**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

 

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**FORM10-Q**

 

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**ýQUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACTOF 1934**

 

**Forthe quarterly period ended June 30, 2006**

 

**OR**

 

**oTRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGEACT OF 1934**

 

**Forthe transition period from             to             **

 

**Commissionfile number 000-51642**

 

**AvizaTechnology, Inc.**

(Exact name ofRegistrant as Specified in its Charter)

 

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

 

**440Kings Village Road**

**ScottsValley, California    95066**

(Address ofPrincipal Executive Offices including Zip Code)

 

**(831)438-2100**

(Registrant’sTelephone Number, Including Area Code)

 

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Indicate by check markwhether the registrant (1) has filed all reports required to be filed 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   ý     NO    o |
|------------------------------------------------------------------|

 

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

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

 

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

 

As of August 10, 2006,the registrant had 16,144,099 shares of its common stock, par value $0.0001 pershare, outstanding.

 

 

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**AvizaTechnology, Inc.**

 

**Tableof Contents**

 
|                                                                                                                              | **Page********No.** |
|-----------------------------------------------------------------------------------------------------------------------------------|---------------------|
| **PART I. FINANCIAL INFORMATION**                                                                                                 |                |
| Item 1. Financial  Statements (unaudited):                                                                                        |                |
| Condensed Consolidated  Balance Sheets — at June 30, 2006 and September 30, 2005                                             |                | 3 |
| Condensed Consolidated  Statements of Operations — for the Three and Nine Months Ended June 30, 2006 and  June 24, 2005 |                | 4 |
| Condensed Consolidated  Statements of Cash Flows — for the Nine Months Ended June 30, 2006 and June  24, 2005                |                | 5 |
| Notes to Condensed  Consolidated Financial Statements                                                                             |                | 6 |
| Item  2. Management’s Discussion and Analysis of Financial Condition and Results of  Operations                              |                | 18 |
| Item 3. Quantitative  and Qualitative Disclosures About Market Risk                                                               |                | 28 |
| Item 4. Controls  and Procedures                                                                                                  |                | 28 |
| **PART II. OTHER  INFORMATION**                                                                                                   |                |   |
| Item 1. Legal  Proceedings                                                                                                        |                | 28 |
| Item  1A. Risk Factors                                                                                                            |                | 28 |
| Item 2. Unregistered  Sales of Equity Securities and Use of Proceeds                                                              |                | 38 |
| Item 3. Defaults  Upon Senior Securities                                                                                          |                | 39 |
| Item 4. Submission  of Matters to a Vote of Security Holders                                                                      |                | 39 |
| Item 5. Other  Information                                                                                                        |                | 39 |
| Item  6. Exhibits                                                                                                                 |                | 39 |

 

2

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**ITEM 1. FINANCIAL STATEMENTS**

 

**AVIZA TECHNOLOGY, INC.**

**CONDENSED CONSOLIDATED BALANCE SHEETS**

**(in thousands, except par amounts and number of shares)**

**(unaudited)**

 
| ** **                                                                                                                                                                                                                    | ** ** | **June 30,  2006** | ** ** | **September 30,  2005** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------|------------|------------------------------|------------|
| **ASSETS**                                                                                                                                                                                                                    |       |                    |       |                         |       |
|                                                                                                                                                                                                                          |       |                    |       |                         |       |
| CURRENT ASSETS:                                                                                                                                                                                                               |       |                    |       |                         |       |
| Cash and cash equivalents                                                                                                                                                                                                     |       | $                       | 17,851     |                         | $          | 7,437 |   |
| Accounts receivable, net  of allowance of $317 and $564, respectively                                                                                                                                                         |       | 32,624                  |       | 23,630                       |       |
| Inventory                                                                                                                                                                                                                     |       | 45,625                  |       | 24,253                       |       |
| Prepaid expenses and other  current assets                                                                                                                                                                                    |       | 7,221                   |       | 11,632                       |       |
|                                                                                                                                                                                                                          |       |                    |       |                         |       |
| Total current assets                                                                                                                                                                                                          |       | 103,321                 |       | 66,952                       |       |
|                                                                                                                                                                                                                          |       |                    |       |                         |       |
| PROPERTY, PLANT AND  EQUIPMENT – net                                                                                                                                                                                     |       | 23,400                  |       | 19,569                       |       |
|                                                                                                                                                                                                                          |       |                    |       |                         |       |
| INTANGIBLE ASSETS – net                                                                                                                                                                                                  |       | 4,871                   |       | 4,000                        |       |
|                                                                                                                                                                                                                          |       |                    |       |                         |       |
| OTHER ASSETS – net                                                                                                                                                                                                       |       | 489                     |       | 388                          |       |
|                                                                                                                                                                                                                          |       |                    |       |                         |       |
| TOTAL                                                                                                                                                                                                                         |       | $                       | 132,081    |                         | $          | 90,909 |   |
|                                                                                                                                                                                                                          |       |                    |       |                         |       |
| **LIABILITIES AND STOCKHOLDERS’  EQUITY (DEFICIT)**                                                                                                                                                                      |       |                    |       |                         |       |
|                                                                                                                                                                                                                          |       |                    |       |                         |       |
| CURRENT LIABILITIES:                                                                                                                                                                                                          |       |                    |       |                         |       |
| Bank borrowing - short  term                                                                                                                                                                                                  |       | $                       | 30,993     |                         | $          | 30,724 |   |
| Accounts payable                                                                                                                                                                                                              |       | 27,095                  |       | 19,397                       |       |
| Warranty liability                                                                                                                                                                                                            |       | 12,899                  |       | 13,599                       |       |
| Accrued liabilities                                                                                                                                                                                                           |       | 15,708                  |       | 8,814                        |       |
|                                                                                                                                                                                                                          |       |                    |       |                         |       |
| Total current liabilities                                                                                                                                                                                                     |       | 86,695                  |       | 72,534                       |       |
|                                                                                                                                                                                                                          |       |                    |       |                         |       |
| Mandatorily redeemable preferred stock, Series B and B-1, $100 par  value - 110,000 shares authorized; 110,000 shares issued and outstanding at  September 30, 2005 (liquidation preference of $11,097 at September 30, 2005) |       | —                  |       | 11,000                       |       |
|                                                                                                                                                                                                                          |       |                    |       |                         |       |
| NOTE PAYABLE - Long term                                                                                                                                                                                                      |       | 6,330                   |       | 6,463                        |       |
|                                                                                                                                                                                                                          |       |                    |       |                         |       |
| Total liabilities                                                                                                                                                                                                             |       | 93,025                  |       | 89,997                       |       |
|                                                                                                                                                                                                                          |       |                    |       |                         |       |
| COMMITMENTS AND  CONTINGENCIES (Note 9)                                                                                                                                                                                       |       |                    |       |                         |       |
|                                                                                                                                                                                                                          |       |                    |       |                         |       |
| PREFERRED STOCK, SERIES A, $0.001 PAR VALUE – 10,000,000 shares  authorized, 5,226,496 shares issued and outstanding at September 30, 2005  (liquidation preference of $32,650 at September 30, 2005)                    |       | —                  |       | 32,650                       |       |
|                                                                                                                                                                                                                          |       |                    |       |                         |       |
| STOCKHOLDERS’ EQUITY  (DEFICIT):                                                                                                                                                                                         |       |                    |       |                         |       |
| Preferred Stock, $0.0001  par value – 5,000,000 shares authorized; none outstanding                                                                                                                                      |       | —                  |       | —                       |       |
| Common stock, $0.0001 par value - 100,000,000 shares authorized;  16,142,748 and 475,065 shares issued and outstanding at June 30, 2006 and  September 30, 2005, respectively                                                 |       | 2                       |       | 1                            |       |
| Additional paid in capital                                                                                                                                                                                                    |       | 88,307                  |       | 4,040                        |       |
| Accumulated other  comprehensive loss                                                                                                                                                                                         |       | 325                     |       | (110                         | )          |
| Accumulated deficit                                                                                                                                                                                                           |       | (49,578                 | )          | (35,669                      | )          |
|                                                                                                                                                                                                                          |       |                    |       |                         |       |
| Total stockholders’ equity  (deficit)                                                                                                                                                                                    |       | 39,056                  |       | (31,738                      | )          |
|                                                                                                                                                                                                                          |       |                    |       |                         |       |
| TOTAL                                                                                                                                                                                                                         |       | $                       | 132,081    |                         | $          | 90,909 |   |

 

The accompanying notes are an integral part of thesecondensed consolidated financial statements.

 

3

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**AVIZATECHNOLOGY, INC.**

**CONDENSEDCONSOLIDATED STATEMENTS OF OPERATIONS**

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

**(unaudited)**

 
| ** **                           | ** ** | **Quarter Ended** | ** ** | **Nine Months Ended** | ** ** |
|--------------------------------------|------------|------------------------|------------|---------------------------------|------------|
| ** **                           | ** ** | **June 30,  2006**     | ** ** | **June 24,  2005**              | ** ** | **June 30,  2006** | ** ** | **June 24,  2005** | ** ** |
| NET SALES                            |       | $                      | 43,662     |                            | $          | 43,799 |   | $ | 108,846 |   | $ | 138,692 |   |
|                                 |       |                   |       |                            |       |   |   |   |   |
| COST OF GOODS SOLD                   |       | 32,916                 |       | 36,978                          |       | 81,774 |   | 118,419 |   |
|                                 |       |                   |       |                            |       |   |   |   |   |
| GROSS PROFIT                         |       | 10,746                 |       | 6,821                           |       | 27,072 |   | 20,273 |   |
|                                 |       |                   |       |                            |       |   |   |   |   |
| OPERATING EXPENSES:                  |       |                   |       |                            |       |   |   |   |   |
| Research and development             |       | 6,547                  |       | 7,266                           |       | 17,743 |   | 16,353 |   |
| Selling, general and  administrative |       | 6,795                  |       | 4,410                           |       | 18,392 |   | 12,255 |   |
| In-process research and  development |       | (29                    | )          | —                          |       | 373 |   | — |   |
|                                 |       |                   |       |                            |       |   |   |   |   |
| Total operating expenses             |       | 13,313                 |       | 11,676                          |       | 36,508 |   | 28,608 |   |
|                                 |       |                   |       |                            |       |   |   |   |   |
| LOSS FROM OPERATIONS                 |       | (2,567                 | )          | (4,855                          | )          | (9,436 | ) | (8,335 | ) |
|                                 |       |                   |       |                            |       |   |   |   |   |
| OTHER INCOME (EXPENSE):              |       |                   |       |                            |       |   |   |   |   |
| Interest income                      |       | 79                     |       | 4                               |       | 132 |   | 14 |   |
| Interest expense                     |       | (1,424                 | )          | (1,050                          | )          | (4,166 | ) | (2,857 | ) |
| Other income (expense) -  net        |       | 16                     |       | 18                              |       | (129 | ) | 34 |   |
|                                 |       |                   |       |                            |       |   |   |   |   |
| Total other income  (expense)        |       | (1,329                 | )          | (1,028                          | )          | (4,163 | ) | (2,809 | ) |
|                                 |       |                   |       |                            |       |   |   |   |   |
| LOSS BEFORE INCOME TAXES             |       | (3,896                 | )          | (5,883                          | )          | (13,599 | ) | (11,144 | ) |
|                                 |       |                   |       |                            |       |   |   |   |   |
| INCOME TAXES                         |       | 70                     |       | 144                             |       | 310 |   | 420 |   |
|                                 |       |                   |       |                            |       |   |   |   |   |
| NET LOSS                             |       | $                      | (3,966     | )                               | $          | (6,027 | ) | $ | (13,909 | ) | $ | (11,564 | ) |
|                                 |       |                   |       |                            |       |   |   |   |   |
| Loss per common share:               |       |                   |       |                            |       |   |   |   |   |
| Basic and diluted                    |       | $                      | (0.27      | )                               | $          | (12.70 | ) | $ | (1.45 | ) | $ | (33.52 | ) |
|                                 |       |                   |       |                            |       |   |   |   |   |
| Weighted average common  shares:     |       |                   |       |                            |       |   |   |   |   |
| Basic and diluted                    |       | 14,667,980             |       | 474,382                         |       | 9,563,903 |   | 344,982 |   |

 

The accompanyingnotes are an integral part of these condensed consolidated financialstatements.

 

4

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**AVIZA TECHNOLOGY, INC.**

**CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS**

**(in thousands)**

**(unaudited)**

 
| ** **                                                                                                     | ** ** | **Nine Months Ended** | ** ** |
|----------------------------------------------------------------------------------------------------------------|------------|---------------------------------|------------|
| ** **                                                                                                     | ** ** | **June 30,  2006**         | ** ** | **June 24,  2005** | ** ** |
| CASH FLOWS FROM OPERATING  ACTIVITIES:                                                                         |       |                            |       |   |   |
| Net loss                                                                                                       |       | $                               | (13,909    | ) | $ | (11,564 | ) |
| Adjustments to reconcile  net loss to net cash provided by (used in) operating activities:                     |       |                            |       |   |   |
| Depreciation                                                                                                   |       | 2,500                           |       | 1,692 |   |
| Amortization                                                                                                   |       | 1,984                           |       | 1,149 |   |
| Fair value of common stock  warrants issued in exchange for loan guarantee                                     |       | 251                             |       | — |   |
| Stock based compensation                                                                                       |       | 700                             |       | — |   |
| Mandatorily redeemable  preferred stock dividend accrued                                                       |       | 497                             |       | — |   |
| (Gain) loss on disposal of  equipment                                                                          |       | (75                             | )          | 983 |   |
| Provision for allowance  for doubtful accounts                                                                 |       | (156                            | )          | (476 | ) |
| Changes in assets and  liabilities:                                                                            |       |                            |       |   |   |
| Accounts receivable                                                                                            |       | 5,656                           |       | (1,875 | ) |
| Inventories                                                                                                    |       | (6,476                          | )          | 1,995 |   |
| Prepaid and other assets                                                                                       |       | 4,584                           |       | (3,292 | ) |
| Accounts payable                                                                                               |       | 3,504                           |       | 6,283 |   |
| Warranty liability                                                                                             |       | (2,088                          | )          | 240 |   |
| Accrued liabilities                                                                                            |       | 3,550                           |       | 1,432 |   |
|                                                                                                           |       |                            |       |   |   |
| Net cash provided by (used  in) operating activities                                                           |       | 522                             |       | (3,433 | ) |
|                                                                                                           |       |                            |       |   |   |
| CASH FLOWS FROM INVESTING  ACTIVITIES:                                                                         |       |                            |       |   |   |
| Cash acquired from Trikon  merger net of direct merger costs                                                   |       | 7,366                           |       | — |   |
| Purchase of technology  license                                                                                |       | —                          |       | (2,000 | ) |
| Purchases of property and  equipment, net                                                                      |       | (4,248                          | )          | (4,025 | ) |
| Proceeds from sale of  equipment                                                                               |       | 175                             |       | — |   |
|                                                                                                           |       |                            |       |   |   |
| Net cash provided by (used  in) investing activities                                                           |       | 3,293                           |       | (6,025 | ) |
|                                                                                                           |       |                            |       |   |   |
| CASH FLOWS FROM FINANCING  ACTIVITIES:                                                                         |       |                            |       |   |   |
| Net proceeds from credit  lines                                                                                |       | 260                             |       | 6,749 |   |
| Proceeds from short-term  borrowings                                                                           |       | —                          |       | 499 |   |
| Proceeds from issuance of  common stock                                                                        |       | 15,041                          |       | 242 |   |
| Proceeds from issuance of  mandatorily redeemable Series B preferred stock                                     |       | —                          |       | 2,000 |   |
| Payments on mortgage loan                                                                                      |       | (210                            | )          | (186 | ) |
| Payments on capital lease  obligations                                                                         |       | (44                             | )          | — |   |
| Payments on short-term  borrowings                                                                             |       | (8,658                          | )          | (454 | ) |
|                                                                                                           |       |                            |       |   |   |
| Net cash provided by  financing activities                                                                     |       | 6,389                           |       | 8,850 |   |
|                                                                                                           |       |                            |       |   |   |
| NET INCREASE (DECREASE) IN  CASH AND CASH EQUIVALENTS                                                          |       | 10,204                          |       | (608 | ) |
| CASH AND CASH EQUIVALENTS:                                                                                     |       |                            |       |   |   |
| Beginning of period                                                                                            |       | 7,437                           |       | 9,429 |   |
|                                                                                                           |       |                            |       |   |   |
| Effect of exchange rates  on foreign cash balances                                                             |       | 210                             |       | (266 | ) |
|                                                                                                           |       |                            |       |   |   |
| End of period                                                                                                  |       | $                               | 17,851     |   | $ | 8,555 |   |
|                                                                                                           |       |                            |       |   |   |
| SUPPLEMENTAL DISCLOSURE OF  CASH FLOW INFORMATION:                                                             |       |                            |       |   |   |
| Cash paid for interest                                                                                         |       | $                               | 2,368      |   | $ | 1,533 |   |
| Income taxes paid                                                                                              |       | $                               | 139        |   | 434 |   |
| Noncash investing and  financing activities:                                                                   |       |                            |       |   |   |
| Fair value of common stock, options and warrants issued in the  acquisition of Trikon Technologies, Inc.       |       | $                               | 24,131     |   | $ | — |   |
| Conversion of mandatorily redeemable preferred stock, Series B and  B-1, and accrued dividends to common stock |       | $                               | 11,594     |   | $ | — |   |
| Purchase of technology  license and fixed assets                                                               |       | $                               | —     |   | 2,000 |   |
| Fair value of common stock  warrants issued in exchange for loan guarantee                                     |       | $                               | 251        |   | $ | — |   |
| Property and equipment  included in accounts payable at quarter end                                            |       | $                               | 134        |   | $ | — |   |

 

The accompanying notes are an integral part of thesecondensed consolidated financial statements.

 

5

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**AVIZATECHNOLOGY, INC.**

**NOTESTO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**June30, 2006**

***(Unaudited)***

 

**1. Basis of Presentation**

 

The accompanyingunaudited condensed consolidated financial statements have been prepared inaccordance with United States (U.S.) generally accepted accounting principlesfor interim financial information and applicable regulations of the Securitiesand Exchange Commission. Certain information and footnote disclosures normallyincluded in financial statements prepared in accordance with accountingprinciples generally accepted in the United States of America have beencondensed or omitted pursuant to such rules and regulations. In the opinion ofmanagement, all adjustments (consisting only of normal recurring adjustments)considered necessary for a fair statement of financial position and operationshave been included. Operating results for the quarter and nine months endedJune 30, 2006 are not necessarily indicative of the results that may beexpected for future quarters and the fiscal year ended September 29,2006.  The accompanying unaudited condensed consolidated financialstatements should be read in conjunction with the audited consolidatedfinancial statements of Aviza Technology, Inc. (the “Company” or “Aviza”) forthe year ending September 30, 2005, which are included in the Company’s AnnualReport on Form 10-K and the risk factors contained herein and therein.

 

The preparation of theaccompanying unaudited condensed consolidated financial statements requires theuse of estimates that affect the reported amounts of assets, liabilities,revenues, expenses and contingencies.  These estimates include, but arenot limited to, estimates related to revenue recognition, allowance fordoubtful accounts, inventory valuation, tangible and intangible long-term assetvaluation, warranty and other obligations, contingent liabilities andlitigation.  Estimates are updated on an ongoing basis and are evaluatedbased on historical experience and current circumstances.  Changes in factsand circumstances in the future may give rise to changes in these estimateswhich may cause actual results to differ from current estimates.

 

The Company’s currentfiscal year will end on September 29, 2006 and includes 52 weeks. TheCompany closes its fiscal quarters on the last Friday of December, March, Juneand September.

 

On December 1, 2005,Aviza, Inc., formerly Aviza Technology, Inc. (“Former Aviza”) completed itsconsolidation through merger with Trikon Technologies, Inc. (“Trikon”). Themerger transaction was effected through the formation of a new companyoriginally named New Athletics, Inc., which issued shares of common stock inexchange for the outstanding shares of common stock of Trikon and outstandingshares of common and Series A preferred stock of Former Aviza. For accountingpurposes, Former Aviza is deemed to have acquired Trikon because, immediatelyafter the merger transaction, former stockholders of Former Aviza ownedapproximately 56% of the combined company and former stockholders of Trikonowned approximately 44% of the combined company. Each outstanding share ofFormer Aviza common and Series A preferred stock was exchanged for .90043 of ashare of New Athletics, Inc. common stock. All common stock and Series Apreferred stock and per share amounts for Former Aviza in these financialstatements have been adjusted to give retroactive effect to this exchange ratiofor all periods presented. Shares of mandatorily redeemable Series B and B-1preferred stock of Former Aviza were not exchanged in the merger transactionand, accordingly, the related share and per share amounts have not beenadjusted.

 

In connection with themerger transaction, New Athletics, Inc. changed its name to Aviza Technology,Inc., the common stock of which is publicly traded on the NASDAQ NationalMarket under the symbol “AVZA.”

 

The following tabledetails the impact of the exchange of shares associated with the merger onDecember 1, 2005:

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

 

Trikon and Former Avizacontinue as subsidiaries of the Company.  The financial informationpresented in this report represents:

 

1)      the financial position of the Company andits subsidiaries as of June 30, 2006;

 

6

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2)      the financial position of Former Aviza asof September 30, 2005;

 

3)      the results of operations of the Company and itssubsidiaries for the quarter and nine months ended June 30, 2006, includingTrikon from December 2, 2005 through June 30, 2006;

 

4)      the changes in cash flow of the Company and itssubsidiaries for the nine months ended June 30, 2006, including Trikon fromDecember 2, 2005 through June 30, 2006;

 

5)      the results of operations of Former Avizafor the quarter and nine months ended June 24, 2005; and

 

6)      the changes in cash flow of Former Avizafor the nine months ended June 24, 2005.

