $1.4 million due to lower shipments and installationsduring the quarter, accrued liabilities of $0.7 million and an increase inprepaid expenses and other assets of $0.2 million.

 

***Cash Flows from InvestingActivities***

*** ***

Cash used in investing activities for thequarter ended December 28, 2007 was $1.2 million. Investing activitiesduring the quarter consisted primarily of purchasing equipment to be used inour development and demonstration laboratories.

 

***Cash Flows from FinancingActivities***

*** ***

Net cash generated by financing activitiesfor the quarter ended December 28, 2007 was $9.6 million. Incremental bank borrowings under our revolving line of credit generated $10.3million in cash. Payments on our mortgage line of credit, short-term borrowingsand capital lease obligations were the primary offsets to these borrowings.

 

During April 2007,we entered into a credit facility with a syndicate of banks to refinance ourexisting line of credit and mortgage line of credit. Our credit facilityincludes a two-year revolving line of credit, an equipment term loan and afour-year commercial real estate term loan. We may borrow up to$55.0 million under our credit facility. Borrowings under the creditfacility bear interest at the London Inter Bank Offering Rate, or LIBOR, plus2.18% (7.4% at December 28, 2007). The terms of the credit agreement prohibits us from paying cashdividends on our common stock. The credit agreement contains certain financialand operating covenants.

 

Maximum borrowingsavailable under the revolving line of credit are $44.0 million and aresecured by our accounts receivable and inventory. Outstanding borrowings underthe revolving line of credit were $23.2 million at December 28, 2007.

 

Maximum borrowingsunder the equipment term loan are $4.0 million and are secured by a lienon our equipment. Our equipment term loan has a three-year amortization periodwith monthly payments of principal and accrued interest. Outstanding borrowingsunder the equipment term loan were $3.3 million at December 28, 2007.As principal is paid down under the equipment portion of the facility,additional borrowing availability will be created under the revolving portionof the credit facility.

 

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Maximum borrowingsunder the commercial real estate term loan are $13.0 million or 70% of theappraised value of the real estate, whichever is lower, and are secured by adeed of trust on our Scotts Valley facility. Monthly payments of principal andaccrued interest will be based on a 20-year amortization period of the loanprincipal. Outstanding borrowings under the commercial real estate term loanwere $11.7 million at December 28, 2007. As principal is paid downunder the commercial real estate portion of the facility, additional borrowingavailability will be created under the revolving portion of the creditfacility.

 

A subsidiary ofours has a revolving line of credit for 200,000,000 Japanese Yen (approximately$1.8 million, at the exchange rate on December 28, 2007) under whichthere were no borrowings at December 28, 2007. The credit line bearsinterest at 1.875% per annum.

 

**Off-Balance Sheet Arrangements**

** **

At December 28, 2007, we had nooff-balance sheet arrangements as defined in Item 303(a)(4) ofRegulation S-K promulgated by the Securities and Exchange Commission.

 

**Contractual Obligations**

** **

Other than operating leases for certainequipment and real estate and certain vendor commitments, we have nosignificant off-balance sheet transactions or unconditional purchase obligations.

 

In the normal course of business, we enterinto purchase commitments for inventory and non-inventory related goods andservices.  These commitments may covermore than one fiscal period.  Inaddition, we are the lessee under several capital and operating leasesprimarily for equipment rentals, office and research space.  Future minimum payments under suchobligations are as follows as of December 28, 2007:

 
| ** **                            | ** ** | **Payments due by period** | ** ** |
|---------------------------------------|------------|-------------------------------------------|------------|
| ** **                            | ** ** | ** **                                | ** ** | ** ** | ** ** | **One to** | ** ** | ** ** | ** ** | **Greater** | ** ** |
| ** **                            | ** ** | ** **                                | ** ** | **Less than** | ** ** | **Three** | ** ** | **Three to** | ** ** | **Than Five** | ** ** |
| ** **                            | ** ** | **Total**                                 | ** ** | **One Year** | ** ** | **Years** | ** ** | **Five Years** | ** ** | **Years** | ** ** |
| ** **                            | ** ** | **(in thousands)**                   | ** ** |
| Bank loan  (revolving line of credit) |       | $                                         | 23,212     |   | $ | 23,212 |   | $ | — |   | $ | — |   | $ | — |   |
| Equipment note  payable               |       | 3,292                                     |       | 1,299 |   | 1,993 |   | — |   |   |   |
| Mortgage note  payable                |       | 11,701                                    |       | 310 |   | 701 |   | 10,690 |   | — |   |
| Other notes  payable                  |       | 1,123                                     |       | 918 |   | 205 |   | — |   | — |   |
| Capital lease  obligations            |       | 588                                       |       | 326 |   | 247 |   | 15 |   | — |   |
| Operating lease  obligations          |       | 8,388                                     |       | 3,723 |   | 3,793 |   | 583 |   | 289 |   |
| Vendor  commitments:                  |       |                                      |       |   |   |   |   |   |   |   |   |
| Inventory                             |       | 17,534                                    |       | 17,480 |   | 54 |   |   |   |   |   |
| Other                                 |       | 6,450                                     |       | 4,705 |   | 1,745 |   |   |   |   |   |
|                                       |            |                                           |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

Payments due by period include interestexpense on all debt and capital lease obligations with fixed interest rates andexclude interest expense on our revolving line of credit, mortgage note payableand equipment note payable which have variable interest rate.

 

Other vendor commitments primarily includeservice related contacts and agreements for information technology support,non- inventory supplies and other service-related commitments.

 

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**ITEM 3.          QUANTITATIVE AND QUALITATIVEDISCLOSURES ABOUT MARKET RISK**

** **

For quantitative and qualitative disclosuresabout market risk currently affecting us, see Item 7A: “Quantitative andQualitative Disclosures About Market Risk” included in our Annual Report on Form 10-Kfor the fiscal year ended September 28, 2007.  Our exposure to marketrisk has not changed materially since September 28, 2007.

