**UNITED STATES**

**SECURITIES AND 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**  |
|-----------------------------------------------------------------------------------------------------|
| ** **                                                                                          |
| **For  the quarterly period ended December 29, 2006**                                               |
| ** **                                                                                          |
| **OR**                                                                                              |
| ** **                                                                                          |
| **o****TRANSITION REPORT  PURSUANT TO SECTION 13 OR 15(d) OF THE  SECURITIES EXCHANGE ACT OF 1934** |

 

**For the transition period from            to            **

**Commission file number 000-51642**

**Aviza Technology, Inc.**

(Exact Name of Registrant as Specified in its Charter)

| **Delaware**                                                    |   | **20-1979646**                           |
|-----------------------------------------------------------------|--------|------------------------------------------|
| (State or Other  Jurisdiction of Incorporation or Organization) |   | (I.R.S. Employer  Identification Number) |
|                                                            |
| **440 Kings Village Road**                                      |
| **Scotts  Valley, California    95066**          |
| (Address of  Principal Executive Offices including Zip Code)    |
|                                                            |
| **(831)  438-2100**                                             |
| (Registrant’s  Telephone Number, Including Area Code)      |

 

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Indicate by check markwhether the registrant: (1) has filed all reports required to be filed bySection 13 or 15 (d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days.

YES   x      NO   o

Indicate by checkmark whether the registrant is a large accelerated filer, an accelerated filer,or a non-accelerated filer.  See definition of “accelerated filer andlarge accelerated filer” in Rule 12b-2 of the Exchange Act.  (Check one):

Large acceleratedfiler    o                        Acceleratedfiler    o                        Non-acceleratedfiler    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 1,2007, the registrant had 16,150,752 shares of its common stock, par value$0.0001 per share, outstanding.

 

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**AvizaTechnology, Inc.**

**Table ofContents**
|                                                                                                                                       | ** ** | **Page  No.** |
|---------------------------------------------------------------------------------------------------------------------------------------|------------|---------------|
|                                                                                                                                  |       |          |
| **PART I. FINANCIAL INFORMATION**                                                                                                     |       |          |
| Item 1. Financial  Statements (unaudited):                                                                                            |       |          |
| Condensed  Consolidated Balance Sheets — at December 29, 2006 and September 29, 2006                                             |       | 3             |
| Condensed  Consolidated Statements of Operations — for the Three Months Ended December  29, 2006 and December 30, 2005 |       | 4             |
| Condensed  Consolidated Statements of Cash Flows — for the Three Months Ended December  29, 2006 and December 30, 2005 |       | 5             |
| Notes to  Condensed Consolidated Financial Statements                                                                                 |       | 6             |
| Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations                                   |       | 15            |
| Item 3.  Quantitative and Qualitative Disclosures About Market Risk                                                                   |       | 23            |
| Item 4. Controls and  Procedures                                                                                                      |       | 23            |
|                                                                                                                                  |       |          |
| **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                                                                  |       | 36            |
| Item 3.  Defaults Upon Senior Securities                                                                                              |       | 36            |
| Item 4.  Submission of Matters to a Vote of Security Holders                                                                          |       | 36            |
| Item  5. Other Information                                                                                                            |       | 36            |
| Item  6. Exhibits                                                                                                                     |       | 37            |

 

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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 29,  2006** | ** ** | **September 29,  2006** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------|------------|------------------------------|------------|
| **ASSETS**                                                                                                                                                                      | ** ** | ** **                  |       |                         |       |
| CURRENT ASSETS:                                                                                                                                                                 |       |                        |       |                         |       |
| Cash and cash  equivalents                                                                                                                                                      |       | $                           | 15,537     |                         | $          | 10,722 |   |
| Accounts  receivable, net of allowance of $340 and $262, respectively                                                                                                           |       | 31,100                      |       | 26,763                       |       |
| Inventory                                                                                                                                                                       |       | 53,141                      |       | 54,499                       |       |
| Prepaid expenses  and other current assets                                                                                                                                      |       | 8,239                       |       | 6,638                        |       |
| Total current  assets                                                                                                                                                           |       | 108,017                     |       | 98,622                       |       |
|                                                                                                                                                                            |       |                        |       |                         |       |
| PROPERTY, PLANT AND  EQUIPMENT—net                                                                                                                                         |       | 26,134                      |       | 25,266                       |       |
| INTANGIBLE ASSETS—net                                                                                                                                                      |       | 4,524                       |       | 4,755                        |       |
| OTHER ASSETS                                                                                                                                                                    |       | 947                         |       | 463                          |       |
| TOTAL                                                                                                                                                                           |       | $                           | 139,622    |                         | $          | 129,106 |   |
|                                                                                                                                                                            |       |                        |       |                         |       |
| **LIABILITIES AND STOCKHOLDERS’  EQUITY**                                                                                                                                  |       |                        |       |                         |       |
|                                                                                                                                                                            |       |                        |       |                         |       |
| CURRENT LIABILITIES:                                                                                                                                                            |       |                        |       |                         |       |
| Short term  borrowings and current portion of notes payable                                                                                                                     |       | $                           | 41,978     |                         | $          | 28,632 |   |
| Accounts payable                                                                                                                                                                |       | 27,400                      |       | 30,792                       |       |
| Warranty  liability                                                                                                                                                             |       | 12,099                      |       | 10,816                       |       |
| Accrued  liabilities                                                                                                                                                            |       | 15,653                      |       | 13,716                       |       |
| Total current  liabilities                                                                                                                                                      |       | 97,130                      |       | 83,956                       |       |
| NOTES PAYABLE—Long term                                                                                                                                                    |       | 1,030                       |       | 6,256                        |       |
| Total  liabilities                                                                                                                                                              |       | 98,160                      |       | 90,212                       |       |
|                                                                                                                                                                            |       |                        |       |                         |       |
| COMMITMENTS AND  CONTINGENCIES (Note 8)                                                                                                                                         |       |                        |       |                         |       |
|                                                                                                                                                                            |       |                        |       |                         |       |
| 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; 16,150,752 shares issued and  outstanding at December 29, 2006  and  September 29, 2006, respectively |       | 2                           |       | 2                            |       |
| Additional  paid-in capital                                                                                                                                                     |       | 89,092                      |       | 88,655                       |       |
| Accumulated  other comprehensive income                                                                                                                                         |       | 1,600                       |       | 594                          |       |
| Accumulated  deficit                                                                                                                                                            |       | (49,232                     | )          | (50,357                      | )          |
| Total  stockholders’ equity                                                                                                                                                |       | 41,462                      |       | 38,894                       |       |
| TOTAL                                                                                                                                                                           |       | $                           | 139,622    |                         | $          | 129,106 |   |

 

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

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**AVIZATECHNOLOGY, INC. AND SUBSIDIARIES**

**CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS**

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

**(unaudited)**
| ** **                          | ** ** | **Quarter Ended**      | ** ** |
|-------------------------------------|------------|-----------------------------|------------|
| ** **                          | ** ** | **December 29,  2006** | ** ** | **December 30,  2005** | ** ** |
|                                | ** ** | ** **                  | ** ** | ** ** | ** ** |
| NET SALES                           |       | $                           | 62,192     |   | $ | 28,943 |   |
| COST OF GOODS  SOLD                 |       | 43,343                      |       | 21,808 |   |
|                                |       |                        |       |   |   |
| GROSS PROFIT                        |       | 18,849                      |       | 7,135 |   |
|                                |       |                        |       |   |   |
| OPERATING  EXPENSES:                |       |                        |       |   |   |
| Research and development            |       | 7,703                       |       | 4,643 |   |
| Selling, general and administrative |       | 8,408                       |       | 5,115 |   |
| In-process research and development |       | —                      |       | 393 |   |
|                                |       |                        |       |   |   |
| Total operating expenses            |       | 16,111                      |       | 10,151 |   |
|                                |       |                        |       |   |   |
| INCOME (LOSS)  FROM OPERATIONS      |       | 2,738                       |       | (3,016 | ) |
|                                |       |                        |       |   |   |
| OTHER INCOME  (EXPENSE):            |       |                        |       |   |   |
| Interest income                     |       | 27                          |       | 40 |   |
| Interest expense                    |       | (1,251                      | )          | (1,386 | ) |
| Other income (expense)—net     |       | 12                          |       | (147 | ) |
|                                |       |                        |       |   |   |
| Total other expense—net        |       | (1,212                      | )          | (1,493 | ) |
|                                |       |                        |       |   |   |
| INCOME (LOSS)  BEFORE INCOME TAXES  |       | 1,526                       |       | (4,509 | ) |
| INCOME TAXES                        |       | 401                         |       | 122 |   |
|                                |       |                        |       |   |   |
| NET INCOME  (LOSS)                  |       | $                           | 1,125      |   | $ | (4,631 | ) |
|                                |       |                        |       |   |   |
| Income (loss)  per share:           |       |                        |       |   |   |
| Basic                               |       | $                           | 0.07       |   | $ | (1.25 | ) |
| Diluted                             |       | $                           | 0.07       |   | $ | (1.25 | ) |
| Weighted average  common shares:    |       |                        |       |   |   |
| Basic                               |       | 16,150,752                  |       | 3,717,898 |   |
| Diluted                             |       | 16,894,582                  |       | 3,717,898 |   |

 

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

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**AVIZATECHNOLOGY, INC. AND SUBSIDIARIES**

**CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS**

**(inthousands)**

**(unaudited)**
| ** **                                                                                                    | ** ** | **Quarter Ended**      | ** ** |
|---------------------------------------------------------------------------------------------------------------|------------|-----------------------------|------------|
| ** **                                                                                                    | ** ** | **December 29,  2006** | ** ** | **December 30,  2005** | ** ** |
| CASH FLOWS FROM  OPERATING ACTIVITIES:                                                                        |       |                        |       |   |   |
| Net income (loss)                                                                                             |       | $                           | 1,125      |   | $ | (4,631 | ) |
| Adjustments to reconcile net income (loss) to net  cash provided by operating activities:                     |       |                        |       |   |   |
| Depreciation                                                                                                  |       | 924                         |       | 714 |   |
| Amortization                                                                                                  |       | 514                         |       | 517 |   |
| Reduction in acquired intangible assets due to the  use of acquired net operating losses                      |       | 150                         |       | — |   |
| Fair value of common stock warrants issued for loan  guarantee                                                |       | —                      |       | 251 |   |
| Stock based compensation                                                                                      |       | 437                         |       | 107 |   |
| Mandatorily redeemable preferred stock dividend  accrued                                                      |       | —                      |       | 219 |   |
| Provision for allowance for doubtful accounts                                                                 |       | 67                          |       | 64 |   |
| Write off in-process research and development from  Trikon                                                    |       | —                      |       | 393 |   |
| Changes in assets and liabilities:                                                                            |       |                        |       |   |   |
| Accounts receivable                                                                                           |       | (3,859                      | )          | 8,224 |   |
| Inventories                                                                                                   |       | 2,447                       |       | 983 |   |
| Prepaid and other assets                                                                                      |       | (526                        | )          | 4,191 |   |
| Accounts payable                                                                                              |       | (3,567                      | )          | (1,304 | ) |
| Warranty liability                                                                                            |       | 1,218                       |       | (1,204 | ) |
| Accrued liabilities                                                                                           |       | 1,697                       |       | 700 |   |
| Net cash provided by operating activities                                                                     |       | 627                         |       | 9,224 |   |
| CASH FLOWS FROM  INVESTING ACTIVITIES:                                                                        |       |                        |       |   |   |
| Cash acquired from Trikon net of direct merger costs                                                          |       | —                      |       | 7,366 |   |
| Purchases of property and equipment                                                                           |       | (1,279                      | )          | (1,462 | ) |
| Net cash (used in) provided by investing activities                                                           |       | (1,279                      | )          | 5,904 |   |
| CASH FLOWS FROM  FINANCING ACTIVITIES:                                                                        |       |                        |       |   |   |
| Net proceeds from credit lines                                                                                |       | 6,150                       |       | (3,625 | ) |
| Proceeds from the issuance of common stock                                                                    |       | —                      |       | 26 |   |
| Payments on mortgage loan                                                                                     |       | (70                         | )          | (70 | ) |
| Payments on other short-term borrowings                                                                       |       | (356                        | )          | (8,650 | ) |
| Payments on capital lease obligations                                                                         |       | (63                         | )          | (8 | ) |
| Net cash provided by (used in) financing activities                                                           |       | 5,661                       |       | (12,327 | ) |
| Effect of exchange rates on foreign cash balances                                                             |       | (194                        | )          | 97 |   |
| NET INCREASE IN  CASH AND CASH EQUIVALENTS                                                                    |       | 4,815                       |       | 2,898 |   |
| CASH AND CASH  EQUIVALENTS:                                                                                   |       |                        |       |   |   |
| Beginning of period                                                                                           |       | 10,722                      |       | 7,437 |   |
| End of period                                                                                                 |       | $                           | 15,537     |   | $ | 10,335 |   |
| SUPPLEMENTAL  DISCLOSURE OF CASH FLOW INFORMATION:                                                            |       |                        |       |   |   |
| Cash paid for interest                                                                                        |       | $                           | 875        |   | $ | 760 |   |
| Income taxes paid                                                                                             |       | $                           | 180        |   | $ | 31 |   |
| Noncash  investing and financing activities:                                                                  |       |                        |       |   |   |
| Notes payable issued for services to be rendered                                                              |       | $                           | 1,737      |   | $ | — |   |
| Equipment acquired under capital lease                                                                        |       | $                           | 715        |   | $ | — |   |
| Fair value of common stock, options and warrants  issued in the acquisition of Trikon Technologies, Inc. |       | $                      | —     |   | $  | 24,442 |   |
| Conversion of preferred stock, Series A, to common  stock                                                     |       | $                           | —     |   | $ | 32,650 |   |
| Fair value of common stock warrants issued in  exchange for loan guarantee                                    |       | $                           | —     |   | $ | 251 |   |
| Property and  equipment included in accounts payable at end of quarter                                        |       | $                           | 139        |   | $ | 232 |   |

 

The accompanying notes are an integral part of these consolidatedfinancial statements.

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**AVIZA TECHNOLOGY, INC. AND SUBSIDIARIESNOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTSDecember 29, 2006*(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. In theopinion 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 29, 2006 are notnecessarily indicative of the results that may be expected for future quartersand the fiscal year ending September 28, 2007.  The accompanying unauditedcondensed consolidated financial statements should be read in conjunction withour audited consolidated financial statements for the year ended September 29,2006, which are included in our Annual Report on Form 10-K and the risk factorscontained 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 28, 2007 and includes 52 weeks.We close our fiscal quarters on the last Friday of December, March, June andSeptember.

On December 1, 2005, we completed ourconsolidation through merger with Trikon Technologies, Inc. (“Trikon”).  In connection with the merger transaction,our common stock became publicly traded on the NASDAQ Global Market under the symbol “AVZA.”  Thefinancial information presented in this report represents:

1)              the financialposition of the Company and its subsidiaries as of December 29, 2006 andSeptember 29, 2006;

2)              the results ofoperations and changes in cash flow of the Company and its subsidiaries for thequarter ended December 29, 2006; and

3)              the results ofoperations and changes in the cash flow of the Company and its subsidiaries forthe quarter ended December 30, 2005, including Trikon from December 2, 2005through December 30, 2005.