 

See Note 6 for additionalinformation related to the merger transaction.

 

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

 

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

 

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

123(R), “Share-BasedPayment” (“SFAS 123(R)”).  SFAS 123(R) establishes accounting forstock-based awards exchanged for employee services.  Accordingly,stock-based compensation cost is measured at grant date, based on the fairvalue of the award, and is recognized as an expense over the employee’srequisite service period.  The Company previously applied AccountingPrinciples Board (“APB”) Opinion No. 25, “*Accountingfor Stock Issued to Employees*,” and related Interpretations andprovided the pro forma disclosures of SFAS No. 123, “*Accounting for Stock-Based Compensation*” (“SFAS 123”). The Company adopted the modified prospective application method as provided bySFAS 123(R).  Under this method, SFAS 123(R) was applied to new awards andto awards modified, repurchased or cancelled after the effective date. Additionally, compensation cost for the portion of awards for which therequisite service has not been rendered, such as unvested stock options, thatare outstanding as of the date of adoption will be recognized as the remainingrequisite services are rendered.  The compensation cost relating tounvested awards on October 1, 2005 was based on the grant-date fair value forthose awards granted after June 24, 2005, the date of the Company’s initialfiling of its Form S-4 registration statement relating to the Trikon merger asdiscussed in Note 6, and based on the intrinsic values as previously recordedunder APB Opinion No. 25 for awards granted prior to that date.

 

In November 2004, theFinancial Accounting Standards Board (“FASB”) issued SFAS No. 151,*Inventory Costs, an Amendment of ARB No. 43,Chapter 4* (“SFAS 151”). The amendments made by SFAS 151are intended to improve financial reporting by clarifying that abnormal amountsof idle facility expense, freight, handling costs and wasted materials(spoilage) should be recognized as current-period charges and by requiring theallocation of fixed production overheads to inventory based on the normalcapacity of the production facilities. The guidance is effective for inventorycosts incurred during fiscal years beginning after June 15, 2005. Earlierapplication is permitted for inventory costs incurred during fiscal yearsbeginning after November 23, 2004.  The provisions of SFAS 151 willbe applied prospectively. Aviza’s historical treatment of inventory costs isconsistent with SFAS 151, and therefore, adoption of SFAS 151 did not have aneffect on its consolidated financial statements.

 

In March 2005, the FASBissued FASB Interpretation No. 47,*Accounting for Conditional Asset Retirement Obligations, an Interpretation ofFASB Statement No. 143* (“FIN 47”). FIN 47 clarifies thatthe term “conditional asset retirement obligation” as used in FASB StatementNo. 143, refers to a legal obligation to perform an asset retirementactivity in which the timing and (or) method of settlement are conditioned on afuture event that may or may not be within the control of the entity. An entityis required to recognize a liability for the fair value of a “conditional assetretirement obligation” if the fair value of the liability can be reasonablyestimated. This interpretation also clarifies when an entity would havesufficient information to reasonably estimate the fair value of a “conditionalasset retirement obligation.” FIN 47 is effective no later than the end offiscal years ending after December 15, 2005. Aviza does not believe theadoption of this interpretation will have an impact on its results of operations.

 

In May 2005, the FASBissued SFAS No. 154, *Accounting Changes andError Corrections* (“SFAS No. 154”), which changes the requirementsfor the accounting and reporting of a change in accounting principle.  SFAS No. 154 applies to all voluntary changesin accounting principle as well as to changes required by an accountingpronouncement that does not include specific transition provisions.  SFAS No. 154 requires that changes inaccounting principle be retrospectively applied.  SFAS No. 154 is effective for

accounting changes andcorrections of errors made in fiscal years beginning after December 15,2005.  SFAS No. 123(R), however,

allowed for a modifiedprospective approach of adoption.  TheCompany does not expect the adoption of SFAS No. 154 to have a significantimpact on its results of operations or financial condition.

 

In June 2006, the FASBissued FASB Interpretation No. 48, *Accountingfor Uncertainty in Income Taxes* (“FIN No. 48”), which clarifies theaccounting for uncertainty in income taxes recognized in the financialstatements in accordance with FASB No. 109, 

 

7

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*AccountingFor Income Taxes*(“FASBNo. 109”).  The interpretation prescribesa recognition threshold and measurement attribute for the financial statementrecognition and measurement of a tax position taken or expected to be taken ina tax return.  The interpretation alsoprovides guidance on derecognition, classification, interest and penalties,accounting in interim periods, disclosure and transition.  FIN No. 48 requires that tax positionspreviously held which no longer meet the more-likely-than-not recognitionthreshold should be derecognized in the first financial reporting period inwhich the threshold is no longer met. Use of a valuation allowance, as per FASB No. 109, is no longer anappropriate substitute for the derecognition of a tax position.  The interpretation is effective for fiscalyears beginning after December 15, 2006. The Company does not expect the adoption of FIN No. 48 to have asignificant impact on its results of operations or financial condition.

 

**3. Balance Sheet Details**

 
| ** **                                      | ** ** | **June 30,  2006**      | ** ** | **September 30,  2005** | ** ** |
|-------------------------------------------------|------------|-------------------------|------------|------------------------------|------------|
| ** **                                      | ** ** | **(in thousands)** | ** ** |
| **Inventories:**                                |       |                    |       |                         |       |
| Raw materials                                   |       | $                       | 25,857     |                         | $          | 14,149 |   |
| Work-in-process                                 |       | 13,911                  |       | 10,104                       |       |
| Finished goods and  evaluation systems          |       | 5,857                   |       | —                       |       |
| Total                                           |       | $                       | 45,625     |                         | $          | 24,253 |   |
|                                            |       |                    |       |                         |       |
| **Prepaid expenses and other  current assets:** |       |                    |       |                         |       |
| Debt issuance costs                             |       | $                       | 1,157      |                         | $          | 2,079 |   |
| Deferred installation  costs                    |       | 1,733                   |       | 3,685                        |       |
| Acquisition costs                               |       | —                  |       | 4,112                        |       |
| Other                                           |       | 4,331                   |       | 1,756                        |       |
| Total                                           |       | $                       | 7,221      |                         | $          | 11,632 |   |
|                                            |       |                    |       |                         |       |
| **Property, plant and equipment,  net:**        |       |                    |       |                         |       |
| Land                                            |       | $                       | 1,839      |                         | $          | 1,839 |   |
| Buildings and improvements                      |       | 11,198                  |       | 11,330                       |       |
| Machinery and equipment                         |       | 11,434                  |       | 6,677                        |       |
| Office furnishings,  fixtures and equipment     |       | 2,580                   |       | 1,420                        |       |
| Leasehold improvement                           |       | 792                     |       | —                       |       |
| Construction in process                         |       | 1,862                   |       | 2,213                        |       |
| Total                                           |       | 29,705                  |       | 23,479                       |       |
| Accumulated depreciation                        |       | (6,305                  | )          | (3,910                       | )          |
| Net property, plant and  equipment              |       | $                       | 23,400     |                         | $          | 19,569 |   |
|                                            |       |                    |       |                         |       |
| **Intangible assets, net:**                     |       |                    |       |                         |       |
| Licenses                                        |       | $                       | 4,026      |                         | $          | 4,000 |   |
| Developed technology                            |       | 686                     |       | —                       |       |
| Brands and trademarks                           |       | 95                      |       | —                       |       |
| Customer relationships                          |       | 218                     |       | —                       |       |
| Patents                                         |       | 77                      |       | —                       |       |
| Total                                           |       | 5,102                   |       | 4,000                        |       |
| Accumulated amortization                        |       | (231                    | )          | —                       |       |
| Net intangible assets                           |       | $                       | 4,871      |                         | $          | 4,000 |   |
|                                            |       |                    |       |                         |       |
| **Accrued liabilities:**                        |       |                    |       |                         |       |
| Accrued payroll and  payroll taxes              |       | $                       | 4,845      |                         | $          | 2,766 |   |
| Deferred revenue                                |       | 5,332                   |       | 545                          |       |
| Customer advance payments                       |       | 425                     |       | —                       |       |
| Other                                           |       | 5,106                   |       | 5,503                        |       |
| Total                                           |       | $                       | 15,708     |                         | $          | 8,814 |   |

 

**4. Stock-Based Compensation**

 

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

123(R), “*Share-Based Payment*” (“SFAS 123(R)”). SFAS 123(R) establishes accounting for stock-based awards exchanged foremployee services.  Accordingly, stock-based compensation cost is measuredat grant date, based on the fair value of the award, and is recognized as anexpense over the employee’s requisite service period.  The Companypreviously applied Accounting Principles

 

8

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Board (“APB”) Opinion No.25, “*Accounting for Stock Issued toEmployees*,” and related Interpretations and provided the pro formadisclosures of SFAS No. 123, “*Accounting forStock-Based Compensation*” (“SFAS 123”).

 

The Company adopted themodified prospective application method as provided by SFAS 123(R).  Underthis method, SFAS 123(R) was applied to new awards and to awards modified,repurchased or cancelled after the effective date.  Additionally,compensation cost for the portion of awards for which the requisite service hasnot been rendered, such as unvested stock options, that were outstanding as ofthe date of adoption are being recognized as the remaining requisite servicesare rendered.  The compensation cost relating to unvested awards at thedate of adoption was based on the grant-date fair value for those awardsgranted after June 24, 2005, the date of the Company’s initial filing of a FormS-4 registration statement relating to the merger transaction as discussed inNote 6, and based on the intrinsic values as previously recorded under APBOpinion No. 25 for awards granted prior to that date.

 

The fair value of eachoption is estimated at the date of grant using the Black-Scholes optionvaluation model.  The Company estimates expected stock price volatilitybased on historical volatility within a representative peer group.  TheCompany uses historical data to estimate expected life and forfeiturerates.  The risk-free interest rate for periods within the expected lifeof the option is based on the U.S. Treasury yield.

 

Under Aviza’s stockoption plans, Aviza may grant options to purchase up to a maximum of 4,106,510shares of common stock, including outstanding options, to employees, directors,and consultants at prices not less than the fair market value on the date ofgrant. These options generally vest over four to five years and generallyexpire seven to ten years from the date of grant.

 

The Company recognizedstock-based compensation expense of $61,000 and $700,000 during the quarter andnine months ended June 30, 2006.  There is no related income tax benefitrecognized in the condensed consolidated statements of operations recorded forthe quarter and nine months ended June 30, 2006.  The estimated fair valueof the Company’s stock options, less expected forfeitures, is amortized overthe awards’ vesting period on a straight-line basis.

 

The modified prospectivetransition method of SFAS 123(R) requires the presentation of pro formainformation, for periods presented prior to the adoption of SFAS 123(R),regarding net loss and net loss per share as if the Company had accounted forits stock plans under the fair value method of SFAS 123(R).  For pro formapurposes, the fair value of stock options was estimated using the Black-Scholesoption valuation model and amortized on a straight-line basis.  The proforma amounts are as follows:

 
| ** **                                                                                   | ** ** | **Quarter Ended  June 24, 2005**                    | ** ** | **Nine Months Ended  June 24, 2005** | ** ** |
|----------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------|------------|----------------------------------------------------------|------------|
| ** **                                                                                   | ** ** | **(in thousands, except per share data)** | ** ** |
| Net loss - as reported                                                                       |       | $                                                                  | (6,027     | )                                                        | $          | (11,564 | ) |
| Deduction: Stock-based employee compensation expense determined under  the fair value method |       | (20                                                                | )          | (83                                                      | )          |
| Net loss - pro forma                                                                         |       | $                                                                  | (6,047     | )                                                        | $          | (11,647 | ) |
|                                                                                         |       |                                                               |       |                                                     |       |
| Loss per common share:                                                                       |       |                                                               |       |                                                     |       |
| Basic and diluted - as  reported                                                             |       | $                                                                  | (12.70     | )                                                        | $          | (33.52 | ) |
| Basic and diluted - pro  forma                                                               |       | $                                                                  | (12.75     | )                                                        | $          | (33.76 | ) |

 

The fair value of theCompany’s stock options granted in the quarter and nine month periods endedJune 30, 2006 and June 24, 2005 was estimated at the date of grant using thefollowing weighted average assumptions:

 
| ** **              | ** ** | **Quarter Ended**  | ** ** | **Nine Months Ended** | ** ** |
|-------------------------|------------|-------------------------|------------|---------------------------------|------------|
| ** **              | ** ** | **June 30,  2006** | ** ** | **June 24,  2005**         | ** ** | **June 30,  2006** | ** ** | **June 24,  2005** | ** ** |
| Expected life (years)   |       | 4.8                     |       | 5.0                             |       | 5.3 |   | 5.0 |   |
| Risk-free interest rate |       | 5.0                     | %          | 3.8                             | %          | 4.5 | % | 3.8 | % |
| Stock price volatility  |       | 67.2                    | %          | 0.0                             | %          | 74.6 | % | 0.0 | % |
| Dividend yield          |       | 0.0                     | %          | 0.0                             | %          | 0.0 | % | 0.0 | % |

 

9

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The following tablesummarizes the Company’s stock option activity under its stock plans as of June30, 2006 and changes during the nine months ended June 30, 2006:

 
| ** **                             | ** ** | **Shares** | ** ** | **Weighted Average  Exercise Price** | ** ** |
|----------------------------------------|------------|------------|------------|------------------------------------------------|------------|
| Outstanding at September  30, 2005     |       | 1,554,444  |       | $                                              | 0.96       |   |
| Options assumed in merger  with Trikon |       | 512,401    |       | $                                              | 21.57      |   |
| Granted                                |       | 815,000    |       | $                                              | 5.60       |   |
| Exercised                              |       | (30,276    | )          | $                                              | 0.87       |   |
| Forfeited                              |       | (16,940    | )          | $                                              | 16.42      |   |
| Outstanding at December  30, 2005      |       | 2,834,629  |       | $                                              | 5.93       |   |
| Granted                                |       | 1,069,000  |       | $                                              | 4.94       |   |
| Exercised                              |       | (14,406    | )          | $                                              | 0.97       |   |
| Forfeited                              |       | (91,170    | )          | $                                              | 28.65      |   |
| Outstanding at March 31,  2006         |       | 3,798,053  |       | $                                              | 5.12       |   |
| Granted                                |       | 38,000     |       | $                                              | 4.87       |   |
| Exercised                              |       | (8,310     | )          | $                                              | 0.90       |   |
| Forfeited                              |       | (22,045    | )          | $                                              | 9.34       |   |
| Outstanding at June 30,  2006          |       | 3,805,698  |       | $                                              | 5.10       |   |

 

As of June 30, 2006,there was $5.5 million of unrecognized compensation cost related to unvested stockoptions granted and outstanding, net of estimated forfeitures.  The costis expected to be recognized over a weighted average period of approximately1.75 years.

 

The following tabledetails total stock-based compensation expense for the quarter and nine monthsended June 30, 2006:

 
| ** **                                | ** ** | **Quarter Ended  June 30, 2006** | ** ** | **Nine Months Ended  June 30, 2006** | ** ** |
|-------------------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                | ** ** | **(in thousands)**                         | ** ** |
| Cost of goods sold                        |       | $                                               | (21        | )                                                   | $          | 66 |   |
| Research and development                  |       | (44                                             | )          | 99                                                  |       |
| Selling, general and  administrative      |       | 126                                             |       | 535                                                 |       |
| Pre-tax stock-based  compensation expense |       | 61                                              |       | 700                                                 |       |
| Income tax benefits                       |       | —                                          |       | —                                              |       |
| Net stock-based  compensation expense     |       | $                                               | 61         |                                                | $          | 700 |   |

 

The options outstandingand exercisable at June 30, 2006 were in the following exercise price ranges:

 
| ** **                              | ** ** | **Options Outstanding**            | ** ** | **Options Exercisable**                        | ** ** |
|-----------------------------------------|------------|-----------------------------------------|------------|-----------------------------------------------------|------------|
| **Range of Exercise  Prices** | ** ** | **Number of  Shares  Outstanding** | ** ** | **Weighted  Average  Remaining  Contractual  Term** | ** ** | **Weighted  Average  Exercise  Price** | ** ** | **Aggregate  Intrinsic Value** | ** ** | **Number Vested  and Exercisable** | ** ** | **Weighted  Average  Exercise  Price** | ** ** | **Aggregate  Intrinsic Value** | ** ** |
| ** **                              | ** ** | ** **                              | ** ** | **(in years)**                                 | ** ** | ** ** | ** ** | **(in thousands)** | ** ** | ** ** | ** ** | ** ** | ** ** | **(in thousands)** | ** ** |
| $0.83 - $0.83                           |       | 1,130,668                               |       | 7.63                                                |       | $ | 0.83 |   | $ | 4,930 |   | 706,024 |   | $ | 0.83 |   | $ | 3,078 |   |
| $0.84 - $5.41                           |       | 1,563,311                               |       | 7.18                                                |       | $ | 4.15 |   | 1,657 |   | 208,541 |   | $ | 2.14 |   | 635 |   |
| $5.42 - $5.60                           |       | 815,000                                 |       | 9.48                                                |       | $ | 5.60 |   | — |   | 101,250 |   | $ | 5.60 |   | — |   |
| $5.61 - $10.69                          |       | 150,375                                 |       | 7.67                                                |       | $ | 8.63 |   | — |   | 128,692 |   | $ | 8.51 |   | — |   |
| $10.70 - $87.07                         |       | 146,344                                 |       | 5.37                                                |       | $ | 41.86 |   | — |   | 133,947 |   | $ | 44.09 |   | — |   |
|                                    |       |                                    |       |                                                |       |   |   |   |   |   |   |   |   |   |   |
| $0.83 - $87.07                          |       | 3,805,698                               |       | 7.76                                                |       | $ | 5.10 |   | $ | 6,587 |   | 1,278,454 |   | $ | 6.73 |   | $ | 3,713 |   |

 

The aggregate intrinsicvalue in the table above represents the total pre-tax intrinsic value, based onthe Company’s closing stock price on June 30, 2006 of $5.19. The weightedaverage remaining contractual term for options exercisable as of June 30, 2006was 7.76 years.

 

The weighted average fairvalue of options on the grant date, as determined under SFAS No. 123(R),granted during the nine months ended June 30, 2006 and June 24, 2005 was $3.45and $0.16 per share, respectively.

 

10

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The total intrinsic valueof options exercised during the nine months ended June 30, 2006 and June 24,2005 was $152,000 and $2,000, respectively. The total cash received fromemployees as a result of employee stock option exercises during the nine monthsended June 30, 2006 and June 24, 2005 was $48,000 and $233,000, respectively.

 

**5. Private Placement of Common Stock and Conversion of Mandatorily RedeemableSeries B and Series B-1 Preferred Stock**

 

On April 24, 2006, theCompany entered into a Stock Purchase Agreement with Caisse de dépôt etplacement du Québec (“CDPQ”), a body organized under the laws of the Provinceof Québec, for the private placement of 3,282,275 shares of the Company’scommon stock for an aggregate purchase price of $15 million.  The shares sold have not been registeredunder the Securities Act of 1933. However, the agreement provides that upon request, the Company isobligated, subject to certain conditions, to use its reasonable best efforts(i) to prepare and file with the Securities and Exchange Commission aregistration statement to enable the resale of the shares and (ii) to maintainthe effectiveness of the registration statement, in each case, for the later of(x) the two-year anniversary of the agreement or (y) the date that all of theshares become eligible for sale pursuant to Rule 144 under the Securities Actduring any one 90-day period.

 

On April 24, 2006, theCompany issued 238,482 and 2,298,492 shares of common stock to the Company’sPresident and CEO and Vantage Point Venture Partners (“VPVP”), the Company’slargest stockholder, respectively, in exchange for an aggregate of 20,000shares of mandatorily redeemable Series B preferred stock and an aggregate of90,000 shares of mandatorily redeemable Series B-1 preferred stock of FormerAviza.  The shares of mandatorilyredeemable Series B and Series B-1 preferred stock were converted to commonshares based upon the redemption value of the mandatorily redeemable Series Band Series B-1 preferred stock at the date of closing of the private placementwith CDPQ divided by the purchase price per share that CDPQ paid, which was$4.57 per share.  The following tablesummarizes the conversion of the mandatorily redeemable Series B and Series B-1preferred stock (in thousands, except number of shares, par value per share andprivate placement price per common share):

 
| **Former  Aviza  Preferred  Stock  Classification** | ** ** | **Pre-  Conversion  Shares** | ** ** | **Par  Value/Share** | ** ** | **Par Value of  Preferred  Stock** | ** ** | **Accrued  Unpaid  Dividends** | ** ** | **Redemption  Value of  Preferred  Stock** | ** ** | **Private  Placement Price  Per Common  Share** | ** ** | **Common  Shares  Issued on  Conversion** | ** ** |
|-----------------------------------------------------|------------|------------------------------|------------|----------------------|------------|------------------------------------|------------|--------------------------------|------------|--------------------------------------------|------------|-------------------------------------------------|------------|-------------------------------------------|------------|
| Series B                                            |       | 20,000                       |       | $                    | 100.00     |                               | $          | 2,000                          |       | $                                          | 180        |                                            | $          | 2,180                                     |       | $ | 4.57 |   | 476,964 |   |
| Series B-1                                          |       | 90,000                       |       | $                    | 100.00     |                               | 9,000      |                           | 414        |                                       | 9,414      |                                            | $          | 4.57                                      |       | 2,060,010 |   |
|                                                |       | 110,000                      |       |                 |       | $                                  | 11,000     |                           | $          | 594                                        |       | $                                               | 11,594     |                                      |       |   | 2,536,974 |   |

 

**6.  Merger and Other Transactions with TrikonTechnologies, Inc.**

 

On December 1, 2005, thestockholders of Trikon approved the merger of Trikon with the Company. Trikon designs, manufactures and services wafer processing semiconductormanufacturing equipment primarily for semiconductor devices.  Its productsare used for chemical and physical vapor deposition and for etch applicationsand are sold to semiconductor manufacturers worldwide.  The Companybelieves that the addition of Trikon broadens the Company’s product portfolioand its ability to provide a wider suite of solutions for customerapplications.  In accordance with the provisions of SFAS No. 141, Aviza istreated as the acquirer for financial reporting purposes.  In the mergertransaction, a wholly owned subsidiary of the Company was merged with and intoTrikon.  Trikon stockholders received 0.29 of a share of Aviza common stockin exchange for each share of Trikon common stock they owned.  A total of4,568,946 shares of Aviza common stock were issued in exchange for theoutstanding common stock of Trikon as of December 1, 2005.  The commonstock issued in the transaction was valued using the average closing price ofTrikon’s common stock on November 30 and December 1, 2005.