 

**ITEM 4.          CONTROLS AND PROCEDURES**

** **

An evaluation was performed under the supervision andwith the participation of our management, including our chief executive officerand chief financial officer, of the effectiveness of the design and operationof our disclosure controls and procedures as of the end of the period coveredby this quarterly report. Based on that evaluation, our management, includingour chief executive officer and chief financial officer, concluded that, as of December 28,2007, our disclosure controls and procedures were effective.  During the quarter ended December 28, 2007,there were no changes in our internal control over financial reporting thatmaterially affected, or were reasonably likely to materially affect, ourinternal control over financial reporting.

** **

**PART II.  OTHER INFORMATION**

** **

**ITEM 1.  LEGAL PROCEEDINGS**

** **

On April 11, 2006, IPS, Ltd. filed a lawsuitagainst us in the United States District Court for the Central District ofCalifornia. The complaint alleges that we improperly used IPS’s confidentialinformation to develop our Celsior single-wafer processing type atomic layerdeposition technology. The complaint is for unspecified monetary damages,injunctive relief and an order rescinding the settlement and distributoragreements that we and IPS entered into in May 2004 in settlement of aprior lawsuit that IPS filed against ASML U.S., Inc. and us in March 2004relating to assets that we acquired from ASML in October 2003. In May 2007,we successfully moved the dispute to arbitration. Discovery commenced in June 2007.The arbitration hearing is currently scheduled for October 2008. We intendto contest the lawsuit vigorously. We do not believe that the outcome ofthis lawsuit will have a material impact on our business, financial conditionor results of operations.

 

Prior to our merger transaction with Trikon Technologies, Inc.,Trikon was a party to an employment lawsuit in France. On March 10, 2004, Dr. JihadKiwan departed Trikon as Director and Chief Executive Officer. On March 29,2004 and April 2, 2004, Trikon received letters from a United Kingdom lawfirm and from a French law firm, respectively, on behalf of Dr. Kiwan,detailing certain monetary claims for severance amounts due to Dr. Kiwanwith respect 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. On January 7, 2008, the FrenchCommercial Court in Grenoble rejected certain of Dr. Kiwan’s claims butordered us to pay monetary awards with respect to certain other of Dr. Kiwan’sclaims. We intend to appeal the decision and do not believe that the outcome ofthe dispute will have a material impact on our business, financial condition orresults of operations.

 

**ITEM 1A.  RISK FACTORS**

** **

There are no material changes to the riskfactors described in the section entitled “Risk Factors” in Item 1A of Part Iof our Annual Report on Form 10-K for the fiscal year ended September 28,2007.

 

***We are substantially leveraged,which could limit our ability to adjust our business to respond to competitivepressures and to obtain sufficient funds to satisfy our future manufacturingcapacity and research and development needs.***

*** ***

We have significant indebtedness.  At December 28, 2007, we had total debtof approximately $39.9 million, of which approximately $26.0 million wasshort-term.  Our indebtedness could haveserious consequences for our business, including limiting our ability to obtainadditional financing in the future for working capital, capital expenditures,acquisitions and general corporate or other purposes.

 

Our ability to pay theprincipal of, and interest on, our indebtedness and to make plannedexpenditures will depend on our future operating performance, which could beaffected by changes in economic conditions and other

 

24

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factors, some of whichare beyond our control.  Our failure tocomply with the covenants and other provisions contained in the agreementsgoverning our indebtedness could result in events of default under theseagreements, which in turn could permit our lenders to accelerate payment of ourindebtedness.  If we are at any timeunable to generate sufficient cash flows from operations to service ourindebtedness, we may be required to attempt to renegotiate the terms of ourindebtedness, refinance all or a portion of our indebtedness or obtainadditional financing.  We cannot assureyou that we will be able to successfully renegotiate or refinance ourindebtedness or obtain any additional financing on acceptable terms, or at all.

 

***We may need to raise capital inorder to support our operations, which capital may not be available on termsacceptable to us, or at all.***

*** ***

At December 28, 2007, we had cash andcash equivalents of approximately $20.2 million and short-term debt ofapproximately $26.0 million.  We may needto raise capital from the sale of debt or equity securities or other sources inorder to support our operations.  We maynot be able to obtain this capital on acceptable terms, or at all.  If we issue additional equity or convertibledebt securities to raise capital, your percentage ownership of Aviza will bereduced, and you may experience significant dilution.  In addition, new investors in Aviza maydemand rights, preferences or privileges that differ from, or are senior to,yours, including warrants in addition to the securities purchased andprotection against future dilutive transactions.

 

***The semiconductor industry ishighly cyclical and unpredictable.***

*** ***

Our business depends upon the capital expendituresof semiconductor manufacturers, which in turn depend on the current anticipatedmarket demand for ICs and, in particular, the DRAM segment of the semiconductorindustry, which accounted for a majority of our net sales for the quarter endedDecember 28, 2007 and the fiscal year ended September 28, 2007. Thesemiconductor industry has historically been cyclical due to sudden changes inmanufacturing capacity.  These changes incapacity have affected the timing and amounts of our customers’ capitalequipment purchases and investments in technology, and continue to affect ourorders, net sales, gross margins and results of operations.

 

During periods of decreasing demand for ICmanufacturing equipment, we must be able to align our cost structureappropriately with prevailing market conditions and motivate and retain keyemployees effectively.  Conversely,during periods of increasing demand, we must have sufficient manufacturingcapacity and inventory to meet customer demand and must be able to attract,retain and motivate a sufficient number of qualified individuals.  If we are unable to align our cost structurewith business conditions in a timely manner and manage our resources andproduction capacity effectively, it could harm our business, financialcondition and results of operations.

 

***We receive most of our net salesfrom a small number of customers, and the loss of, or a significant reductionor fluctuation in, orders from those customers could seriously harm ourbusiness.***

*** ***

For the quarter ended December 28, 2007,approximately 41% of our net sales were attributable to three customers andapproximately 74% of our sales were attributable to our top 10 customers.  For our fiscal year ended September 28,2007, approximately 41% of our net sales were attributable to two customers andapproximately 67% of our net sales were attributable to our top 10customers.  For our fiscal year ended September 29,2006, approximately 35% of our net sales were attributable to two customers andapproximately 74% of our net sales were attributable to our top 10customers.  We expect to continue toreceive a substantial portion of our net sales from a small number of customersfor the foreseeable future.  If ourlargest customers delay, cancel or do not place orders, we may not be able toreplace those orders with new orders.  Aswe expect to configure our systems to customer specifications, changing,rescheduling or canceling orders may result in significant non-recoverablecosts.  The loss of, or a significantreduction in, orders from any of our major customers could seriously harm ourbusiness.

