**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

**FORM 10-Q**

**x**                              QUARTERLYREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

**Forthe quarterly period ended March 30, 2007**

**OR**

**o**                                 TRANSITIONREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

**Forthe transition period from                to**

**Commissionfile number 000-51642**

**Aviza Technology, Inc.**

(Exact name of Registrantas Specified in its Charter)

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

 

**440 Kings Village Road**

**Scotts Valley, California   95066**

(Address of PrincipalExecutive Offices including Zip Code)

**(831) 438-2100**

(Registrant’s TelephoneNumber, Including Area Code)

Indicate by check mark whether the registrant: (1) hasfiled all reports required to be filed by Section 13 or 15 (d) of theSecurities Exchange Act of 1934 during the preceding 12 months (or for suchshorter period that the registrant was required to file such reports), and (2)has been subject to such filing requirements for the past 90 days.

YES x   NO o

Indicate by check mark whether the registrant is alarge accelerated filer, an accelerated filer, or a non-acceleratedfiler.  See definition of “accelerated filer and large accelerated filer”in Rule 12b-2 of the Exchange Act.  (Check one):
| Large accelerated filer   o |   | Accelerated filer   o |   | Non-accelerated filer   x |
|---------------------------------------|--------|---------------------------------|--------|-------------------------------------|

 

Indicate by check mark whether the registrant is ashell company (as defined in Rule 12b-2 of the Exchange Act).

YES o   NO x

Asof May 8, 2007, the registrant had 20,815,252 shares of its common stock, parvalue $0.0001 per share, outstanding.

 

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**AvizaTechnology, Inc.**

**Tableof Contents**
| ** **   | ** ** | ** **                                                                                                                        | ** ** | Page       | ** ** |
|--------------|------------|-----------------------------------------------------------------------------------------------------------------------------------|------------|------------|------------|
| ** **   | ** ** | ** **                                                                                                                        | ** ** | **No.**    | ** ** |
| **PART I.**  | ** ** | **FINANCIAL INFORMATION**                                                                                                         | ** ** | ** ** | ** ** |
| Item 1.      |       | Financial Statements  (unaudited):                                                                                                |       |       |       |
|         |       | Condensed Consolidated Balance Sheets — at March 30,  2007 and September 29, 2006                                       |       | 3          |       |
|         |       | Condensed Consolidated Statements of Operations — for  the Three and Six Months Ended March 30, 2007 and March 31, 2006 |       | 4          |       |
|         |       | Condensed Consolidated Statements of Cash Flows — for  the Six Months Ended March 30, 2007 and March 31, 2006      |       | 5          |       |
|         |       | Notes to Condensed Consolidated Financial Statements                                                                              |       | 6          |       |
| Item 2.      |       | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                                       |       | 17         |       |
| Item 3.      |       | Quantitative  and Qualitative Disclosures About Market Risk                                                                       |       | 27         |       |
| Item 4.      |       | Controls and  Procedures                                                                                                          |       | 27         |       |
| **PART II.** | ** ** | **OTHER INFORMATION**                                                                                                             |       | 28         |       |
| Item 1.      |       | Legal Proceedings                                                                                                                 |       | 28         |       |
| Item 1A.     |       | Risk Factors                                                                                                                      |       | 28         |       |
| Item 2.      |       | Unregistered  Sales of Equity Securities and Use of Proceeds                                                                      |       | 40         |       |
| Item 3.      |       | Defaults Upon  Senior Securities                                                                                                  |       | 40         |       |
| Item 4.      |       | Submission of  Matters to a Vote of Security Holders                                                                              |       | 40         |       |
| Item 5.      |       | Other Information                                                                                                                 |       | 41         |       |
| Item 6.      |       | Exhibits                                                                                                                          |       | 41         |       |

 

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 **ITEM 1. FINANCIAL STATEMENTS**