See Note 5 for additional information relatedto the merger transaction.

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 September 29, 2006,the Securities and Exchange Commission released Staff Accounting Bulletin 108,Considering the Effects of Prior Year Misstatements in Current Year FinancialStatements ("SAB 108"), which provides guidance on how the effects ofthe carryover or reversal of prior year misstatements should be considered inquantifying a current year misstatement. SAB 108 calls for the quantificationof errors using both a balance sheet and income statement approach based on theeffects of such errors on each of the company's financial statements and therelated financial statement disclosures. SAB 108 is effective for financialstatements issued for the fiscal year ending after November 15, 2006. Adoptionof SAB 108 will not have a significant impact on our results of operations orfinancial condition.

On December 21, 2006, the Financial AccountingStandards Board (“FASB”) issued FASB Staff Position (FSP) Emerging Issues TaskForce (“EITF”) 00-19-2, “*Accounting forRegistration Payment Arrangements,*” which requires an issuer toaccount for a contingent obligation to transfer consideration under aregistration payment arrangement in accordance with FASB Statement No. 5, *Accounting for Contingencies* and FASB Interpretation 14, *Reasonable Estimation of the Amount of Loss*.  Registration payment arrangements arefrequently entered into in connection with issuance of unregistered financialinstruments, such as equity shares or warrants. A registration payment arrangement contingently obligates the issuer tomake future payments or otherwise transfer consideration to another party ifthe issuer fails to file a registration statement with

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the SEC for the resale of specified financialinstruments or fails to have the registration statement declared effectivewithin a specific period.  The FSPrequires issuers to make certain disclosures for each registration paymentarrangement or group of similar arrangements. The FSP is effective immediately for registration payment arrangementsand financial instruments entered into or modified after the FSP’s issuancedate.  For previously issued registrationpayment arrangements and financial instruments subject to those arrangements,the FSP is effective for financial statements issued for fiscal years beginningafter December 15, 2006.  We do notexpect the adoption of this FSP to have a significant impact on our financialcondition or results of operations.

**3.  Balance Sheet Details**
| ** **                                      | ** ** | **December 29,  2006** | ** ** | **September 29,  2006** | ** ** |
|-------------------------------------------------|------------|-----------------------------|------------|------------------------------|------------|
| ** **                                      | ** ** | **(in thousands)**     | ** ** |
|                                            |       |                        | ** ** | ** **                   | ** ** |
| **Inventories:**                                | ** ** | ** **                  | ** ** | ** **                   | ** ** |
| Raw materials                                   |       | $                           | 28,628     |                         | $          | 29,414 |   |
| Work-in-process                                 |       | 21,351                      |       | 21,337                       |       |
| Finished goods  and evaluation systems          |       | 3,162                       |       | 3,748                        |       |
| Total                                           |       | $                           | 53,141     |                         | $          | 54,499 |   |
|                                            |       |                        |       |                         |       |
| **Prepaid  expenses and other current assets:** |       |                        |       |                         |       |
| Deferred  installation costs                    |       | $                           | 1,511      |                         | $          | 1,301 |   |
| Taxes                                           |       | 2,828                       |       | 2,003                        |       |
| Other                                           |       | 3,900                       |       | 3,334                        |       |
| Total                                           |       | $                           | 8,239      |                         | $          | 6,638 |   |
|                                            |       |                        |       |                         |       |
| **Property,  plant and equipment, net:**        |       |                        |       |                         |       |
| Land                                            |       | $                           | 1,839      |                         | $          | 1,839 |   |
| Buildings and  improvements                     |       | 12,140                      |       | 12,047                       |       |
| Machinery and  equipment                        |       | 13,329                      |       | 12,947                       |       |
| Office  furnishings, fixtures and equipment     |       | 2,867                       |       | 2,659                        |       |
| Construction in  process                        |       | 4,090                       |       | 2,840                        |       |
| Total                                           |       | 34,265                      |       | 32,332                       |       |
| Accumulated  depreciation                       |       | (8,131                      | )          | (7,066                       | )          |
| Net property,  plant and equipment              |       | $                           | 26,134     |                         | $          | 25,266 |   |
|                                            |       |                        |       |                         |       |
| **Accrued  liabilities:**                       |       |                        |       |                         |       |
| Accrued payroll  and payroll taxes              |       | $                           | 5,991      |                         | $          | 4,584 |   |
| Deferred revenue                                |       | 2,855                       |       | 2,023                        |       |
| Other                                           |       | 6,807                       |       | 7,109                        |       |
| Total                                           |       | $                           | 15,653     |                         | $          | 13,716 |   |

 

**4.  Stock-Based Compensation**

Effective October 1, 2005, we adopted theprovisions of Statement of Financial Accounting Standards (“SFAS”) No. 123(R), *Share-Based Payment* (“SFAS 123(R)”). SFAS 123(R) establishes standards for the accounting for transactions in whichan entity exchanges its equity instruments for goods or services.  It alsoaddresses transactions in which an entity incurs liabilities in exchange forgoods or services that are based on the fair value of the entity’s equityinstruments or that may be settled by the issuance of those equityinstruments.  Accordingly, stock-based compensation cost is measured atgrant date, based on the fair value of the award, and is recognized as expenseover the employee’s requisite service period.  The measurement ofstock-based compensation cost is based on several criteria including, but notlimited to, the valuation model used and associated input factors such asexpected term of the award, stock price volatility, dividend rate, risk-freeinterest rate and award

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cancellation rate.  The input factorsused 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 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, accordingly prior period amounts have notbeen restated.  Additionally, compensation cost for the portion of awardsfor which the requisite service has not been rendered, such as unvested stockoptions, that were outstanding as of the date of adoption are being recognizedas the remaining requisite services are rendered.  The compensation costrelating to unvested awards at the date of adoption was based on the grant-datefair value for those awards granted after June 24, 2005, the date of theCompany’s initial filing of a Form S-4 registration statement relating to themerger transaction as discussed in Note 5 and based on the intrinsic values aspreviously recorded under 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 based on historical volatilitywithin a representative peer group.  We use historical data to estimateexpected life and forfeiture rates.  The risk-free interest rate forperiods within the contractual life of the option is based on the U.S. Treasuryyield with similar expected life.

Under our stock option plans, we may grant options to purchase up to amaximum of 5,644,000 shares of common stock, including outstanding optionsto employees, directors and consultants at a price not less than the fairmarket value on the date of the grant. These options generally vest over four tofive years and generally expire seven to ten years from the date ofthe grant.

We recognized stock-based compensationexpense of $437,000 and $107,000 during the quarters ended December 29, 2006and December 30, 2005 respectively.  Due to uncertainty surrounding therealization of the income tax benefit related to stock based compensationexpense, there is no related income tax benefit recognized in the consolidatedstatements of operation for the quarters ended December 29, 2006 and December30, 2005 respectively, as a full valuation allowance has been provided againstthe deferred tax asset.

The fair value of our stock options grantedin the quarters ended December 29, 2006 and December 30, 2005 was estimated atthe date of grant using the following weighted average assumptions:
|                          | ** ** | **Quarter Ended**      | ** ** |
|--------------------------|------------|-----------------------------|------------|
| ** **               | ** ** | **December 29,  2006** | ** ** | **December 30,  2005** | ** ** |
| Expected life  (years)   |       | 4.8                         |       | 6.1 |   |
| Risk-free  interest rate |       | 4.6                         | %          | 4.4 | % |
| Stock price  volatility  |       | 64.6                        | %          | 76.1 | % |
| Dividend yield           |       | 0.0                         | %          | 0.0 | % |

 

The following table summarizes our stockoption activity under the stock plans during the quarter ended December 29, 2006: 
|                                    | ** ** | **Number of  Shares** | ** ** | **Weighted Average  Exercise Price** | ** ** |
|------------------------------------|------------|----------------------------|------------|------------------------------------------------|------------|
| ** **                         | ** ** | ** **                 | ** ** | ** **                                     | ** ** |
| Outstanding at  September 29, 2006 |       | 3,791,164                  |       | $                                              | 5.08       |   |
| Granted                            |       | 111,500                    |       | 4.55                                           |       |
| Forfeited                          |       | (44,433                    | )          | 17.23                                          |       |
| Outstanding at December  29, 2006  |       | 3,858,231                  |       | $                                              | 4.92       |   |

 

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As of December 29, 2006, there was $4.1million 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 3.17years.

The following table details total stock-basedcompensation expense for the quarters ended December 29, 2006 and December 30,2005:
|                                           | ** ** | **Quarter Ended**      | ** ** |
|-------------------------------------------|------------|-----------------------------|------------|
| ** **                                | ** ** | **December 29,  2006** | ** ** | **December 30,  2005** | ** ** |
| ** **                                | ** ** | **(in thousands)**     | ** ** |
| Cost of goods  sold                       |       | $                           | 49         |   | $ | 12 |   |
| Research and  development                 |       | 114                         |       | 14 |   |
| Selling, general  and administrative      |       | 274                         |       | 81 |   |
| Pre-tax  stock-based compensation expense |       | 437                         |       | 107 |   |
| Income tax  benefits                      |       | —                      |       | — |   |
| Stock-based  compensation expense         |       | $                           | 437        |   | $ | 107 |   |

 

The options outstanding and exercisable atDecember 29, 2006 were in the following exercise price ranges:
| ** **                          | ** ** | **Options Outstanding** | ** ** | **Options Exercisable**                                     | ** ** |
|-------------------------------------|------------|------------------------------|------------|------------------------------------------------------------------|------------|
| **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                       |       | 1,130,218                    |       | 7.13                                                             |       | $ | 0.83 |   | 849,675 |   | $ | 0.83 |   |
| $0.84 -$4.98                        |       | 1,568,667                    |       | 6.57                                                             |       | 4.12 |   | 276,114 |   | 2.53 |   |
| $4.99 - $7.28                       |       | 968,990                      |       | 8.88                                                             |       | 5.67 |   | 338,704 |   | 5.85 |   |
| $7.29 - $87.07                      |       | 190,356                      |       | 5.34                                                             |       | 32.10 |   | 169,731 |   | 34.41 |   |
| $0.83 - $87.07                      |       | 3,858,231                    |       | 7.26                                                             |       | $ | 4.92 |   | 1,634,224 |   | $ | 5.65 |   |

 

The aggregate intrinsic value of the optionsoutstanding and the options exercisable at December 29, 2006 was $4,877,000 and$3,462,000 respectively.  The aggregate intrinsic value represents thetotal pre-tax intrinsic value based on the closing stock price of $4.27 pershare at December 29, 2006.  The weighted average remaining contractuallife for options exercisable as of December 29, 2006 was 7.27 years.

The weighted average fair value of options onthe grant date, as determined under SFAS 123(R), granted during the quartersended December 29, 2006 and December 30, 2005 was $2.62 and $3.90 per share,respectively.

The total intrinsic value of optionsexercised during the quarters ended December 29, 2006 and December 30, 2005,was $0 and $68,000, respectively. The total cash received from employees as aresult of employee stock options exercises during the quarters ended December29, 2006 and December 30, 2005 was $0 and $26,000, respectively.

**5.  Merger with TrikonTechnologies, Inc.**

On December 1, 2005, the stockholders ofTrikon approved the merger of Trikon with the Company.  Trikon designs,manufactures and services wafer processing semiconductor manufacturingequipment primarily for front end of line applications.  Its products areused for chemical and physical vapor deposition and for etch applications

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and are sold to semiconductor manufacturersworldwide.  In accordance with the provisions of SFAS No. 141, Avizawas treated as the acquirer for financial reporting purposes.  In themerger transaction, a wholly owned subsidiary of the Company was merged withand into Trikon.  Trikon stockholders received 0.29 of a share of Avizacommon stock in exchange for each share of Trikon common stock theyowned.  A total of 4,568,946 shares of Aviza common stock were issued in exchangefor the outstanding common stock of Trikon as of December 1, 2005.  Inaddition, 629,126 shares of common stock were reserved for issuance uponexercise of Trikon common stock options and warrants assumed at December 1,2005. The options and warrants were valued using the Black-Scholes optionpricing model.

Asummary of the total consideration given in the merger with Trikon is asfollows (in thousands, except share and per share amounts):

| Issuance of  Aviza common stock (4,568,946 shares at the price of $5.17 per share)                                                                        |   | $      | 23,632 |   |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------|--------|--------|
| Value of substitute options and warrants  to acquire 629,126 shares of Aviza common stock in exchange for all  outstanding options and warrants of Trikon |   | 499    |   |
| Total equity consideration                                                                                                                                |   | 24,131 |   |
| Direct merger costs                                                                                                                                       |   | 6,116  |   |
| Total consideration                                                                                                                                       |   | $      | 30,247 |   |

 

Under the purchase method of accounting, thetotal consideration issued for Trikon common stock, options and warrants asshown in the table above was allocated to the Trikon tangible and intangibleassets, and liabilities based on their estimated fair values as of the date ofthe merger transaction.

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

The results of operations of Trikon have beenincluded in our results of operations for all the periods subsequent to theDecember 1, 2005 merger date.  The following pro forma financialinformation includes adjustments related to amortization of purchasedintangibles, depreciation of purchased fixed assets, elimination of deferredrent liability and stock based compensation costs that would have been recordedif the acquisition had occurred at the beginning of the period presented. Thepro forma financial information for the combined entities has beenprepared for comparative purposes only and is not necessarily indicative ofwhat the actual results may have been if the acquisition had in fact occurredat the beginning of the period presented or to future results. Pro formaresults for the quarter ended December 30, 2005 were (in thousandsexcept per share amounts): 
| ** **                       | ** ** | **Quarter Ended  December 30,  2005** | ** ** |
|----------------------------------|------------|-------------------------------------------------|------------|
|                             |       |                                            |       |
| Net sales                        |       | $                                               | 35,408     |   |
| Net loss                         |       | $                                               | (6,758     | ) |
|                             |       |                                            |       |
| Net loss per  common share:      |       |                                            |       |
| Basic and diluted                |       | $                                               | (0.66      | ) |
|                             |       |                                            |       |
| Weighted average  common shares: |       |                                            |       |
| Basic and  diluted               |       | 10,284                                          |       |

 

**6.  BorrowingFacilities**

 

Borrowing consists of thefollowing (in thousands):

 
|                                        | ** ** | **December 29,** | ** ** | **September 29,** | ** ** |
|----------------------------------------|------------|-----------------------|------------|------------------------|------------|
| ** **                             | ** ** | **2006**              | ** ** | **2006**               | ** ** |
|                                   |       |                  |       |                   |       |
| Bank Loans (revolving  line of credit) |       | $                     | 34,428     |                   | $          | 28,277 |   |
| Mortgage note  payable                 |       | 6,393                 |       | 6,463                  |       |
| Other notes  payable                   |       | 1,381                 |       | —                 |       |
| Capital lease  obligations             |       | 806                   |       | 148                    |       |
| Total                                  |       | 43,008                |       | 34,888                 |       |
| Less: current  portion                 |       | 41,978                |       | 28,632                 |       |
| Long term portion                      |       | $                     | 1,030      |                   | $          | 6,256 |   |

** **

During the quarter endedDecember 29, 2006, we entered into agreements to finance a portion of ourenterprise resource planning system upgrade. These obligations are payable in monthly installments through November2009 and bear interest at 5.1% to 10%.