 

#### ***We have incurred losses for mostof our existence, and we may never again be able to achieve profitability***.

#### ** **

We incurred losses of $8.5 million during thequarter ended December 28, 2007.  Wehad net income of $0.4 million for the fiscal year ended September 28,2007 (fiscal 2007).  However, we incurrednet losses of $14.7 million and $16.0 million for the fiscal years ended September 29,2006 (fiscal 2006) and September 30, 2005 (fiscal 2005),respectively.  As a result, we may needto continue increasing our sales and reducing our costs in order to achieve andmaintain profitability.  However, we maynever again generate sufficient net sales or reduce our costs

 

25

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sufficiently to achieve profitability.  Even if we again achieve profitability, wemay not have sustainable profitability on a quarterly or annual basis in thefuture.  If we are unable to achieve andsustain profitability, we may be forced to implement expense reductionmeasures, including selling assets, consolidating operations, reducing ourworkforce or delaying, cancelling or reducing certain system development,marketing or other operational programs, any of which could harm our business.

 

***Claims or litigation regardingour intellectual property rights could seriously harm our business or requireus to incur significant costs.***

*** ***

In recent years, there has been significantlitigation in the semiconductor equipment industry involving patents and otherintellectual property rights. Infringement claims have been asserted against us and may be assertedagainst us in the future, and we may not be able to defend ourselves againstsuch claims successfully.  Any claim thatour systems infringe the proprietary rights of others would force us to defendourselves and possibly our customers against the alleged infringement.  These claims and any resulting lawsuits, ifsuccessful, could subject us to significant liability for damages andinvalidate our proprietary rights.  Theselawsuits, regardless of their outcome, would likely be time-consuming andexpensive to resolve and would divert management’s time and attention.  Any potential intellectual propertylitigation could force us to do one or more of the following:

 

·                  lose or forfeit our proprietaryrights;

·                  stop manufacturing or selling systemsthat incorporate the challenged intellectual property;

·                  obtain from the owner of theinfringed intellectual property right a license to sell or use the relevanttechnology, which license may not be available on reasonable terms or at alland may involve significant royalty payments;

·                  pay damages and attorneys’ fees insome circumstances; or

·                  redesign those systems that use thechallenged intellectual property.

 

If we are forced to take any of theseactions, our business could be severely harmed.

 

On April 11, 2006,IPS, Ltd. filed a lawsuit against us in the United States District Court forthe Central District of California. The complaint alleges that we improperlyused IPS’s confidential information to develop our Celsior single-waferprocessing type atomic layer deposition technology. The complaint is forunspecified monetary damages, injunctive relief and an order rescinding thesettlement and distributor agreements that we and IPS entered into in May 2004in settlement of a prior lawsuit that IPS filed against ASML U.S., Inc.and us in March 2004 relating to assets that we acquired from ASML in October 2003.In May 2007, we successfully moved the dispute to arbitration. Discoverycommenced in June 2007. The arbitration hearing is currently scheduled forOctober 2008. We intend to contest the lawsuit vigorously. In the event ofa negative outcome in this dispute, we may be required to discontinue sales ofour Celsior system, forgo development of other atomic layer deposition systemsand pay monetary damages, which could harm our business, financial conditionand results of operations.

 

***Our results of operations maysuffer if we fail to manage our inventory effectively.***

*** ***

We need to manage our inventory of component parts,work-in-process and finished goods effectively to meet customer deliverydemands at an acceptable risk and cost. Our customers are increasingly requiring very short lead times fordelivery, which may require us to purchase and carry additional inventory.  For both the inventories that support themanufacture of our systems and our spare parts inventories, if the customerdemand we anticipate does not materialize in a timely manner, we will incurincreased carrying costs and some inventory could become obsolete or otherwiseunfit for sale, resulting in write-offs which would harm our results ofoperations.  Conversely, if customer demandfor our systems materializes more quickly than we anticipate, our inventoriesmay be insufficient, which could result in lost sales opportunities that couldharm our results of operations.

 

***Wewill not be able to compete effectively if we fail to address the technologyneeds of our customers.***

*** ***

We operate in a highly competitiveenvironment, and our future success is dependent upon our ability, in a timelyand cost-effective manner, to:

 

·                  develop and market new systems andtechnologies;

 

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·                  improve our existing systems andtechnologies;

·                  expand into or develop equipmentsolutions for new markets for IC products;

·                  achieve market acceptance andaccurately forecast demand for our systems and technologies;

·                  achieve cost efficiencies across oursystem offerings;

·                  qualify new or improved systems forvolume manufacturing with our customers; and

·                  lower our customers’ cost ofownership.

 

We may not be able to forecast or respondaccurately to the technological trends in the semiconductor industry or respondto specific product announcements by competitors that may be developingtechnologies and systems that are more effective or that achieve morewidespread acceptance than ours.  We alsomay not be able to develop strategic alliances with equipment and materialssuppliers to the semiconductor industry to produce next-generation films andprocesses.  In addition, we may incursubstantial costs to ensure the functionality and reliability of our currentand future systems.  If our newlydeveloped systems are unreliable or do not meet our customers’ expectations,then we could experience reduced orders, higher manufacturing costs, delays incollecting accounts receivable or additional service and warrantyexpenses.  Our failure to meet ourcustomers’ technology needs and other demands will impair our ability tocompete effectively, which in turn could harm our business, financial conditionand results of operations.