**AVIZATECHNOLOGY, INC.  AND SUBSIDIARIES**

**CONDENSED CONSOLIDATED BALANCE SHEETS**

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

**(unaudited)** 
| ** **                                                                                                                                                                            | ** ** | **March 30,** | ** ** | **September 29,** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------|------------|------------------------|------------|
| ** **                                                                                                                                                                            | ** ** | **2007**           | ** ** | **2006**               | ** ** |
| **ASSETS**                                                                                                                                                                            | ** ** | ** **         | ** ** | ** **             | ** ** |
| CURRENT ASSETS:                                                                                                                                                                       |       |               |       |                   |       |
| Cash and cash  equivalents                                                                                                                                                            |       | $                  | 21,523     |                   | $          | 10,722 |   |
| Accounts  receivable, net of allowance of $220 and $262, respectively                                                                                                                 |       | 43,064             |       | 26,763                 |       |
| Inventory                                                                                                                                                                             |       | 56,902             |       | 54,499                 |       |
| Prepaid expenses  and other current assets                                                                                                                                            |       | 7,674              |       | 6,638                  |       |
| Total current  assets                                                                                                                                                                 |       | 129,163            |       | 98,622                 |       |
|                                                                                                                                                                                  |       |               |       |                   |       |
| PROPERTY, PLANT AND  EQUIPMENT—net                                                                                                                                               |       | 28,375             |       | 25,266                 |       |
| INTANGIBLE ASSETS—net                                                                                                                                                            |       | 4,224              |       | 4,755                  |       |
| OTHER ASSETS                                                                                                                                                                          |       | 889                |       | 463                    |       |
| TOTAL                                                                                                                                                                                 |       | $                  | 162,651    |                   | $          | 129,106 |   |
|                                                                                                                                                                                  |       |               |       |                   |       |
| **LIABILITIES AND STOCKHOLDERS’  EQUITY**                                                                                                                                        | ** ** | ** **         | ** ** | ** **             | ** ** |
| CURRENT LIABILITIES:                                                                                                                                                                  |       |               |       |                   |       |
| Short term  borrowings and current portion of notes payable                                                                                                                           |       | $                  | 37,727     |                   | $          | 28,632 |   |
| Accounts payable                                                                                                                                                                      |       | 28,135             |       | 30,792                 |       |
| Warranty  liability                                                                                                                                                                   |       | 12,903             |       | 10,816                 |       |
| Accrued  liabilities                                                                                                                                                                  |       | 15,462             |       | 13,716                 |       |
| Total current  liabilities                                                                                                                                                            |       | 94,227             |       | 83,956                 |       |
| NOTES PAYABLE—Long term                                                                                                                                                          |       | 886                |       | 6,256                  |       |
| Total  liabilities                                                                                                                                                                    |       | 95,113             |       | 90,212                 |       |
|                                                                                                                                                                                  |       |               |       |                   |       |
| COMMITMENTS AND  CONTINGENCIES (Note 10)                                                                                                                                              |       |               |       |                   |       |
|                                                                                                                                                                                  |       |               |       |                   |       |
| STOCKHOLDERS’ EQUITY:                                                                                                                                                            |       |               |       |                   |       |
| Preferred stock,  $0.0001 par value—5,000,000 shares authorized; none outstanding                                                                                                |       | —             |       | —                 |       |
| Common stock,  $0.0001 par value—100,000,000 shares authorized; 20,215,252 and 16,150,752  shares issued and outstanding at March 30, 2007 and September 29, 2006,  respectively |       | 2                  |       | 2                      |       |
| Additional  paid-in capital                                                                                                                                                           |       | 113,610            |       | 88,655                 |       |
| Accumulated  other comprehensive income                                                                                                                                               |       | 1,803              |       | 594                    |       |
| Accumulated  deficit                                                                                                                                                                  |       | (47,877            | )          | (50,357                | )          |
| Total  stockholders’ equity                                                                                                                                                      |       | 67,538             |       | 38,894                 |       |
| TOTAL                                                                                                                                                                                 |       | $                  | 162,651    |                   | $          | 129,106 |   |

 

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

3

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**AVIZATECHNOLOGY, INC. AND SUBSIDIARIES**

**CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS**

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

**(unaudited)**
| ** **                           | ** ** | **Quarter Ended** | ** ** | **Six Months Ended** | ** ** |
|--------------------------------------|------------|------------------------|------------|--------------------------------|------------|
| ** **                           | ** ** | **March 30,**     | ** ** | **March 31,**             | ** ** | **March 30,** | ** ** | **March 31,** | ** ** |
| ** **                           | ** ** | **2007**               | ** ** | **2006**                       | ** ** | **2007** | ** ** | **2006** | ** ** |
|                                 | ** ** | ** **             | ** ** | ** **                     | ** ** | ** ** | ** ** | ** ** | ** ** |
| NET SALES                            |       | $                      | 61,638     |                           | $          | 36,241 |   | $ | 123,829 |   | $ | 65,184 |   |
| COST OF GOODS SOLD                   |       | 42,714                 |       | 27,050                         |       | 86,057 |   | 48,858 |   |
|                                 |       |                   |       |                           |       |   |   |   |   |
| GROSS PROFIT                         |       | 18,924                 |       | 9,191                          |       | 37,772 |   | 16,326 |   |
|                                 |       |                   |       |                           |       |   |   |   |   |
| OPERATING EXPENSES:                  |       |                   |       |                           |       |   |   |   |   |
| Research and  development            |       | 8,011                  |       | 6,553                          |       | 15,714 |   | 11,196 |   |
| Selling, general  and administrative |       | 8,221                  |       | 6,482                          |       | 16,628 |   | 11,597 |   |
| In-process  research and development |       | —                 |       | 9                              |       | — |   | 402 |   |
|                                 |       |                   |       |                           |       |   |   |   |   |
| Total operating expenses             |       | 16,232                 |       | 13,044                         |       | 32,342 |   | 23,195 |   |
|                                 |       |                   |       |                           |       |   |   |   |   |
| INCOME (LOSS) FROM  OPERATIONS       |       | 2,692                  |       | (3,853                         | )          | 5,430 |   | (6,869 | ) |
|                                 |       |                   |       |                           |       |   |   |   |   |
| OTHER INCOME (EXPENSE):              |       |                   |       |                           |       |   |   |   |   |
| Interest income                      |       | 110                    |       | 13                             |       | 137 |   | 53 |   |
| Interest expense                     |       | (1,063                 | )          | (1,356                         | )          | (2,315 | ) | (2,742 | ) |
| Other income  (expense)—net     |       | 11                     |       | 2                              |       | 24 |   | (145 | ) |
|                                 |       |                   |       |                           |       |   |   |   |   |
| Total other  expense—net        |       | (942                   | )          | (1,341                         | )          | (2,154 | ) | (2,834 | ) |
|                                 |       |                   |       |                           |       |   |   |   |   |
| INCOME (LOSS) BEFORE  INCOME TAXES   |       | 1,750                  |       | (5,194                         | )          | 3,276 |   | (9,703 | ) |
| INCOME TAXES                         |       | 395                    |       | 118                            |       | 796 |   | 240 |   |
|                                 |       |                   |       |                           |       |   |   |   |   |
| NET INCOME (LOSS)                    |       | $                      | 1,355      |                           | $          | (5,312 | ) | $ | 2,480 |   | $ | (9,943 | ) |
|                                 |       |                   |       |                           |       |   |   |   |   |
| Income (loss) per  share:            |       |                   |       |                           |       |   |   |   |   |
| Basic                                |       | $                      | 0.08       |                           | $          | (0.52 | ) | $ | 0.15 |   | $ | (1.42 | ) |
| Diluted                              |       | $                      | 0.07       |                           | $          | (0.52 | ) | $ | 0.14 |   | $ | (1.42 | ) |
|                                 |       |                   |       |                           |       |   |   |   |   |
| Weighted average common  shares:     |       |                   |       |                           |       |   |   |   |   |
| Basic                                |       | 17,538,955             |       | 10,305,831                     |       | 16,844,853 |   | 7,011,864 |   |
| Diluted                              |       | 18,374,237             |       | 10,305,831                     |       | 17,637,631 |   | 7,011,864 |   |