 

In connection with themerger transaction, Aviza assumed a warrant issued by Trikon to an investor forthe purchase of 101,500 shares of common stock (“investor warrants”) with anexercise price of $21.55 per share. In addition, further warrants for thepurchase of 15,225 shares of common stock (“placement agent warrants”) wereissued to the placement agent. The warrants expire on October 22, 2007.The warrants may be redeemed at the Company’s option for $0.34 at any timeprovided that for any 20 trading days in a 30-day trading period the closingmarket price exceeds $38.79 for the investor warrants, and $40.34 for theplacement agent warrants, and the average daily trading volume of Aviza commonstock exceeds 43,500 shares.

 

In addition, 629,570shares of common stock were reserved for issuance upon exercise of Trikoncommon stock options and warrants assumed at December 1, 2005.  The options and warrants were valued usingthe Black-Scholes option-pricing model with the following assumptions:

 

11

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

 

A summary of the totalconsideration is as follows (in thousands):

 
| Issuance of Aviza common stock                                                                                                                            |   | $      | 23,632 |   |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------|--------|--------|
| Value of substitute options and warrants to acquire 629,570 shares of  Aviza common stock in exchange for all outstanding options and warrants of  Trikon |   | 499    |   |
|                                                                                                                                                      |   |   |   |
| Total equity consideration                                                                                                                                |   | 24,131 |   |
| Direct merger costs                                                                                                                                       |   | 6,116  |   |
|                                                                                                                                                      |   |   |   |
| Total consideration                                                                                                                                       |   | $      | 30,247 |   |

 

Direct costs related tothe merger totaled $6.1 million.  This amount consisted of $2.7 millionfor legal services, $1.5 million for accounting and finance services, $1.0million for services from investment bankers, and $0.9 million of other directcosts related to the merger. Direct costs reflect a $100,000 increase inestimated merger costs recorded during the quarter ended March 31, 2006.

 

Under the purchase methodof accounting, the total consideration issued for Trikon common stock, optionsand warrants as shown in the table above is allocated to the Trikon tangibleand intangible assets, and liabilities based on their estimated fair values asof the date of the merger transaction.  The unaudited information is basedon management’s estimates of fair values supported as necessary by valuationsperformed by external valuation professionals.  The allocation of totalconsideration to Trikon’s tangible and intangible assets is set forth in thefollowing table (in thousands):

 
| Trikon historical net book value                       |   |   |   | $       | 30,565 |   |
|--------------------------------------------------------|--------|--------|--------|---------|--------|--------|
| Estimated fair value  adjustments:                     |   |   |   |    |   |
| Inventory to fair value                                |   | 1,492  |   |    |   |
| Property, plant and  equipment                         |   | 13,439 |   |    |   |
| Deferred income, net of  related costs                 |   | 3,524  |   |    |   |
| Deferred rent                                          |   | 583    |   |    |   |
| Accrued liabilities                                    |   | (241   | )      |    |   |
| Intangible assets:                                     |   |   |   |    |   |
| Customer relationships                                 |   | 2,126  |   |    |   |
| Brands and trademarks                                  |   | 940    |   |    |   |
| Patents                                                |   | 744    |   |    |   |
| Developed technology                                   |   | 6,673  |   |    |   |
| In-process research and  development                   |   | 3,615  |   |    |   |
| Licenses                                               |   | 253    |   |    |   |
| Total estimated fair value  of intangible assets       |   | 14,351 |   |    |   |
|                                                   |   |   |   |    |   |
| Total fair value  adjustments                          |   |   |   | 33,148  |   |
|                                                   |   |   |   |    |   |
| Fair value of net assets  acquired                     |   |   |   | 63,713  |   |
| Excess of fair value of  net assets over consideration |   |   |   | (33,466 | )      |
| Total consideration  allocated                         |   |   |   | $       | 30,247 |   |

 

12

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In accordance withgenerally accepted accounting principles, the excess of the fair value ofTrikon’s net assets over the consideration given has been allocated as a prorata reduction of the amounts that would otherwise have been allocated toTrikon’s non-current assets acquired.  The allocation of the excess fairvalue is as follows (in thousands):

 
| Property,  plant and equipment                      |   | $      | 20,594 |   |
|-----------------------------------------------------|--------|--------|--------|--------|
|                                                |   |   |   |
| Customer  relationships                             |   | 1,907  |   |
| Brands  and trademarks                              |   | 843    |   |
| Patents                                             |   | 667    |   |
| Developed  technology                               |   | 5,985  |   |
| In-process  research and development                |   | 3,243  |   |
| Licenses                                            |   | 227    |   |
|                                                |   |   |   |
| Allocation  of excess fair value to intangibles     |   | 12,872 |   |
|                                                |   |   |   |
| Excess  fair value of net assets over consideration |   | $      | 33,466 |   |

 

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

 
| Customer  relationships              |   | $   | 219    |   |
|--------------------------------------|--------|-----|--------|--------|
| Brands  and trademarks               |   | 97  |   |
| Patents                              |   | 77  |   |
| Developed  technology                |   | 687 |   |
| In-process  research and development |   | 373 |   |
| Licenses                             |   | 26  |   |
| Total  intangibles acquired          |   | $   | 1,479  |   |

 

A portion of the mergerconsideration was allocated to identifiable intangible assets.  Afterallocation of the excess fair value related to the transaction, theidentifiable intangibles acquired totaled $1.5 million as adjusted through June30, 2006.  The value of the in-processresearch and development was written off subsequent to the merger.

 

The intangible assets arebeing amortized over their estimated useful lives.  With the exception ofin-process research and development, the useful lives of the intangibles rangefrom 10 to 15 years.  In-process research and development consists ofresearch and development in process at the time of the merger that had notdemonstrated its technological feasibility and does not have an alternativefuture use.

 

As a result of the mergertransaction, Aviza recorded a restructuring liability of $241,000 primarilyrelating to building closures of $96,000 and employee severance and relatedpayments of $145,000.  These costs were included in determination of thefair value of the net assets acquired in the merger transaction.

 

The write-ups andwrite-downs of Trikon’s assets to fair value for financial reporting purposesresulted in a difference for income tax reporting purposes.  This fairvalue write-up of inventory and intangibles, as well as the reduction ofdeferred income, deferred rent and certain accrued liabilities, was notrecorded for tax purposes due to the merger transaction being a tax-freetransaction.  This will cause Aviza to have less revenue and more expensesfor financial statement purposes than for tax purposes with respect to theseitems.  As a result, Aviza recorded a net current deferred tax liabilityof $1.6 million relating to these items.  Similarly, the write-down ofTrikon’s property, plant, and equipment, as well as the reduction of certainaccrued liabilities to fair value for financial reporting purposes, results ina difference for income tax reporting purposes. This will cause Aviza to haveless depreciation and other expenses for financial statement purposes than fortax purposes with respect to these items.  As a result, Avizarecorded a deferred tax asset of $1.6 million relating to these items.

 

A deferred tax asset of$31.8 million was recorded as part of the merger representing future taxdeductions (primarily net operating loss carry forwards), which can only berealized to the extent of future taxable income.  At June 30, 2006,management is unable to assert that it is more likely than not that the Companywill generate sufficient taxable income to realize its net deferred tax assetsin excess of the deferred tax liabilities recorded in relation to the write-upof inventory and intangibles to fair value at the merger date describedabove.  Accordingly, the net deferred tax assets have been offset in fullby a valuation allowance at June 30, 2006.

 

On March 14, 2005, theCompany entered into a joint development agreement with Trikon related to thedevelopment of control software to be used in certain of the Company’sproducts.  As part of the agreement, the Company paid a $4.0 millionlicense fee and

agreed to pay royaltiesbased on sales of the licensed product.  The license has an estimated lifeof 10 years. In connection with the merger transaction, no royalty payments aremade, and the $4.0 million license fee is amortized over the 10-year estimatedlife of the license.

 

13

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Amortization expenserelating to all intangibles, excluding in-process research and developmentacquired from Trikon, was $123,000 and $231,000 during the quarter and ninemonths ended June 30, 2006, respectively.  There was no amortization ofintangibles during the quarter and nine months ended June 24, 2005.  Basedon the intangible assets recorded at June 30, 2006, and assuming no subsequentadditions to, or impairment of the underlying assets, the remaining estimatedamortization expense is expected to be as follows (in thousands):

 
| **Fiscal year ending:**        | ** ** | ** ** | ** ** |
|------------------------------------------|------------|------------|------------|
|                                     |       |       |       |
| September 29, 2006 (remaining  3 months) |       | $          | 127        |   |
| September 28, 2007                       |       | 509        |       |
| September 26, 2008                       |       | 509        |       |
| September 25, 2009                       |       | 509        |       |
| September 24, 2010                       |       | 509        |       |
| Thereafter                               |       | 2,708      |       |
| Total                                    |       | $          | 4,871      |   |

 

**ProForma Financial Information for the Acquisition of Trikon**

 

The results of operationsof Trikon have been included in the results of operations of Aviza for allperiods after the December 1, 2005 merger date.  The following unauditedpro forma financial information presents the results of operations for thequarter and nine months ended June 30, 2006 as if the acquisition of Trikon hadoccurred on October 1, 2005, the beginning of the Company’s fiscal year2006.  The pro forma financial information for the combined entities hasbeen prepared for comparative purposes only and is not necessarily indicativeof what actual results may have been if the acquisition had in fact occurred atthe beginning of fiscal 2006 or of future results.

 
| ** **                      | ** ** | **Quarter Ended  June 30, 2006**                              | ** ** | **Nine Months Ended  June 30, 2006** | ** ** |
|---------------------------------|------------|------------------------------------------------------------------------------|------------|----------------------------------------------------------|------------|
| ** **                      | ** ** | **(in thousands, except share and per share data)** | ** ** |
| Net sales                       |       | $                                                                            | 44,331     |                                                     | $          | 118,690 |   |
| Net loss                        |       | $                                                                            | (3,297     | )                                                        | $          | (13,353 | ) |
|                            |       |                                                                         |       |                                                     |       |
| Net Loss per common share:      |       |                                                                         |       |                                                     |       |
| Basic and diluted               |       | $                                                                            | (0.22      | )                                                        | $          | (1.14 | ) |
|                            |       |                                                                         |       |                                                     |       |
| Weighted average common shares: |       |                                                                         |       |                                                     |       |
| Basic and diluted               |       | $                                                                            | 14,667,980 |                                                     | $          | 11,752,629 |   |

 

**7. Borrowing Facilities**

 

As of June 30, 2006, theCompany has a line of credit agreement with a bank under which it may borrow upto $40,000,000.  A total of $20,000,000 of the line is secured by firstpriority liens on all of Aviza’s existing and future acquired assets, and theremaining portion of the line is guaranteed by the Company’s majoritystockholder, VantagePoint Venture Partners (“VPVP”).  The credit facilityhas a stated maturity of August 11, 2007.  The terms of the line of creditagreement prohibit the Company from paying cash dividends on its commonstock.  On May 30, 2006, the Companyamended its line of credit agreement reducing the interest rate by 0.5% to thebank’s prime rate.  Under the terms ofthe line of credit agreement, Aviza is required to meet certain financial andoperating covenants.

 

Aviza was in compliancewith the financial and operating covenants as of June 30, 2006. At September30, 2005, the Company was in violation of these covenants. Based on VPVP’sguarantee that it would not require reimbursement from the Company prior toSeptember 30, 2006, should VPVP be required to make payment under theguarantee, on December 20, 2005, the bank waived non-compliance under theagreement as of September 30, 2005.  The agreement has subsequently beenamended to include Aviza as obligor and the covenants reset.  Inconnection with the merger transaction with Trikon, VPVP continued itsguarantee under the line of credit on behalf of the Company.  The Companyissued VPVP additional warrants to purchase 290,000 shares of common stock inconnection with its continued guarantee.  Borrowings under this creditline were $30.6 million at June 30, 2006.

 

A subsidiary of theCompany has a revolving line of credit for 200,000,000 Japanese Yen(approximately $1,747,000 at the exchange rate on June 30, 2006) under whichthere were no borrowings at June 30, 2006. The credit line bears interest at1.375% per annum.

 

14

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***Notes Payable***

 

***Mortgage***—Aviza’s mortgage line of credit is secured by amortgage on Aviza’s land and buildings and matures on September 30, 2007.The debt carries interest calculated as the sum of LIBOR rates plus a margin of5.25% and is repayable in monthly principal installments of $23,333 plusinterest. The effective interest rate at June 30, 2006 and September 30, 2005was 10.4% and 9.0%, respectively.

 

Under the provisions ofthe revolving line of credit and the mortgage line of credit note payable,Aviza is required to maintain interest rate protection on a portion of itsindebtedness. To satisfy this obligation, in August 2004 and September 2004,Aviza entered into interest rate cap agreements with financial institutions fora total notional amount of $17,000,000, expiring on August 6, 2007 and October10, 2006, respectively. Under the revolving line of credit agreement, Avizapays interest at the bank’s prime rate (8.25% at June 30, 2006); however, themaximum rate is set at 8.25%. Under the note payable, Aviza continues to payinterest at LIBOR rates plus a margin of 5.25%; however, the maximum rate forthe LIBOR component is 6.75%. Any changes in the fair value of the interestrate caps is charged to or credited to interest expense. At June 30, 2006 andSeptember 30, 2005, the fair value of the interest rate caps was $31,000 and$14,000, respectively.

 

***Loan Guarantee — Warrants***

 

Prior to the mergertransaction, Former Aviza granted warrants to VPVP to purchase an aggregate of$20 million of Series A preferred stock at a price of $5.625 per share. Former Aviza allocated approximately $3.5 million of the line of credit to thewarrants and is amortizing the amount to interest expense over the term of thedebt.  These warrants were canceled as part of the merger transaction.

 

In exchange for itscontinued guarantee of a portion of the Company’s bank line of credit, onDecember 1, 2005, Aviza issued warrants to purchase 290,000 shares of commonstock at $31.03 per share to VPVP.  The warrants have a term of fouryears.  The warrants were valued using the Black-Scholes option valuationmodel using with the following assumptions:

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

 

Based on the precedingassumptions and the fair value of the related debt, the warrants issued onDecember 1, 2005 were valued at $251,000.  The fair value of the warrantswill be amortized to interest expense over the remaining term of the bank lineof credit.

 

The total amountallocated to the debt associated with the above mentioned warrants, asdetermined using the Black-Scholes option valuation method, was $3.8 million.In addition, an aggregate fee of $1,147,000 was paid to lenders for the revolvingline of credit and the property mortgage. These amounts are being charged tointerest expense on a straight-line basis over the lives of the related loans.The unamortized portion of these costs is recorded as prepaid expenses andother current assets and other assets of $1,157,000 and $33,000 at June 30,2006 and $2,079,000 and $131,000 at September 30, 2005.

 

Aviza recorded $438,000and $400,000 during the quarters ended June 30, 2006 and June 24, 2005,respectively, and $1,289,000 and $1,202,000 during the nine months ended June30, 2006 and June 24, 2005, respectively, of expense related to amortization ofthe debt issuance and warrant costs. The amortization is recorded in interestexpense. Estimated future amortization of these charges consists of thefollowing (in thousands):

 
| **Fiscal Years Ending**        |   | ** ** | ** ** |
|------------------------------------------|--------|------------|------------|
| September  29, 2006 (remaining 3 months) |   | $          | 465        |   |
| September  28, 2007                      |   | 725        |       |
|                                     |   |       |       |
| Total                                    |   | $          | 1,190      |   |

 

**8. Warranty and Guarantees**

 

***Warranty***—The Company accrues for the estimated cost of the warrantyon its systems, which includes the cost of the labor and parts necessary torepair systems during the warranty period. The amounts recorded in the warrantyaccrual are estimated based on actual historical costs incurred and onestimated probable future expenses related to current sales. The warrantyaccrual is spread over the warranty period on a straight-line basis. Systemstypically have warranty periods ranging from one to three years. The componentsof the warranty accrual are as follows:

 

15

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| ** **                                                                         | ** ** | **Quarter Ended**  | ** ** | **Nine Months Ended** | ** ** |
|------------------------------------------------------------------------------------|------------|-------------------------|------------|----------------------------|------------|
| ** **                                                                         | ** ** | **June 30,  2006**      | ** ** | **June 24,  2005**    | ** ** | **June 30,  2006** | ** ** | **June 24,  2005** | ** ** |
| ** **                                                                         | ** ** | **(in thousands)** | ** ** |
| Beginning warranty accrual                                                         |       | $                       | 12,978     |                       | $          | 13,381 |   | $ | 13,599 |   | $ | 13,533 |   |
| Additional accruals for  new shipments                                             |       | 2,473                   |       | 1,956                      |       | 5,184 |   | 5,898 |   |
| Warranty liability assumed  in merger                                              |       | —                  |       | —                     |       | 1,386 |   | — |   |
| Warranty costs incurred                                                            |       | (1,633                  | )          | (1,519                     | )          | (4,861 | ) | (5,613 | ) |
| Expirations and change in liability for pre-existing warranties  during the period |       | (919                    | )          | —                     |       | (2,409 | ) | — |   |
| Ending warranty accrual                                                            |       | $                       | 12,899     |                       | $          | 13,818 |   | $ | 12,899 |   | $ | 13,818 |   |

 

***Guarantees***—In addition to product warranties, the Company, fromtime to time, in the normal course of business, indemnifies certain customersagainst third-party claims that the Company’s products, when used for theirintended purposes, infringe the intellectual property rights of such thirdparty or other claims made against certain parties. It is not possible todetermine the maximum potential amount of liability under these indemnificationobligations due to the limited history of prior indemnification claims and theunique facts and circumstances that are likely to be involved in eachparticular claim. Historically, the Company has not made payments under theseobligations and no liabilities have been recorded for these obligations on thebalance sheet at June 30, 2006 and September 30, 2005, respectively.

 

**9.  Commitments and Contingencies**

 

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

 

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 sales, income and business operations.

 

Management believes thatthe likelihood of the failure of WJ, ARCADIS or AIS is remote and that any remainingor uninsured environmental liabilities will not have a material effect on theCompany’s results of operations or financial position.

 

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

 

Other than operatingleases for certain equipment and real assets, Aviza has no significantoff-balance sheet transactions or unconditional purchase obligations.

 

As of June 30, 2006,Aviza’s cash obligations and commitments relating to its debt obligations andlease payments were as follows:

 
| ** **                            | ** ** | **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) |       | $                                         | 30,584     |   | $ | 30,584 |   | $ | — |   | $ | — |   | $ | — |   |
| Note Payable                          |       | 6,533                                     |       | 280 |   | 6,253 |   | — |   | — |   |
| Other Short-Term  Borrowings          |       | 129                                       |       | 129 |   | — |   | — |   | — |   |
| Operating Lease  Obligations          |       | 6,235                                     |       | 2,536 |   | 3,343 |   | 356 |   | — |   |
| Capital Lease Obligations             |       | 150                                       |       | 74 |   | 38 |   | 38 |   | — |   |
|                                       |            |                                           |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

Prior to the mergertransaction, Trikon was a party to an employment lawsuit in France.  OnMarch 10, 2004, Dr. Jihad Kiwan departed Trikon as Director and ChiefExecutive Officer. On March 29, 2004 and April 2, 2004 Trikonreceived letters from a United Kingdom law firm and from a French law firm respectively,on behalf of Dr. Kiwan, detailing certain monetary claims for severance 

 

16

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amounts due toDr. Kiwan with respect to his employment with Trikon. On April 28,2004 Dr. Kiwan filed a lawsuit in France and on June 10, 2004 filedsimilar proceedings in the United Kingdom. Dr. Kiwan has subsequentlywithdrawn the proceedings in the United Kingdom. Trikon and the Company are inthe process of vigorously defending against the French claim. Trikon and theCompany do not believe that the outcome of these claims will be material to theresults of operations or the financial condition of the Company.

 

On April 11, 2006, IPS,Ltd. filed a lawsuit against the Company in the United StatesDistrict Court for the Central District of California. The complaint allegesthat the Company used confidential information of IPS to develop asingle-wafer-processing type atomic layer deposition (ALD) system. Thecomplaint is for unspecified monetary damages, injunctive relief and an orderrescinding the settlement and distributor agreements that theCompany and IPS entered into in May 2004 in settlement of a prior lawsuitthat IPS filed against ASML U.S., Inc. and the Company in March 2004relating to assets that the Company acquired from ASML in October2003. The Company believes that it has complied with the settlementand distributor agreements and that the allegations contained in IPS’scomplaint are without merit.