** **

**7.  IntangibleAssets**

Intangibleassets are recorded at cost, net of accumulated amortization, and are amortizedover their estimated useful lives using the straight-line method.  The estimated useful lives for ourintangibles are as follows:

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| Licenses                |   | 10 to 15 years |
|-------------------------|--------|----------------|
| Developed  technology   |   | 10 years       |
| Brands and  trademarks  |   | 10 years       |
| Customer  relationships |   | 10 years       |
| Patents                 |   | 10 years       |

 

Weevaluate intangibles for indicators of possible impairment when events orchanges in circumstances indicate the carrying amount of the asset may not berecoverable.

Intangibleassets at December 29, 2006 and September 29, 2006 consist of thefollowing (in thousands):
| ** **              | ** ** | **December 29, 2006** | ** ** | **September 29, 2006** | ** ** |
|-------------------------|------------|---------------------------------|------------|----------------------------------|------------|
| ** **              | ** ** | **Cost**                        | ** ** | **Income Tax  Adjustment**  | ** ** | **Accumulated  Amortization** | ** ** | **Net Book  Value** | ** ** | **Cost** | ** ** | **Accumulated  Amortization** | ** ** | **Net Book  Value** | ** ** |
|                    |       |                            |       |                             |       |   |   |   | ** ** | ** ** |   |   |   |   |   |
| Licenses                |       | $                               | 4,028      |                             | $          | (4 | ) | $ | (369 | ) | $ | 3,655 |   | $ | 4,026 |   | $ | (268 | ) | $ | 3,758 |   |
| Developed  technology   |       | 726                             |       | (94                              | )          | (78 | ) | 554 |   | 694 |   | (58 | ) | 636 |   |
| Brands and  trademarks  |       | 101                             |       | (13                              | )          | (11 | ) | 77 |   | 96 |   | (8 | ) | 88 |   |
| Customer  relationships |       | 230                             |       | (29                              | )          | (25 | ) | 176 |   | 220 |   | (18 | ) | 202 |   |
| Patents                 |       | 81                              |       | (10                              | )          | (9 | ) | 62 |   | 78 |   | (7 | ) | 71 |   |
| Total                   |       | $                               | 5,166      |                             | $          | (150 | ) | $ | (492 | ) | $ | 4,524 |   | $ | 5,114 |   | $ | (359 | ) | $ | 4,755 |   |

 

Duringthe quarter ended December 29, 2006, one of the subsidiaries we acquired inconnection with the merger transaction with Trikon generated sufficient taxableincome to recognize a portion of the net deferred tax assets acquired in themerger transaction related to net operating loss carry forward.  Management had been previously unable toassert that it was more likely than not that the Company would generatesufficient taxable income to realize the net deferred tax assets in excess ofthe deferred tax liabilities recorded in relation to the write-up of inventoryand intangibles to fair value at December 1, 2005, the date of the consummationof the merger transaction.  Accordingly,the net deferred tax assets had been offset in full by a valuation allowance onthat date.  In the absence of goodwill,under generally accepted accounting principles, the tax benefit derived fromreversal of this valuation allowance must be applied first to reducenon-current intangible assets related to the merger transaction, and second toreduce income tax expense.  Approximately$150,000 of the valuation allowance attributed to net deferred tax assets relatingto the net operating loss carry forward acquired in the merger transaction wasrecognized during the quarter ended December 29, 2006 and the intangible assetsacquired in the merger transaction have been reduced accordingly.  The remaining net deferred tax assets havebeen offset in full by a valuation allowance at December 29, 2006.

Amortizationexpenses relating to all intangibles, excluding in-process research anddevelopment acquired from Trikon (Note 5), was $128,000 and $9,000 for thequarters ended December 29, 2006 and December 30, 2005.  Based on the intangible assets recorded atDecember 29, 2006, and assuming no subsequent additions to, or impairmentof the underlying assets, the remaining amortization expense is expected to beas follows (in thousands): 
| September 28, 2007  (remaining nine months) |   | $     | 376    |   |
|---------------------------------------------|--------|-------|--------|--------|
| September 26,  2008                         |   | 501   |   |
| September 25,  2009                         |   | 501   |   |
| September 24,  2010                         |   | 501   |   |
| September 30,  2011                         |   | 501   |   |
| Thereafter                                  |   | 2,144 |   |
| Total                                       |   | $     | 4,524  |   |

 

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**8.  Warranty and Guarantees**

***Warranty***—TheCompany accrues for the estimated cost of the warranty on its systems, whichincludes the cost of the labor and parts necessary to repair systems during thewarranty period. The amounts recorded in the warranty accrual are estimatedbased on actual historical costs incurred and on estimated probable futureexpenses related to current sales. The warranty accrual is spread over thewarranty period on a straight-line basis. Systems typically have warrantyperiods ranging from one to three years. The components of the warranty accrualare as follows:
| ** **                                                                        | ** ** | **Quarter Ended**      | ** ** |
|-----------------------------------------------------------------------------------|------------|-----------------------------|------------|
| ** **                                                                        | ** ** | **December 29,  2006** | ** ** | **December 30,  2005** | ** ** |
|                                                                              |       |                        |       |   |   |
| Beginning  warranty accrual                                                       |       | $                           | 10,816     |   | $ | 13,599 |   |
| Additional  accruals for new shipments                                            |       | 3,040                       |       | 1,311 |   |
| Warranty  liability assumed in merger                                             |       | —                      |       | 1,386 |   |
| Warranty costs  incurred                                                          |       | (1,839                      | )          | (1,286 | ) |
| Expiration and  change in liability for pre-existing warranties during the period |       | 82                          |       | (1,236 | ) |
| Ending warranty accrual                                                           |       | $                           | 12,099     |   | $ | 13,774 |   |

 

***Guarantees***—Inaddition to product warranties, we, from time to time, in the normal course ofbusiness, indemnify certain customers against third-party claims that the 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 are likelyto be involved in each particular claim. Historically, we have not madepayments under these obligations and no liabilities have been recorded forthese obligations on the balance sheet at December 29, 2006 and September 29,2006, respectively.

**9.  Commitments andContingencies**

In November 2006, we discovered that we mayhave exported certain pressure transducers that are listed on the U.S. Bureauof Industry and Security’s Commerce Control List without proper authorization,either in the form of an export license or pursuant to an exception to theBureau of Industry and Security’s export license requirements, and on December20, 2006, we submitted our initial notification of a voluntary self-disclosureof possible export compliance problems to the Office of Export Enforcement inaccordance with applicable Export Administration Regulations. We are currentlyconducting a review of all of our exports of pressure transducers since October7, 2003, the date on which we commenced operations, in order to determine thenature and scope of the potential issue with respect to those pressuretransducers. If, as a result of our review, we determine that we failed tocomply with applicable U.S. export regulations, we may be required to pay civilfines and penalties to the U.S. government. Because we have not yet completedour review, we do not know whether we will ultimately have to pay any fines orpenalties or, if we do, whether those fines or penalties will be substantial.

On April 11, 2006, IPS, Ltd. fileda lawsuit against us in the United States District Court for the CentralDistrict of California. The complaint alleges that we improperly used IPS’sconfidential information to develop our Celsior single-wafer processing typeatomic layer deposition technology. We have filed an answer denying the claim.The complaint is for unspecified monetary damages, injunctive relief and anorder rescinding the settlement and distributor agreements that IPS and Avizaentered into in May 2004 in settlement of a prior lawsuit that IPS filedagainst ASML U.S., Inc. and Aviza in March 2004 relating to assetsthat we acquired from ASML in October 2003. We believe that we havecomplied with the settlement and distributor agreements and that theallegations contained in IPS’s complaint are without merit. We intend tocontest the lawsuit vigorously.

Discoveryin the litigation has not yet begun because the parties disagree about theproper forum in which to resolve the claims asserted by IPS. On May 12,2006, we filed with the United States District Court for the NorthernDistrict of California a petition to compel arbitration in Santa Clara County,California. On August 3, 2006, Judge Ware of the Northern District ofCalifornia found that one or more of the claims asserted by IPS were likelyarbitrable and ordered the parties to arbitration to determine which claimswere properly subject to arbitration. On October 23, 2006, Judge Cooper ofthe Central District of California stayed proceedings pending resolution of thequestion of arbitrability. The parties are currently in the process of filingtheir pleadings in the arbitration.

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 lawfirm, 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. Kiwan has subsequently withdrawn the

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proceedings in the United Kingdom. Weare in the process of vigorously contesting the French claim and do not believethat the outcome of the claim will be material to our business, financialcondition or results of operations.

Our Scotts Valleylocation is a federal Superfund site. Chlorinated solvent and othercontamination was identified at the site in the early 1980’s, and by the late1980’s Watkins Johnson Corporation (“WJ”) (a previous owner of theCompany) had installed a groundwater extraction and treatment system. In 1991,WJ entered into a consent decree with the United States EnvironmentalProtection Agency providing for remediation of the site. In July 1999, WJsigned a remediation agreement with an environmental consulting firm, ARCADISGeraghty and Miller (“ARCADIS”). Pursuant to this remediation agreement, WJpaid approximately $3 million in exchange for which ARCADIS agreed toperform the work necessary to assure satisfactory completion of WJ’s obligationunder the consent decree. The agreement also includes a cost overrun guarantyfrom ARCADIS up to a total project cost of $15 million. In addition, theagreement included procurement of a ten-year, claims-made insurance policy tocover overruns of up to $10 million from American International Specialty(“AIS”), along with a ten-year, claims made $10 million policy to coverunknown pollution conditions at the site.

Failure of WJ, ARCADIS,or AIS to fulfill their obligations may subject the Company to substantialfines, 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.

Management believes thatthe likelihood of the failure of WJ, ARCADIS or AIS is remote and that anyremaining or uninsured environmental liabilities will not have a materialeffect on the Company’s results of operations or financial position.

Other than operating leases for certainequipment and real assets, we have no significant off-balance sheettransactions or unconditional purchase obligations.

As of December 29, 2006, our cash obligationsand commitments relating to our debt obligations and lease payments were asfollows:
| ** **                            | ** ** | **Payments due by period** | ** ** |
|---------------------------------------|------------|-------------------------------------------|------------|
| ** **                            | ** ** | **Total**                                 | ** ** | **Less than  One Year** | ** ** | **One to  Three  Years** | ** ** | **Three to  Five Years** | ** ** | **Greater  Than Five  Years** | ** ** |
| ** **                            | ** ** | **(in thousands)**                   | ** ** |
| Bank loan  (revolving line of credit) |       | $                                         | 34,428     |   | $ | 34,428 |   | $ | — |   | $ | — |   | $ | — |   |
| Mortgage note  payable                |       | 6,393                                     |       | 6,393 |   | — |   | — |   | — |   |
| Other notes  payable                  |       | 1,452                                     |       | 929 |   | 523 |   | — |   | — |   |
| Capital lease  obligations            |       | 861                                       |       | 306 |   | 524 |   | 31 |   | — |   |
| Operating lease  obligations          |       | 6,793                                     |       | 2,833 |   | 3,678 |   | 282 |   | — |   |
|                                       |            |                                           |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

**Payments due byperiod include interest expense on all debt and capital lease obligations withfixed interest rates.  This excludes our revolvingline of credit and mortgage note payable.**

**10.  Major Customers**

During the quarters ended December 29, 2006and December 30, 2005, one customer accounted for 42% and 12% of total netsales, respectively, and during the quarter ended December 30, 2005, twodifferent customers accounted for 34% and 13% of total net sales, respectively.

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**11.  Comprehensive Income (Loss)**

The components of comprehensive income (loss)are as follows:
| ** **                         | ** ** | **Quarter Ended**      | ** ** |
|------------------------------------|------------|-----------------------------|------------|
| ** **                         | ** ** | **December 29,  2006** | ** ** | **December 30,  2005** | ** ** |
| Net income  (loss)                 |       | $                           | 1,125      |   | $ | (4,631 | ) |
| Currency  translation adjustment   |       | 1,006                       |       | 12 |   |
|                               |       |                        |       |   |   |
| Total  comprehensive income (loss) |       | $                           | 2,131      |   | $ | (4,619 | ) |

 

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

Basic income (loss) per share has beencomputed based upon the weighted average number of common shares outstandingfor the periods presented. Diluted income (loss) per share is calculated asthough all potentially dilutive shares were outstanding during the period,based upon the application of the treasury stock method.  The following details the calculation of thenet income (loss) per share for the period presented (in thousands, exceptshare and per share data):
|                                               | ** ** | **Quarter Ended**      | ** ** |
|-----------------------------------------------|------------|-----------------------------|------------|
| ** **                                    | ** ** | **December 29,  2006** | ** ** | **December 30,  2005** | ** ** |
|                                          | ** ** | ** **                  | ** ** | ** ** |   |
| Numerator:                                    |       |                        |       |   |   |
| Net income  (loss)                            |       | $                           | 1,125      |   | $ | (4,631 | ) |
|                                          |       |                        |       |   |   |
| Denominator:                                  |       |                        |       |   |   |
| Weighted average  shares, basic               |       | 16,150,752                  |       | 3,717,898 |   |
| Effect of  potentially dilutive securities:   |       |                        |       |   |   |
| Stock options                                 |       | 743,830                     |       | — |   |
| Dilutive weighted  average shares outstanding |       | 16,894,582                  |       | 3,717,898 |   |
|                                          |       |                        |       |   |   |
| Net income (loss) per  share - basic          |       | $                           | 0.07       |   | $ | (1.25 | ) |
|                                          |       |                        |       |   |   |
| Net income (loss) per  share - diluted        |       | $                           | 0.07       |   | $ | (1.25 | ) |

 

For purposes of calculating fully diluted netincome (loss) per share, potentially dilutive shares during the quarter endedDecember 29, 2006 consisted of 3,902,664 shares of common stock issuable uponassumed exercise of all outstanding stock options and 406,725 shares of commonstock issuable upon assumed exercise of all outstanding common stock warrants.2,361,347 weighted average equivalent shares of the potentially dilutive sharesrelated to the outstanding stock options and all of the potentially dilutiveshares related to the outstanding common stock warrants were excluded from thecomputation of weighted average common shares used to calculate fully dilutednet income per share for the quarter ended December 29, 2006, as their exerciseprice exceeded the average market value of our common stock for theperiod.  During the quarter endedDecember 30, 2005, potentially dilutive shares consisted of our mandatorilyredeemable Series B and B-1 preferred stock aggregating 110,000 shares, whichon April 24, 2006 converted into approximately 2.5 million shares of our commonstock, 2,881,845 shares of common stock issuable upon the assumed exercise ofall outstanding common stock options and 406,725 shares of common stockissuable upon assumed exercise of all outstanding common stock warrants.  Because we recorded a net loss during thequarter ended December 30, 2005, the calculation of dilutive loss per shareexcludes potentially dilutive shares as they were anti-dilutive and would havereduced the loss per share.