 

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

4

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**AVIZATECHNOLOGY, INC.  AND SUBSIDIARIES**

**CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS**

**(inthousands)**

**(unaudited)** 
| ** **                                                                                                | ** ** | **Six Months Ended** | ** ** |
|-----------------------------------------------------------------------------------------------------------|------------|--------------------------------|------------|
| ** **                                                                                                | ** ** | **March 30,** 2007        | ** ** | **March 31,  2006** | ** ** |
| CASH FLOWS FROM  OPERATING ACTIVITIES:                                                                    |       |                           |       |   |   |
| Net income  (loss)                                                                                        |       | $                              | 2,480      |   | $ | (9,943 | ) |
| Adjustments to  reconcile net income (loss) to net cash (used in) provided by operating  activities:      |       |                           |       |   |   |
| Depreciation                                                                                              |       | 1,887                          |       | 1,603 |   |
| Amortization                                                                                              |       | 767                            |       | 1,454 |   |
| Reduction in  acquired intangible assets due to the use of acquired net operating losses                  |       | 330                            |       | — |   |
| Fair value of  common stock warrants issued for loan guarantee                                            |       | —                         |       | 251 |   |
| Stock based  compensation                                                                                 |       | 914                            |       | 639 |   |
| Mandatorily  redeemable preferred stock dividend accrued                                                  |       | —                         |       | 439 |   |
| Provision for  allowance for doubtful accounts                                                            |       | (52                            | )          | (200 | ) |
| Write off in-process  research and development from Trikon                                                |       | —                         |       | 402 |   |
| Changes in  assets and liabilities:                                                                       |       |                           |       |   |   |
| Accounts  receivable                                                                                      |       | (15,616                        | )          | 4,466 |   |
| Inventories                                                                                               |       | (1,158                         | )          | 659 |   |
| Prepaid and  other assets                                                                                 |       | (15                            | )          | 3,247 |   |
| Accounts payable                                                                                          |       | (3,137                         | )          | 249 |   |
| Warranty  liability                                                                                       |       | 2,013                          |       | (2,004 | ) |
| Accrued  liabilities                                                                                      |       | 1,473                          |       | 1,855 |   |
| Net cash (used  in) provided by operating activities                                                      |       | (10,114                        | )          | 3,117 |   |
| CASH FLOWS FROM  INVESTING ACTIVITIES:                                                                    |       |                           |       |   |   |
| Cash acquired  from Trikon net of direct merger costs                                                     |       | —                         |       | 7,366 |   |
| Purchases of  property and equipment                                                                      |       | (4,210                         | )          | (2,700 | ) |
| Net cash (used  in) provided by investing activities                                                      |       | (4,210                         | )          | 4,666 |   |
| CASH FLOWS FROM  FINANCING ACTIVITIES:                                                                    |       |                           |       |   |   |
| Net proceeds  from credit lines                                                                           |       | 2,119                          |       | (2,532 | ) |
| Proceeds from  the issuance of common stock                                                               |       | 24,042                         |       | 40 |   |
| Payments on  mortgage loan                                                                                |       | (140                           | )          | (140 | ) |
| Payments on  other short-term borrowings                                                                  |       | (582                           | )          | (8,658 | ) |
| Payments on  capital lease obligations                                                                    |       | (131                           | )          | (21 | ) |
| Net cash  provided by (used in) financing activities                                                      |       | 25,308                         |       | (11,311 | ) |
| Effect of  exchange rates on foreign cash balances                                                        |       | (183                           | )          | (47 | ) |
| NET INCREASE (DECREASE)  IN CASH AND CASH EQUIVALENTS                                                     |       | 10,801                         |       | (3,575 | ) |
| CASH AND CASH  EQUIVALENTS:                                                                               |       |                           |       |   |   |
| Beginning of  period                                                                                      |       | 10,722                         |       | 7,437 |   |
| End of period                                                                                             |       | $                              | 21,523     |   | $ | 3,862 |   |
| SUPPLEMENTAL DISCLOSURE  OF CASH FLOW INFORMATION:                                                        |       |                           |       |   |   |
| Cash paid for  interest                                                                                   |       | $                              | 1,770      |   | $ | 1,438 |   |
| Income taxes  paid                                                                                        |       | $                              | 276        |   | $ | 63 |   |
| Noncash investing and  financing activities:                                                              |       |                           |       |   |   |
| Notes payable  issued for services to be rendered                                                         |       | $                              | 1,737      |   | $ | — |   |
| Equipment  acquired under capital lease                                                                   |       | $                              | 715        |   | $ | — |   |
| Fair value of  common stock, options and warrants issued in the acquisition of Trikon  Technologies, Inc. |       | $                         | —     |   | $  | 24,442 |   |
| Conversion of  preferred stock, Series A, to common stock                                                 |       | $                              | —     |   | $ | 32,650 |   |
| Fair value of  common stock warrants issued in exchange for loan guarantee                                |       | $                              | —     |   | $ | 251 |   |
| Property and equipment  included in accounts payable at end of quarter                                    |       | $                              | 393        |   | $ | 200 |   |