 

**10. Geographic Information and Major Customers**

 

Aviza’s business consistsof multiple products and services which operate in multiple operationalsegments that are aggregated into one reportable segment due to similareconomic characteristics and 1) the nature of the products and services beingthe same, 2) the nature of the production processes being the same, 3) the typeor class of customer being similar, and 4) the distribution process forproducts and services being similar. All products and services are marketedwithin the geographic regions in which the Company operates.

 

The Company operates inthree geographical regions: Asia Pacific, Europe and North America. Forgeographical reporting, revenues are attributed to the geographical locationsin which the customers’ facilities are located while long-lived tangible assetsare attributed to the geographic location in which they are located. Thefollowing details Company sales and long-lived assets by geographical region:

 
| ** **      | ** ** | **Quarter Ended**  | ** ** | **Nine Months Ended** | ** ** |
|-----------------|------------|-------------------------|------------|----------------------------|------------|
| ** **      | ** ** | **June 30,  2006**      | ** ** | **June 24,  2005**    | ** ** | **June 30,  2006** | ** ** | **June 24,  2005** | ** ** |
| ** **      | ** ** | **(in thousands)** | ** ** |
| Net sales:      |       |                    |       |                       |       |   |   |   |   |
| Asia Pacific    |       | $                       | 27,475     |                       | $          | 27,213 |   | $ | 68,129 |   | $ | 92,444 |   |
| Europe          |       | 10,588                  |       | 10,422                     |       | 23,711 |   | 31,358 |   |
| North America   |       | 5,599                   |       | 6,164                      |       | 17,006 |   | 14,890 |   |
| Total net sales |       | $                       | 43,662     |                       | $          | 43,799 |   | $ | 108,846 |   | $ | 138,692 |   |

 
| ** **                        | ** ** | **June 30,  2006**      | ** ** | **September 30,  2005** | ** ** |
|-----------------------------------|------------|-------------------------|------------|------------------------------|------------|
| ** **                        | ** ** | **(in thousands)** | ** ** |
| Long-lived tangible  assets:      |       |                    |       |                         |       |
| Asia Pacific                      |       | $                       | 206        |                         | $          | 300 |   |
| Europe                            |       | 3,013                   |       | 162                          |       |
| North America                     |       | 20,181                  |       | 19,107                       |       |
| Total long-lived tangible  assets |       | $                       | 23,400     |                         | $          | 19,569 |   |

 

During the quarter endedJune 30, 2006, two customers accounted for 31% and 11% of total net sales,respectively, and during the nine months ended June 30, 2006, three customersaccounted for 24%, 12% and 12% of total net sales, respectively.

 

**11. Comprehensive Loss**

 

The components ofcomprehensive loss are as follows:

 
| ** **                       | ** ** | **Quarter Ended**  | ** ** | **Nine Months Ended** | ** ** |
|----------------------------------|------------|-------------------------|------------|----------------------------|------------|
| ** **                       | ** ** | **June 30,  2006** | ** ** | **June 24,  2005**    | ** ** | **June 30,  2006** | ** ** | **June 24,  2005** | ** ** |
| ** **                       | ** ** | **(in thousands)** | ** ** |
| Net loss                         |       | $                       | (3,966     | )                          | $          | (6,027 | ) | $ | (13,909 | ) | $ | (11,564 | ) |
| Currency translation  adjustment |       | 451                     |       | 441                        |       | 435 |   | 297 |   |
| Total comprehensive loss         |       | $                       | (3,515     | )                          | $          | (5,586 | ) | $ | (13,474 | ) | $ | (11,267 | ) |
|                                  |            |                         |            |                            |            |  |  |  |  |  |  |  |  |  |

 

17

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**12. Loss Per Share**

 

Basic loss per share hasbeen computed based upon the weighted average number of common sharesoutstanding for the periods presented. For diluted loss per share, shares usedin the per share computation include weighted average common and potentiallydilutive shares outstanding. Potentially dilutive shares during the quarter andnine months ended June 30, 2006 consist of the Company’s mandatorily redeemableSeries B and B-1 preferred stock aggregating 110,000 shares, which onApril 24, 2006 converted into 2.5 million shares of the Company’s common stock,and 3.8 million shares of common stock issuable upon the assumed exercise ofall outstanding stock options and 407,000 shares of common stock issuable uponassumed exercise of all outstanding warrants. During the quarter and ninemonths ended June 24, 2005, potentially dilutive shares consisted of theCompany’s Series A preferred stock exercisable into 5.2 million shares ofcommon stock and shares issuable upon the assumed exercise of dilutive stockoptions.  Because the Company recorded a net loss during the quarters andnine months ended June 30, 2006 and June 24, 2005, respectively, thecalculation of dilutive loss per share excludes potentially dilutive shares asthey were anti-dilutive and would have reduced the loss per share.  Thefollowing details the calculation of net loss per share for the periodspresented (in thousands except share and per share data):

 
| ** **                                                            | ** ** | **Quarter Ended** | ** ** | **Nine Months Ended** | ** ** |
|-----------------------------------------------------------------------|------------|------------------------|------------|----------------------------|------------|
| ** **                                                            | ** ** | **June 30,  2006**     | ** ** | **June 24,  2005**    | ** ** | **June 30,  2006** | ** ** | **June 24,  2005** | ** ** |
| Numerator:                                                            |       |                   |       |                       |       |   |   |   |   |
| Net loss                                                              |       | $                      | (3,966     | )                          | $          | (6,027 | ) | $ | (13,909 | ) | $ | (11,564 | ) |
|                                                                  |       |                   |       |                       |       |   |   |   |   |
| Denominator:                                                          |       |                   |       |                       |       |   |   |   |   |
| Weighted average shares,  basic                                       |       | 14,667,980             |       | 474,382                    |       | 9,563,903 |   | 344,982 |   |
| Dilutive effect of options and mandatorily redeemable preferred stock |       | —                 |       | —                     |       | — |   | — |   |
| Total diluted                                                         |       | 14,667,980             |       | 474,382                    |       | 9,563,903 |   | 344,982 |   |
|                                                                  |       |                   |       |                       |       |   |   |   |   |
| Basic and diluted net loss  per share                                 |       | $                      | (0.27      | )                          | $          | (12.70 | ) | $ | (1.45 | ) | $ | (33.52 | ) |
|                                                                       |            |                        |            |                            |            |  |  |  |  |  |  |  |  |  |

 

On April 24, 2006, theCompany sold 3,282,275 shares of its common stock for $15 million in a privateplacement. In connection with the closing of the private placement, alloutstanding shares of mandatorily redeemable Series B and Series B-1 preferredstock of the Company’s subsidiary, Aviza, Inc., and accrued but unpaiddividends on those shares converted into an aggregate of 2,536,974 shares ofthe Company’s common stock, representing the same per-share purchase price asin the private placement.

 

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

**CautionaryStatement Regarding Forward-Looking Statements**

 

*Thestatements in this report include forward-looking statements. Theseforward-looking statements are based on our management’s current expectationsand beliefs and involve numerous risks and uncertainties that could causeactual results to differ materially from expectations. You should not rely uponthese forward-looking statements as predictions of future events because wecannot assure you that the events or circumstances reflected in thesestatements will be achieved or will occur. You can identify forward-lookingstatements 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 and phrases or other variations ofthese words and phrases or comparable terminology. These forward-lookingstatements relate to, among other things: our sales, results of operations andanticipated cash flows; capital expenditures; depreciation and amortization expenses;research and development expenses; sales, general and administrative expenses;the development and timing of the introduction of new products andtechnologies; our ability to maintain and develop relationships with ourexisting and potential future customers and our ability to maintain the levelof investment in research and development and capacity that is required toremain competitive.  Many factors could cause our actual results to differmaterially from those projected in these forward-looking statements, including,but not limited to: whether we will be able to integrate Trikon’s businesssuccessfully and achieve anticipated synergies; variability of our revenues andfinancial performance; risks associated with product development and technologicalchanges; the acceptance of our products in the marketplace by existing andpotential future customers; disruption of operations or increases in expensesdue to our involvement in litigation or caused by civil or political unrest orother catastrophic events; general economic conditions and conditions in thesemiconductor industry in particular; the continued employment of our keypersonnel and risks associated with competition.*

 

*For adiscussion of the factors that could cause actual results to differ materiallyfrom the forward-looking statements, see the “Risk Factors” set forth in Item1A of Part II of this report, the “Liquidity and Capital Resources”section under “Management’s Discussion and Analysis of Financial Conditionand Results of Operations” in this item of this report and the other risks anduncertainties that are set forth elsewhere in this report or detailed in ourother Securities and Exchange Commission reports and filings. We assume noobligation to update these forward-looking statements.*

 

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The following discussionand analysis of the financial condition and results of operations of Avizashould be read together with the condensed consolidated financial statements ofAviza and related notes that are included elsewhere in this report and theconsolidated financial statements and related notes included in our AnnualReport on Form 10-K for the fiscal year ended September 30, 2005.

 

**Overview**

 

Aviza Technology, Inc. (“Aviza”),formerly New Athletics, Inc., was incorporated in 2004 for the purpose ofeffecting the merger of Aviza, Inc., formerly Aviza Technology, Inc., andTrikon Technologies, Inc.  The financial condition, results of operationsand changes in cash flows for periods prior to December 2, 2005 presented inthe condensed consolidated financial statements included in this reportrepresent the activities of Aviza, Inc.

 

On December 1, 2005,Aviza completed its consolidation through merger with Trikon Technologies,Inc.  Aviza’s common stock became publicly traded on the Nasdaq NationalMarket under the symbol “AVZA” upon the completion of the merger.  Avizaaccounted for the merger transaction as a purchase of Trikon by Aviza, usingthe purchase method of accounting.  As a result of the completion of themerger transaction, Aviza’s results of operations will include Trikon’s resultsof operations for all periods after December 1, 2005.  We believe that thecombined product lines of Aviza and Trikon will present a more competitive suiteof products to customers in the semiconductor industry.

 

Aviza develops,manufactures, markets and services integrated circuit fabrication processequipment for the global semiconductor, compound semiconductor, nanotechnologyand other related industries.  Customers for these products include wafermanufacturers and semiconductor integrated circuit, or IC, manufacturers, whoeither use the ICs for their own captive products or sell them to othercompanies. Aviza’s equipment is primarily used by IC manufacturers in thebeginning of the semiconductor manufacturing process, commonly known as frontend of line, or FEOL, manufacturing. Aviza has developed a variety of distinctproduct lines, including thermal processing furnaces, atomic layer deposition, orALD, low-pressure chemical vapor deposition, or LPCVD, and atmospheric pressurechemical vapor deposition, or APCVD, products. To date, more than 2,500 Avizasystems have been installed worldwide.

 

As part of its focus onthe ALD market, Aviza acquired a license agreement with IPS, Ltd., under whichAviza distributed single wafer ALD products manufactured by IPS. As aresult of a disagreement as to interpretation of the rights of the partiesunder the license agreement and how best to approach the ALD market, Aviza andIPS agreed in May 2004, as subsequently amended, to terminate the licenseagreement and Aviza agreed not to ship any such products afterDecember 31, 2005. As a result, Aviza will not recognize any revenueattributable to these products after December 31, 2005, other than theremaining contractual revenue

attributable to productspreviously shipped and revenue attributable to a recent customer order shippedduring the quarter ended June 30, 2006, for which Aviza and IPS have reached anagreement. Aviza and IPS will review future orders of these products on a case-

by-case basis. Avizarecognized net sales of $1.6 million and $1.1 million in the quarters endedJune 30, 2006 and June 24, 2005, respectively, $6.9 million and $15.2 millionin the nine months ended June 30, 2006 and June 24, 2005, respectively, and$21.6million in the fiscal year ended September 30, 2005 attributable to theseproducts.

 

Aviza’s customers areprimarily IC manufacturers. The semiconductor industry is cyclical and has experiencedsignificant fluctuations. Aviza’s revenue is impacted by these broad industrytrends. Moreover, Aviza has a highly concentrated customer base.

 

Aviza is often requiredto develop products in advance of its customers’ demand for those products, andAviza undertakes significant product development efforts in advance of any ofits customers expressly indicating demand for Aviza’s products. Aviza’s productdevelopment efforts typically span six months to two years.

 

As a result of the lengthof Aviza’s sales cycles, Aviza’s net sales for any period are generallyweighted toward products that Aviza had introduced for sale in prior years. Forpurposes of revenue recognition, Aviza classifies its products into twocategories, “proven technology” and “new technology.” Proven technology systemsare those systems with respect to which Aviza has a history of successfulinstallations within a reasonable time frame of delivery and the costs tocomplete installation do not vary materially from one instance to another. Newtechnology systems are those systems with respect to which Aviza cannotdemonstrate that it can meet the provisions of customer acceptance at the timeof shipment.

 

Aviza typically sellsequipment and installation services as a bundled arrangement.  Inaccordance with Emerging Issues Task Force, Issue No. 00-21 (“EITF 00-21”), “Accountingfor Revenue Arrangements with Multiple Deliverables”, the fair value ofinstallation is determined as the price Aviza charges for similar installationservices provided to its customers without regard to the warranty provisions.Upon shipment of Aviza’s proven technology, Aviza records revenue at the lesserof (i) the residual amount after deducting the fair value of undeliveredservices from the contractual value or (ii) the non-contingent amount. Theremaining contractual revenue is recorded upon successful installation of theproduct. Cost of the equipment relating to proven technology is recorded uponshipment. To the extent a loss is calculated on shipment due to the foregoingdeferral of revenue, a portion of the cost is also deferred to reflect zerogross profit at the time of shipment. The residual revenue, deferred costs andinstallation costs are recorded upon successful installation of the product.Revenue and cost of equipment relating to new technology is deferred untilinstallation and acceptance at the customer’s premises is completed.

 

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The result of theseaccounting policies is that for new technology, Aviza’s recognition of bothrevenue and cost of goods sold is delayed until customer acceptance, at whichtime both revenue and cost of goods sold are recognized in full in determiningAviza’s gross margin. However, for proven technology, Aviza’s cost of goodssold may be recognized in full upon shipment, but recognition of a portion ofAviza’s revenue is delayed until successful installation of the product. Thiscan result in diminished gross margins at the time of shipment.

 

Aviza intends to pursuestrategic acquisitions of other semiconductor equipment companies and othercomplementary technologies that it believes will enable it to expand itsproduct offerings in the IC fabrication equipment market.

 

**CriticalAccounting Policies**

 

Aviza’s discussion andanalysis of its financial condition and results of operations is based on Aviza’sconsolidated financial statements that have been prepared in accordance withaccounting principles generally accepted in the United States of America. Thepreparation of these financial statements requires Aviza to make estimates andjudgments that affect the reported amounts of assets, liabilities, revenue andexpenses. Aviza bases its estimates on historical experience and on variousother assumptions that it believes to be reasonable under the circumstances,the results of which form the basis for making judgments about the carryingvalues of assets and liabilities that are not readily apparent from othersources. Actual results may differ from these estimates under differentassumptions or conditions.

 

Aviza believes that thefollowing critical accounting policies affect its more significant judgmentsused in the preparation of its consolidated financial statements:

 

***Acquisition of Trikon Technologies, Inc.***

 

In connection with Aviza’sacquisition of the business of Trikon, Aviza allocated the purchase priceassociated with the acquisition to the tangible and intangible assets acquiredand liabilities assumed based on their estimated fair values. The valuations ofthese intangible assets required Aviza to make significant estimates andassumptions.

 

The critical estimatesAviza used in allocating the purchase price included future expected cash flowsfrom customer contracts, distribution agreements and acquired developed technologies,as well as assumptions about the periods of time the products would continue tobe used in Aviza’s product portfolio. Aviza’s estimates of fair value at thetime they were made were based upon assumptions that Aviza believed to bereasonable, but which are inherently uncertain and unpredictable.

 

***Revenue Recognition***

 

Aviza recognizes revenuein accordance with Staff Accounting Bulletin No. 104, (“SAB 104”) and EITF00-21. These accounting standards require that four basic criteria must be metbefore revenue can be recognized: (1) persuasive evidence of anarrangement exists; (2) delivery has occurred or services have beenrendered; (3) the price is fixed or determinable; and(4) collectibility is reasonably assured. Determination of criteria for items(3) and (4) above is based on Aviza’s judgment regarding the fixednature of the amounts charged for the products delivered and the collectibilityof those amounts.

 

For purposes of revenuerecognition, Aviza classifies its products into two categories, “proventechnology” and “new technology.” Proven technology with respect to a singlecustomer means that Aviza has a history of at least three successfulinstallations within a reasonable time frame of delivery to that customer andthe costs to complete installation for that customer do not vary materiallyfrom one instance to another. A given product becomes proven technology for allof Aviza’s customers when Aviza has successfully installed the product within areasonable time frame of delivery for at least three different customers andthe costs to complete installation do not vary materially from one instance toanother. New technology systems are those systems with respect to which Avizacannot demonstrate that it can meet the provisions of customer acceptance atthe time of shipment.

 

Aviza typically sellsequipment and installation services as a bundled arrangement. The fair value ofinstallation is determined as the price Aviza charges for similar servicesprovided to its customers without regard to the warranty provisions. Uponshipment of Aviza’s proven technology, Aviza records revenue upon shipment atthe lesser of (i) the residual amount after deducting the fair value ofundelivered services from the contractual value or (ii) the non-contingentamount. The remaining contractual revenue is recorded upon successfulinstallation of the product. Cost of the equipment relating to proventechnology is recorded upon shipment. To the extent a loss is calculated onshipment due to the foregoing deferral of revenue, a portion of the cost isalso deferred to reflect zero gross profit at the time of shipment. Theresidual revenue, deferred costs and installation costs are recorded uponsuccessful installation of the product.

 

Revenue on new technologyis deferred until installation and acceptance at the customer’s premises iscompleted, as these sales do not meet the provisions of customer acceptance atthe time of shipment under SAB 104 until this occurs. Cost of the equipmentrelating to new technology is also recorded upon customer acceptance. Upon thetransition of a product from new technology to proven 

 

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technology, Avizaaccounts for the product as proven technology from that point forward.

 

Revenue from services isrecognized as the services are performed. Revenue from prepaid servicecontracts is recognized ratably over the life of the contract. Revenue fromspare parts is recorded upon shipment.

 

Aviza assessescollectibility based on the creditworthiness of its customers and pasttransaction history. Aviza performs ongoing credit evaluations of itscustomers. In addition, Aviza requires collateral from certain of its customersin the form of letters of credit. Aviza has not experienced significant collectionlosses in the past. However, a significant change in the liquidity or financialposition of any one of Aviza’s customers, especially one or more of Aviza’smost significant customers, could make it more difficult for Aviza to assesscreditworthiness, which could result in a financial loss to Aviza.

 

***Stock-Based Compensation***

 

Effective October 1,2005, Aviza adopted the provisions of Statement of Financial AccountingStandards (“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 cancellation rate.  The input factors to use inthe valuation model are based on subjective future expectations combined withmanagement judgment.  If there is a difference between the assumptionsused in determining stock-based compensation costs and the actual factors,which become known over time, Aviza may change the input factors used indetermining stock-based compensation costs.  These changes may materiallyimpact Aviza’s results of operations in the period such changes are made.

 

***Inventory Valuation***

 

Aviza assesses therecoverability of its inventory at the end of each quarter based on assumptionsabout customer demand and market conditions. Obsolete inventory or inventory inexcess of Aviza’s estimated usage is written down to its estimated market valueless costs to sell. The inventory write-downs are recorded as an inventoryvaluation allowance established on the basis of obsolete

inventory or specificallyidentified inventory in excess of established usage. Inherent in Aviza’sestimates of market value in determining inventory valuation are estimatesrelated to economic trends, future demand for its products and technologicalobsolescence of its products. If actual market conditions are less favorablethan Aviza’s projections, Aviza may be required to write down additionalinventory.

 

***Warranty***

 

Aviza accrues for theestimated cost of the warranty on its systems as cost of goods sold, whichincludes the cost of the labor and parts necessary to repair systemsduring the warranty period. The amounts recorded in the warranty accrual areestimated based on actual historical expenses incurred and on estimatedprobable future expenses related to Aviza’s current sales. The warranty serviceis generally incurred ratably over the warranty period, therefore, the warrantyaccrual is spread over the warranty period on a straight-line basis. Aviza’ssystems typically have warranty periods ranging from one to three years. Aviza’sactual warranty costs in the future may vary from Aviza’s historical warrantycosts, which could result in adjustments to Aviza’s warranty reserves in futureperiods.

 

***Income Taxes***

 

As part of the process ofpreparing its financial statements, Aviza is required to estimate its incometax provision (benefit) in each of the jurisdictions in which it operates. Thisprocess requires Aviza to estimate its current income tax provision (benefit)and assess temporary differences resulting from differing treatment of itemsfor tax and accounting purposes. These differences result in deferred taxassets and liabilities, which are included in Aviza’s balance sheet.

 

Aviza records a valuationallowance to reduce its deferred tax assets to the amount that is more likelythan not to be realized. While Aviza has considered future taxable income andany ongoing prudent and feasible tax planning strategies in assessing the needfor the valuation allowance, if Aviza were to determine that it would be ableto realize its deferred tax assets in the future in excess of its net recordedamount, an adjustment to the deferred tax asset would increase income in theperiod such determination was made. Likewise, if Aviza were to determine thatit would not be able to realize all or part of a net deferred tax asset in thefuture, an adjustment to the deferred tax asset would be charged to income inthe period such determination was made. As of June 30, 2006, Aviza had a fullvaluation allowance for its net deferred tax assets.