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**13.  Financing**

On January 5, 2007, we filed a registrationstatement on Form S-1 under the Securities Act of 1933 for the purpose ofoffering 4,000,000 shares of our common stock for sale.

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

**CautionaryStatement Regarding Forward-Looking Statements**

*The statements in this report includeforward-looking statements. These forward-looking statements are based on ourmanagement’s current expectations and beliefs and involve numerous risks anduncertainties that could cause actual results to differ materially fromexpectations. You should not rely upon these forward-looking statements aspredictions of future events because we cannot assure you that the events orcircumstances reflected in these statements will be achieved or will occur. Youcan identify forward-looking statements by the use of forward-looking terminology,including the words “believes,” “expects,” “may,” “will,” “should,” “seeks,” “intends,”“plans,” “estimates” or “anticipates” or the negative of these words andphrases or other variations of these words and phrases or comparableterminology. These forward-looking statements relate to, among other things:our sales, results of operations and anticipated cash flows; capitalexpenditures; depreciation and amortization expenses; research and developmentexpenses; sales, general and administrative expenses; the development andtiming of the introduction of new products and technologies; our ability tomaintain and develop relationships with our existing and potential futurecustomers and our ability to maintain the level of investment in research anddevelopment and capacity that is required to remain competitive.  Manyfactors could cause our actual results to differ materially from thoseprojected in these forward-looking statements, including, but not limited to: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 expenses due to our involvement in litigation orcaused 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**

Wedesign, manufacture, sell and support advanced semiconductor capital equipmentand process technologies for the global semiconductor industry and relatedmarkets. We offer both front-end-of-line and back-end-of-line systems andprocess technologies used in a variety of segments of the semiconductor marketusing critical thin film formation technologies, including ALD, PVD, CVD, Etchand thermal processing systems.

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 endedDecember 29, 2006, one customer, Inotera Memories Inc., accounted for 42% ofour net sales and approximately 75% of our net sales were attributable to ourtop ten customers.  For the fiscal yearended September 29, 2006, two customers, Winbond Electronics Corp. andInotera 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 ourtop ten customers. For the fiscal year ended September 30, 2005, threecustomers, Inotera Memories, Inc., Infineon Technologies AG and WinbondElectronics Corp., accounted for 43%, 15% and 11% of our net sales,respectively, and approximately

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84%of our net sales in fiscal 2005 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.

AvizaTechnology, Inc. was incorporated on December 8, 2004 to facilitatethe merger transaction of our subsidiaries, Aviza, Inc. and TrikonTechnologies, Inc. Aviza, Inc. was incorporated on September 18,2003 by affiliates of VantagePoint as Thermal Acquisition Corporation, aDelaware corporation, for the purpose of acquiring the business of the ThermalDivision of ASML Holding, N.V., a Netherlands corporation, which divisionof ASML is referred to in this discussion as the Predecessor. OnOctober 10, 2003, Thermal Acquisition Corporation acquired the business ofthe Predecessor and changed its name to Aviza Technology, Inc., which namewas subsequently changed to Aviza, Inc. in connection with the mergertransaction with Trikon.

OnDecember 1, 2005, we completed the merger transaction with Trikon, and ourcommon stock is publicly traded on the Nasdaq Global Market under the symbol “AVZA.”We accounted for the merger transaction as a purchase of Trikon, using thepurchase method of accounting. As a result of the merger transaction, ourresults of operations include Trikon’s results of operations for all periodsafter December 1, 2005.

Weare often required to develop systems in advance of our customers’ demand forthose systems, and we undertake significant system development efforts inadvance of any of our customers expressly indicating demand for our systems.Our system development efforts typically span six months to two years.

Weintend to pursue strategic acquisitions of other semiconductor equipmentcompanies and other complementary technologies that we believe will enable usto expand our system offerings in the IC fabrication equipment market.

**Critical AccountingPolicies**

Ourdiscussion and analysis of our financial condition and results of operations isbased on our consolidated financial statements that have been prepared inaccordance with accounting principles generally accepted in theUnited States of America. The preparation of these financial statementsrequires us to make estimates and judgments that affect the reported amounts ofassets, liabilities, revenue and expenses. We base our estimates on historicalexperience and on various other assumptions that we believe to be reasonableunder the circumstances, the results of which form the basis for makingjudgments about the carrying values of assets and liabilities that are notreadily apparent from other sources. Actual results may differ from theseestimates under different assumptions or conditions.

Webelieve that the following critical accounting policies affect our moresignificant judgments used in the preparation of our consolidated financialstatements:

***Acquisitions of theBusinesses of the Predecessor and Trikon***

Inconnection with our acquisitions of the businesses of the Predecessor andTrikon, we allocated the purchase price associated with the acquisition of thetangible and intangible assets acquired and liabilities assumed based on theirestimated fair values. The valuations of these intangible assets required us tomake significant estimates and assumptions.

Thecritical estimates we used in allocating the purchase price included futureexpected cash flows from customer contracts, distribution agreements andacquired developed technologies, as well as assumptions about the periods oftime the systems would continue to be used in our portfolio of systems. Ourestimates of fair value at the time they were made were based upon assumptionsthat we believed to be reasonable, but which are inherently uncertain andunpredictable.

***Revenue Recognition***

Werecognize revenue in accordance with Staff Accounting Bulletin No. 104 (“SAB 104”),and EITF 00-21. These accounting standards require that four basiccriteria must be met before revenue can be recognized: 

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(1) persuasiveevidence of an arrangement exists; (2) delivery has occurred or serviceshave been rendered; (3) the price is fixed or determinable; and(4) collectability is reasonably assured. Determination of criteria foritems (3) and (4) above is based on our judgment regarding the fixednature of the amounts charged for the systems delivered and the collectabilityof those amounts.

Weoften undertake significant system development efforts in advance of any of ourcustomers expressly indicating demand for our systems. As a result of thelength of our sales cycles, our net sales for any period are generally weightedtoward systems that we introduced for sale in prior years. For purposes ofrevenue recognition, we classify our systems into two categories, “proventechnology” and “new technology.” “Proven technology” systems are those systemswith respect to which we have a history of successful installations within areasonable time frame of delivery and the costs to complete installation do notvary materially from one instance to another. “New technology” systems arethose systems with respect to which we cannot demonstrate that we can meet theprovisions of customer acceptance at the time of shipment.

Wetypically sell equipment and installation services as a bundled arrangement. Inaccordance with EITF 00-21, the fair value of installation is determinedas the price we charge for similar installation services provided to ourcustomers without regard to the warranty provisions. Upon shipment of “proventechnology,” we record revenue upon shipment at the lesser of (i) theresidual amount after deducting the fair value of undelivered services from thecontractual value or (ii) the non-contingent amount. The remainingcontractual revenue is recorded upon successful installation of the system.Cost of the equipment relating to “proven technology” is recorded uponshipment. To the extent a loss is calculated on shipment due to the foregoingdeferral of revenue, a portion of the cost is also deferred to reflect zerogross profit at the time of shipment. The residual revenue, deferred costs andinstallation costs are recorded upon successful installation of the system.Revenue and cost of equipment relating to “new technology” is deferred untilinstallation and acceptance at the customer’s premises is completed.

Theresult of these accounting policies is that for “new technology,” ourrecognition of both revenue and cost of goods sold is delayed until customeracceptance, at which time both revenue and cost of goods sold are recognized infull in determining our gross margin. However, for “proven technology,” ourcost of goods sold may be recognized in full upon shipment, but recognition ofa portion of our revenue is delayed until successful installation of thesystem. This can result in diminished gross margins at the timeof shipment.

Revenuefrom services is recognized as the services are performed. Revenue from prepaidservice contracts is recognized ratably over the life of the contract. Revenuefrom spare parts is recorded upon shipment.

Weassess collectability based on the creditworthiness of our customers and pasttransaction history. We perform ongoing credit evaluations of our customers. Inaddition, we require collateral from certain of our customers in the form ofletters of credit. We have not experienced significant collection losses in thepast. However, a significant change in the liquidity or financial position ofany one of our customers, especially one or more of our most significantcustomers, could make it more difficult for us to assess creditworthiness,which could result in a financial loss.

***Inventory Valuation***

Weassess the recoverability of our inventory at the end of each quarter based onassumptions about customer demand and market conditions. Obsolete inventory orinventory in excess of our estimated usage is written down to its estimatedmarket value less costs to sell. The inventory write-downs are recorded as aninventory valuation allowance established on the basis of obsolete inventory orspecifically identified inventory in excess of established usage. Inherent inour estimates of market value in determining inventory valuation are estimatesrelated to economic trends, future demand for our systems and technologicalobsolescence of our systems. If actual market conditions are less favorablethan our projections, we may be required to write down additional inventory.

***Warranty***

Weaccrue for the estimated cost of the warranty on our systems as cost of goodssold, which includes the cost of the labor and parts necessary to repairsystems during the warranty period. The amounts recorded in the warrantyaccrual are estimated based on actual historical expenses incurred and onestimated probable future expenses related to our current sales. The warrantyservice is generally incurred ratably over the warranty period. Our systems 

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typicallyhave warranty periods ranging from one to three years. Our actual warrantycosts in the future may vary from our historical warranty costs, which couldresult in adjustments to our warranty reserves in future periods.

***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 ourbalance sheet.

Werecord 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 we 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. As ofDecember 29, 2006, we had a full valuation allowance for our net deferredtax assets.

***Stock-BasedCompensation***

Effective October 1, 2005, we adopted the provisions of Statementof Financial Accounting Standards (“SFAS”) No. 123(R), *Share-Based Payment* (“SFAS 123(R)”).SFAS 123(R) establishes accounting for stock-based awards exchanged foremployee services. Accordingly, stock-based compensation cost is measured atgrant date, based on the fair value of the award, and is recognized as anexpense over the employee’s requisite service period. We previously appliedAccounting Principles Board (“APB”) Opinion No. 25, “*Accounting for Stock Issued to Employees*,”and related Interpretations and provided the pro forma disclosures ofSFAS No. 123, *Accountingfor Stock-Based Compensation* (“SFAS 123”).

We adopted the modified prospective application method as provided bySFAS 123(R). Under this method, SFAS 123(R) was applied to new awardsand to awards modified, repurchased or cancelled after the effective date.Additionally, compensation cost for the portion of awards for which the requisiteservice has not been rendered, such as unvested stock options, that areoutstanding as of the date of adoption will be recognized as the remainingrequisite services are rendered. The compensation cost relating to unvestedawards on the date of adoption was based on the grant-date fair value for thoseawards granted after June 24, 2005, the date of our initial filing of ourForm S-4 registration statement relating to our merger transaction withTrikon, and based on the intrinsic values as previously recorded under APBOpinion No. 25 for awards granted prior to that date.

The fair value of each option is estimated at the date of grant usingthe Black-Scholes option valuation model. We estimate expected stock pricevolatility based on historical volatility within a representative peer group.We use historical data to estimate expected life and forfeiture rates. Therisk-free interest rate for periods within the expected life of the option isbased on the U.S. Treasury yield.

 

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***Resultsof Operations***

The financialinformation in the table below is for the quarters ended December 29, 2006 andDecember 30, 2005.
| ** **                           | ** ** | **Quarter Ended** | ** ** |
|--------------------------------------|------------|------------------------|------------|
| ** **                           | ** ** | **December 29,**  | ** ** | **December 30,** | ** ** |
| ** **                           | ** ** | **2006**               | ** ** | **2005** | ** ** |
|                                 |       |                   |       |   |   |
| Net sales                            |       | 100                    | %          | 100 | % |
| Cost of goods  sold                  |       | 70                     | %          | 75 | % |
| Gross margin                         |       | 30                     | %          | 25 | % |
|                                 |       |                   |       |   |   |
| Operating  expenses:                 |       |                   |       |   |   |
| Research and  development            |       | 12                     | %          | 16 | % |
| Selling, general  and administrative |       | 14                     | %          | 18 | % |
| In-process  research and development |       | 0                      | %          | 1 | % |
| Total operating  expenses            |       | 26                     | %          | 35 | % |
| Income (loss)  from operations       |       | 4                      | %          | (10 | )% |
| Other income  (expense):             |       |                   |       |   |   |
| Interest income                      |       | 0                      | %          | 0 | % |
| Interest expense                     |       | (2                     | )%         | (5 | )% |
| Other income  (expense), net         |       | 0                      | %          | (1 | )% |
| Total other  income (expense)        |       | (2                     | )%         | (6 | )% |
| Income (loss)  before income taxes   |       | 2                      | %          | (16 | )% |
| Income taxes                         |       | 0                      | %          | 0 | % |
| Net income (loss)                    |       | 2                      | %          | (16 | )% |

 

***Net Sales***
|            | ** ** | **Quarter Ended**  | ** ** |
|------------|------------|-------------------------|------------|
| ** ** | ** ** | **December 29,**   | ** ** | **December 30,** | ** ** |
| ** ** | ** ** | **2006**                | ** ** | **2005** | ** ** |
| ** ** | ** ** | **(in thousands)** | ** ** |
| Net sales  |       | $                       | 62,192     |   | $ | 28,943 |   |
|            |            |                         |            |  |  |  |  |

 

Net sales for the quarter ended December 29, 2006 increased by $33.2million, or 115%, from the quarter ended December 30, 2005.  The increase in net sales from quarter toquarter was primarily due to the following:

·                  The integrationof our PVD, Etch and CVD product lines acquired through our merger with Trikoninto our suite of products.  Because themerger with Trikon occurred on December 1, 2005, the quarter ended December 30,2005 included only $0.6 million of net sales contributed by the merged Trikonsubsidiary.  Net sales related to theseproduct lines during the quarter ended December 29, 2006 increased byapproximately $19.2 million over the quarter ended December 30, 2005; and

·                  Approximately$14.1 million of the increase in net sales is related to our deposition andthermal processing products. Non-contingent revenue recognized upon shipment of these products duringthe quarter ended December 29, 2006 increased by approximately $15.3 millionover the quarter ended December 30, 2005. This was due primarily to a 53% increase in system unit shipments and achange in our product mix with a higher percentage of the unit shipmentsrelating to our RVP 300*plus* and ALDsystems, which have higher average selling prices than our 200mm and belowprocessing systems. In addition, demand for spare parts, services and fieldoptions upgrades increased, resulting in an approximate 28% increase in sparesand service sales during the quarter ended December 29, 2006 as compared to thequarter ended December 30, 2005. These increases were partially offset by adecrease of $1.2 million in net sales recognized on field 

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acceptances of our deposition and thermal batch processing systemsrelated to the timing of such acceptances during the quarter ended December 29,2006 versus the quarter ended December 30, 2005.