 

***We have long sales cycles for oursystems, which may cause our results of operations to fluctuate from period toperiod.***

*** ***

Our systems are technologically complex.  Our prospective customers generally mustcommit significant resources to test and evaluate our systems and to installand integrate them into their manufacturing lines.  In addition, our customers often require asignificant number of system presentations and demonstrations, in some instancesevaluating equipment on site, before reaching a sufficient level of confidencein our systems’ performance and compatibility with their requirements to placean order.  As a result, our sales processis often subject to delays associated with lengthy approval processes thattypically accompany the design and testing of new systems.  Our sales cycles often have lasted for manymonths or even years and require us to invest significant resources.  In addition, we may incur significant costsin supporting evaluation equipment at customers’ facilities, and ordersexpected in one quarter could shift to another quarter because of the timing ofour customers’ purchase decisions.  Allof these factors could cause our results of operations to fluctuate from periodto period.

*** ***

***Because we lack long-term purchase commitments from ourcustomers, our net sales and inventory could fluctuate from period to period,which could harm our results of operations.***

*** ***

We generally donot enter into long-term purchase contracts with our customers. Our business ischaracterized by short-term purchase orders and shipment schedules and ourcustomers may cancel or delay their orders without penalty. As a result, it isdifficult for us to forecast our net sales and to determine the appropriatelevels of inventory that we need to carry in order to meet future demand. Inaddition, because we do not have long-term contracts with our customers, weforecast our net sales and plan our production and inventory levels based uponthe demand forecasts of our customers, which are highly unpredictable and canfluctuate substantially. This could lead to increased inventory levels andincreased carrying costs and risk of excess or obsolete inventory due tounanticipated reductions in purchases by our customers.

 

***Our deferred revenue from sales ofour systems that constitute “new technology” and our backlog of customer ordersmay not result in future net sales.***

*** ***

We defer revenue and any associated profit from thesale of newly introduced systems that are subject to contractual customeracceptance provisions and substantive installation obligations, which we referto as “new technology,” until our customer has acknowledged its acceptance ofthe system or the installation work is completed.  If the system does not meet the agreedspecifications and the customer refuses to accept the system, we will notrealize the deferred revenue and any associated deferred profit and we may berequired to refund any cash payments previously received from the customer,which may harm our business, financial condition and results of operations.

 

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We schedule the production of our systems based inpart upon our backlog.  Due to possiblecustomer changes in delivery schedules and cancellations of orders, our backlogat any particular date will not necessarily be indicative of actual sales forany future period.  In addition, while weevaluate each customer order on a case-by-case basis to determine qualificationfor inclusion in backlog, we cannot assure you that amounts that we include inbacklog will ultimately result in future sales. As a result, our backlog may not be a reliable indication of our futurenet sales.  A reduction in backlog duringany particular period, or the failure of our backlog to result in future netsales, could harm our business, financial condition and results of operations,and cause our net sales to fall below our expectations and the expectations ofanalysts and investors.

 

***Our competitors have greaterfinancial resources and greater name recognition and therefore may compete moresuccessfully.***

*** ***

We face competition or potential competition frommany companies that have greater resources than we have.  If we are unable to compete effectively withthese companies, our market share may decline and our business could beharmed.  Virtually all of our principalcompetitors are substantially larger than we are and most of them have broaderproduct lines than we do.  These competitorshave well-established reputations in the markets in which we compete, greaterexperience with high-volume manufacturing, broader name recognition,substantially larger customer bases and substantially greater financial,technical, manufacturing and marketing resources than we do.  We also face potential competition from newmarket entrants, including established manufacturers in other segments of thesemiconductor capital equipment market who may decide to diversify and developand market products that compete with our system offerings.

 

***Semiconductor manufacturers aretypically loyal to their existing semiconductor equipment suppliers, which maymake it difficult for us to obtain new customers.***

*** ***

Because semiconductor manufacturers must makesubstantial investments to install and integrate capital equipment into theirsemiconductor fabrication facilities, they tend to choose semiconductorequipment manufacturers based on established relationships, productcompatibility and proven system performance.

 

Once a semiconductor manufacturer selects aparticular vendor’s capital equipment, the manufacturer generally relies for asignificant period of time upon the equipment from this vendor of choice forthe specific production line application. To do otherwise creates risk for the manufacturer because manufacturinga semiconductor requires many process steps and a fabrication facility willcontain many different types of machines that must work cohesively to produceproducts that meet the customers’ specifications.  If any piece of equipment fails to perform asexpected, the customer could incur significant costs related to defectiveproducts, production line downtime or low production yields.

 

Since most new fabrication facilities are similar toexisting ones, semiconductor manufacturers tend to continue using equipmentthat has a proven track record.  Based onour experience with our major customers, we have observed that once aparticular piece of equipment is selected from a vendor, the customer is likelyto continue purchasing that same piece of equipment from the vendor for similarapplications in the future.  Broadeningour market share remains difficult due to choices made by customers thatcontinue to be influenced by pre-existing bases installed by competing vendors.  As a result, our ability to obtain newcustomers and additional orders may be limited.

 

A semiconductor manufacturer frequently will attemptto consolidate its other capital equipment requirements with the samevendor.  As a result, we may face narrowwindows of opportunity to be selected as the “vendor of choice” by potentialnew customers.  It may be difficult forus to sell to a particular customer for a significant period of time once thatcustomer selects a competitor’s product, and we may not be successful inobtaining broader acceptance of our systems and technology.  If we are not able to achieve broader marketacceptance of our systems and technology, it could harm our business, financialcondition and results of operations.

 

***We depend upon sole suppliers forcertain key components.***

*** ***

Substantially all of our net sales have come fromthe sale of systems that contain key components that are available only from asingle source or limited sources.  As aresult, we depend on a number of sole suppliers for key components used in themanufacturing of our systems.  If we areunable to obtain timely delivery of sufficient

 

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quantities of these components, we will be unable tomanufacture systems to meet customer demand on a timely basis.  Most significantly, certain systems aredesigned around automation modules supplied by sole suppliers.  Due to the high cost of these modules, wekeep very few in inventory.  Although wehave never been unable to manufacture or ship a system due to an inability toobtain a component sourced from a sole supplier, if a sole supplier fails todeliver the component on a timely basis, delivery of certain systems could bedelayed.  If a sole supplier is unable todeliver any such components for a prolonged period of time, we may have to redesigncertain systems.  Redesigning systemscould take significant time and be expensive, and we cannot assure you that wewill be able to do so, or that customers will adopt the redesigned systems.