 

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***Results of Operations***

* *

The financial information in the table below is for the quartersand nine months ended June 30, 2006 and June 24, 2005:

 
| ** **                          | ** ** | **Quarter Ended** | ** ** | **Nine Months Ended** | ** ** |
|-------------------------------------|------------|------------------------|------------|----------------------------|------------|
| ** **                          | ** ** | **June 30,  2006**     | ** ** | **June 24,  2005**    | ** ** | **June 30,  2006** | ** ** | **June 24,  2005** | ** ** |
|                                |       |                   |       |                       |       |   |   |   |   |
| Net sales                           |       | 100                    | %          | 100                        | %          | 100 | % | 100 | % |
| Cost of  goods sold                 |       | 75                     | %          | 84                         | %          | 75 | % | 85 | % |
| Gross margin                        |       | 25                     | %          | 16                         | %          | 25 | % | 15 | % |
| Operating  expenses:                |       |                   |       |                       |       |   |   |   |   |
| Research and development            |       | 15                     | %          | 17                         | %          | 17 | % | 12 | % |
| Selling, general and administrative |       | 16                     | %          | 10                         | %          | 17 | % | 9 | % |
| In-process research and development |       | 0                      | %          | 0                          | %          | 0 | % | 0 | % |
| Total operating expenses            |       | 31                     | %          | 27                         | %          | 34 | % | 21 | % |
| Loss from  operations               |       | (6                     | )%         | (11                        | )%         | (9 | )% | (6 | )% |
| Other income  (expense):            |       |                   |       |                       |       |   |   |   |   |
| Interest income                     |       | 0                      | %          | 0                          | %          | 0 | % | 0 | % |
| Interest expense                    |       | (3                     | )%         | (3                         | )%         | (4 | )% | (2 | )% |
| Other income (expense)-net          |       | 0                      | %          | 0                          | %          | 0 | % | 0 | % |
| Total other income (expense)        |       | (3                     | )%         | (3                         | )%         | (4 | )% | (2 | )% |
| Loss before  income taxes           |       | (9                     | )%         | (14                        | )%         | (13 | )% | (8 | )% |
| Income taxes                        |       | 0                      | %          | 0                          | %          | 0 | % | 0 | % |
| Net loss                            |       | (9                     | )%         | (14                        | )%         | (13 | )% | (8 | )% |

*** ***

***Net Sales***

 

Net sales consist of revenue recognized upon shipment orinstallation of proven technology and upon acceptance of new technology. Inaddition, spare parts sales are recognized upon shipment. Service revenue isrecognized upon completion of the service activity or ratably over the term ofthe service contract.

 

| ** ** | ** ** | **Quarter Ended**          | ** ** | **Nine Months Ended** | ** ** |
|------------|------------|---------------------------------|------------|----------------------------|------------|
| ** ** | ** ** | **June 30,  2006**              | ** ** | **June 24,  2005**         | ** ** | **June 30,  2006** | ** ** | **June 24,  2005** | ** ** |
| ** ** | ** ** | **(dollars in thousands)** | ** ** |
| Net sales  |       | $                               | 43,662     |                       | $          | 43,799 |   | $ | 108,846 |   | $ | 138,692 |   |
|            |            |                                 |            |                            |            |  |  |  |  |  |  |  |  |

 

Net sales for the quarter ended June 30, 2006 decreased by $0.1million from the quarter ended June 24, 2005. While system sales of the Company’sthermal products decreased by approximately $10.7 million during the June 2006quarter relative to the June 2005 quarter, this shortfall was almost completelyoffset by sales of $10.6 million which were generated by the Company’s PVD andEtch products and earned upon acceptance of one “new technology” ALD Celsiorproduct and increased spares and service sales.

 

Net sales for the nine months ended June 30, 2006 decreased by$29.8 million, or 22%, from the nine months ended June 24, 2005. This decreasewas primarily due to the change in status of Aviza’s RVP-300 and ALD Pantheonproducts from “new” to “proven” technology during the quarter ended December24, 2004, which resulted in recognition of $29.3 million of revenue onpreviously shipped “new” systems during the nine months ended June 24, 2005.The change in status was due to sufficient customer acceptances of theseproducts in accordance with Aviza’s revenue recognition policy.  Decreases in the Company’s sales of itsthermal products were partially offset by PVD and Etch system sales andincreased spares and service sales relating to the PVD, Etch and CVD productlines acquired through the merger with Trikon.

 

Aviza’s net sales for fiscal 2006 may be adversely affected byAviza’s inability to sell certain ALD products.  As a result of adisagreement as to the interpretation of the rights of the parties to a licenseagreement between Aviza and IPS, under which Aviza distributed single wafer ALDproducts manufactured by IPS, the parties agreed to terminate the licenseagreement and Aviza agreed not to ship any such products after December 31,2005.  As a result, Aviza will not recognize any revenue attributable tothese products after December 31, 2005, other than the remaining contractualrevenue attributable to products previously shipped and revenue attributable toa recent customer order shipped during the quarter ended June 30, 2006, for whichAviza and IPS have reached an agreement. Aviza and IPS will review futureorders of these products on a case-by-case basis. Aviza recognized net sales of$1.6 million and $1.1 million in the quarters ended June 30, 2006 and June 24,2005, respectively, $6.9 million and $15.2 million in the nine months endedJune 30, 2006 and June 24, 2005, respectively, and $21.6 million in the fiscalyear ended September 30, 2005 attributable to these products. 

 

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***Gross Profit and Gross Margin***

 

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

 

| ** **   | ** ** | **Quarter Ended**               | ** ** | **Nine Months Ended** | ** ** |
|--------------|------------|--------------------------------------|------------|----------------------------|------------|
| ** **   | ** ** | **June 30,  2006**                   | ** ** | **June 24,  2005**         | ** ** | **June 30,  2006** | ** ** | **June 24,  2005** | ** ** |
| ** **   | ** ** | **(dollars in thousands)** | ** ** |
| Gross profit |       | $                                    | 10,746     |                       | $          | 6,821 |   | $ | 27,072 |   | $ | 20,273 |   |
| Gross margin |       | 25                                   | %          | 16                         | %          | 25 | % | 15 | % |
|              |            |                                      |            |                            |            |  |  |  |  |  |  |  |  |

 

The increase in gross profit of $3.9 million, or 58%, for thequarter ended June 30, 2006 versus the quarter ended June 24, 2005 wasprimarily a result of higher average selling prices on the RVP-300 productline, improvements in RVP-300 product line configurations, higher gross marginsrecognized on a greater number of product installations, higher gross marginsrelated to customer acceptance of one “new technology” ALD Celsior product, andincreased gross margins generated by a change in product mix, with a larger proportionof shipments of the Etch and PVD product lines that we acquired through ourmerger with Trikon.  Spares and servicemargins remained consistent on a quarter-over-quarter basis.

 

The increase in gross profit of $6.8 million, or 34%, for the ninemonths ended June 30, 2006 versus the nine months ended June 24, 2005 wasprimarily a result of “new” technology becoming “proven” during the nine monthsended June 24, 2005. During the quarter ended December 24, 2004, the Company’sRVP-300 and ALD Pantheon products became “proven” technology, which resulted in$29.3 million in revenue recognized on “proven” technology in the nine monthsended June 24, 2005 related to systems shipped during previous quarters as “new”technology.  While this resulted in higher net sales for the nine monthsended June 24, 2005 compared to the nine months ended June 30, 2006, the grossmargin attributable to this revenue was less than 10%, which resulted in lowergross profit during the nine months ended June 24, 2005. The increase in grossprofit for the nine months ended June 30, 2006 versus the nine months endedJune 24, 2005 was also a result of higher average selling prices on the RVP-300product line, improvements in RVP-300 product line configurations, higher grossmargins recognized on product installations, higher gross profits related tocustomer acceptance of one “new technology” ALD Celsior product, and increasedgross margins generated by a change in product mix, with a larger proportion ofshipments of the Etch and PVD product lines that we acquired through our mergerwith Trikon.

 

***Research and Development***

 

Research and development expense consists of employment costsattributable to employees, consultants and contractors who primarily spendtheir time on product design, engineering and process development; materialsand supplies used in product prototyping, including wafers, chemicals andprocess gases; depreciation and amortization expense allocable to research anddevelopment activities and facilities; direct charges for repairs to researchequipment and laboratories; and costs of outside services for facilities,process engineering support and wafer analytical services. Aviza also includesin research and development expenses associated with the preparation, filing andprosecution of patents and other intellectual property.

 

| ** **                | ** ** | **Quarter Ended**          | ** ** | **Nine Months Ended** | ** ** |
|---------------------------|------------|----------------------------|------------|-----------------------|------------|
| ** **                | ** ** | **June 30,  2006**         | ** ** | **June 24,  2005**    | ** ** | **June 30,  2006** | ** ** | **June 24,  2005** | ** ** |
| ** **                | ** ** | **(dollars in thousands)** | ** ** |
| Research and  development |       | $                          | 6,547      |                  | $          | 7,266 |   | $ | 17,743 |   | $ | 16,353 |   |
| Percent of  net sales     |       | 15                         | %          | 17                    | %          | 17 | % | 12 | % |
|                           |            |                            |            |                       |            |  |  |  |  |  |  |  |  |

 

The decrease in research and development costs of $0.7 million, or10%, during the quarter ended June 30, 2006 as compared to the quarter endedJune 24, 2005 was due primarily to a charge of $2.5 million for materialpurchased in anticipation of Aviza’s engineering design of its RVP-500 producttaken during the June 2005 quarter.  Dueto a redesign of this product, the Company determined that this material had nofuture value and, therefore, wrote it off. The absence of this $2.5 million charge in the June 2006 quarter wasoffset by $1.8 million of research and development costs relating primarily tothe Etch, PVD and CVD product lines acquired through the merger withTrikon.  

 

The increase in research and development costs of $1.4 million, or8%, during the nine months ended June 30, 2006 as compared to the nine monthsended June 24, 2005 relates primarily to $4.0 million in costs for ongoingresearch and development for the PVD, Etch and CVD product lines acquiredthrough the merger with Trikon.  Thisincrease was partially offset by the effect of the RVP-500 material write-offof $2.5 million during the nine months ended June 24, 2005 and lower consultingcosts of approximately $0.7 million during the nine months ended June 30,2006.  Higher depreciation expense andstock-based compensation expense make up the majority of the remainingdifference.

 

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While spending by Former Aviza on research and development remainedrelatively constant from quarter to quarter, the distribution of the costs andexpenses during the quarter and nine months ended June 30, 2006 was directedmore toward advancement of Aviza’s ALD and variable batch thermal programs thanduring the comparable periods in the prior fiscal year.

 

***Selling, General andAdministrative***

 

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**          | ** ** | **Nine Months Ended** | ** ** |
|--------------------------------------|------------|----------------------------|------------|-----------------------|------------|
| ** **                           | ** ** | **June 30,  2006**         | ** ** | **June 24,  2005**    | ** ** | **June 30,  2006** | ** ** | **June 24,  2005** | ** ** |
| ** **                           | ** ** | **(dollars in thousands)** | ** ** |
| Selling,  general and administrative |       | $                          | 6,795      |                  | $          | 4,410 |   | $ | 18,392 |   | $ | 12,255 |   |
| Percent of  net sales                |       | 16                         | %          | 10                    | %          | 17 | % | 9 | % |
|                                      |            |                            |            |                       |            |  |  |  |  |  |  |  |  |

 

The increase in selling, general and administrative expenses of$2.4 million during the quarter ended June 30, 2006 over the quarter ended June24, 2005 was due to increased legal and audit expense of $0.8 million andincremental costs of $1.6 million relating to selling, general and administrativeactivities of the Trikon subsidiary subsequent to the consummation of ourmerger transaction with Trikon and increased bad debt and commission expensetotaling $0.4 million.  The increaseswere partially offset by the net change in foreign currency exchange gains orlosses of $0.7 million.

 

The increase in selling, general and administrative expenses of$6.1 million during the nine months ended June 30, 2006 over the nine monthsended June 24, 2005 was primarily due to increases in sales commissions to third-partyrepresentatives, primarily in China, increased stock-based compensation expenserelated to the adoption of SFAS 123(R) during the nine months ended June 30,2006 and increased legal, audit and costs related to being a public company,increases in costs related to infrastructure built up in foreign subsidiariesand lower bad debt provision adjustments during the quarter ended June 30,2006.  In addition, the expenses relatedto the selling, general and administrative activities of the Trikon subsidiarywere incremental costs during the nine months ended June 30, 2006 over the ninemonths ended June 24, 2005.

 

***In-process Research andDevelopment***

 

| ** **                           | ** ** | **Quarter Ended**          | ** ** | **Nine Months Ended** | ** ** |
|--------------------------------------|------------|----------------------------|------------|-----------------------|------------|
| ** **                           | ** ** | **June 30,  2006**         | ** ** | **June 24,  2005**    | ** ** | **June 30,  2006** | ** ** | **June 24,  2005** | ** ** |
| ** **                           | ** ** | **(dollars in thousands)** | ** ** |
| In-process  research and development |       | $                          | (29        | )                     | $          | — |   | 373 |   | $ | — |   |
| Percent of  net sales                |       | 0                          | %          | 0                     | %          | 0 | % | 0 | % |
|                                      |            |                            |            |                       |            |  |  |  |  |  |  |  |

 

In-process research and development costs incurred during the ninemonths ended June 30, 2006 were the result of the merger with Trikon inDecember 2005 and represent the write-off of technology that had not reachedtechnological feasibility at the time of the merger.

* *

***Interest Expense***

 

| ** ** | ** **            | **Quarter Ended**          | ** ** | **Nine Months Ended** | ** ** |
|------------|-----------------------|----------------------------|------------|-----------------------|------------|
| ** ** | ** **            | **June 30,  2006**         | ** ** | **June 24,  2005**    | ** ** | **June 30,  2006** | ** ** | **June 24,  2005** | ** ** |
| ** ** | ** **            | **(dollars in thousands)** | ** ** |
|       | Interest  expense     |                       | $          | 1,424                 |       | $ | 1,050 |   | $ | 4,166 |   | $ | 2,857 |   |
|       | Percent of  net sales |                       | 3          | %                     | 3          | % | 4 | % | 2 | % |
|            |                       |                            |            |                       |            |  |  |  |  |  |  |  |  |  |

 

Aviza’s interest expense for the quarters and nine months endedJune 30, 2006 and June 24, 2005 consisted primarily of interest incurred on itsrevolving line of credit, its mortgage line of credit, which is secured by amortgage on Aviza’s land and buildings, amortization of debt issuance costs andamortization of the fair value of the warrants issued to affiliates of VantagePointVenture Partners, or VPVP, in consideration for VPVP’s agreement to guarantee aportion of Aviza’s revolving line of credit.  Aviza’s 

 

24

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aggregate borrowings under its revolving line of credit and mortgageline of credit were $37.1 million as of June 30, 2006 and $34.5 million as ofJune 24, 2005.  Interest expense on the revolving line of credit increasedduring the quarter and nine months ended June 30, 2006 over the comparableperiod of fiscal 2005 due to higher average borrowings and higher averageinterest rates.  Aviza recordedamortization of debt issuance costs and the fair value of warrants of $438,000and $400,000 during the quarters ended June 30, 2006 and June 24, 2005,respectively, and $1.3 million and $1.2 million during the nine months endedJune 30, 2006 and June 24, 2005, respectively.

 

During the quarter and nine months ended June 30, 2006, accrueddividends of $57,000 and $497,000, respectively, on the mandatory redeemableSeries B and B-1 preferred stock of Aviza, Inc. were charged to interestexpense.  There was no charge to interest expense for dividends in thequarter and nine months ended June 24, 2005. In connection with the closing ofthe private placement of 3,282,275 shares of Aviza’s common stock on April 24,2006, all outstanding shares of Aviza, Inc.’s mandatorily redeemable Series Band B-1 preferred stock converted into shares of Aviza’s common stock. As aresult of this conversion, dividends will no longer accrue after April 24,2006.

 

***Income Taxes***

 

Because Aviza has incurred significant operating losses, nomaterial federal or state income taxes have been recorded. Aviza recordedincome taxes relating to certain profitable international subsidiaries.

 

**Liquidity and Capital Resources**

 

At Aviza’s inception, affiliates of VPVP funded Aviza with a cashinvestment of $32.7 million to acquire the business from ASML and to fundAviza’s initial operations. Since then, Aviza has funded its operations throughborrowings under its revolving line of credit and its mortgage line of creditas well as from the proceeds of the issuance of common and mandatorilyredeemable Series B and Series B-1 preferred stock. As of June 30, 2006, Avizahad $9.4 million available for additional borrowings under its revolving creditfacility, subject to certain conditions, and $5.0 million available foradditional borrowings under its mortgage line of credit, subject to Aviza’sability to meet certain financial or property zoning criteria.

 

On April 24, 2006, the Company entered into a Stock PurchaseAgreement with Caisse de dépôt et placement du Québec (“CDPQ”), a bodyorganized under the laws of the Province of Québec, for the private placementof 3,282,275 shares of the Company’s common stock for an aggregate purchaseprice of $15 million.  The shares soldhave not been registered under the Securities Act of 1933.  However, the agreement provides that uponrequest, the Company is obligated, subject to certain conditions, to use itsreasonable best efforts (i) to prepare and file with the Securities andExchange Commission a registration statement to enable the resale of the shares

and (ii) to maintain the effectiveness of the registrationstatement, in each case, for the later of (x) the two-year anniversary of theagreement or (y) the date that all of the shares become eligible for salepursuant to Rule 144 under the Securities Act during any one 90-day period.

 

At June 30, 2006, Aviza’s cash and cash equivalents were $17.9million as compared to $7.4 million at September 30, 2005.  Theincrease in cash and cash equivalents of $10.5 million during the nine monthsended June 30, 2006 was due primarily to the sale of 3,282,275 shares of commonstock in a private placement for $15.0 million in April 2006, $7.4 million ofcash acquired in the merger transaction with Trikon and cash provided byoperations of $0.5 million, which were partially offset by net payments of $8.7million on the Company’s revolving lines of credit and short-term borrowingsand $4.2 million of cash used to purchase equipment primarily for use in Aviza’sdevelopment and demonstration laboratories.

 

Aviza’s revolving line of credit contains certain financial andoperating covenants. Aviza was in compliance with these covenants as of June 30,2006. Aviza was in violation of these covenants at September 30, 2005. Bank ofAmerica has waived Aviza’s non-compliance under the line of credit agreement atSeptember 30, 2005 through amendments to the credit facility.

*** ***

***Cash Flows from Operating Activities***

 

Aviza’s cash provided by operating activities was$0.5 million for the nine months ended June 30, 2006.  This consistedprimarily of cash used to fund net losses of $13.9 million, which was offset inpart by non-cash expense adjustments (depreciation, amortization, bad debt,common stock warrants, mandatorily redeemable preferred stock dividends,stock-based compensation and gains on the disposal of equipment) aggregating$5.7 million. Net changes in assets and liabilities during the nine months endedJune 30, 2006 provided $8.7 million of cash.  This increase in cash wasprimarily provided by decreases in accounts receivable of $5.7 million, prepaidand other assets of $4.6 million, an increase in accounts payable of $3.5million and accrued liabilities of $3.5 million, which was partially offset byan increase in inventory of $6.5 million and a decrease in warranty liabilitiesof $2.1 million.

 

Aviza’s cash used in operating activities for the nine months endedJune 24, 2005 was $3.4 million.  This consisted primarily of cash used tofund net losses of $11.6 million, which was offset in part by non-cashexpense adjustments (depreciation, amortization, bad debt and losses on thedisposal of equipment) aggregating $3.3 million. Net changes in assets andliabilities during the nine months ended June 24, 2005 provided $4.8 million ofcash.  Decreases in inventories provided$2.0 million in cash.  Increases inaccounts 

 

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payable, warranty liability and accrued liabilities totaling $8.0million also provided cash from operations. These sources of cash were partially offset by increases in accountsreceivable of $1.9 million and prepaid and other assets of $3.3 million.

 

***Cash Flows fromInvesting Activities***

 

Aviza’s cash provided by investing activities for the nine monthsended June 30, 2006 was $3.3 million. This consisted of $13.4 million of cashacquired in the merger transaction with Trikon and $0.2 million of proceedsfrom the sale of equipment, reduced by direct merger costs incurred by Aviza of$6.1 million and $4.2 million used to purchase equipment primarily for Aviza’sdevelopment and demonstration laboratories.

 

Aviza’s cash used in investing activities for the nine monthsended June 24, 2005 was $6.0 million. This consisted of a $2.0 million licensefee paid to Trikon and $4.0 million to purchase property and equipment,primarily equipment to be used in Aviza’s development and demonstrationlaboratories.

 

***Cash Flows from FinancingActivities***

 

Aviza’s cash provided by financing activities for the nine monthsended June 30, 2006 was $6.4 million. Proceeds from the issuance of commonstock provided approximately $15.0 million. Aviza paid $8.7 million to repay borrowings assumed in our mergertransaction with Trikon.

 

Aviza’s cash provided by financing activities for the nine monthsended June 24, 2005 was approximately $8.9 million. This cash consisted ofapproximately $6.7 million in net borrowings under Aviza’s lines of credit andapproximately $2.2 million in proceeds from the issuance of common andmandatorily redeemable Series B preferred stock.