During the quarter ended December 29, 2006, our Deep Silicon EtchChamber, or DSi Chamber, which offers benefits to production users insystem-in-package, wafer level packaging and conventional micro electromechanical systems applications, became “proven technology” after sufficientsuccessful installations and acceptance at our customer sites to warrant thechange from “new technology” to “proven technology.”

***GrossProfit and Gross Margin***

Gross profit is the difference between net sales and cost of goodssold.  Cost of goods sold consists of purchased material, labor andoverhead to manufacture equipment or spare parts and the cost of service andfactory and field support to customers for warranty, installation and paidservice calls.  In addition, the cost of outsourcing the assembly ormanufacturing of systems and subsystems to third parties is included in cost ofgoods sold.  Gross margin is gross profit expressed as a percentage of netsales.
|              | ** ** | **Quarter Ended**               | ** ** |
|--------------|------------|--------------------------------------|------------|
| ** **   | ** ** | **December 29,**                | ** ** | **December 30,** | ** ** |
| ** **   | ** ** | **2006**                             | ** ** | **2005** | ** ** |
| ** **   | ** ** | **(dollars in thousands)** | ** ** |
| Gross profit |       | $                                    | 18,849     |   | $ | 7,135 |   |
| Gross margin |       | 30                                   | %          | 25 | % |
|              |            |                                      |            |  |  |  |  |

 

The increase in gross margin of 5% was primarily a result of changes inthe mix of the systems we sold. Improvements in the gross margins for our ALD and batch thermalprocessing product lines and higher gross margins on the contingent revenuerecorded upon system acceptance during the quarter ended December 29, 2006as compared to the quarter ended December 30, 2005 contributed to theincreased gross margin on a quarter over quarter basis.  During the quarter ended December 29,2006, the percentage of our net sales attributable to our RVP 300*plus* batch thermal processing system decreased by 8% to 37% fromthe quarter ended December 30, 2005. Gross margins on our ALD Celsior products sold during the quarter endedDecember 29, 2006 exceeded the gross margins on our ALD Pantheon productssold during the quarter ended December 30, 2005.  The ALD Celsior replaced the ALD Pantheon asour single wafer ALD product during fiscal year 2006.  In addition, gross margins on our PVD, Etchand CVD products lines that we acquired as part of the merger with Trikon weresignificantly higher than the average for systems sold during the quarter endedDecember 30, 2005.  Reconfigurationof RVP 300*plus* product reduced manufacturingcosts, which more than offset lower average selling prices on our highest salesvolume product. These product mix improvements were partially offset by lowerservice revenue as a percentage of total revenue.

***Researchand Development***

Research and development expense consists of employment costsattributable to employees, consultants and contractors who primarily spendtheir time on system design, engineering and process development; materials andsupplies used in system prototyping, including wafers, chemicals and processgases; depreciation and amortization expense allocable to research and developmentactivities and facilities; direct charges for repairs to research equipment andlaboratories; costs of outside services for facilities; and process engineeringsupport and wafer analytical services.  We also include in research anddevelopment expenses associated with the preparation, filing and prosecution ofpatents and other intellectual property.
|                           | ** ** | **Quarter Ended**               | ** ** |
|---------------------------|------------|--------------------------------------|------------|
| ** **                | ** ** | **December 29,**                | ** ** | **December 30,** | ** ** |
| ** **                | ** ** | **2006**                             | ** ** | **2005** | ** ** |
| ** **                | ** ** | **(dollars in thousands)** | ** ** |
| Research and  development |       | $                                    | 7,703      |   | $ | 4,643 |   |
| Percent of total  revenue |       | 12                                   | %          | 16 | % |
|                           |            |                                      |            |  |  |  |  |

 

The increase in research and development costs of approximately $3.1million, or 66%, over the quarter ended December 30, 2005 was primarily due to$2.1 million of incremental costs incurred in relation to our PVD, Etch and 

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CVD products groups that we acquired through the merger with Trikon inDecember 2005.  In addition, salaries,benefits and facilities costs increased by approximately $0.7 million inrelation to our ongoing ALD and thermal batch processing research anddevelopment efforts in the quarter ended December 29, 2006 versus the quarterended December 30, 2005.

***Selling,General and Administrative***

Selling, general and administrative expense consists of employmentcosts attributable to employees, consultants and contractors who primarilyspend their time on sales, marketing and order administration and corporateadministrative services; occupancy costs attributable to employees performingthese functions; sales commissions; promotional marketing expenses; and legaland accounting expenses.
|                                      | ** ** | **Quarter Ended**               | ** ** |
|--------------------------------------|------------|--------------------------------------|------------|
| ** **                           | ** ** | **December 29,**                | ** ** | **December 30,** | ** ** |
| ** **                           | ** ** | **2006**                             | ** ** | **2005** | ** ** |
| ** **                           | ** ** | **(dollars in thousands)** | ** ** |
| Selling, general  and administrative |       | $                                    | 8,408      |   | $ | 5,115 |   |
| Percent of net sales                 |       | 14                                   | %          | 18 | % |
|                                      |            |                                      |            |  |  |  |  |

 

The increase in selling, general and administrative expense of $3.3million, or 64%, over the quarter ended December 30, 2005 was primarily dueto increased legal and accounting fees of $0.6 million primarily in relation tolitigation related costs, incremental costs of $0.7 million related to theinfrastructure acquired in the merger with Trikon during December 2005,increases in salaries, employee benefits and commissions of $1.4 million, $0.3million in increased costs related to international infrastructure build-up anda $0.4 million increase in export and licensing fees.  The increases were partially offset by thenet gain from foreign currency exchange transactions of approximately $0.5million.

***In-processResearch and Development***
|                                      | ** ** | **Quarter Ended**               | ** ** |
|--------------------------------------|------------|--------------------------------------|------------|
| ** **                           | ** ** | **December 29,**                | ** ** | **December 30,** | ** ** |
| ** **                           | ** ** | **2006**                             | ** ** | **2005** | ** ** |
| ** **                           | ** ** | **(dollars in thousands)** | ** ** |
| In-process  research and development |       | $                                    | —     |   | $ | 393 |   |
| Percent of net sales                 |       | 0                                    | %          | 1 | % |
|                                      |            |                                      |            |  |  |  |  |

 

In-process research and development incurred in the quarter endedDecember 30, 2005 was a result of the merger transaction with Trikon andrepresented the write-off of technology that had not yet reached technologicalfeasibility.

***InterestExpense***
|                       | ** ** | **Quarter Ended**               | ** ** |
|-----------------------|------------|--------------------------------------|------------|
| ** **            | ** ** | **December 29,**                | ** ** | **December 30,** | ** ** |
| ** **            | ** ** | **2006**                             | ** ** | **2005** | ** ** |
| ** **            | ** ** | **(dollars in thousands)** | ** ** |
| Interest expense      |       | $                                    | 1,251      |   | $ | 1,386 |   |
| Percent of net  sales |       | 2                                    | %          | 5 | % |
|                       |            |                                      |            |  |  |  |  |

 

Our interest expense for the quarters ended December 29, 2006 andDecember 30, 2005 consisted primarily of interest incurred on our revolvingline of credit, another line of credit, which is secured by a mortgage on ourland and buildings, amortization of debt issuance costs on the lines of creditand amortization of the fair value of the warrants issued to affiliates ofVantagePoint Venture Partners, or VPVP, in consideration for VPVP’s agreementto guarantee a portion of our revolving line of credit. In addition, dividendsthat were accrued on our mandatorily redeemable series B and B-1 preferredstock were charged to interest during the quarter ended December 30, 2005.

Aggregate borrowings under our revolving line of credit and mortgageline of credit were $40.8 million as of December 29, 2006 and $32.8million as of December 30, 2005. The average interest rates on our revolving and mortgage lines of creditincreased from approximately 7.5% and 9.3%, respectively, during the quarterended December 30, 2005 to approximately 8.25% and 10.63%, respectively,during the quarter ended December 29, 2006.  We recorded amortization of debt issuancecosts and the fair value of 

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the warrants of $386,000 and $413,000 during the quarters endedDecember 29, 2006 and December 30, 2005, respectively. During the quarterended December 30, 2005, dividends earned of $220,000 on our mandatorilyredeemable Series B and B-1 preferred stock were recorded as interestexpense.  In connection with the closingof the private placement of 3,282,275 shares of our common stock on April 24,2006, all outstanding shares of our mandatorily redeemable Series B andB-1 preferred stock were converted into shares of our common stock.  As aresult of the conversion, dividends ceased accruing as of April 24, 2006.

***IncomeTaxes***

Because we have incurred significant operating losses during priorperiods, no material federal or state income taxes have been recorded. We  recorded income taxes relating to certainprofitable international subsidiaries.

**Liquidityand Capital Resources**

At December 29, 2006, we had $5.6 million available for additionalborrowings under our revolving line of credit, subject to certain conditions,and $5.0 million available for additional borrowings under our mortgageline of credit, subject to our ability to meet certain financial or propertyzoning criteria. Our revolving line of credit has a stated maturity of August11, 2007.

At December 29, 2006, our cash and cash equivalents were $15.5 millionas compared to $10.7 million at September 29, 2006. This increase in cashand cash equivalents is primarily attributable to increased borrowings underour revolving line of credit and cash generated from operations during thequarter ended December 29, 2006.

On January 5, 2007, we filed a registration statement on Form S-1 underthe Securities Act of 1933 for the purpose of offering 4,000,000 shares of ourcommon stock for sale.  We intend to usethe net proceeds from the offering for working capital, research anddevelopment and other general corporate purposes, which may include repayingborrowings under our mortgage and revolving lines of credit.

We currently anticipate that our existing cash balances, cash providedby operations, available borrowings under our existing lines of credit and netproceeds from our expected stock offering will be sufficient to meet ouranticipated cash needs for at least the next 12 months.  However, we maychoose to raise additional capital from the sale of debt or equity securitiesor from other sources in order to support our operations and expansion plans.  We may not be able to obtain any additional capital on acceptable terms, if atall.

***CashFlows from Operating Activities***

Cash provided by operating activities for the quarter endedDecember 29, 2006 was $0.6 million. Net income during the quarter ended December 29, 2006 of approximately$1.1 million, together with non-cash expense adjustments (depreciation,amortization, stock-based compensation, bad debt and net operating lossutilization) aggregating approximately $2.1 million, provided cash fromoperating activities to offset cash used to fund changes in operating assetsand liabilities.  Net changes inoperating assets and liabilities during the quarter used approximately $2.6million of cash.  Cash used to fundincreases in accounts receivable, prepaid expenses and other assets and areduction in accounts payable was $3.9 million, $0.5 million and $3.6 million,respectively.  These uses of cash werepartially offset by cash generated through a reduction in inventory of $2.5million and increases in warranty liability and accrued liabilities of $1.2million and $1.7 million, respectively.

***CashFlows from Investing Activities***

Cash used in investing activities for the quarter ended December 29,2006 was approximately $1.3 million. Investing activities during the quarterconsisted of purchasing equipment primarily used in our development anddemonstration laboratories.

***CashFlows from Financing Activities***

Net cash generated by financing activities for the quarter ended December29, 2006 was $5.7 million.  Incremental bank borrowings under ourrevolving line of credit generated $6.2 million in cash. Payments on ourmortgage line of credit, short-term borrowings and capital lease obligationswere the primary offsets to these borrowings.

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At December 29, 2006, we had a revolving line of credit which consistsof a $20.0 million revolving credit facility that is guaranteed byaffiliates of VPVP and a separate revolving credit facility that provides forborrowings up to $20.0 million based upon a defined borrowing base. Theborrowings under our revolving line of credit accrue interest at the bank’sprime rate of which $10.0 million is subject to an interest rate cap of8.25%, which is payable monthly. Our revolving line of credit has a statedmaturity of August 11, 2007. Outstanding borrowings under our revolvingline of credit were $34.4 million at December 29, 2006 and $28.3 million atSeptember 29, 2006.

At December 29, 2006, we had a $12.0 million line of credit securedby a mortgage on our land and buildings. The borrowings under this mortgageline of credit accrue interest at a rate of LIBOR plus a margin of 5.25%, ofwhich $7.0 million is subject to a LIBOR rate capped at 6.75%, and isrepayable in monthly principal installments of $23,333 plus interest. Ourmortgage line of credit matures on September 30, 2007. Outstandingborrowings under our mortgage line of credit were $6.4 million at December29, 2006 and $6.5 million at September 29, 2006, respectively.  Theremaining availability of $5.0 million, which does not increase to reflectrepayments under the terms of our mortgage line of credit, may be available inthe future if we meet certain financial or property zoning criteria.

**Off-BalanceSheet Arrangements**

At December 29, 2006, we had no off-balance sheet arrangements asdefined in Item 303(a)(4) of Regulation S-K promulgated by the Securitiesand Exchange Commission.

**ContractualObligations**

Other than operating leases for certain equipment and real estate, wehave no significant off-balance sheet transactions or unconditional purchaseobligations.  See Note 8 to the Condensed Consolidated FinancialStatements for a table of our cash obligations and commitments relating to ourdebt obligations and lease commitments as of December 29, 2006.

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

For quantitative and qualitative disclosures about market riskcurrently affecting us, see Item 7A: “Quantitative and Qualitative DisclosuresAbout Market Risk” included in our Annual Report on Form 10-K for the fiscalyear ended September 29, 2006.  Our exposure to market risk has notchanged materially since September 29, 2006.

**ITEM 4.    CONTROLS AND PROCEDURES**

***DisclosureControls and Procedures***

We maintain disclosure controls and procedures that are designed withthe objective of providing reasonable assurance that information required to bedisclosed in our Exchange Act reports is recorded, processed, summarized andreported within the time periods specified in the SEC’s rules and forms, andthat such information is accumulated and communicated to our management,including our Chief Executive Officer and Chief Financial Officer, asappropriate, to allow timely decisions regarding required disclosure. Indesigning and evaluating our disclosure controls and procedures, managementrecognizes that any controls and procedures, no matter how well designed andoperated, can provide only reasonable assurance of achieving the desiredcontrol objectives, and our management is required to apply its judgment inevaluating the cost-benefit relationship of possible controls and procedures.

As of December 29, 2006, the end of the period covered by this report,based on the evaluation of our Chief Executive Officer and Chief FinancialOfficer of the effectiveness of the design and operation of our disclosurecontrols and procedures, our Chief Executive Officer and Chief FinancialOfficer concluded that our disclosure controls and procedures were effective atthe reasonable assurance level.

***Changesin Internal Control Over Financial Reporting***

There was no change in our internal control over financial reportingduring the first quarter of fiscal 2007 that has materially affected, or isreasonably likely to materially affect, our internal control over financialreporting.