 

***Warranty claims in excess of ourestimates could seriously harm our business.***

*** ***

We offer a warranty on all of our systems.  If our customers make claims under ourwarranties that exceed our estimates of the cost of our warranties, it couldharm our business, financial condition and results of operations.

 

***If we deliver systems withdefects, our credibility may be harmed, sales and market acceptance of oursystems may decrease and we may incur liabilities associated with thosedefects.***

*** ***

Our systems are complex and sometimes have containederrors, defects and bugs when introduced. If we deliver systems with errors, defects or bugs, our credibility andthe market acceptance and sales of our systems could be harmed.  Further, if our systems contain errors,defects or bugs, we may be required to expend significant capital and resourcesto alleviate these problems.  Defectscould also lead to commercial or product liability as a result of lawsuitsagainst us or against our customers.  Wehave agreed to product liability indemnities with some of our customers, andour product and commercial liability insurance policies currently provide onlylimited coverage per claim.  In the eventof a successful product liability or commercial claim, we could be obligated topay damages that may not be covered by insurance or that significantly exceedour insurance coverage.

 

***Our employment costs in theshort-term are fixed to a large extent, and therefore any unexpected shortfallsin net sales could harm our results of operations.***

*** ***

Our operating expense levels are based insignificant part on our headcount, which generally is driven by our long-termnet sales goals.  For a variety ofreasons, particularly the high cost and disruption of layoffs and the costs ofrecruiting and training, our headcount in the short-term is fixed to a large extent.  As a result, we may be unable to reduce ouremployment costs in a timely manner to compensate for any unexpected shortfallsin net sales, which could harm our results of operations.

 

***Ourhigh spending levels on research and development and our need to maintain ahigh level of customer service and support could harm our results ofoperations.***

*** ***

In order to remaincompetitive, we need to maintain high levels of investment in research anddevelopment, marketing and customer service, while at the same time controllingour operating expenses.

 

The industry in which weoperate is characterized by the need for continued investment in research anddevelopment as well as a high level of worldwide customer service and support.As a result of our need to maintain spending levels in these areas, our resultsof operations could be harmed if our net sales fall below expectations. Inaddition, because of the emphasis that we place on research and development andtechnological innovation, our operating expenses may increase further in thefuture, which could harm our results of operations.

 

We cannot assure you thatwe will have sufficient resources to make a high level of investment inresearch and development, marketing and customer service while controlling ouroperating expenses or that our systems will be viewed as competitive as aresult of technological advances by our competitors or changes in semiconductorprocessing technology. Any such competitive pressures may require us to reduceprices significantly or result in lost customer orders, which could harm ourbusiness, financial condition and results of operations.

 

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***If we are unable to hire andretain a sufficient number of qualified personnel, our results of operationscould be negatively affected.***

*** ***

Our success depends in part upon our ability toattract and retain qualified management, technical, sales and support personnelfor our operations on a worldwide basis. We believe that our success is particularly dependent on thecontributions of the principal members of our management, operations andengineering staff, including Jerauld J. Cutini, our President and ChiefExecutive Officer, Patrick C. O’Connor, our Executive Vice President and ChiefFinancial Officer, and John Macneil, our Executive Vice President and ChiefTechnology Officer.  We do not havelong-term employment contracts with these or any of our other key personnel,and their knowledge of our business and industry would be extremely difficultfor us to replace.  Competition forqualified personnel is intense, particularly in the San Francisco Bay Area,where our headquarters is located, and we cannot assure you that we will beable to continue to attract and retain qualified personnel.  Our results of operations could be negativelyaffected by our loss of key executives or employees or our inability to attractand retain skilled executives and employees.

 

***Our ability to compete could bejeopardized by our inability to protect our intellectual property rights fromchallenges by third parties.***

*** ***

Our success and ability to compete depend in largepart upon protecting proprietary technology. We have relied on a combination of patent, trade secret, copyright andtrademark laws, non-disclosure and other contractual agreements and technicalmeasures to protect our proprietary rights.

 

We cannot assure you that patents will be issued onpending patent applications or that competitors will not be able legitimatelyto ascertain proprietary information embedded in our systems that is notcovered by patent or copyright.  If thishappens, we may not be able to prevent the competitor from using thisinformation.

 

In addition, if we assert patent rights against acompetitor’s product, we cannot assure you that any claim in any patent will besufficiently broad nor, if sufficiently broad, that the patent will not bechallenged, invalidated or circumvented. We may not have sufficient resources to establish, monitor and protectour rights.  Failure to protect ourintellectual property rights could harm our business.

 

***Our efforts to protect ourintellectual property may be less effective in some foreign countries whereintellectual property rights are not as well protected as in the United States.***

*** ***

Wederived a significantportion of our****net sales forthe quarter ended December 29, 2007 and****fiscal2007 from sales in foreign countries, including certain countries in Asia suchas Singapore, Taiwan, Japan, Malaysia, China and Korea.  The laws of some foreign countries do not protectproprietary rights to as great an extent as do the laws of the United States,and many U.S. companies have encountered substantial problems in protectingtheir proprietary rights against infringement in such countries, some of whichare countries in which we have sold and in which we expect to continue to sellsystems.  For example, Taiwan is not asignatory to the Patent Cooperation Treaty, which is designed to specify rules andmethods for defending intellectual property internationally.  In Taiwan, the publication of a patent priorto its filing would invalidate the ability of a company to obtain apatent.  There is a risk that our meansof protecting our proprietary rights may not be adequate in some foreigncountries.  Our competitors in these countriesmay independently develop similar technology or duplicate our systems.  If we fail to protect our intellectualproperty adequately in those countries, it would be easier for our competitorsto sell competing products in those countries.