 

The accompanying notes are an integral part of theseconsolidated financial statements.

5

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**AVIZATECHNOLOGY, INC. AND SUBSIDIARIES**

**NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**March30, 2007**

***(Unaudited)***

**1. Basis of Presentation**

The accompanying unaudited condensedconsolidated financial statements have been prepared in accordance with UnitedStates (U.S.) generally accepted accounting principles for interim financialinformation and applicable regulations of the U.S. Securities and ExchangeCommission.  Certain information and footnote disclosures normallyincluded in financial statements prepared in accordance with accountingprinciples generally accepted in the United States have been condensed oromitted pursuant to such rules and regulations. In the opinion of management,all adjustments (consisting only of normal recurring adjustments) considerednecessary for a fair statement of financial position and results of operationshave been included.  Our operating results for the quarter and six monthsended March 30, 2007 are not necessarily indicative of the results that may beexpected for future quarters and the fiscal year ending September 28,2007.  The accompanying unaudited condensed consolidated financialstatements should be read in conjunction with our audited consolidatedfinancial statements for the year ended September 29, 2006, which are includedin our Annual Report on Form 10-K and the risk factors contained herein andtherein.

The preparation of the accompanyingunaudited condensed consolidated financial statements requires the use ofestimates that affect the reported amounts of assets, liabilities, revenues,expenses and contingencies.  These estimates include, but are not limitedto, estimates related to revenue recognition, allowance for doubtful accounts,inventory valuation, tangible and intangible long-term asset valuation,warranty and other obligations, contingent liabilities and litigation. Estimates are updated on an ongoing basis and are evaluated based on historicalexperience and current circumstances.  Changes in facts and circumstancesin the future may give rise to changes in these estimates which may causeactual results to differ from current estimates.

Aviza Technology Inc.’s (the “Company”or “Aviza”) current fiscal year will end on September 28, 2007 and includes52 weeks. We close our fiscal quarters on the last Friday of December,March, June and September.

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

1)              the financial position of the Company and itssubsidiaries as of March 30, 2007 and September 29, 2006;

2)              the results of operations of the Company and itssubsidiaries for the quarter and six months ended March 30, 2007;

3)              the cash flows of the Company and its subsidiaries forthe six months ended March 30, 2007;

4)              the results of operations of the Company and itssubsidiaries for the quarter and six months ended March 31, 2006,including Trikon from December 2, 2005; and

5)              the cash flows of the Company and its subsidiaries forthe six months ended March 31, 2006, including Trikon from December 2, 2005.

See Note5 for additional information related to the merger transaction.

The condensed consolidated financialstatements include the accounts of the Company and its subsidiaries.  All significant intercompany accounts andtransactions have been eliminated in consolidation.