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**PART II. OTHER INFORMATION**

**ITEM 1.  LEGAL PROCEEDINGS**

On April 11, 2006, IPS, Ltd. (IPS) filed a lawsuit against us in theUnited States District Court for the Central District of California. Thecomplaint alleges that we improperly used IPS’s confidential information todevelop our Celsior single-wafer processing type atomic layer depositiontechnology. We have filed an answer denying the claim. The complaint is forunspecified monetary damages, injunctive relief and an order rescinding thesettlement and distributor agreements that IPS and Aviza entered into in May2004 in settlement of a prior lawsuit that IPS filed against ASML U.S., Inc.and Aviza in March 2004 relating to assets that we acquired from ASML inOctober 2003. We believe that we have complied with the settlement anddistributor agreements and that the allegations contained in IPS’s complaintare without merit. We intend to contest the lawsuit vigorously.

Discovery in the litigation has not yet begun because the partiesdisagree about the proper forum in which to resolve the claims asserted by IPS.On May 12, 2006, we filed with the United States District Court for theNorthern District of California a petition to compel arbitration in Santa ClaraCounty, California. On August 3, 2006, Judge Ware of the Northern District ofCalifornia found that one or more of the claims asserted by IPS was likelyarbitrable and ordered the parties to arbitration to determine which claimswere properly subject to arbitration. On October 23, 2006, Judge Cooper of theCentral District of California stayed proceedings pending resolution of thequestion of arbitrability. The parties are currently in the process of filingtheir pleadings in the arbitration.

**ITEM 1A.  RISK FACTORS**

There are no material changes to the risk factors described in thesection entitled “Risk Factors” in Item 1A of Part I of our Annual Report onForm 10-K for the fiscal year ended September 29, 2006, except for (i) theaddition of the risk factor entitled “We are subject to export regulations andcould be required to pay substantial fines and penalties if we fail to complywith these regulations” and (ii) the updating of the risk factors entitled “Wewill be required to spend significant time, money and other resources todetermine whether our internal control over financial reporting iseffective.  If we are unable to achieveand maintain effective internal control over financial reporting, the value ofyour investment in Aviza could decline” and “We will not be required to furnisha report on our internal control over financial reporting until December 2008”to reflect the SEC’s final rule extending the deadlines for non-acceleratedfilers to comply with certain provisions of Section 404 of the Sarbanes-OxleyAct of 2002.

***We mayneed to raise capital in order to support our operations, which capital may notbe available on terms acceptable to us, or at all.***

At December 29, 2006, we had cash and cash equivalents ofapproximately $15.5 million and short-term debt of approximately $42.0million.  We may need to raise capitalfrom the sale of debt or equity securities or other sources in order to supportour operations.  We may not be able toobtain 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 and protectionagainst future dilutive transactions.

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***We aresubstantially leveraged, which could limit our ability to adjust our businessto respond to competitive pressures and to obtain sufficient funds to satisfyour future manufacturing capacity and research and development needs.***

We have significant indebtedness. At December 29, 2006, we had total debt of approximately $43.0million, of which approximately $42.0 million was short-term.  Our indebtedness could have seriousconsequences 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.

Ourability to pay the principal of, and interest on, our indebtedness and to makeplanned expenditures will depend on our future operating performance, whichcould be affected by changes in economic conditions and other factors, some ofwhich are beyond our control.  Ourfailure to comply with the covenants and other provisions contained in theagreements governing our indebtedness could result in events of default underthese agreements, which in turn could permit our lenders to accelerate paymentof our indebtedness.  If we are at anytime unable 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 haveincurred losses for most of our existence, and we may never again be able toachieve profitability.***

Weachieved profitability for the first time with net income of $1.1 million forthe quarter ended December 29, 2006. However, we incurred net losses of $14.7 million, $16.0 million and$19.7 million for the fiscal years ended September 29, 2006 (fiscal 2006),September 30, 2005 (fiscal 2005) and the fiscal period from October 7,2003 through September 24, 2004 (fiscal 2004), respectively.  As a result, we will need to continue toincrease our sales and reduce our costs in order to sustain profitability.  However, we may never again generatesufficient net sales or reduce our costs sufficiently to achieveprofitability.  Even if we again achieveprofitability, we may not have sustainable profitability on a quarterly orannual basis in the future.  If we areunable to sustain profitability, we may be forced to implement expensereduction measures, including selling assets, consolidating operations,reducing our workforce or delaying, canceling or reducing certain systemdevelopment, marketing or other operational programs, any of which could harmour business.

***Wereceive most of our net sales from a small number of customers, and the lossof, or a significant reduction or fluctuation in, orders from those customerscould seriously harm our business.***

Forthe quarter ended December 29, 2006, approximately 42% of our net sales wereattributable to Inotera Memories Inc. and approximately 75% of our sales wereattributable to our top 10 customers. For our fiscal year ended September 29, 2006, approximately 35% ofour net sales were attributable to two customers and approximately 74% of ournet sales were attributable to our top 10 customers.  Winbond Electronics Corp. and InoteraMemories, Inc. accounted for 24% and 11% of our net sales in fiscal 2006,respectively.  For our fiscal year endedSeptember 30, 2005, approximately 69% of our net sales were attributableto three customers and approximately 84% of our net sales were attributable toour top 10 customers.  Inotera Memories,Inc., Infineon Technologies AG and Winbond Electronics Corp. accounted for 43%,15% and 11% of our net sales in fiscal 2005, respectively.  We expect to continue to receive asubstantial portion of our net sales from a small number of customers for theforeseeable future.  If our largestcustomers delay, cancel or do not place orders, we may not be able to replacethose orders with new orders.  As weexpect to configure our systems to customer specifications, changing,rescheduling or cancelling 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.

***Claims orlitigation regarding our intellectual property rights could seriously harm ourbusiness or require us to incur significant costs.***

Inrecent years, there has been significant litigation in the semiconductorequipment industry involving patents and other intellectual propertyrights.  Infringement claims have beenasserted against us and may be asserted against us in the future, and we may notbe able to defend ourselves against such claims successfully.  Any claim that our systems infringe theproprietary rights of others would force us to defend ourselves and possiblyour customers against the alleged infringement. These claims and any resulting lawsuits, if successful, could subject us

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tosignificant liability for damages and invalidate our proprietary rights.  These lawsuits, regardless of their outcome,would likely be time-consuming and expensive to resolve and would divertmanagement’s time and attention.  Anypotential intellectual property litigation could force us to do one or more ofthe following:

·                  lose or forfeit our proprietary rights;

·                  stop manufacturing or selling systems thatincorporate the challenged intellectual property;

·                  obtain from the owner of the infringedintellectual property right a license to sell or use the relevant technology,which license may not be available on reasonable terms or at all and mayinvolve significant royalty payments;

·                  pay damages and attorneys’ fees in somecircumstances; or

·                  redesign those systems that use thechallenged intellectual property.

Ifwe are forced to take any of these actions, our business could be severelyharmed.

OnApril 11, 2006, IPS, Ltd. filed a lawsuit against us in the United StatesDistrict Court for the Central District of California.  The complaint alleges that we improperly usedIPS’s confidential information to develop our Celsior single-wafer processingtype atomic layer deposition technology. The complaint is for unspecifiedmonetary damages, injunctive relief and an order rescinding the settlement anddistributor agreements that we and IPS entered into in May 2004 in settlementof a prior lawsuit that IPS filed against ASML U.S., Inc. and us in March 2004relating to assets that we acquired from ASML in October 2003.  We intend to contest the lawsuit vigorously.

Discoveryin the litigation has not yet begun because the parties disagree about theproper forum in which to resolve the claims asserted by IPS.  On May 12, 2006, we filed with the UnitedStates District Court for the Northern District of California a petition tocompel arbitration in Santa Clara County, California.  On August 3, 2006, Judge Ware of the NorthernDistrict of California found that one or more of the claims asserted by IPS waslikely arbitrable and ordered the parties to arbitration to determine whichclaims were properly subject to arbitration. On October 23, 2006, Judge Cooper of the Central District of Californiastayed proceedings pending resolution of the question of arbitrability.  The parties are currently in the process offiling their pleadings in the arbitration.

Inthe event of a negative outcome in this dispute, we may be required todiscontinue sales of our Celsior system, forgo development of other atomiclayer deposition systems and pay monetary damages and attorneys’ fees, whichcould harm our business, financial condition and results of operations.

***We aresubject to export regulations and could be required to pay substantial finesand penalties if we fail to comply with these regulations.***

Weare subject to governmental regulations relating to the export of certain partsused in the manufacturing and maintenance of our systems.  If we fail to comply with these regulations,we could be required to pay substantial fines and penalties.

InNovember 2006, we discovered that we may have exported certain pressuretransducers that are listed on the U.S. Bureau of Industry and Security’sCommerce Control List without proper authorization, either in the form of anexport license or pursuant to an exception to the Bureau of Industry andSecurity’s export license requirements, and on December 20, 2006, wesubmitted our initial notification of a voluntary self-disclosure of possibleexport compliance problems to the Office of Export Enforcement in accordancewith applicable Export Administration Regulations.  We are currently conducting a review of allof our exports of pressure transducers since October 7, 2003, the date on whichwe commenced operations, in order to determine the nature and scope of thepotential issue with respect to those pressure transducers.  If, as a result of our review, we determinethat we failed to comply with applicable U.S. export regulations, we may berequired to pay civil fines and penalties to the U.S. government.  Because we have not yet completed our review,we do not know whether we will ultimately have to pay any fines or penaltiesor, if we do, whether those fines or penalties will be substantial.  If we have to pay substantial fines orpenalties to the U.S. government, it could harm our financial condition andresults of operations.

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***Thesemiconductor industry is highly cyclical and unpredictable.***

Ourbusiness depends upon the capital expenditures of semiconductor manufacturers,which in turn depend on the current anticipated market demand for ICs and, inparticular, the DRAM segment of the semiconductor industry, which accounted fora majority of our net sales for the quarter ended December 29, 2006 and the fiscalyear ended September 29, 2006. The semiconductor industry has historicallybeen cyclical due to sudden changes in manufacturing capacity.  These changes in capacity have affected thetiming and amounts of our customers’ capital equipment purchases andinvestments in technology, and continue to affect our orders, net sales, grossmargins and results of operations.

Duringperiods of decreasing demand for IC manufacturing equipment, we must be able toalign our cost structure appropriately with prevailing market conditions andmotivate and retain key employees effectively. Conversely, during periods of increasing demand, we must have sufficientmanufacturing capacity and inventory to meet customer demand and must be ableto attract, retain and motivate a sufficient number of qualifiedindividuals.  If we are unable to alignour cost structure with business conditions in a timely manner and manage ourresources and production capacity effectively, it could harm our business,financial condition and results of operations.

***Becausewe lack long-term purchase commitments from our customers, our net sales andinventory could fluctuate from period to period, which could harm our resultsof operations.***

Wegenerally do not enter into long-term purchase contracts with ourcustomers.  Our business is characterizedby short-term purchase orders and shipment schedules, and our customers maycancel or delay their orders without penalty. As a result, it is difficult for us to forecast our net sales and todetermine the appropriate levels of inventory that we need to carry in order tomeet future demand.  In addition, becausewe do not have long-term contracts with our customers, we forecast our netsales and plan our production and inventory levels based upon the demand forecastsof our customers, which are highly unpredictable and can fluctuatesubstantially.  This could lead toincreased inventory levels and increased carrying costs and risk of excess orobsolete inventory due to unanticipated reductions in purchases by ourcustomers.

***Ourdeferred revenue from sales of our systems that constitute “new technology” andour backlog of customer orders may not result in future net sales.***

Wedefer revenue and any associated profit from the sale of newly introducedsystems that are subject to contractual customer acceptance provisions andsubstantive installation obligations, which we refer to as “new technology,”until our customer has acknowledged its acceptance of the system or theinstallation work is completed.  If thesystem does not meet the agreed specifications and the customer refuses toaccept the system, we will not realize the deferred revenue and any associateddeferred profit and we may be required to refund any cash payments previouslyreceived from the customer, which may harm our business, financial conditionand results of operations.

Weschedule the production of our systems based in part upon our backlog.  Due to possible customer changes in deliveryschedules and cancellations of orders, our backlog at any particular date willnot necessarily be indicative of actual sales for any future period.  In addition, while we evaluate each customerorder on a case-by-case basis to determine qualification for inclusion inbacklog, we cannot assure you that amounts that we include in backlog willultimately result in future sales.  As aresult, our backlog may not be a reliable indication of our future netsales.  A reduction in backlog during anyparticular period, or the failure of our backlog to result in future net sales,could harm our business, financial condition and results of operations, andcause our net sales to fall below our expectations and the expectations ofanalysts and investors.

***We havelong sales cycles for our systems, which may cause our results of operations tofluctuate from period to period.***

Oursystems are technologically complex.  Ourprospective customers generally must commit significant resources to test andevaluate our systems and to install and integrate them into their manufacturinglines.  In addition, our customers oftenrequire a significant number of system presentations and demonstrations, insome instances evaluating equipment on site, before reaching a sufficient levelof confidence in our systems’ performance and compatibility with theirrequirements to place an order.  As aresult, our sales process is often subject to delays 

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associatedwith lengthy approval processes that typically accompany the design and testingof new systems.  Our sales cycles oftenhave lasted for many months or even years and require us to invest significantresources.  In addition, we may incursignificant costs in supporting evaluation equipment at customers’ facilities,and orders expected in one quarter could shift to another quarter because ofthe timing of our customers’ purchase decisions.  All of these factors could cause our resultsof operations to fluctuate from period to period.

***Ourresults of operations may suffer if we fail to manage our inventoryeffectively.***

Weneed to manage our inventory of component parts, work-in-process and finishedgoods effectively to meet customer delivery demands at an acceptable risk andcost.  Our customers are increasinglyrequiring very short lead times for delivery, which may require us to purchaseand carry additional inventory.  For boththe inventories that support the manufacture of our systems and our spare partsinventories, if the customer demand we anticipate does not materialize in atimely manner, we will incur increased carrying costs and some inventory couldbecome obsolete or otherwise unfit for sale, resulting in write-offs whichwould harm our results of operations. Conversely, if customer demand for our systems materializes more quicklythan we anticipate, our inventories may be insufficient, which could result inlost sales opportunities that could harm our results of operations.

***We willnot be able to compete effectively if we fail to address the technology needsof our customers.***

Weoperate in a highly competitive environment, and our future success isdependent upon our ability, in a timely and cost-effective manner, to:

·                  develop and market new systems andtechnologies;

·                  improve our existing systems andtechnologies;

·                  expand into or develop equipment solutionsfor new markets for IC products;

·                  achieve market acceptance and accuratelyforecast demand for our systems and technologies;

·                  achieve cost efficiencies across our systemofferings;

·                  qualify new or improved systems for volumemanufacturing with our customers; and

·                  lower our customers’ cost of ownership.

Wemay not be able to forecast or respond accurately to the technological trendsin the semiconductor industry or respond to specific product announcements bycompetitors that may be developing technologies and systems that are moreeffective or that achieve more widespread acceptance than ours.  We also may not be able to develop strategicalliances with equipment and materials suppliers to the semiconductor industryto produce next-generation films and processes. In addition, we may incur substantial costs to ensure the functionalityand reliability of our current and future systems.  If our newly developed systems are unreliableor do not meet our customers’ expectations, then we could experience reducedorders, higher manufacturing costs, delays in collecting accounts receivable oradditional service and warranty expenses. Our failure to meet our customers’ technology needs and other demandswill impair our ability to compete effectively, which in turn could harm ourbusiness, financial condition and results of operations.