 

***We will be required to spendsignificant time, money and other resources to determine whether our internalcontrol over financial reporting is effective. If we are unable to achieve and maintain effective internal control overfinancial reporting, the value of your investment in Aviza could decline.***

*** ***

As currently in effect, Section 404 ofthe Sarbanes-Oxley Act of 2002, or Section 404, requires that beginningwith our Annual Report on Form 10-K for our fiscal year ending in September 2008,we must furnish a report on our internal control over financial reporting.  This report will contain an assessment by ourmanagement of the effectiveness of our internal control over financialreporting and may contain an opinion by our independent registered public accountingfirm as to the effectiveness of our internal control over financial reportingif we qualify as an “accelerated filer,” as defined under the SecuritiesExchange Act, for our fiscal year ending in September 2008.  Beginning with our Annual Report on Form 10-Kfor our fiscal year ending in September 2009, we will be

 

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required toinclude both our management’s assessment and an opinion by our independentregistered public accounting firm as to the effectiveness of our internalcontrol over financial reporting.

 

Our internal control over financial reportingmay not be considered effective if, among other things:

 

·                  any material weaknesses in ourinternal control over financial reporting exist;

·                  we fail to evaluate key controls in atimely fashion; or

·                  we fail to remediate assesseddeficiencies.

 

The process of implementing our internalcontrol over financial reporting and complying with Section 404 will beexpensive and time consuming, and will require significant effort bymanagement.  We cannot assure you that wewill implement and maintain effective internal control over financialreporting.  If management asserts thatour internal control over financial reporting is ineffective or if ourindependent registered public accounting firm expresses an adverse opinion onthe effectiveness of our internal control over financial reporting, the valueof your investment in Aviza could decline. In addition, a delay in complying with Section 404 may subject usto a variety of administrative actions, including ineligibility for short-formresale registration, action by the SEC, the suspension or delisting of ourcommon stock from the Nasdaq Global Market and the inability of registeredbroker-dealers to make a market in our common stock, which could further reduceour stock price and could harm our business.

 

***We will not be required tofurnish a report on our internal control over financial reporting until December 2008.***

*** ***

We are not currently required to furnish a report onour internal control over financial reporting pursuant to the SEC’s rules underSection 404 as part of the Annual Reports that we file on Form 10-K.  These rules will apply to us when wefile our Annual Report on Form 10-K for our fiscal year ending in September 2008,which we are required to file in December 2008.  As a result, we cannot assure you that ourinternal control over financial reporting is effective, and you will not have areport from us to that effect until December 2008, and our independentregistered public accounting firm may not have to provide their attestation onour management’s report or their opinion as to the effectiveness of our internalcontrol over financial reporting until December 2009.

 

***A disruption of our manufacturingoperations could harm our business.***

*** ***

Although we outsource the manufacturing for certainof our systems or sub-assemblies to third parties, we produce most of oursystems at our manufacturing facilities in Scotts Valley, California andNewport, South Wales, U.K.  In the eventof a disruption of operations at our facilities, our third-party manufacturerswould not be able to make up the capacity loss. Our manufacturing operations could be subject to disruption for avariety of reasons, including natural disasters, work stoppages, operationalfacility constraints and terrorism.  Anysuch disruption could cause delays in shipments of systems to our customers,result in cancellation of customer orders or loss of customers and seriouslyharm our business.

 

***We outsource manufacturing andlogistics activities to third-party service providers, which decreases ourcontrol over the performance of these functions.***

*** ***

We have already outsourced certainmanufacturing and spare parts logistics functions to third-party serviceproviders, and we may outsource more of those functions in the future.  While we expect 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 performanceproblems by these third-party service providers could result in cost overruns,delayed deliveries, shortages, quality issues or other problems that couldresult in significant customer dissatisfaction and could harm our business,financial condition and results of operations.

 

If for any reason one or more of thesethird-party service providers becomes unable or unwilling to continue toprovide services of acceptable quality, at acceptable costs and in a timelymanner, our ability to deliver our systems or spare parts to our customerscould be severely impaired.  We would quicklyneed to identify and qualify substitute service providers or increase ourinternal capacity, which could be expensive, time consuming and difficult, andcould result in unforeseen operations problems. Substitute service providers might not be available or, if available,might be unwilling or unable to offer services on acceptable terms.

 

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If customer demand for our systems increases,we may be unable to secure sufficient additional capacity from our currentservice providers on commercially reasonable terms, if at all.

 

We expect that our requirements will continueto represent a small portion of the total capacities of our third-party serviceproviders, and they may preferentially allocate capacity to other customers,even during periods of high demand for our systems.  In addition, these third-party serviceproviders could suffer financial difficulties or disruptions in theiroperations due to causes beyond our control.

 

***The semiconductor industry isglobal and has expanded within Asia.  Wehave penetrated this market with some of our systems.  If we are unable to continue to penetratethis market with those systems and penetrate this market with our other systems,our business could be harmed.***

*** ***

The percentage of worldwide semiconductorproduction that is based in Asia Pacific is growing more rapidly than in otherregions.  Although we derivedapproximately 46% of our net sales for quarter ended December 28, 2007,and 61% and 64% of our net sales for fiscal 2007 and fiscal 2006, respectively,from our sales to customers located in the Asia Pacific region, our brandrecognition in the region is limited.  Inorder to grow our business, we need to penetrate the region with the additionof new customers, new systems and the expansion of our relationships with ourexisting customers.  We havetraditionally sold our systems primarily through our direct sales force.  Although we have a direct sales force andlocal representatives in the Asia Pacific region, we cannot assure you that wewill be able to continue penetrating markets in this region.  Our failure to continue to penetrate thesemarkets, or failure to attract the additional personnel necessary to servicenew and existing customers, may harm our competitive position and our futurebusiness.

 

***Our results of operations couldbe negatively affected by currency fluctuations.***

*** ***

Although our net sales are generally denominated inU.S. dollars and we report our results of operations in U.S. dollars, ourNewport, South Wales operations are based in the United Kingdom and most of theoperating expenses attributable to those operations are incurred in Britishpounds.  As a result, a significantportion of our costs are subject to currency fluctuations.  Accordingly, if the British pound increasesin value against the U.S. dollar, our operating expenses as a percentage of ournet sales will increase and our gross margins will decline.  In addition, our sales in Japan and otherforeign service sales are denominated in local currency.  As a result, fluctuations in those localcurrencies could also have an impact on our results of operations.