 

At June 30, 2006, Aviza has a revolving line of credit whichconsists of a $20.0 million revolving credit facility that is guaranteedby affiliates of VPVP and a separate revolving credit facility that providesfor borrowings up to $20.0 million based upon a defined borrowing base.During the quarter ended June 30, 2006, the line of credit agreement wasamended reducing the interest rate by 0.5% to the bank’s prime rate.  A total of $10.0 million of theborrowing availability is subject to an interest rate cap of 8.25%, which ispayable monthly. This revolving line of credit has a stated maturity ofAugust 11, 2007. Outstanding borrowings under this revolving line ofcredit were $30.6 million at June 30, 2006 and $30.4 million at September 30,2005.

 

At June 30, 2006, Aviza has a $12.0 million line of creditsecured by a mortgage on its land and buildings. The borrowings under Aviza’smortgage line of credit accrue interest at a rate of LIBOR plus a margin of5.25%, of which $7.0 million is subject to a LIBOR rate capped at 6.75%,and is repayable in monthly principal installments of $23,333 plus interest.Aviza’s mortgage line of credit matures on September 30, 2007. Outstandingborrowings under Aviza’s mortgage line of credit were $6.5 million and$6.7 million at June 30, 2006 and September 30, 2005, respectively.  Theremaining availability of $5.0 million, which does not increase to reflectrepayments under the terms of Aviza’s mortgage line of credit, may be availablein the future if Aviza meets certain financial or property zoning criteria.

 

At June 30, 2006, a subsidiary of the Company has a revolving lineof credit for ¥200 million Japanese Yen (approximately $1.7 million at theexchange rate on June 30, 2006) on which there were no borrowings at June 30,2006. Borrowings under the credit line bear interest at 1.375% per annum.

 

On April 24, 2006, the Company entered into a Stock PurchaseAgreement with Caisse de dépôt et placement du Québec (“CDPQ”), a bodyorganized under the laws of the Province of Québec, for the private placementof 3,282,275 shares of the Company’s common stock for an aggregate purchaseprice of $15 million.  The shares soldhave not been registered under the Securities Act of 1933.  

However, the agreement provides that upon request, the Company isobligated, subject to certain conditions, to use its reasonable best 

efforts (i) to prepare and file with the Securities and Exchange Commissiona registration statement to enable the resale of the shares and (ii) tomaintain the effectiveness of the registration statement, in each case, for thelater of (x) the two-year anniversary of the agreement or (y) the date that allof the shares become eligible for sale pursuant to Rule 144 under theSecurities Act during any one 90-day period.

 

Aviza currently anticipates that its existing cash balances, thecash that it expects to generate from its operating activities and availableborrowings under its existing lines of credit will be sufficient to meet itsanticipated cash needs for at least the next 12 months.  However, Avizamay need to raise additional capital from the sale of debt or equity securitiesor from other sources in order to support its operations and expansionplans.  Aviza may not be able to obtain any additional capital onacceptable terms, if at all.

 

**Off-Balance Sheet Arrangements**

 

As of June 30, 2006, Aviza had no off-balance sheet arrangementsas defined in Item 303(a)(4) of Regulation S-K promulgated by theSecurities and Exchange Commission.

 

**Contractual Obligations**

 

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

 

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unconditional purchase obligations.  See Note 9 of theCondensed Consolidated Financial Statements for a table of Aviza’s cashobligations and commitments relating to its debt obligations and leasecommitments as of June 30, 2006.

 

**Recent Accounting Pronouncements**

 

Effective October 1, 2005, the Company adopted the provisions ofStatement of Financial Accounting Standards (“SFAS”) No. 123(R), “Share-BasedPayment” (“SFAS 123(R)”).  SFAS 123(R) establishes accounting forstock-based awards exchanged for employee services.  Accordingly,stock-based compensation cost is measured at grant date, based on the fairvalue of the award, and is recognized as an expense over the employee’srequisite service period.  The Company previously applied AccountingPrinciples Board (“APB”) Opinion No. 25, “Accounting for Stock Issued toEmployees,” and related Interpretations and provided the pro forma disclosuresof SFAS No. 123, “Accounting for Stock-Based Compensation” (“SFAS 123”). The Company elected to adopt the modified prospective application method asprovided by SFAS 123(R), and, accordingly, the Company recorded compensationcosts as the requisite service rendered for the unvested portion of previouslyissued awards that remain outstanding at the initial date of adoption and anyawards issued, modified, repurchased, or cancelled after the effective date ofSFAS 123(R).  Under the modified prospective transition method, resultsfor prior periods are not restated.  See Note 4 to the Condensed ConsolidatedFinancial Statements for additional disclosures.

 

In May 2003, the Financial Accounting Standards Board (“FASB”)issued SFAS No. 150,*Accounting forCertain Instruments with Characteristics of both Liabilities and Equity.*SFAS No. 150 clarifies the accounting for certain financial instrumentswith characteristics of both liabilities and equity and requires that thoseinstruments be classified as liabilities in statements of financial position.Previously, many of those financial instruments were classified as equity. SFASNo. 150 is effective for financial instruments entered into or modifiedafter December 15, 2003 and otherwise is effective at the beginning of thefirst interim period beginning after June 15, 2003. The adoption of SFASNo. 150 did not have a significant impact on Aviza’s financial statements.

 

In November 2004, the FASB issued SFAS No. 151,*Inventory Costs, an Amendment of ARB No. 43,Chapter 4* (“SFAS 151”). The amendments made by SFAS 151are intended to improve financial reporting by clarifying that abnormal amountsof idle facility expense, freight, handling costs and wasted materials(spoilage) should be recognized as current-period charges and by requiring theallocation of fixed production overheads to inventory based on the normalcapacity of the production facilities. The guidance is effective for inventorycosts incurred during fiscal years beginning after June 15, 2005. Earlierapplication is permitted for inventory costs incurred during fiscal yearsbeginning after November 23, 2004.  The provisions of SFAS 151 willbe applied prospectively. Aviza’s historical treatment of inventory costs isconsistent with SFAS 151, and therefore adoption of SFAS 151 did not have aneffect on its consolidated financial statements.

 

In March 2005, the FASB issued FIN 47,*Accounting for Conditional Asset RetirementObligations, an Interpretation of FASB Statement No. 143* (“FIN 47”).FIN 47 clarifies that the term “conditional asset retirement obligation”as used in FASB Statement No. 143, refers to a legal obligation to performan asset retirement activity in which the timing and (or) method of settlementare conditioned on a future event that may or may not be within the control ofthe entity. An entity is required to recognize a liability for the fair valueof a “conditional asset retirement obligation” if the fair value of theliability can be reasonably estimated. This 

interpretation also clarifies when an entity would have sufficientinformation to reasonably estimate the fair value of a “conditional assetretirement obligation.” FIN 47 is effective no later than the end offiscal years ending after December 15, 2005. Aviza does not believe theadoption of this interpretation will have an impact on its results ofoperations.

 

In May 2005, the FASB issued SFAS No. 154, “Accounting Changes andError Corrections” (“SFAS No. 154”), which changes the requirements for theaccounting and reporting of a change in accounting principle.  SFAS No. 154 applies to all voluntary changesin 

accounting principle as well as to changes required by anaccounting pronouncement that does not include specific transitionprovisions.  SFAS No. 154 requires thatchanges in accounting principle be retrospectively applied.  SFAS No. 154 is effective for accounting changesand corrections of errors made in fiscal years beginning after December 15,2005.  SFAS No. 123(R), however, allowedfor a modified prospective approach of adoption.  The Company does not expect the adoption ofSFAS No. 154 to have a significant impact on its results of operations orfinancial condition.

 

In June 2006, the FASB issued FASB Interpretation No. 48, *Accounting for Uncertainty in Income Taxes*(“FIN No. 48”), which clarifies the accounting for uncertainty in income taxesrecognized in the financial statements in accordance with FASB No. 109, *Accounting For Income Taxes*(“FASB No. 109”).  The interpretation prescribes a recognitionthreshold and measurement attribute for the financial statement recognition andmeasurement of a tax position taken or expected to be taken in a taxreturn.  The interpretation also providesguidance in derecognition, classification, interest and penalties, accountingin interim periods, disclosure and transition. FIN No. 48 requires that tax positions previously held which no longermeet the more-likely-than-not recognition threshold should be derecognized inthe first financial reporting period in which the threshold is no longermet.  Use of a valuation allowance as perFASB No. 109, is no longer an appropriate substitute for the derecognition of atax position.  The interpretation iseffective for fiscal years beginning after December 15, 2006.  The Company does not expect the adoption ofFIN No. 48 to have a significant impact on its results of operations or financialcondition.

 

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**ITEM 3.   QUANTITATIVE ANDQUALITATIVE DISCLOSURES ABOUT MARKET RISK**

 

For quantitative and qualitative disclosures about market riskcurrently affecting Aviza, see Item 7A: “Quantitative and QualitativeDisclosures About Market Risk” included in our Annual Report on Form 10-K forthe fiscal year ended September 30, 2005.  The Company’s exposure tomarket risk has not changed materially since September 30, 2005.

 

**ITEM 4.   CONTROLS AND PROCEDURES**

 

***Disclosure Controls andProcedures***

 

Aviza maintains disclosure controls and procedures that aredesigned with the objective of providing reasonable assurance that informationrequired to be disclosed in its Exchange Act reports is recorded, processed,summarized and reported within the time periods specified in the SEC’s rulesand forms, and that such information is accumulated and communicated to itsmanagement, including its Chief Executive Officer and Chief Financial Officer,as appropriate, to allow timely decisions regarding required disclosure. Indesigning and evaluating its disclosure controls and procedures, managementrecognizes that any controls and 

procedures, no matter how well designed and operated, can provideonly reasonable assurance of achieving the desired control objectives, and ourmanagement is required to apply its judgment in evaluating the cost-benefitrelationship of possible controls and procedures.

 

As of June 30, 2006, the end of the period covered by this report,based on the evaluation of the Chief Executive Officer and Chief FinancialOfficer of the effectiveness of the design and operation of its disclosurecontrols and procedures, the Chief Executive Officer and Chief FinancialOfficer concluded that Aviza’s disclosure controls and procedures wereeffective at the reasonable assurance level.

 

***Changes in Internal ControlOver Financial Reporting***

 

There has been no change in Aviza’s internal control overfinancial reporting during the first nine months of fiscal 2006 that hasmaterially affected, or is reasonably likely to materially affect, its internalcontrol over financial reporting.

 

**PART II.  OTHER INFORMATION**

 

**ITEM 1.  LEGAL PROCEEDINGS**

 

On April 11, 2006, IPS, Ltd. filed a lawsuit against Aviza in theUnited States District Court for the Central District of California. Thecomplaint alleges that Aviza used confidential information of IPS to develop asingle-wafer-processing type atomic layer deposition (ALD) system. Thecomplaint is for unspecified monetary damages, injunctive relief and an orderrescinding the settlement and distributor agreements that Aviza and IPS enteredinto in May 2004 in settlement of a prior lawsuit that IPS filed against ASMLU.S., Inc. and Aviza in March 2004 relating to assets that Aviza acquired fromASML in October 2003. Aviza believes that it has complied with the settlementand distributor agreements and that the allegations contained in IPS’scomplaint are without merit. 

 

**ITEM1A.  RISK FACTORS**

 

There are no material changes to the risk factors described in thesection entitled “Risk Factors” in Item 1A in Part II of our Quarterly Reporton Form 10-Q for the fiscal quarter ended March 31, 2006.

* *

***Aviza may need to raiseadditional capital in order to support its operations and expansion plans,which capital may not be available on terms acceptable to Aviza, or at all.***

 

As of June 30, 2006, Aviza had cash and cash equivalents ofapproximately $17.9 million and short-term debt of approximately $31.0 million.In the future, Aviza may need to raise capital from the sale of debt or equitysecurities or other sources in order to support its operations and expansionplans. Aviza may not be able to obtain this capital on acceptable terms, or atall. If Aviza issues additional equity or convertible debt securities to raisethis capital, current stockholders’ percentage ownership of Aviza will bereduced, and they may experience significant dilution. In addition, newinvestors in Aviza may demand rights, preferences or privileges that differfrom, or are senior to, those of existing investors, including warrants inaddition to the securities purchased and protection against future dilutivetransactions.

 

***Aviza has incurred losses overthe last few years, and Aviza may not be able to achieve profitability.***

 

Aviza incurred net losses of $4.0 million and $13.9 million forthe quarter and nine months ended June 30, 2006, respectively, and $16.0million and $19.7 million for the fiscal years ended September 30, 2005 andSeptember 24, 2004, respectively. As a result, Aviza will need to increasesales and reduce costs in order to achieve profitability. However, Aviza maynever generate sufficient revenues or reduce costs sufficiently to achieveprofitability. Even if Aviza does achieve profitability, it may not sustain orincrease 

 

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profitability on a quarterly or annual basis in the future. IfAviza is unable to achieve profitability, it may be forced to implement 

expense reduction measures, including selling its assets,consolidating its operations, reducing its workforce or delaying, canceling orreducing certain product development, marketing or other operational programs,any of which could harm its business.

 

***Aviza’s net sales in calendar2006 may be adversely affected by the loss of Aviza’s Pantheon ALD productline.***

 

When Aviza acquired the Thermal Division of ASML Holding, N.V.,which we refer to in this report as the Predecessor, Aviza acquired a licenseagreement with IPS, Ltd. pursuant to which Aviza distributed single-waferatomic layer deposition, or single-wafer ALD, products manufactured by IPS.Aviza recognized net sales of $6.9 million, or approximately 6% of its netsales, and $15.2 million, or approximately 11% of its net sales, attributableto these products in the nine months ended June 30, 2006 and June 24, 2005,respectively. During fiscal 2005, Aviza recognized net sales of $21.6 million,or approximately 13% of its net sales, attributable to these products. Aviza and IPS agreed in May 2004 that Aviza would not ship any suchproducts after December 31, 2005. As a result, Aviza will not recognizeany revenue attributable to these products after December 31, 2005, otherthan the remaining 

contractual revenue attributable to products previously shippedand revenue attributable to a recent customer order shipped during the quarterended June 30, 2006 for which Aviza and IPS have reached an agreement. Avizaand IPS will review future orders for these products on a case-by-case basis.If Aviza is unable to develop its own products to address the ALD market inlieu of these products, its net sales may decline and its business may beharmed.

 

On April 11, 2006, IPS, Ltd. filed a lawsuit against Aviza in theUnited States District Court for the Central District of California. Thecomplaint alleges that Aviza used confidential information of IPS to develop asingle-wafer-processing type atomic layer deposition (ALD) system. Thecomplaint is for unspecified monetary damages, injunctive relief and an orderrescinding the settlement and distributor agreements that Aviza and IPS enteredinto in May 2004 in settlement of a prior lawsuit that IPS filed against ASMLU.S., Inc. and Aviza in March 2004 relating to assets that Aviza acquired fromASML in October 2003.  Although Avizabelieves that it has complied with the settlement and distributor agreementsand that the allegations contained in IPS’s complaint are without merit, anegative outcome in the litigation could harm Aviza’s business.

 

***Aviza expects to receive asubstantial portion of its revenues from a small number of customers, and theloss of, or a significant reduction or fluctuation in, orders from thosecustomers could harm Aviza’s business.***

 

During the nine months ended June 30, 2006, approximately 48% ofAviza’s net sales were attributable to three customers and approximately 73% ofAviza’s net sales were attributable to its top ten customers.  WinbondElectronics Corp., Qimonda AG (formerly a unit of Infineon Technologies, Inc.)and Inotera Memories, Inc. accounted for 24%, 12% and 12% of Aviza’s net sales,respectively, for the nine months ended June 30, 2006.  For the fiscalyear ended September 30, 2005, approximately 69% of Aviza’s net sales wereattributable to three customers and approximately 84% of Aviza’s net sales wereattributable to its top ten customers. Inotera Memories, Inc., InfineonTechnologies, Inc. and Winbond Electronics Corp. accounted for 43%, 15% and 11%of Aviza’s net sales, respectively, for the fiscal year ended September 30,2005. As a result, Aviza expects to receive a substantial portion of itsrevenues from a small number of customers. Sales to any single customer mayvary significantly from quarter to quarter. If Aviza’s largest customers delay,cancel or do not place orders, Aviza may not be able to replace these orderswith new orders. As Aviza expects to configure its products to customerspecifications, changing, rescheduling or canceling orders may result insignificant non-recoverable costs. The loss of, or a decline or fluctuation insales to, any of Aviza’s major customers would negatively impact its business.

 

***Aviza may not achieve thebenefits expected from its merger transaction with Trikon, which may harm itsbusiness and could result in the loss of key customers and personnel.***

 

Achieving the benefits of Aviza’s merger transaction with Trikonwill depend in part on whether Aviza will be able to successfully integrateTrikon’s technology, operations and personnel in a timely and efficient mannerto minimize the impact on customers, employees and management. The integrationof Trikon and Aviza will be a complex, time-consuming and expensive process andmay harm Aviza’s business, financial condition and results of operations. Thechallenges involved in this integration include, but are not limited to, thefollowing:

 

•              retaining existing customers of both Trikon and Aviza;

 

•              retaining and integrating management and other keyemployees of both Trikon and Aviza;

 

•              coordinating functions between Aviza’s geographicallyseparate primary offices located in Scotts Valley, California and Newport,South Wales, U.K.;

 

•              consolidating Aviza’s and Trikon’s sales and marketingefforts so that the industry receives useful information about Aviza’sproducts;

 

•              identifying and eliminating redundant operations andassets;

 

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•              coordinating research and development activities tointegrate existing technologies and enhance introduction of new products andtechnologies;

 

•              integrating purchasing and procurement operations inmultiple locations;

 

•              combining product offerings effectively and quickly;

 

•              integrating sales and service efforts so that customers cando business easily with Aviza;

 

•              persuading employees that the business cultures of Trikonand Aviza are compatible;

 

•              offering products and services of Trikon and Aviza to eachother’s customers; and

 

•              developing and maintaining uniform standards, controls,procedures and policies, including internal controls and procedures that Avizawill be required to maintain under the Sarbanes-Oxley Act of 2002.

 

Aviza cannot assure you that Aviza and Trikon can successfullyintegrate their businesses in a timely manner or that all or any of theanticipated benefits of the merger transaction will be realized.

 

The merger transaction involves the integration of two companiesthat previously have operated independently. Risks to the successful

integration of the two companies include:

 

•              the impairmentof relationships with employees, customers, distributors, strategic partnersand suppliers;

 

•              the potentialdisruption of Aviza’s business and distraction of its management;

 

•              the difficultyof incorporating acquired technology into Aviza’s product offerings;

 

•              not achievingexpected synergies; and

 

•              unanticipatedexpenses related to integrating Aviza and Trikon.

 

Aviza may not succeed in addressing these risks or any otherproblems encountered in connection with the merger transaction.

* *

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

 

Aviza’s business and operations depend upon the capitalexpenditures of semiconductor manufacturers, which in turn depend on thecurrent anticipated market demand for integrated circuits. The semiconductorindustry has historically been cyclical due to sudden changes in manufacturingcapacity. These changes in capacity have affected the timing and amounts ofAviza’s customers’ capital equipment purchases and investments in technology,and continue to affect orders, net sales, gross margins and results ofoperations.

 

During periods of decreasing demand for integrated circuitmanufacturing equipment, Aviza must be able to appropriately align coststructure with prevailing market conditions and effectively motivate and retainkey employees. Conversely, during periods of increasing demand, Aviza must havesufficient manufacturing capacity and inventory to meet customer demand andmust be able to 

attract, retain and motivate a sufficient number of qualifiedindividuals. If Aviza is unable to adjust its cost structure to businessconditions in a timely matter and to manage resources and production capacityeffectively during changes in demand, this inability could harm Aviza’sbusiness, financial condition or results of operations.

*** ***

***Aviza’s operating results maybe unpredictable and could vary dramatically from period to period.***

 

Aviza’s products are technologically complex. Prospectivecustomers generally must commit significant resources to test and evaluatethese products and to install and integrate them into their manufacturinglines. In addition, customers often require a significant number of productpresentations and demonstrations, in some instances evaluating equipmenton-site, before reaching a sufficient level of confidence in the product’sperformance and compatibility with their requirements to place an order. As aresult, the sales process is often subject to delays associated with lengthyapproval processes that typically accompany the design and testing of newproducts. The sales cycles of Aviza’s products often have lasted for manymonths or even years. Longer sales cycles require an investment of significantresources in attempting to make sales. In addition, Aviza may incur significant costs in supporting evaluationequipment at customers’ facilities, and orders expected in one quarter couldshift to another quarter because of the timing of Aviza’s customers’ purchasedecisions.

 

Furthermore, individual orders for Aviza’s products and serviceswill have large unit prices and low volumes. In addition, gross 

 

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margins and sales terms may vary greatly across Aviza’s productand service offerings. As such, a loss or delay or change in the product andservices mix of even a single customer could have a significant effect on theearnings per share that Aviza reports in any given period.

 

Aviza’s revenues may also fluctuate greatly from period to periodas the products sold by Aviza change from “new technology” to “proventechnology,” as discussed in more detail in the subsection entitled “*Revenue Recognition*” in the sectionentitled “Management’s Discussion and Analysis of Financial Condition andResults of Operations” in Item 2 of Part I of this report.

 

***Aviza’s deferred revenue andorders backlog may not result in future net sales.***

 

Revenue recognition guidance requires that revenues and anyassociated profit from the sale of newly introduced systems that are subject tocontractual customer acceptance provisions and substantive installationobligations be deferred until the customer has 

acknowledged its acceptance of the system or the installation workis completed. If the system does not meet the agreed specifications and thecustomer refuses to accept the system, the deferred revenue and any associateddeferred profit will not be realized and Aviza may be required to refund anycash payments previously received from the customer, which may harm Aviza’sbusiness, financial condition, results of operations and cash flows.