***Ourcompetitors have greater financial resources and greater name recognition andtherefore may compete more successfully.***

Weface competition or potential competition from many companies that have greaterresources than we have.  If we are unableto compete effectively with these companies, our market share may decline andour business could be harmed.  Virtuallyall of our principal competitors are substantially larger than we are and mostof them have broader product lines than we do. These competitors have well-established reputations in the markets inwhich we compete, greater experience with high-volume manufacturing, broadername recognition, substantially larger customer bases and substantially greaterfinancial, 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.

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***Semiconductormanufacturers are typically loyal to their existing semiconductor equipmentsuppliers, which may make it difficult for us to obtain new customers.***

Becausesemiconductor manufacturers must make substantial investments to install andintegrate capital equipment into their semiconductor fabrication facilities,they tend to choose semiconductor equipment manufacturers based on establishedrelationships, product compatibility and proven system performance.

Oncea semiconductor manufacturer selects a particular vendor’s capital equipment,the manufacturer generally relies for a significant period of time upon theequipment from this vendor of choice for the specific production lineapplication.  To do otherwise createsrisk for the manufacturer because manufacturing a semiconductor requires manyprocess steps and a fabrication facility will contain many different types ofmachines that must work cohesively to produce products that meet the customers’specifications.  If any piece ofequipment fails to perform as expected, the customer could incur significantcosts related to defective products, production line downtime or low productionyields.

Sincemost new fabrication facilities are similar to existing ones, semiconductormanufacturers tend to continue using equipment that has a proven trackrecord.  Based on our experience with ourmajor customers, we have observed that once a particular piece of equipment isselected from a vendor, the customer is likely to continue purchasing that samepiece of equipment from the vendor for similar applications in the future.  Broadening our market share remains difficultdue to choices made by customers that continue to be influenced by pre-existingbases installed by competing vendors.  Asa result, our ability to obtain new customers and additional orders may belimited.

Asemiconductor manufacturer frequently will attempt to consolidate its othercapital equipment requirements with the same vendor.  As a result, we may face narrow windows ofopportunity to be selected as the “vendor of choice” by potential newcustomers.  It may be difficult for us tosell 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 dependupon sole suppliers for certain key components.***

Substantiallyall of our net sales have come from the sale of systems that contain keycomponents that are available only from a single source or limitedsources.  As a result, we depend on anumber of sole suppliers for key components used in the manufacturing of oursystems.  If we are unable to obtaintimely delivery of sufficient quantities of these components, we will be unableto manufacture 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 toredesign certain systems.  Redesigningsystems could take significant time and be expensive, and we cannot assure youthat we will be able to do so, or that customers will adopt the redesignedsystems.

***Warrantyclaims in excess of our estimates could seriously harm our business.***

Weoffer a warranty on all of our systems. If our customers make claims under our warranties that exceed ourestimates of the cost of our warranties, it could harm our business, financial conditionand results of operations.

***If wedeliver systems with defects, our credibility may be harmed, sales and marketacceptance of our systems may decrease and we may incur liabilities associatedwith those defects.***

Oursystems are complex and sometimes have contained errors, defects and bugs whenintroduced.  If we deliver systems witherrors, defects or bugs, our credibility and the market acceptance and sales ofour systems could be harmed.  Further, ifour systems contain errors, defects or bugs, we may be required to expendsignificant capital and resources to alleviate these problems.  Defects could also lead to commercial orproduct liability as a result of lawsuits against us or against our customers.  We have agreed to product liability indemnitieswith some of 

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ourcustomers, and our product and commercial liability insurance policiescurrently provide only limited coverage per claim.  In the event of a successful productliability or commercial claim, we could be obligated to pay damages that maynot be covered by insurance or that significantly exceed our insurancecoverage.

***Ouremployment costs in the short-term are fixed to a large extent, and thereforeany unexpected shortfalls in net sales could harm our results of operations.***

Ouroperating expense levels are based in significant part on our headcount, whichgenerally is driven by our long-term net sales goals.  For a variety of reasons, particularly thehigh cost and disruption of layoffs and the costs of recruiting 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.

***Our highspending levels on research and development and our need to maintain a highlevel of customer service and support could harm our results of operations.***

Inorder to remain competitive, we need to maintain high levels of investment inresearch and development, marketing and customer service, while at the sametime controlling our operating expenses.

Theindustry in which we operate is characterized by the need for continuedinvestment in research and development as well as a high level of worldwidecustomer service and support.  As aresult of our need to maintain spending levels in these areas, our results ofoperations could be harmed if our net sales fall below expectations.  In addition, because of the emphasis that weplace on research and development and technological innovation, our operatingexpenses may increase further in the future, which could harm our results ofoperations.

Wecannot assure you that we will have sufficient resources to make a high levelof investment in research and development, marketing and customer service whilecontrolling our operating expenses or that our systems will be viewed ascompetitive as a result of technological advances by our competitors or changesin semiconductor processing technology.  Anysuch competitive pressures may require us to reduce prices significantly orresult in lost customer orders, which could harm our business, financialcondition and results of operations.

***Adisruption of our manufacturing operations could harm our business.***

Althoughwe outsource the manufacturing for certain of our systems or sub-assembliesto third parties, we produce most of our systems at our manufacturingfacilities in Scotts Valley, California and Newport, South Wales, U.K.  In the event of a disruption of operations atour facilities, our third-party manufacturers would not be able to makeup the capacity loss.  Our manufacturingoperations could be subject to disruption for a variety of reasons, includingnatural disasters, work stoppages, operational facility constraints andterrorism.  Any such disruption couldcause delays in shipments of systems to our customers, result in cancellationof customer orders or loss of customers and seriously harm our business.

***Weoutsource manufacturing and logistics activities to third-party service providers,which decreases our control over the performance of these functions.***

Wecurrently outsource certain manufacturing and spare parts logistics functionsto third-party service providers, and we may outsource more of those functionsin the future.  While we expect toachieve operational flexibility and cost savings as a result of thisoutsourcing, outsourcing has a number of risks and reduces our control over theperformance of the outsourced functions. Significant performance problems by these third-party service providerscould result in cost overruns, delayed deliveries, shortages, quality issues orother problems that could result in significant customer dissatisfaction andcould harm our business, financial condition and results of operations.

Iffor any reason one or more of these third-party service providers becomesunable or unwilling to continue to provide services of acceptable quality, atacceptable costs and in a timely manner, our ability to deliver our systems orspare parts to our customers could be severely impaired.  We would quickly need to identify and qualifysubstitute service providers or increase our internal capacity, which could beexpensive, time consuming and

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difficult,and could result in unforeseen operations problems. Substitute serviceproviders might not be available or, if available, might be unwilling or unableto offer services on acceptable terms.

Ifcustomer demand for our systems increases, we may be unable to securesufficient additional capacity from our current service providers oncommercially reasonable terms, if at all.

Ourrequirements currently represent and are expected to continue to represent asmall portion of the total capacities of our third-party service providers, andthey may preferentially allocate capacity to other customers, even duringperiods 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.

***Thesemiconductor industry is global and has expanded within Asia. We havepenetrated this market with some of our systems. If we are unable to continueto penetrate this market with those systems and penetrate this market with ourother systems, our business could be harmed.***

Thepercentage of worldwide semiconductor production that is based in Asia isgrowing more rapidly than in other regions. Although we derived approximately55% of our net sales for the quarter ended December 29, 2006 and****64%, 65% and 46% of our net sales for fiscal 2006, 2005 and2004, respectively, from our sales to customers located in the Asia Pacificregion, our brand recognition in the region is limited. In order to grow ourbusiness, we need to penetrate the region with the addition of new customers,new systems and the expansion of our relationships with our existing customers.We have traditionally sold our systems primarily through our direct salesforce. Although we have a direct sales force and local representatives in theAsia Pacific region, we cannot assure you that we will be able to continuepenetrating 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 prospects.

***If we areunable to hire and retain a sufficient number of qualified personnel, ourresults of operations could be negatively affected.***

Oursuccess depends in part upon our ability to attract and retain qualifiedmanagement, technical, sales and support personnel for our operations on aworldwide 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 have long-term employment contracts with these orany of our other key personnel, and their knowledge of our business andindustry would be extremely difficult for 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 ofoperations could be negatively affected by our loss of key executives oremployees or our inability to attract and retain skilled executives andemployees.

***Changesin accounting standards for equity-based compensation may adversely affect ourresults of operations and our ability to attract and retain employees.***

Ouradoption of SFAS No. 123(R) required us to expense all equity-basedcompensation that we provide to our employees and directors beginning with ourfiscal quarter ended December 30, 2005. The environment for skilledemployees that are knowledgeable about our systems and services is acompetitive one, and we believe that equity-based compensation is an importantpart of the overall compensation that we offer to attract and retain suchemployees. SFAS No. 123(R) has adversely affected and will continue toadversely affect our results of operations. If we decide to decrease theamounts of equity-based compensation that we offer to our current andprospective employees on account of the related expenses that we have to incuras a result of SFAS No. 123(R), it could impair our ability to attract andretain employees.

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***Ourability to compete could be jeopardized by our inability to protect ourintellectual property rights from challenges by third parties.***

Oursuccess and ability to compete depend in large part upon protecting proprietarytechnology. We have relied on a combination of patent, trade secret, copyrightand trademark laws, non-disclosure and other contractual agreements andtechnical measures to protect our proprietary rights.

Wecannot assure you that patents will be issued on pending patent applications orthat competitors will not be able legitimately to ascertain proprietaryinformation embedded in our systems that is not covered by patent or copyright.If this happens, we may not be able to prevent the competitor from using thisinformation.

Inaddition, if we assert patent rights against a competitor’s product, we cannotassure you that any claim in any patent will be sufficiently broad nor, ifsufficiently broad, that the patent will not be challenged, invalidated orcircumvented. We may not have sufficient resources to establish, monitor andprotect our rights. Failure to protect our intellectual property rights couldharm our business.

***Ourefforts to protect our intellectual property may be less effective in someforeign countries where intellectual property rights are not as well protectedas in the United States.***

We derived a significant portion of our****net sales for the quarter ended December 29, 2006 and****fiscal 2006 from sales in foreign countries, includingcertain countries in Asia such as Singapore, Taiwan, Japan, Malaysia, China andKorea. The laws of some foreign countries do not protect proprietary rights toas great an extent as do the laws of the United States, and many U.S. companieshave encountered substantial problems in protecting their proprietary rightsagainst infringement in such countries, some of which are countries in which wehave sold and in which we expect to continue to sell systems. For example,Taiwan is not a signatory to the Patent Cooperation Treaty, which is designedto specify rules and methods for defending intellectual propertyinternationally. In Taiwan, the publication of a patent prior to its filingwould invalidate the ability of a company to obtain a patent. There is a riskthat our means of protecting our proprietary rights may not be adequate in someforeign countries. Our competitors in these countries may independently developsimilar technology or duplicate our systems. If we fail to protect ourintellectual property adequately in those countries, it would be easier for ourcompetitors to sell competing products in those countries.

***We willbe required to spend significant time, money and other resources to determinewhether our internal control over financial reporting is effective. If we areunable to achieve and maintain effective internal control over financialreporting, the value of your investment in Aviza could decline.***

Section 404of the Sarbanes-Oxley Act of 2002, or Section 404, requires thatbeginning with our Annual Report on Form 10-K for our fiscal year endingin September 2008, we must furnish a report on our internal control overfinancial reporting. This report will contain an assessment by our managementof the effectiveness of our internal control over financial reporting. Beginningwith our Annual Report on Form 10-K for our fiscal year ending inSeptember 2009, this report will also contain an opinion by ourindependent registered public accounting firm as to our management’s assessmentof our internal control over financial reporting and the effectiveness of ourinternal control over financial reporting.

Weidentified material weaknesses in our internal control over financial reportingas of the end of fiscal 2004, and Trikon Technologies, Inc., or Trikon, withwhich we completed our merger transaction in December 2005, restated itsfinancial statements in May 2005 as a result of Trikon’s identification oferrors which resulted in material weaknesses in its internal control overfinancial reporting. As a result of our and Trikon’s identified materialweaknesses, we face a significant challenge in ensuring our operations aredesigned in a manner that is consistent with the framework of internal controlestablished by the Committee of Sponsoring Organization of the TreadwayCommission.

Ourinternal control over financial reporting may not be considered effective if,among other things:

·                  any material weaknesses in our internalcontrol over financial reporting exist;

·                  we fail to evaluate key controls in a timelyfashion; or

·                  we fail to remediate assessed deficiencies.

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Ifmanagement asserts that our internal control over financial reporting isineffective, or if our independent registered public accounting firm expressesan adverse opinion on management’s assessment or that our internal control overfinancial reporting is ineffective, the value of your investment in Aviza coulddecline.

***We willnot be required to furnish a report on our internal control over financialreporting until December 2008.***

Weare not currently required to furnish a report on our internal control overfinancial reporting pursuant to the SEC’s rules under Section 404 as partof the Annual Reports that we file on Form 10-K. These rules will apply tous when we file our Annual Report on Form 10-K for our fiscal year endingin September 2008, which we are required to file in December 2008. Asa result, we cannot assure you that our internal control over financialreporting is effective, and you will not have a report from us to that effectuntil December 2008, and our independent registered public accounting firmwill not have to provide their attestation on our management’s report or theiropinion as to the effectiveness of our internal control over financial reportinguntil December 2009.

***Ourresults of operations could be negatively affected by currency fluctuations.***

Althoughour net sales are generally denominated in U.S. dollars and we report ourresults of operations in U.S. dollars, our Newport, South Wales operations arebased in the United Kingdom and most of the operating expenses attributable tothose operations are incurred in British pounds. As a result, a significantportion of our costs are subject to currency fluctuations. Accordingly, if theBritish pound increases in value against the U.S. dollar, our operatingexpenses as a percentage of our net sales will increase and our gross marginswill decline. In addition, our sales in Japan and other foreign service salesare denominated in local currency. As a result, fluctuations in those localcurrencies could also have an impact on our results of operations.

***Becausewe have significant operations outside of the United States, we are subject topolitical, economic and other international conditions that could increase ouroperating expenses and the regulation of our systems and make it more difficultfor us to maintain operating and financial controls.***

Wehave manufacturing facilities in Newport, South Wales, U.K., and sales andservice offices in many other countries. In addition, approximately 55% of ournet sales for the quarter ended December 29, 2006 and****64%of our net sales for fiscal 2006 were derived from sales in the Asia Pacificregion. In recent years, Asian economies have been highly volatile and recessionary,resulting in significant fluctuations in local currencies and otherinstabilities. Instabilities in Asian economies may continue and recur in thefuture or instability could occur in other foreign economies, any of whichcould harm our business, financial condition and results of operations.