 

***Because we have significantoperations outside of the United States, we are subject to political, economicand other international conditions that could increase our operating expensesand the regulation of our systems and make it more difficult for us to maintainoperating and financial controls.***

*** ***

We have manufacturing facilities in Newport, SouthWales, U.K., and sales and service offices in many other countries.  In addition, approximately 46% of our netsales for the quarter ended December 28, 2007, and****61%and 64% of our net sales for fiscal 2007 and fiscal 2006, respectively, werederived from sales in the Asia Pacific region. In recent years, Asian economies have been highly volatile andrecessionary, resulting in significant fluctuations in local currencies andother instabilities.  Instabilities inAsian economies may continue and recur in the future or instability could occurin other foreign economies, any of which could harm our business, financialcondition and results of operations.

 

Our exposure to the business risks presented byAsian economies and other foreign economies will increase to the extent wecontinue to expand our global operations. Our international operations will continue to subject us to a number ofrisks, including:

 

·                  longersales cycles;

 

·                  multiple,conflicting and changing governmental laws and regulations;

 

·                  protectionistlaws and business practices that favor local companies;

 

·                  priceand currency exchange rates and controls;

 

·                  difficultiesin collecting accounts receivable; and

 

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·                  politicaland economic instability.

 

Any of these risks could harm our business,financial condition and results of operations.

*** ***

***Our operations are subject tohealth and safety and environmental laws that may expose us to liabilities fornoncompliance.***

*** ***

We are subject to a variety of governmentalregulations relating to the use, storage, discharge, handling, manufacture anddisposal of all materials present at, or are output from, our facilities,including toxic or other hazardous chemical byproducts of the manufacturingprocesses.  We are also subject togovernmental regulations affecting the content, reuse, recycling, distributionand labeling of systems and parts containing hazardous materials.  Environmental claims, or failure to complywith any present or future regulations, could result in significant costs to remediate,the assessment of damages or imposition of fines, the suspension of productionof certain systems or the cessation of operations.

 

New regulations could require the purchase ofcostly equipment or the incurrence of other significant expenses. Failure tocontrol the use or adequately restrict the discharge of hazardous substancescould subject us to future liabilities, which could negatively affect ourfinancial condition and results of operations.

 

We own and operate a facility located inScotts Valley, California, or the Scotts Valley Site, which is currentlysubject to an Administrative Order on Consent, or Consent Order, dated as of July 16,1991 entered into by Watkins-Johnson Company (now WJ Communications, Inc.),a prior owner of the Scotts Valley Site, and the United States EnvironmentalProtection Agency.  The Scotts ValleySite is listed on the National Priorities List as the “Watkins-JohnsonSuperfund Site” pursuant to the Comprehensive Environmental ResponseCompensation and Liability Act.  Thecontamination on the Scotts Valley Site includes chlorinated solvents in soiland groundwater.  The site is beingremediated under the terms of an agreement under which an environmentalconsultant, ARCADIS Geraghty & Miller International, has agreed tocomplete the work, and an insurance policy is in place to cover certainremediation costs.  If, however, ARCADIS,WJ Communications and the insurance provider fail to fulfill theirobligations, we could be subject to substantial fines and be forced to suspendproduction, alter manufacturing processes or cease business operations, any ofwhich could harm our business, financial condition or results of operations.

*** ***

***Our ability to use net operatinglosses to offset future taxable income is subject to limitations.***

*** ***

In general, under Section 382 of theInternal Revenue Code, a corporation that undergoes an “ownership change” issubject to limitations on its ability to utilize its pre-ownership change netoperating losses, or NOLs, to offset future taxable income.  A corporation generally undergoes an “ownershipchange” if the percentage of stock of the corporation owned by one or more ofits 5% stockholders (where all stock owned by stockholders who are not 5%stockholders generally is treated as owned by one or more 5% stockholders) hasincreased by more than 50 percentage points over a three-year period.

 

Trikon’s NOLs are subject to limitationsarising from previous ownership changes and were subject to additionallimitations as a result of our merger transaction with Trikon.  Our existing NOLs are also subject tolimitations, and our merger transaction with Trikon and our private placementtransaction with Caisse de dépôt et placement du Québec in April 2006resulted in our undergoing an ownership change, thus further limiting the useof our NOLs.** **Itis impossible for us to ensure that we will not experience an ownership changein the future because changes in our stock ownership, some of which are outsideof our control, could result in an ownership change under Section 382 ofthe Internal Revenue Code.

 

Generally, the limitations on our ability touse either our or Trikon’s pre-merger transaction NOLs to offset future taxableincome are expected to be significant, and thus our liability for future U.S.federal income taxes may be materially higher than that liability would havebeen absent such limitations.  Similar rules mayapply for foreign and state income tax purposes as well.

 

***Business interruptions couldadversely affect our business.***

*** ***

Our operations are vulnerable to interruption byfire, earthquake, power loss, telecommunications failure and other eventsbeyond our control.  A disaster couldseverely damage our ability to deliver our systems to our

 

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customers.  Inorder to manufacture our systems, we will need to maintain and protect ourmanufacturing facilities and computer systems, many of which will be located inor near our headquarters in Scotts Valley, California.  Scotts Valley is located near a knownearthquake fault zone.  Although ourfacilities are designed to be fault-tolerant, our systems are susceptible todamage from fire, floods, earthquakes, power loss, telecommunications failuresand similar events.  Although we maintaingeneral business insurance against interruptions such as fires and floods, wecannot assure you that the amount of coverage will be adequate in anyparticular case.

 

***Any acquisitions we may makecould disrupt business and harm our financial condition.***

 

We may invest in complementary products, companiesor technologies.  Such investmentsinvolve numerous risks, including:

 

·                  diversionof management’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 acquisitions are inherently subject tosignificant risks, and our inability to manage these risks effectively couldharm our business, financial condition and results of operations.