 

Order backlog does not necessarily include all sales needed toachieve net revenue expectations for a subsequent period. Aviza will schedulethe production of its systems based in part upon order backlog. Due to possiblecustomer changes in delivery schedules and cancellations of orders, Aviza’sbacklog at any particular date will not necessarily be indicative of actualsales for any succeeding period. In addition, while Aviza will evaluate eachcustomer order on a case-by-case basis to determine qualification for inclusionin backlog, Aviza cannot assure you that amounts included in backlog willultimately result in future sales. A reduction in backlog during any particularperiod, or the failure of Aviza’s backlog to result in future sales, could harmAviza’s business, financial condition, results of operations and cash flows.

 

***Aviza’s backlog orders may besubject to cancellation or delay.***

 

Although Aviza expects to maintain a backlog of customer orderswith expected shipment dates within 12 months, Aviza’s customers mayrequest cancellations or delivery delays. As a result, Aviza’s backlog may notbe a reliable indication of its future revenues. If 

shipments of orders in backlog are cancelled or delayed, Aviza’srevenues could fall below its expectations and the expectations of marketanalysts and investors.

* *

***Aviza’s results of operationsmay suffer if it fails to effectively manage its inventory.***

 

Aviza needs to manage its inventory of component parts,work-in-process and finished goods effectively to meet customer deliverydemands at an acceptable risk and cost. Customers are increasingly requiringvery short lead times for delivery, which may require Aviza to purchase andcarry additional inventory. For both the inventories that will supportmanufacturing of Aviza’s products and Aviza’s spare parts inventories, if thecustomer demand Aviza anticipates does not materialize in a timely manner,Aviza will incur increased carrying costs and some inventory could becomeunsellable or obsolete, resulting in write-offs which would adversely affectthe results of Aviza’s operations.

 

***Warranty claims in excess ofAviza’s projections could seriously harm its business.***

 

Aviza offers a warranty on its products. The cost associated withthis warranty will be significant, and in the event that Aviza’s projectionsand estimates of this cost are inaccurate, Aviza’s financial performance couldbe seriously harmed.

* *

***If Aviza delivers systems withdefects, its credibility may be harmed, sales and market acceptance of itssystems may decrease and Aviza may incur liabilities associated with thosedefects.***

 

Aviza’s systems are complex and sometimes have contained errors,defects and bugs when introduced. If Aviza delivers systems with errors,defects or bugs, its credibility and the market acceptance and sales of itssystems could be harmed. Further, if Aviza’s systems contain errors, defects orbugs, Aviza may be required to expend significant capital and resources toalleviate these problems. Defects could also lead to commercial or product liabilityas a result of lawsuits against Aviza or against its customers. Aviza hasagreed to product liability indemnities, and its product and commercialliability insurance policies currently provide only limited coverage per claim.In the event of a successful product liability or commercial claim, Aviza couldbe obligated to pay damages that may not be covered by insurance or that aresignificantly in excess of its insurance coverage.

 

***Aviza’s employment costs in theshort-term will be fixed to a large extent, and therefore any unexpectedrevenue shortfall could adversely affect its operating results.***

 

Aviza’s operating expense levels are based in significant part onits headcount, which generally will be driven by longer-term revenue goals. Fora variety of reasons, particularly the high cost and disruption of layoffs andthe costs of recruiting and training, Aviza’s 

 

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headcount in the short term is fixed to a large extent. As aresult, Aviza may be unable to reduce its employment costs in a timely mannerto compensate for any unexpected revenue or gross margin shortfalls, whichcould adversely affect Aviza’s operating results.

 

***Aviza’s high spending levels onresearch and development and its need to maintain a high level of customerservice and support could harm its results of operations.***

 

In order to remain competitive, Aviza will need to maintain highlevels of investment in research and development, marketing and customerservice, while at the same time controlling its operating expenses.

 

The industry in which Aviza operates is characterized by the needfor continued investment in research and development as well as a high level ofworldwide customer service and support. As a result of Aviza’s need to maintainspending levels in these areas, its operating results could be harmed if itsnet sales fall below expectations. In addition, because of the emphasis thatAviza places on research and development and technological innovation, Aviza’soperating costs may increase further in the future, which could have a negativeimpact on its results of operations and cash flows in any given period.

 

Aviza cannot assure you that it will have sufficient resources tomake a high level of investment in research and development, marketing andcustomer service while controlling its operating expenses or that Aviza’sproducts will be viewed as competitive as a result of technological advances byits competitors or changes in semiconductor processing technology. Any such competitivepressures may require Aviza to significantly reduce prices or result in lostcustomer orders, which could harm Aviza’s business, financial condition,results of operations and cash flows.

 

***A disruption of Aviza’smanufacturing operations could harm its business.***

 

Although Aviza is increasingly outsourcing the manufacturing forcertain of its products or sub-assemblies to third parties, Aviza produces mostof its products at its manufacturing facilities in Scotts Valley, Californiaand Newport, South Wales.  Aviza will have

very limited ability to interchangeably produce its products ateither facility, and in the event of a disruption of operations at itsfacilities, Aviza’s third-party manufacturers would not be able to make up thecapacity loss. Aviza’s manufacturing operations could 

be subject to disruption for a variety of reasons, includingnatural disasters, work stoppages, operational facility constraints and 

terrorism. Any such disruption could cause delays in shipments ofproducts to Aviza’s customers, result in cancellation of customer orders orloss of customers and seriously harm Aviza’s business.

*** ***

***Aviza is increasinglyoutsourcing manufacturing and logistics activities to third-party serviceproviders, which decreases its control over the performance of these functions.***

 

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

 

If for any reason one or more of these third-party serviceproviders becomes unable or unwilling to continue to provide services ofacceptable quality, at acceptable costs and in a timely manner, Aviza’s abilityto deliver its products or spare parts to its customers 

could be severely impaired. Aviza would quickly need to identifyand qualify substitute service providers or increase its internal capacity,which could be expensive, time consuming and difficult, and could result inunforeseen operations problems. Substitute service providers might not beavailable or, if available, might be unwilling or unable to offer services onacceptable terms.

 

If customer demand for Aviza’s products increases, it may beunable to secure sufficient additional capacity from its current service providerson commercially reasonable terms, if at all.

 

Aviza’s requirements are expected to represent a small portion ofthe total capacities of its third-party service providers, and thesethird-party service providers may preferentially allocate capacity to othercustomers, even during periods of high demand for Aviza’s products. Inaddition, these third-party service providers could suffer financialdifficulties or disruptions in their operations due to causes beyond Aviza’scontrol.

*** ***

***Aviza will not be able tocompete effectively if it fails to address the technology needs of itscustomers.*** 

 

Aviza operates in a highly competitive environment, and its futuresuccess is heavily dependent on effective development, commercialization andcustomer acceptance of new products compared to its competitors. In addition,Aviza’s future success is dependent upon its ability to timely andcost-effectively:

 

•              develop andmarket new products and technologies;

 

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•              improve existingproducts and technologies;

 

•              expand into ordevelop equipment solutions for new markets for integrated circuit products;

 

•              achieve marketacceptance and accurately forecast demand for products and technologies;

 

•              achieve costefficiencies across product offerings; 

 

•              qualify new orimproved products for volume manufacturing with customers; and

 

•              lower customers’cost of ownership.

 

Aviza will also need to develop technology and other applications,and it cannot assure you that such developments will be consistent with theneeds of customers.

 

Aviza may not be able to forecast or respond accurately to thetechnological trends in the semiconductor industry or respond to specificproduct announcements by competitors who may be developing technologies andproducts that are more effective or that achieve more widespread acceptance. Inaddition, Aviza may incur substantial costs to ensure the functionality andreliability of current and future products. If newly developed products areunreliable or do not meet Aviza’s customers’ expectations, then reduced orders,higher manufacturing costs, delays in collecting accounts receivable oradditional service and warranty expense could result. Any delays in meetingcustomer demands could limit the potential for follow-on sales formanufacturing. Any of these events could negatively affect the ability togenerate the return that Aviza would expect to achieve on its investments inthese new products.

 

If Aviza fails to develop solutions to achieve all of the specificationsrequired by device manufacturers and the device manufacturers fail to integratethese technologies successfully with their other processes, or competitorsdevelop competing solutions, then Aviza’s ability to grow revenues from theseproducts could be negatively affected.

 

***Aviza’s operating results couldbe negatively affected by currency fluctuations.***

 

Although Aviza’s revenues are generally denominated in U.S.dollars and Aviza will report its financial results in U.S. dollars, Aviza’sNewport, South Wales operation is based in the United Kingdom and most of itsoperating expenses are incurred in British pounds.  As a result, asignificant portion of Aviza’s costs will be subject to currencyfluctuations.  Accordingly, if the British pound 

increases in value against the U.S. dollar, Aviza’s expenses as apercentage of revenues will increase and Aviza’s gross margins will bereduced.  In addition, Aviza’s sales in Japan and other foreign servicerevenue are denominated in local currency. As a result, fluctuations in thoselocal currencies could also have an impact on Aviza’s operating results.

 

***The semiconductor industry isglobal and is expanding within Asia. If Aviza is unable to penetrate thismarket, its ability to grow revenues could be restricted.***

 

The percentage of worldwide semiconductor production that is basedin Asia is growing more rapidly than in other regions. Although Aviza derivedapproximately 63% and 67% of its net sales for the nine months ended June 30,2006 and June 24, 2005, respectively, and 66% and 46% of its net sales for thefiscal years ended September 30, 2005 and September 24, 2004,respectively, from its sales in the Asia Pacific region, its brand recognitionis limited. In order to grow its business, it will be necessary for Aviza topenetrate the region with the addition of new customers and the expansion ofits relationships with existing customers. Aviza has traditionally sold itsproducts primarily through its direct sales force. As a result, retaining andattracting key sales and service personnel will be of critical importance toAviza. These markets are typically subject to growth rates that are higher thanworldwide growth rates. Although Aviza has a direct sales force in this region,we cannot assure you that we will be able to continue penetrating markets inthe 

Asia Pacific region. Failure to penetrate these markets, orfailure to attract the additional personnel necessary to service new andexisting customers, may harm Aviza’s competitive position and adversely affectour future business prospects.

 

***Aviza’s competitors havegreater financial resources and greater name recognition and therefore maycompete more successfully.***

 

Aviza faces competition or potential competition from manycompanies with greater resources. If Aviza is unable to compete effectivelywith these companies, market share may decline and Aviza’s business could beharmed. Virtually all of Aviza’s primary competitors are substantially largercompanies and some of them have broader product lines. These competitors havewell-established 

reputations in the markets in which Aviza competes, greaterexperience with high-volume manufacturing, broader name recognition,substantially larger customer bases and substantially greater financial,technical, manufacturing and marketing resources. Aviza will also facepotential competition from new market entrants, including establishedmanufacturers in other segments of the semiconductor capital equipment marketwho may decide to diversify and develop and market products that compete withAviza’s product offerings.

 

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

 

Because semiconductor manufacturers must make a substantialinvestment to install and integrate capital equipment into a semiconductorfabrication facility, these manufacturers tend to choose semiconductorequipment manufacturers based on established relationships, productcompatibility and proven system performance.

 

Once a semiconductor manufacturer selects a particular vendor’scapital equipment, the manufacturer generally relies for a significant periodof time upon the equipment from this vendor of choice for the specificproduction line application. To do otherwise creates risk 

for the manufacturer because manufacturing a semiconductorrequires many process steps and a fabrication facility will contain manydifferent types of machines that must work cohesively to produce products thatmeet the customers’ specifications. If any piece of equipment fails to performas expected, the customer could incur significant costs related to defectiveproducts, production line downtime or low production yields.

 

Since most new fabrication facilities are similar to existingones, semiconductor manufacturers tend to continue using equipment that has aproven track record. Based on experience with major customers such as Infineon,Aviza has observed that once a particular piece of equipment is selected from avendor, the customer is likely to continue purchasing that same piece ofequipment from the vendor for similar applications in the future. Aviza’scustomer lists, though limited, increased in fiscal 2005. However, broadeningmarket share remains difficult due to choices made by customers that continueto be influenced by pre-existing bases installed by competing vendors. As aresult, Aviza’s ability to obtain new customers and additional orders may belimited.

 

A semiconductor manufacturer frequently will attempt toconsolidate its other capital equipment requirements with the same vendor. As aresult, Aviza may face narrow windows of opportunity to be selected as the “vendorof choice” by potential new customers. It may be difficult for Aviza to sell toa particular customer for a significant period of time once that customerselects a competitor’s product, and Aviza may not be successful in obtainingbroader acceptance of its systems and technology. If Aviza is not able toachieve broader market acceptance of its systems and technology, Aviza may beunable to grow its business and operating results, and Aviza’s financialcondition may be harmed.

 

***Aviza depends upon solesuppliers for certain key components.***

 

Substantially all of Aviza’s revenues have come from the sale ofproducts that contain key components that are available only from a singlesource or limited sources. As a result, Aviza depends on a number of solesuppliers for key components used in the manufacturing of its products. IfAviza is unable to obtain timely delivery of sufficient quantities of thesecomponents, it will be unable to manufacture products to meet customer demandon a timely basis. Most significantly, certain product lines are designedaround automation modules supplied by sole suppliers. Due to the high cost ofthese modules, Aviza keeps very few in inventory. 

 

Although Aviza has never been unable to manufacture or ship aproduct due to its inability to obtain a component sourced from a solesupplier, if a sole supplier fails to deliver the component on a timely basis,delivery of certain products could be delayed. If a sole supplier is unable todeliver any such modules for a prolonged period of time, Aviza may have to redesigncertain products.

Aviza cannot assure you that it will be able to do so, or thatcustomers will adopt the redesigned systems.

 

***If Aviza is unable to hire andretain a sufficient number of qualified personnel, its results of operationswill be negatively affected.***

 

Aviza’s business and future operating results will depend in partupon the ability to attract and retain qualified management, technical, salesand support personnel for its operations on a worldwide basis. Competition forqualified personnel is intense, particularly in the San Francisco Bay Area,where Aviza’s headquarters are located, and Aviza cannot assure you that itwill be able to continue to attract and retain qualified personnel. Aviza’sresults of operations could be negatively affected by its loss of keyexecutives or employees or its inability to attract and retain skilledexecutives and employees as needed.

*** ***

***Aviza’s ability to competecould be jeopardized by its inability to protect intellectual property rightsfrom challenges by third parties.***

 

Aviza’s success and ability to compete depend in large part uponprotecting proprietary technology. Aviza has relied on a combination of patent,trade secret, copyright and trademark laws, non-disclosure and othercontractual agreements and technical measures to protect its proprietaryrights.

 

Aviza cannot assure you that patents will be issued on pendingpatent applications or that competitors will not be able to legitimately ascertainproprietary information embedded in Aviza’s products that is not covered bypatent or copyright. If this happens, Aviza may not be able to prevent thecompetitor from using this information.

 

In addition, if Aviza asserts patent rights against a competitor’sproduct, Aviza cannot assure you that any claim in any patent will besufficiently broad nor, if sufficiently broad, that the patent will not bechallenged, invalidated or circumvented, or that Aviza will have sufficientresources to prosecute its rights. Failure to protect its intellectual propertyrights could have an adverse effect on Aviza’s business.

 

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***Claims or litigation regardingits intellectual property rights could seriously harm Aviza’s business orrequire Aviza to incur significant costs.***

 

In recent years, there has been significant litigation in thesemiconductor equipment industry involving patents and other intellectualproperty rights. Infringement claims may be asserted against Aviza in thefuture and, if such claims are made, Aviza may not be able to defend againstsuch claims successfully or, if necessary, obtain licenses on reasonable terms.Any claim that Aviza’s products infringe the proprietary rights of others wouldforce Aviza to defend itself and possibly its customers against the allegedinfringement. 

These claims and any resulting lawsuit, if successful, couldsubject Aviza to significant liability for damages and invalidate its 

proprietary rights. These lawsuits, regardless of their outcome,would likely be time-consuming and expensive to resolve and would divertmanagement’s time and attention. Any potential intellectual property litigationcould force Aviza to do one or more of the following:

 

•              lose or forfeit proprietary rights;

 

•              stop manufacturing or selling products that incorporate thechallenged intellectual property;

 

•              obtain from the owner of the infringed intellectualproperty right a license to sell or use the relevant technology, which licensemay not be available on reasonable terms or at all and may involve significantroyalty payments;

 

•              pay damages, including treble damages and attorneys’ feesin some circumstances; or

 

•              redesign those products that use the challengedintellectual property.

 

If Aviza is forced to take any of these actions, its businesscould be severely harmed. 

 

On April 11, 2006, IPS, Ltd. filed a lawsuit against Aviza in theUnited States District Court for the Central District of California. Thecomplaint alleges that Aviza used confidential information of IPS to develop asingle-wafer-processing type atomic layer deposition (ALD) system. Thecomplaint is for unspecified monetary damages, injunctive relief and an orderrescinding the settlement and distributor agreements that Aviza and IPS enteredinto in May 2004 in settlement of a prior lawsuit that IPS filed against ASMLU.S., Inc. and Aviza in March 2004 relating to assets that Aviza acquired fromASML in October 2003. Although Aviza believes that it has complied with thesettlement and distributor agreements and that the allegations contained in IPS’scomplaint are without merit, a negative outcome in the litigation could harmAviza’s business.

 

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

 

A significant portion of Aviza’s net sales for the nine monthsended June 30, 2006 and fiscal 2005 were derived from sales in foreigncountries, including certain countries in Asia such as Singapore, Taiwan, Japan,Malaysia, China and Korea. The laws of some foreign countries do not protectproprietary rights to as great an extent as do the laws of the United States,and many U.S. companies have 

encountered substantial problems in protecting their proprietaryrights against infringement in such countries, some of which are countries inwhich Aviza has sold and in which Aviza expects to continue to sell systems.For example, Taiwan and China are not signatories to the Patent CooperationTreaty, which is designed to specify rules and methods for defendingintellectual property internationally. In Taiwan and China, the publication ofa patent prior to its filing would invalidate the ability of a company toobtain a patent. Similarly, in contrast to the United States where the contentsof patent applications remain confidential during the patent prosecutionprocess, the contents of a patent application are published upon filing whichprovides competitors an advanced view of the contents of patent applicationsprior to the establishment of patent rights. There is a risk that Aviza’s meansof protecting its proprietary rights may not be adequate in these countries.Aviza’s competitors in these countries may independently develop similartechnology or duplicate Aviza’s systems. If Aviza fails to adequately protectits intellectual property in those countries, it would be easier for Aviza’scompetitors to sell competing products in those countries.

*** ***

***Aviza’s operations are subjectto health and safety and environmental laws that may expose it to liabilitiesfor noncompliance.***

 

Aviza is subject to a variety of governmental regulations relatingto the use, storage, discharge, handling, manufacture and disposal of allmaterials present at, or are output from, Aviza’s facilities, including thetoxic or other hazardous chemical byproducts of the manufacturing processes.Aviza is also subject to governmental regulations affecting the content, reuse,recycling, distribution and labeling of products containing hazardousmaterials. Environmental claims, or failure to comply with any present orfuture regulations, could result in significant costs to remediate, theassessment of damages or imposition of fines, the suspension of production ofcertain products or the cessation of operations.

 

New regulations could require the purchase of costly equipment orthe incurrence of other significant expenses. Failure to control the use oradequately restrict the discharge of hazardous substances could subject Avizato future liabilities, which could negatively affect Aviza’s operating resultsand financial condition.

 

Aviza owns and operates a facility located in Scotts Valley,California, or the Scotts Valley Site, which is currently subject to an 

 

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

 

***Aviza has had materialweaknesses in internal control over financial reporting in the past and Avizacannot assure you that additional material weaknesses will not be identified inthe future. Aviza’s failure to implement and maintain effective internalcontrol over financial reporting could result in material misstatements inAviza’s financial statements, which could require Aviza to restate itsfinancial statements, cause investors to lose confidence in Aviza’s reportedfinancial information and have a negative effect on Aviza’s stock price.***

 

In connection with the audit of Aviza’s financial statements forthe period from October 7, 2003 through September 24, 2004, Aviza’sindependent registered public accounting firm identified material weaknesses inAviza’s internal control over financial reporting as defined in the standardsestablished by the Public Company Accounting Oversight Board (United States)that affected Aviza’s financial statements for its fiscal year endedSeptember 24, 2004.

 

The material weaknesses in Aviza’s internal control over financialreporting are summarized below:

 

•              After issuance of the financial statements by thePredecessor for calendar year 2002 and the period from January 1, 2003 of throughOctober 9, 2003, Aviza discovered errors in these financial statementswhich required Aviza to restate the financial statements of the Predecessor forboth periods.

 

•              Significant adjustments were required in areas involvingmanagement judgment such as warranty accrual, receivables allowance andin-transit inventory, and assumptions used by Aviza to record accountingentries did not initially have detailed support.

 

•              Aviza did not have in its possession an interest rate capagreement with its bank in connection with Aviza’s revolving line of credit andhad not recorded the agreement as a derivative in its financial statements. Inaddition, Aviza was not aware that it was required to record dividends underits corporate charter prior to correction of its corporate charter.

 

Although the management of Aviza believes that it has remediatedeach of these identified material weaknesses, Aviza cannot assure you that itwill not identify additional material weaknesses or significant deficiencies inits internal control over financial reporting in the future.