6

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

During the quarter ended September29, 2006, the Securities and Exchange Commission (“SEC”) released StaffAccounting Bulletin 108, “Considering the Effects of Prior Year Misstatementsin Current Year Financial Statements” (“SAB 108”), which provides guidance onhow the effects of the carryover or reversal of prior year misstatements shouldbe considered in quantifying a current year misstatement.  SAB 108 calls for the quantification oferrors using both a balance sheet and income statement approach based on theeffects of such errors on each of the company’s financial statements and therelated financial statement disclosures. SAB 108 is effective for financial statements issued for the fiscal yearending after November 15, 2006.  Adoptionof SAB 108 did not have a significant impact on our results of operations orfinancial condition.

On December 21, 2006, the FinancialAccounting Standards Board (“FASB”) issued FASB Staff Position (“FSP”) EmergingIssues Task Force (“EITF”) 00-19-2, “Accounting for Registration PaymentArrangements,” which requires an issuer to account for a contingent obligationto transfer consideration under a registration payment arrangement inaccordance with FASB Statement No. 5, “Accounting for Contingencies” and FASBInterpretation 14, “Reasonable Estimation of the Amount of Loss.”  Registration payment arrangements arefrequently entered into in connection with issuance of unregistered financialinstruments, such as equity shares or warrants. A registration payment arrangement contingently obligates the issuer tomake future payments or otherwise transfer consideration to another party ifthe issuer fails to file a registration statement with the SEC for the resaleof specified financial instruments or fails to have the registration statementdeclared effective within a specific period. The FSP requires issuers to make certain disclosures for eachregistration payment arrangement or group of similar arrangements.  The FSP is effective immediately forregistration payment arrangements and financial instruments entered into ormodified after the FSP’s issuance date. For previously issued registration payment arrangements and financialinstruments subject to those arrangements, the FSP is effective for financialstatements issued for fiscal years beginning after December 15, 2006.  The adoption of this FSP did not have asignificant impact on our financial condition or results of operations.

**3. Balance Sheet Details**
| ** **                                      | ** ** | **March 30,  2007** | ** ** | **September 29,  2006** | ** ** |
|-------------------------------------------------|------------|--------------------------|------------|------------------------------|------------|
| ** **                                      | ** ** | **(in thousands)**  | ** ** |
| **Inventories:**                                | ** ** | ** **               | ** ** | ** **                   | ** ** |
| Raw materials                                   |       | $                        | 30,524     |                         | $          | 29,414 |   |
| Work-in-process                                 |       | 23,009                   |       | 21,337                       |       |
| Finished goods and evaluation systems           |       | 3,369                    |       | 3,748                        |       |
| Total                                           |       | $                        | 56,902     |                         | $          | 54,499 |   |
|                                            |       |                     |       |                         |       |
| **Prepaid  expenses and other current assets:** | ** ** | ** **               | ** ** | ** **                   | ** ** |
| Deferred installation costs                     |       | $                        | 1,582      |                         | $          | 1,301 |   |
| Taxes                                           |       | 2,077                    |       | 2,003                        |       |
| Other                                           |       | 4,015                    |       | 3,334                        |       |
| Total                                           |       | $                        | 7,674      |                         | $          | 6,638 |   |
|                                            |       |                     |       |                         |       |
| **Property,  plant and equipment, net:**        | ** ** | ** **               | ** ** | ** **                   | ** ** |
| Land                                            |       | $                        | 1,839      |                         | $          | 1,839 |   |
| Buildings and improvements                      |       | 12,160                   |       | 12,047                       |       |
| Machinery and equipment                         |       | 14,884                   |       | 12,947                       |       |
| Office furnishings, fixtures and equipment      |       | 2,869                    |       | 2,659                        |       |
| Construction in process                         |       | 5,692                    |       | 2,840                        |       |
| Total                                           |       | 37,444                   |       | 32,332                       |       |
| Accumulated depreciation                        |       | (9,069                   | )          | (7,066                       | )          |
| Net property, plant and equipment               |       | $                        | 28,375     |                         | $          | 25,266 |   |
|                                            |       |                     |       |                         |       |
| **Accrued  liabilities:**                       | ** ** | ** **               | ** ** | ** **                   | ** ** |
| Accrued payroll and payroll taxes               |       | $                        | 6,210      |                         | $          | 4,584 |   |
| Deferred revenue                                |       | 2,891                    |       | 2,023                        |       |
| Other                                           |       | 6,361                    |       | 7,109                        |       |
| Total                                           |       | $                        | 15,462     |                         | $          | 13,716 |   |