Ourexposure to the business risks presented by Asian economies and other foreigneconomies will increase to the extent we continue to expand our globaloperations. Our international operations will continue to subject us to anumber of risks, including:

·                  longer sales cycles;

·                  multiple, conflicting and changinggovernmental laws and regulations;

·                  protectionist laws and business practicesthat favor local companies;

·                  price and currency exchange rates andcontrols;

·                  difficulties in collecting accountsreceivable;

·                  travel and transportation difficultiesresulting from actual or perceived health risks, such as Severe AcuteRespiratory Syndrome and Avian Influenza, commonly referred to as SARS and BirdFlu, respectively; and

·                  political and economic instability.

Anyof these risks could harm our business, financial condition and results ofoperations.

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***Ouroperations are subject to health and safety and environmental laws that mayexpose us to liabilities for noncompliance.***

Weare subject to a variety of governmental regulations relating to the use,storage, discharge, handling, manufacture and disposal of all materials presentat, or are output from, our facilities, including toxic or other hazardouschemical byproducts of the manufacturing processes. We are also subject togovernmental regulations affecting the content, reuse, recycling, distributionand labeling of systems and parts containing hazardous materials. Environmentalclaims, or failure to comply with any present or future regulations, couldresult in significant costs to remediate, the assessment of damages orimposition of fines, the suspension of production of certain systems or thecessation of operations.

Newregulations could require the purchase of costly equipment or the incurrence ofother significant expenses. Failure to control the use or adequately restrictthe discharge of hazardous substances could subject us to future liabilities,which could negatively affect our financial condition and results ofoperations.

Weown and operate a facility located in Scotts Valley, California, or the ScottsValley Site, which is currently subject to an Administrative Order on Consent,or Consent Order, dated as of July 16, 1991 entered into by Watkins-JohnsonCompany (now WJ Communications, Inc.), a prior owner of the Scotts ValleySite, and the United States Environmental Protection 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. The contamination on the Scotts Valley Siteincludes chlorinated solvents in soil and 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 theinsurance provider fail to fulfill their obligations, we could be subject tosubstantial fines and be forced to suspend production, alter manufacturingprocesses or cease business operations, any of which could harm our business,financial condition or results of operations.

***Ourability to use net operating losses to offset future taxable income is subjectto limitations.***

Ingeneral, under Section 382 of the Internal Revenue Code, a corporation thatundergoes an “ownership change” is subject to limitations on its ability toutilize its pre-change net operating losses, or NOLs, to offset future taxableincome. A corporation generally undergoes an “ownership change” if thepercentage of stock of the corporation owned by one or more of its 5%stockholders (where all stock owned by stockholders who are not 5% stockholdersgenerally is treated as owned by one or more 5% stockholders) has increased bymore than 50 percentage points over a three-year period.

Trikon’snet operating losses are subject to limitations arising from previous ownershipchanges and will be subject to additional limitations as a result of our mergertransaction with Trikon. Our existing net operating losses also may be subjectto limitations, and our merger transaction with Trikon may have resulted in ourundergoing an ownership change, thus potentially further limiting our abilityto use our net operating losses.****It isimpossible for us to ensure that we will not experience an ownership change inthe future because changes in our stock ownership, some of which are outside ofour control, could result in an ownership change under Section 382 of theInternal Revenue Code.

Generally,the limitations on our ability to use either our or Trikon’s pre-mergertransaction NOLs to offset future taxable income are expected to besignificant, and thus our liability for future U.S. federal income taxes may bematerially higher than that liability would have been absent such limitations. Similarrules may apply for foreign and state income tax purposes as well.

***Businessinterruptions could adversely affect our business.***

Ouroperations are vulnerable to interruption by fire, earthquake, power loss,telecommunications failure and other events beyond our control. A disastercould severely damage our ability to deliver our systems to our 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 locatednear a known earthquake fault zone. Although our facilities are designed to befault-

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tolerant,our systems are susceptible to damage from fire, floods, earthquakes, powerloss, telecommunications failures and 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.

***Anyacquisitions we may make could disrupt business and harm our financialcondition.***

Wemay invest in complementary products, companies or technologies. Suchinvestments involve numerous risks, including:

·                  diversion of management’s attention fromother operational matters;

·                  inability to complete acquisitions asanticipated or at all;

·                  inability to realize synergies expected toresult from an acquisition;

·                  failure to commercialize purchasedtechnologies;

·                  ineffectiveness of an acquired company’sinternal controls;

·                  impairment of acquired intangible assets as aresult of technological advancements or worse-than-expected performance of theacquired company or its product offerings;

·                  unknown and undisclosed commitments orliabilities;

·                  failure to integrate and retain keyemployees; and

·                  ineffective integration of operations.

Mergersand acquisitions are inherently subject to significant risks, and our inabilityto manage these risks effectively could harm our business, financial conditionand results of operations.

***Ouraffiliates own a large amount of our common stock, which will limit yourability to influence our corporate activities.***

AtDecember 29, 2006, affiliates of VantagePoint Venture Partners, which we referto collectively as VantagePoint, and Caisse de dépôt et placement du Québec,which we refer to as CDPQ, beneficially owned approximately 48% and 20%,respectively, of our outstanding common stock and will beneficially ownapproximately 38% and 16%, respectively, of our outstanding common stock uponcompletion of our proposed public offering of common stock. VantagePoint andCDPQ exercise significant influence over our operations, business strategy andthe outcome of votes on all matters requiring stockholder approval, includingthe approval of significant corporate transactions such as mergers or otherbusiness combinations. VantagePoint or CDPQ may have interests that differ fromthe interests of our other stockholders. This concentration of ownership mayalso have the effect of delaying or preventing a change of control of Aviza ordiscouraging others from making tender offers for shares of our common stock,which could prevent our other stockholders from receiving a premium for theirshares.

***The priceour common stock has been and may continue to be volatile, which may lead tolosses by investors or to securities litigation.***

Themarket price of our common stock has been and may continue to be volatile, andour stock price may decline in the future. For example, for the period fromDecember 2, 2005, the first day that our common stock was publicly traded,through February 1, 2007, the closing price range of our common stock was $3.66to $6.56 per share.

Inaddition, in recent years, the stock market in general, and the market forshares of high technology stocks in particular, have experienced extreme pricefluctuations, and these fluctuations have frequently been unrelated to theoperating performance of the affected companies. These fluctuations could leadto a decline in the market price of our common stock. In the past, securitieslitigation has often been instituted against a company following periods ofvolatility in its stock price. This type of litigation, if filed against us,could result in substantial costs and divert management’s attention andresources.

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**ITEM 2.  UNREGISTERED SALES OF EQUITY SECURITIES AND USEOF PROCEEDS**

None.

**ITEM 3.  DEFAULTS UPON SENIOR SECURITIES**

None.

**ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITYHOLDERS**

Atour 2007 Annual Meeting of Stockholders held on January 31, 2007, ourstockholders approved the three proposals noted below by the following votes:
|                                                                                      | ** ** | **FOR**    | ** ** | **AGAINST/  WITHHELD** | ** ** | **ABSTAINED** | ** ** | **BROKER  NON-VOTES** | ** ** |
|--------------------------------------------------------------------------------------|------------|------------|------------|------------------------|------------|---------------|------------|-----------------------|------------|
| **Proposal  One—Election of Directors**                                         |       |       |       |                   |       |          |       |                  |       |
| Jerauld J.  Cutini                                                                   |       | 15,143,335 |       | —                 |       | 27,350        |       | —                |       |
| C. Richard  Neely, Jr.                                                               |       | 15,143,335 |       | —                 |       | 27,350        |       | —                |       |
|                                                                                 |       |       |       |                   |       |          |       |                  |       |
| **Proposal  Two—Ratification of Independent Registered Public Accounting Firm** |       | 15,152,020 |       | 6,785                  |       | 11,880        |       | —                |       |
| ** **                                                                           |       |       |       |                   |       |          |       |                  |       |
| **Proposal Three—Approval of the  2007 Bonus Plan**                             |       | 11,933,211 |       | 627,453                |       | 49,666        |       | 2,560,355             |       |

 

**ITEM 5. OTHER INFORMATION**

None.

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**ITEM 6.EXHIBITS**
| Exhibit  Number | ** ** | **Description**                                                                                                                                                                                                                                                                                                                                                                                                                                                |
|-----------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 3.1             |       | Amended and Restated Certificate of Incorporation of  Aviza Technology, Inc., incorporated by reference to Exhibit 3.1 to the  Annual Report on Form 10-K filed by the registrant with the Commission on  December 29, 2005.                                                                                                                                                                                                                                   |
|            |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| 3.2             |       | Amended and Restated Bylaws of Aviza Technology,  Inc., incorporated by reference to Exhibit 3.2 to the Annual Report on Form  10-K filed by the registrant with the Commission on December 29, 2005.                                                                                                                                                                                                                                                          |
|            |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| 4.1             |       | Specimen certificate of common stock of Aviza  Technology, Inc., incorporated by reference to Exhibit 4.1 to the Annual  Report on Form 10-K filed by the registrant with the Commission on December  29, 2005.                                                                                                                                                                                                                                                |
|            |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| 10.1            |       | Amendment No. 2 to Second Amended and Restated  Stockholder Agreement, dated as of December 1, 2006, by and among the  Company, Trikon Technologies, Inc. and VantagePoint Venture Partners IV (Q),  L.P., VantagePoint Venture Partners IV, L.P. and VantagePoint Venture  Partners IV Principals Fund, L.P., incorporated by reference to Exhibit 10.1  to the Current Report on Form 8-K filed by the registrant with the Commission  on December 21, 2006. |
|            |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| 10.2            |       | Aviza Technology, Inc. 2007 Management Bonus Plan,  incorporated by reference to Exhibit 10.2 to the Current Report on Form 8-K  filed by the registrant with the Commission on December 21, 2006.                                                                                                                                                                                                                                                             |
|            |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| 10.3            |       | Aviza Technology, Inc. Amended and Restated 2005  Stock Plan, incorporated by reference to Exhibit 10.3 to the Current Report  on Form 8-K filed by the registrant with the Commission on December 21, 2006.                                                                                                                                                                                                                                                   |
|            |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| 10.4            |       | Amendment No. 1 to the Trikon Technologies, Inc.  2004 Equity Incentive Plan, incorporated by reference to Exhibit 10.4 to the  Current Report on Form 8-K filed by the registrant with the Commission on  December 21, 2006.                                                                                                                                                                                                                                  |
|            |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| 10.5            |       | Amendment No. 1 to the Aviza, Inc. 2003 Equity  Incentive Plan, incorporated by reference to Exhibit 10.5 to the Current  Report on Form 8-K filed by the registrant with the Commission on December  21, 2006.                                                                                                                                                                                                                                                |
|            |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| 31.1            |       | Certification of the Chief Executive Officer  pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                                                                                                                       |
|            |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| 31.2            |       | Certification of the Chief Financial Officer  pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                                                                                                                       |
|            |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| 32.1            |       | Certification of the Chief Executive Officer  pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                                                                                                                       |
|            |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| 32.2            |       | Certification of the Chief Financial Officer  pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                                                                                                                       |

 

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**SIGNATURES**

Pursuant to the requirements of the Securities Exchange Act of 1934,the registrant has duly caused this report to be signed on its behalf by theundersigned thereunto duly authorized.
|                          |       | Aviza Technology, Inc.                                  |                             |
|--------------------------|------------|---------------------------------------------------------|----------------------------------|
|                     | * *   | *(Registrant)*                                          |
| * *                 | * *   | * *                                                |
| Dated: February  5, 2007 |       |                                                    |
|                     |       | By:                                                     | **/s/ PATRICK C. O’CONNOR** | ** ** |
|                     |       |                                                    |
|                     | ** ** | **Patrick C. O’Connor******                        |
|                     | * *   | *Executive Vice President and Chief Financial  Officer* |
|                     | * *   | *(Principal Financial and Accounting Officer)*          |
|                          |            |                                                         |                                  |  |  |

 

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**EXHIBIT INDEX**
| Exhibit Number | ** ** | **Description**                                                                                                                                                                                                                                                                                                                                                                                                                                                |
|----------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 3.1            |       | Amended and Restated Certificate of Incorporation of  Aviza Technology, Inc., incorporated by reference to Exhibit 3.1 to the  Annual Report on Form 10-K filed by the registrant with the Commission on  December 29, 2005.                                                                                                                                                                                                                                   |
|           |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| 3.2            |       | Amended and Restated Bylaws of Aviza Technology,  Inc., incorporated by reference to Exhibit 3.2 to the Annual Report on Form  10-K filed by the registrant with the Commission on December 29, 2005.                                                                                                                                                                                                                                                          |
|           |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| 4.1            |       | Specimen certificate of common stock of Aviza  Technology, Inc., incorporated by reference to Exhibit 4.1 to the Annual  Report on Form 10-K filed by the registrant with the Commission on December  29, 2005.                                                                                                                                                                                                                                                |
|           |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| 10.1           |       | Amendment No. 2 to Second Amended and Restated  Stockholder Agreement, dated as of December 1, 2006, by and among the  Company, Trikon Technologies, Inc. and VantagePoint Venture Partners IV (Q),  L.P., VantagePoint Venture Partners IV, L.P. and VantagePoint Venture  Partners IV Principals Fund, L.P., incorporated by reference to Exhibit 10.1  to the Current Report on Form 8-K filed by the registrant with the Commission  on December 21, 2006. |
|           |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| 10.2           |       | Aviza Technology, Inc. 2007 Management Bonus Plan,  incorporated by reference to Exhibit 10.2 to the Current Report on Form 8-K  filed by the registrant with the Commission on December 21, 2006.                                                                                                                                                                                                                                                             |
|           |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| 10.3           |       | Aviza Technology, Inc. Amended and Restated 2005  Stock Plan, incorporated by reference to Exhibit 10.3 to the Current Report  on Form 8-K filed by the registrant with the Commission on December 21, 2006.                                                                                                                                                                                                                                                   |
|           |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| 10.4           |       | Amendment No. 1 to the Trikon Technologies, Inc.  2004 Equity Incentive Plan, incorporated by reference to Exhibit 10.4 to the  Current Report on Form 8-K filed by the registrant with the Commission on  December 21, 2006.                                                                                                                                                                                                                                  |
|           |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| 10.5           |       | Amendment No. 1 to the Aviza, Inc. 2003 Equity  Incentive Plan, incorporated by reference to Exhibit 10.5 to the Current  Report on Form 8-K filed by the registrant with the Commission on December  21, 2006.                                                                                                                                                                                                                                                |
|           |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| 31.1           |       | Certification of the Chief Executive Officer  pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                                                                                                                       |
|           |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| 31.2           |       | Certification of the Chief Financial Officer  pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                                                                                                                       |
|           |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| 32.1           |       | Certification of the Chief Executive Officer  pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                                                                                                                       |
|           |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| 32.2           |       | Certification of the Chief Financial Officer  pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                                                                                                                       |
|           |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                           |

 

 

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