 

In addition, in May 2005, Trikon restated its previously issuedfinancial statements with respect to:

 

•              the classification of accounts receivable and deferredrevenue on contracts with a portion of the contract price that is withhelduntil final acceptance;

 

•              the timing of recognition of costs on those contracts; and

 

•              the allocation of facilities costs.

 

To address the material weaknesses in Trikon’s internal controlover financial reporting evidenced by this restatement, Trikon took remedialmeasures related to the selection, application and monitoring of its accountingpolicies.

 

Any failure to maintain or implement required new or improved controls,or any difficulties Aviza encounters in their implementation, could result inadditional material weaknesses or significant deficiencies causing Aviza tofail to meet its periodic reporting obligations or result in materialmisstatements in Aviza’s financial statements. Any such failure could alsoadversely affect the results of periodic management evaluations and annualauditor attestation reports regarding the effectiveness of Aviza’s internalcontrol over financial reporting that will be required when the SEC’s rulesunder Section 404 of the Sarbanes-Oxley Act of 2002 become applicable toAviza beginning with its first Annual Report on Form 10-K for the fiscalyear ending in September 2007, which will be filed in December 2007.The existence of a material weakness could result in errors in Aviza’sfinancial statements that could result in a restatement of financialstatements, cause Aviza to fail to meet its reporting obligations and causeinvestors to lose confidence in its reported financial information, leading toa decline in Aviza’s stock price.

 

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***Aviza will be required to spendsignificant time, money and other resources to ensure and determine that itsinternal control over financial reporting is effective. If Aviza is unable toachieve and maintain effective internal control over financial reporting, thevalue of your investment in Aviza could decline.***

 

Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002,beginning with Aviza’s Annual Report on Form 10-K for its fiscal yearending in September 2007, Aviza will be required to furnish a report onits internal control over financial reporting. This report will contain anassessment by Aviza’s management of the effectiveness of Aviza’s internalcontrol over financial reporting and a statement that Aviza’s independentregistered public accounting firm has attested to and reported on Aviza’smanagement’s assessment of Aviza’s internal control over financial reporting.

 

Aviza has identified material weaknesses in internal control overfinancial reporting as of the end of fiscal 2004, and Trikon restated itsfinancial statements in May 2005 as a result of Trikon’s identification ofmaterial weaknesses in its internal control over financial 

reporting.  In addition, because it just recently became apublic company, Aviza has not been subject to Section 404 of theSarbanes-Oxley Act of 2002. As a result of Aviza’s and Trikon’s identifiedmaterial weaknesses and the fact that Aviza just recently became a publiccompany, Aviza faces a significant challenge in ensuring its operations aredesigned in a manner that is consistent with the framework of internal controlestablished by the Committee of Sponsoring Organization of the TreadwayCommission.

 

Aviza’s internal control over financial reporting may not beconsidered effective if, among other things:

 

•              any materialweaknesses in Aviza’s internal control over financial reporting exist;

 

•              Aviza fails toevaluate key controls in a timely fashion; or

 

•              Aviza fails toremediate assessed deficiencies.

 

If Aviza’s management asserts that Aviza’s internal control overfinancial reporting is ineffective, or if Aviza’s independent registered publicaccounting firm expresses an adverse opinion on Aviza’s management’s assessmentor that Aviza’s internal control over financial reporting is ineffective, thevalue of your investment in Aviza could decline.

 

***Aviza will not be required tofurnish a report on its internal control over financial reporting untilDecember 2007.***

 

Aviza is not currently required to furnish a report on itsinternal control over financial reporting pursuant to the SEC’s rules underSection 404 of the Sarbanes-Oxley Act of 2002 as part of the AnnualReports that it files on Form 10-K. However, these rules will apply toAviza when it files its Annual Report on Form 10-K for its fiscal yearending in September 2007, which will be filed in December 2007.

 

***Aviza’s ability to use netoperating losses to offset future taxable income is subject to limitations.***

 

In general, under Section 382 of the Internal Revenue Code, acorporation that undergoes an “ownership change” is subject to limitations onits ability to utilize its pre-change net operating losses to offset futuretaxable income. A corporation generally undergoes an “ownership change” if thepercentage of stock of the corporation owned by one or more of its 5%stockholders has increased by more than 50 percentage points over a three-yearperiod.

 

Trikon’s net operating losses are subject to limitations arisingfrom previous ownership changes and will be subject to additional limitationsas a result of the merger transaction. In addition, if Aviza undergoes anownership change after the merger transaction, 

Aviza’s ability to utilize NOLs could be limited by Section 382 ofthe Internal Revenue Code. It is impossible for Aviza to ensure that it willnot experience an ownership change in the future because of changes in itsstock ownership, some of which are outside of Aviza’s control, could result inan ownership change under Section 382 of the Internal Revenue Code.

 

Generally, the limitations on Aviza’s ability to use either its orTrikon’s pre-merger transaction NOLs to offset future taxable income areexpected to be significant, and thus Aviza’s liability for future U.S. federalincome taxes may be materially higher than that liability would have beenabsent such limitations. Similar rules may apply for foreign and state incometax purposes as well.

*** ***

***Business interruptions couldadversely affect Aviza’s business.***

 

Aviza’s operations are vulnerable to interruption by fire,earthquake, power loss, telecommunications failure and other events beyond itscontrol. A disaster could severely damage Aviza’s ability to deliver itsproducts to its customers. In order to manufacture its products, Aviza willneed to maintain and protect its manufacturing facilities and computer systems,many of which will be located in or near its headquarters in Scotts Valley,California. Scotts Valley is located near a known earthquake fault zone.Although Aviza’s facilities are designed to be fault tolerant, Aviza’s systemsare susceptible to damage from fire, floods, earthquakes, power loss,telecommunications failures and similar events. Although Aviza will maintaingeneral business insurance against interruptions such as fires and floods,there can be no assurance that the amount of coverage will be adequate in anyparticular case.

 

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***Any acquisitions Aviza may makecould disrupt business and harm its financial condition.***

 

Aviza may invest in complementary products, companies ortechnologies. Such investments involve numerous risks, including:

 

•              diversion of management’s attention from other operationalmatters;

 

•              inability to complete acquisitions as anticipated or atall;

 

•              inability to realize synergies expected to result from anacquisition;

 

•              failure to commercialize purchased technologies;

 

•              ineffectiveness of an acquired company’s internal controls;

 

•              impairment of acquired intangible assets as a result oftechnological advancements or worse-than-expected performance of the acquiredcompany or its product offerings;

 

•              unknown and undisclosed commitments or liabilities;

 

•              failure to integrate and retain key employees; and

 

•              ineffective integration of operations.

 

Mergers and acquisitions are inherently subject to significantrisks, and Aviza’s inability to manage these risks effectively could adverselyaffect its business, financial condition and results of operations.

 

***If Aviza is unable to establishand build a recognized brand, it may be unable to grow its business.***

 

Aviza’s management has made the decision to use the “Aviza” brandgoing forward and believes that transferring market acceptance for the “Trikon”brand to Aviza and maintaining a recognized brand for Aviza will be critical tothe success of its strategy.  In the near term, Aviza may face somedisruption in the marketplace due to the disappearance of the “Trikon” brandand a lack of recognition for the “Aviza” brand.  The adoption of the “Aviza”brand may prevent Aviza from taking advantage of certain goodwill of existingcustomers and strategic partners of Trikon.  Furthermore, in order topromote the “Aviza” brand in response to competitive pressures, Aviza may findit necessary to increase its marketing expenditures or otherwise increase itsfinancial commitment to building and maintaining brand loyalty and awarenessamong existing and potential clients.  If Aviza fails to promote, maintainand protect its brand, or incurs excessive expenses in an attempt to promoteand maintain its brand, its business, financial condition, results ofoperations and prospects will be harmed.

 

***Affiliates of VantagePoint owna large amount of Aviza’s common stock, which will limit your ability toinfluence corporate activities of Aviza.***

 

At August 10, 2006, affiliates of VantagePoint beneficially ownedapproximately 48% of Aviza’s outstanding voting power. VantagePoint exercisessignificant influence over Aviza’s operations, business strategy and theoutcome of votes on all matters requiring stockholder approval, including theapproval of significant corporate transactions, such as mergers or otherbusiness 

combinations. VantagePoint may have interests that differ from theinterests of other stockholders of Aviza. This concentration of 

ownership may also have the effect of delaying or preventing achange of control of Aviza or discouraging others from making tender offers forshares of Aviza, which could prevent the other stockholders of Aviza fromreceiving a premium for your shares.

*** ***

***The price of Aviza’s commonstock has fluctuated and may fluctuate significantly in the future, which maylead to losses by investors or to securities litigation.***

 

The market price of Aviza’s common stock has been and may becomehighly volatile in the future, and Aviza’s stock price may decline in thefuture.  For example, for the period from December 2, 2005, Aviza’s firstday of trading, through August 10, 2006, the price range of Aviza’s commonstock was $3.77 to $6.56 per share.

 

In addition, in recent years, the stock market in general, and themarket for shares of high technology stocks in particular, have experiencedextreme price fluctuations.  The fluctuations have frequently been unrelatedto the operating performance of the affected companies.  Such fluctuationscould adversely affect the market price of Aviza’s common stock.  In thepast, securities litigation has often been instituted against a companyfollowing periods of volatility in its stock price.  This type oflitigation, if filed against Aviza, could result in substantial costs anddivert management’s attention and resources.

 

**ITEM 2.  UNREGISTERED SALES OF EQUITYSECURITIES AND USE OF PROCEEDS**

 

On April 24, 2006, Aviza sold an aggregate of 3,282,275 shares ofits common stock to Caisse de dépôt et placement du Québec, a body organizedunder the laws of the Province of Québec, for an aggregate purchase price of$15 million in a private placement. In 

 

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connection with and at the closing of this sale, Jerauld J.Cutini, Aviza’s President and Chief Executive Officer, elected to convert all10,000 shares of mandatorily redeemable Series B preferred stock of Aviza,Inc., a subsidiary of Aviza, held by him into an aggregate of 238,482 shares ofAviza’s common stock, and affiliates of VantagePoint Venture Partners electedto convert all 10,000 shares of mandatorily redeemable Series B preferred stockof Aviza, Inc. and all 90,000 shares of mandatorily redeemable Series B-1preferred stock of Aviza, Inc. held by them into an aggregate of 2,298,492shares of Aviza’s common stock. Pursuant to the terms of Aviza, 

Inc.’s certificate of incorporation, each share of mandatorilyredeemable Series B preferred stock and mandatorily redeemable Series B-1preferred stock of Aviza, Inc. was converted into a number of shares of Aviza’scommon stock determined by dividing (a) the redemption price of such share ofmandatorily redeemable Series B preferred stock or mandatorily redeemableSeries B-1 preferred stock of Aviza, Inc. on the closing date of the offeringby (b) $4.57, which is the per-share purchase price that Caisse de dépôt etplacement du Québec paid for its shares.

 

Aviza, Inc.’s issuance of the securities in each of thetransactions described above was exempt from registration under the SecuritiesAct in reliance on Section 4(2) of the Securities Act and Regulation Dpromulgated thereunder. The recipients of the securities in each of thesetransactions represented their intention to acquire the securities forinvestment only and not with a view to or for sale in connection with anydistribution thereof, and appropriate legends were affixed to the sharecertificates and other instruments issued in such transactions. The sales ofthese securities were made without general solicitation or advertising.

 

**ITEM 3.  DEFAULTS UPON SENIORSECURITIES**

 

None.

 

**ITEM 4.  SUBMISSION OF MATTERS TO AVOTE OF SECURITY HOLDERS**

 

None.

 

**ITEM 5. OTHER INFORMATION**

 

None.

 

**ITEM 6.  EXHIBITS**

 
| 2.1    |   | Agreement and Plan of Merger, dated as of March 14, 2005,  by and among Trikon Technologies, Inc., Aviza, Inc. (formerly, Aviza  Technology, Inc.), Aviza Technology, Inc. (formerly, New Athletics, Inc.),  Baseball Acquisition Corp. I and Baseball Acquisition Corp. II, as  amended, incorporated by reference to Annex A to Amendment No. 4 to the  Registration Statement on Form S-4 filed by Aviza Technology, Inc. (formerly,  New Athletics, Inc.) with the Commission on October 28, 2005 (File No.  333-126098). |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| 3.1    |   | Amended and Restated Certificate of Incorporation of Aviza  Technology, Inc. (formerly, New Athletics, Inc.), incorporated by reference  to Exhibit 3.1 to our Annual Report on Form 10-K filed with the Commission on  December 29, 2005.                                                                                                                                                                                                                                                                                                        |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| 3.2    |   | Amended and Restated Bylaws of Aviza Technology, Inc.,  incorporated by reference to Exhibit 3.2 to our Annual Report on Form 10-K  filed with the Commission on December 29, 2005.                                                                                                                                                                                                                                                                                                                                                               |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| 4.1    |   | Specimen certificate of common stock of Aviza Technology, Inc.,  incorporated by reference to Exhibit 4.1 to our Annual Report on form 10-K  filed with the Commission on December 29, 2005.                                                                                                                                                                                                                                                                                                                                                      |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| 4.2    |   | Form of redeemable warrant to purchase shares of common  stock dated October 22, 2003 issued in connection with the sale of  common stock and warrants to Special Situations Fund III LP and certain of  its affiliate funds, incorporated by reference to Exhibit 4.1 to the  Current Report on Form 8-K filed by Trikon Technologies, Inc. with the  Commission on October 23, 2003                                                                                                                                    |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| 10.1   |   | Employment Agreement, dated as of December 1, 2005, between  Aviza Technology, Inc. and Jerauld J. Cutini, incorporated by reference to  Exhibit 10.1 to our Current Report on Form 8-K filed with the Commission on  April 7, 2006.                                                                                                                                                                                                                                                                                                              |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| 10.2   |   | Employment Agreement, dated as of December 1, 2005, between  Aviza Technology, Inc. and Patrick C. O’Connor, incorporated by reference to  Exhibit 10.2 to our Current Report on Form 8-K filed with the Commission on  April 7,                                                                                                                                                                                                                                                                                                             |

 

39

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|   |   | 2006.                                                                                                                                                                                                                                                                                                                                                                                                                            |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                             |
| 10.3   |   | Employment Agreement, dated as of December 1, 2005, between  Aviza Technology, Inc. and John Macneil, incorporated by reference to Exhibit  10.3 to our Current Report on Form 8-K filed with the Commission on April 7,  2006.                                                                                                                                                                                                  |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                             |
| 10.4   |   | Stock Purchase Agreement, dated as of April 24, 2006, by and  between Aviza Technology, Inc. and Caisse de dépôt et placement du Québec,  incorporated by reference to Exhibit 10.1 to our Current Report on Form 8-K  filed with the Commission on April 25, 2006.                                                                                                                                               |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                             |
| 10.5   |   | Amendment No. 5, dated as of March 31, 2006, to Credit Agreement  between Bank of America, N.A. and Aviza, Inc., incorporated by reference to  Exhibit 10.2 to our Current Report on Form 8-K filed with the Commission on  April 25, 2006.                                                                                                                                                                                      |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                             |
| 10.6   |   | Amendment No. 6, dated as of May 1, 2006, to Credit Agreement  between Bank of America, N.A. and Aviza, Inc., incorporated by reference to  Exhibit 10.1 to our Current Report on Form 8-K filed with the Commission on  June 5, 2006.                                                                                                                                                                                           |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                             |
| 10.7   |   | Amendment to Second Amended and Restated Stockholder Agreement,  dated as of April 24, 2006, by and among the Company, Trikon Technologies,  Inc. and VantagePoint Venture Partners IV (Q), L.P., VantagePoint Venture  Partners IV, L.P. and VantagePoint Venture Partners IV Principals Fund, L.P.,  incorporated by reference to Exhibit 10.3 to our Current Report on Form 8-K  filed with the Commission on April 25, 2006. |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                             |
| 31.1   |   | Certification of the Chief Executive Officer pursuant to Section  302 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                                                                                         |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                             |
| 31.2   |   | Certification of the Chief Financial Officer pursuant to Section  302 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                                                                                         |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                             |
| 32.1   |   | Certification of the Chief Executive Officer pursuant to Section  906 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                                                                                         |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                             |
| 32.2   |   | Certification of the Chief Financial Officer pursuant to Section  906 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                                                                                         |

 

40

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**SIGNATURES**

 

Pursuant to the requirements of the Securities Exchange Act of1934, the registrant has duly caused this report to be signed on its behalf bythe undersigned thereunto duly authorized.

 
|                   | Aviza Technology, Inc.                                  |                         |
|------------------------|---------------------------------------------------------|------------------------------|
|                   | *(Registrant)*                                          | * *                     |
| * *               | * *                                                |
| * *               | * *                                                |
| Dated: August 10, 2006 |                                                    |
|                   | By:                                                     | /s/ Patrick C. O’Connor |   |
|                   |                                                    |
|                   | **Patrick C. O’Connor**                            |
|                   | *Executive Vice President and Chief Financial  Officer* |
|                   | *(Principal Financial and Accounting Officer)*          |
|                        |                                                         |                              |  |  |

 

41

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EXHIBITINDEX

 
| 2.1    |   | Agreement and Plan of  Merger, dated as of March 14, 2005, by and among Trikon Technologies,  Inc., Aviza, Inc. (formerly, Aviza Technology, Inc.), Aviza Technology, Inc.  (formerly, New Athletics, Inc.), Baseball Acquisition Corp. I and  Baseball Acquisition Corp. II, as amended, incorporated by reference to  Annex A to Amendment No. 4 to the Registration Statement on Form S-4  filed by Aviza Technology, Inc. (formerly, New Athletics, Inc.) with the  Commission on October 28, 2005 (File No. 333-126098). |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| 3.1    |   | Amended and Restated  Certificate of Incorporation of Aviza Technology, Inc. (formerly, New  Athletics, Inc.), incorporated by reference to Exhibit 3.1 to our Annual  Report on Form 10-K filed with the Commission on December 29, 2005.                                                                                                                                                                                                                                                                                                        |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| 3.2    |   | Amended and Restated  Bylaws of Aviza Technology, Inc., incorporated by reference to Exhibit 3.2 to  our Annual Report on Form 10-K filed with the Commission on December 29,  2005.                                                                                                                                                                                                                                                                                                                                                              |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| 4.1    |   | Specimen certificate of  common stock of Aviza Technology, Inc., incorporated by reference to Exhibit  4.1 to our Annual Report on Form 10-K filed with the Commission on December  29, 2005.                                                                                                                                                                                                                                                                                                                                                     |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| 4.2    |   | Form of redeemable  warrant to purchase shares of common stock dated October 22, 2003 issued  in connection with the sale of common stock and warrants to Special  Situations Fund III LP and certain of its affiliate funds, incorporated by  reference to Exhibit 4.1 to the Current Report on Form 8-K filed by  Trikon Technologies, Inc. with the Commission on October 23, 2003.                                                                                                                                   |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| 10.1   |   | Employment Agreement,  dated as of December 1, 2005, between Aviza Technology, Inc. and Jerauld J.  Cutini, incorporated by reference to Exhibit 10.1 to our Current Report on  Form 8-K filed with the Commission on April 7, 2006.                                                                                                                                                                                                                                                                                                              |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| 10.2   |   | Employment Agreement,  dated as of December 1, 2005, between Aviza Technology, Inc. and Patrick C. O’Connor,  incorporated by reference to Exhibit 10.2 to our Current Report on Form 8-K  filed with the Commission on April 7, 2006.                                                                                                                                                                                                                                                                                                       |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| 10.3   |   | Employment Agreement,  dated as of December 1, 2005, between Aviza Technology, Inc. and John  Macneil, incorporated by reference to Exhibit 10.3 to our Current Report on  Form 8-K filed with the Commission on April 7, 2006                                                                                                                                                                                                                                                                                                                    |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| 10.4   |   | Stock Purchase Agreement,  dated as of April 24, 2006, by and between Aviza Technology, Inc. and Caisse  de dépôt et placement du Québec, incorporated by reference to Exhibit 10.1 to  our Current Report on Form 8-K filed with the Commission on April 25, 2006.                                                                                                                                                                                                                                                                |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| 10.5   |   | Amendment No. 5, dated as  of March 31, 2006, to Credit Agreement between Bank of America, N.A. and  Aviza, Inc., incorporated by reference to Exhibit 10.2 to our Current Report  on Form 8-K filed with the Commission on April 25, 2006.                                                                                                                                                                                                                                                                                                       |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| 10.6   |   | Amendment No. 6, dated as  of May 1, 2006, to Credit Agreement between Bank of America, N.A. and Aviza,  Inc., incorporated by reference to Exhibit 10.1 to our Current Report on Form  8-K filed with the Commission on June 5, 2006.                                                                                                                                                                                                                                                                                                            |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| 10.7   |   | Amendment to Second  Amended and Restated Stockholder Agreement, dated as of April 24, 2006, by  and among the Company, Trikon Technologies, Inc. and VantagePoint Venture  Partners IV (Q), L.P., VantagePoint Venture Partners IV, L.P. and  VantagePoint Venture Partners IV Principals Fund, L.P., incorporated by  reference to Exhibit 10.3 to our Current Report on Form 8-K filed with the  Commission on April 25, 2006.                                                                                                                 |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| 31.1   |   | Certification of the Chief  Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                                                                                                                                                                                                          |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| 31.2   |   | Certification of the Chief  Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                                                                                                                                                                                                          |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| 32.1   |   | Certification of the Chief  Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                                                                                                                                                                                                          |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| 32.2   |   | Certification of the Chief  Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                                                                                                                                                                                                          |

 

42

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