 

***Our affiliates own a large amountof our common stock, which will limit your ability to influence our corporateactivities.***

*** ***

At December 28, 2007, affiliates ofVantagePoint Venture Partners, which we refer to collectively as VantagePoint,and Caisse de dépôt et placement du Québec, which we refer to as CDPQ,beneficially owned approximately 35.3% and 15.0%, respectively, of ouroutstanding common stock.  VantagePointand CDPQ exercise significant influence over our operations, business strategyand the outcome of votes on all matters requiring stockholder approval,including the approval of significant corporate transactions such as mergers orother business combinations. VantagePoint or CDPQ may have interests that differ from the interestsof our other stockholders.  Thisconcentration of ownership may also have the effect of delaying or preventing achange of control of Aviza or discouraging others from making tender offers forshares of our common stock, which could prevent our other stockholders fromreceiving a premium for their shares.

 

***The price of our common stock hasbeen and may continue to be volatile, which may lead to losses by investors orto securities litigation.***

*** ***

The market price of our common stock has been andmay continue to be volatile, and our stock price may decline in thefuture.  For example, for the period fromDecember 2, 2005, the first day that our common stock was publicly traded,through February 6, 2008, the closing price range of our common stock was$1.04 to $8.74 per share.

 

In addition, in recent years, the stock market ingeneral, and the market for shares of high technology stocks in particular,have experienced extreme price fluctuations, and these fluctuations havefrequently been unrelated to the operating performance of the affectedcompanies.  These fluctuations could leadto a decline in the market price of our common stock.  In the past, securities litigation has oftenbeen instituted against a company following periods of volatility in its stockprice.  This type of litigation, if filedagainst us, could result in substantial costs and divert management’s attentionand resources.

 

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**ITEM 2.  UNREGISTERED SALES OFEQUITY SECURITIES AND USE OF PROCEEDS**

 

On December 5, 2007, we entered into an Asset PurchaseAgreement with Semitool, Inc., a Montana corporation, whereby we acquiredcertain thermal assets, coupled with certain exclusive and non-exclusiveintellectual property and technology licenses, relating to semiconductordevice manufacturing in exchange for one million newly issued sharesof our common stock, par value $0.0001 per share, and royaltypayments subject to the achievement of certain conditions. The transactionclosed on December 7, 2007.

 

Our issuance of the securities in the transaction described above wasexempt from registration under the Securities Act in reliance on Section 4(2) ofthe Securities Act and Regulation D promulgated thereunder. The recipient ofthe securities in this transaction represented its intention to acquire thesecurities for investment only and not with a view to or for sale in connectionwith any distribution thereof, and appropriate legends were affixed to theshare certificates and other instruments issued in this transaction. The salesof these securities were made without general solicitation or advertising.

 

**ITEM 3.  DEFAULTS UPON SENIORSECURITIES**

** **

None.

 

**ITEM 4.  SUBMISSION OF MATTERSTO A VOTE OF SECURITY HOLDERS**

** **

At our 2008 Annual Meeting of Stockholders held on January 30,2008, our stockholders approved the two proposals noted below by the followingvotes:

 
| ** **                                                                           | ** ** | **FOR**    | ** ** | **AGAINST/  WITHHELD** | ** ** | **ABSTAINED** | ** ** | **BROKER  NON-  VOTES** | ** ** |
|--------------------------------------------------------------------------------------|------------|------------|------------|------------------------|------------|---------------|------------|-------------------------|------------|
| **Proposal One—Election of Directors**                           | ** ** | ** ** | ** ** | ** **             | ** ** | ** **    | ** ** | ** **              | ** ** |
| Richard M. Conn                                                                      |       | 20,692,496 |       | 194,256                |       | —        |       | —                  |       |
| Dana C. Ditmore                                                                      |       | 20,707,343 |       | 179,409                |       | —        |       | —                  |       |
| Klaus C. Weimer,  Ph.D.                                                              |       | 20,088,137 |       | 798,615                |       | —        |       | —                  |       |
| ** **                                                                           |       |       |       |                   |       |          |       |                    |       |
| **Proposal  Two—Ratification of Independent Registered Public Accounting Firm** |       | 20,874,226 |       | 3,500                  |       | 9,073         |       | —                  |       |

 

**ITEM 5. OTHER INFORMATION**

** **

None.

 

35

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**ITEM 6.EXHIBITS**

 
| **Exhibit  Number** | ** ** | **Description**                                                                                                                   |
|---------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------|
|                |       |                                                                                                                              |
| **10.1              |       | Asset Purchase  Agreement, dated as of December 5, 2007, by and between Aviza Technology, Inc.  and Semitool, Inc. |
|                |       |                                                                                                                              |
| 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.                    |

 

----

**Confidential Treatment has been requested as to portions of thisexhibit.

 

36

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**SIGNATURES**

** **

Pursuant to the requirements of theSecurities Exchange Act of 1934, the registrant has duly caused this report tobe signed on its behalf by the undersigned thereunto duly authorized.

 
|                           |     | Aviza  Technology, Inc.                                                                                                        |                              |
|--------------------------------|----------|-------------------------------------------------------------------------------------------------------------------------------------|-----------------------------------|
|                           | * * | *(Registrant)*                                                                                                                      | * *                          |
| * *                       | * * | * *                                                                                                                            |
| * *                       | * * | * *                                                                                                                            |
| Dated:  February 11, 2008 |     |                                                                                                                                |
|                           |     | By:                                                                                                                                 | **/s/  PATRICK C. O’CONNOR** | ** ** |
|                           |     |                                                                                                                                |
|                           | * * | **Patrick  C. O’Connor***Executive Vice President  and Chief Financial  Officer  (Principal Financial and Accounting Officer)* |
|                                |          |                                                                                                                                     |                                   |  |  |

 

37

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**EXHIBITINDEX**

 
| **Exhibit   Number** | ** ** | **Description**                                                                                                                   |
|---------------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------|
|                      |       |                                                                                                                              |
| **10.1                    |       | Asset Purchase  Agreement, dated as of December 5, 2007, by and between Aviza  Technology, Inc. and Semitool, Inc. |
|                      |       |                                                                                                                              |
| 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.                    |

 

----

**Confidential Treatment has been requested as to portions of thisexhibit.

 

38

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