 

7

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**4.  Stock-Based Compensation**

Effective October 1, 2005, we adoptedthe provisions of Statement of Financial Accounting Standards (“SFAS”) No.123(R), “*Share-Based Payment*” (“SFAS 123(R)”). SFAS 123(R) establishes standards for the accounting for transactions in whichan entity exchanges its equity instruments for goods or services.  It also addresses transactions in which anentity incurs liabilities in exchange for goods or services that are based onthe fair value of the entity’s equity instruments or that may be settled by theissuance of those equity instruments. Accordingly, stock-based compensation cost is measured at grant date,based on the fair value of the award, and is recognized as expense over theemployee’s requisite service period.  The measurement of stock-basedcompensation cost is based on several criteria including, but not limited to,the valuation model used and associated input factors such as expected term ofthe award, stock price volatility, dividend rate, risk-free interest rate andaward cancellation rate.  The inputfactors used in the valuation model are based on subjective future expectationscombined with management judgment.  Ifthere is a difference between the assumption used in determining stock-basedcompensation costs and the actual factors, which become known over time, we maychange future input factors used in determining stock-based compensationcosts.  These changes may materiallyimpact our results of operations in the period such changes are made.

We adopted the modified prospectiveapplication method as provided by SFAS 123(R).  Under this method, SFAS123R was applied to new awards and to awards modified, repurchased or cancelledafter the effective date.  Accordingly,prior period amounts have not been restated.  Additionally, compensationcost for the portion of awards for which the requisite service has not beenrendered, such as unvested stock options, that were outstanding as of the dateof adoption are being recognized as the remaining requisite services arerendered.  The compensation cost relating to unvested awards at the dateof adoption was based on the grant-date fair value for those awards grantedafter June 24, 2005, the date of the Company’s initial filing of a Form S-4registration statement relating to the merger transaction as discussed in Note5, and based on the intrinsic values as previously recorded under APB OpinionNo. 25 for awards granted prior to that date.

The fair value of each option isestimated at the date of grant using the Black-Scholes option valuationmodel.  We estimate expected stock price volatility based on historicalvolatility within a representative peer group.  We use historical data toestimate expected life and forfeiture rates.  The risk-free interest ratefor periods within the contractual life of the option is based on the U.S.Treasury yield with similar expected life.

Under our stock option plans, we maygrant options to purchase up to a maximum of 5,644,000 shares of common stock,including outstanding options, to employees, directors and consultants atprices not less than the fair market value on the date of the grant. These optionsgenerally vest over four to five years and generally expire seven to ten yearsfrom the date of the grant.

We recognized stock-basedcompensation expense of $477,000 and $914,000 during the quarter and six monthsended March 30, 2007, respectively, and $532,000 and $639,000 during thequarter and six months ended March 31, 2006, respectively.  Due touncertainty surrounding the realization of the income tax benefit related tostock-based compensation expense, there is no related income tax benefit recognizedin the consolidated statements of operations for the quarters and six monthsended March 30, 2007 and March 31, 2006, respectively, as a full valuationallowance has been provided against the deferred tax asset.

8

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Thefair value of our stock options granted in the quarter and six month periodsended March 30, 2007 and March 31, 2006, respectively, was estimated usingthe following weighted average assumptions:

|                          | ** ** | **Quarter Ended** | ** ** | **Six Months Ended** | ** ** |
|--------------------------|------------|------------------------|------------|--------------------------------|------------|
| ** **               | ** ** | **March 30,**     | ** ** | **March 31,**             | ** ** | **March 30,** | ** ** | **March 31,** | ** ** |
| ** **               | ** ** | **2007**               | ** ** | **2006**                       | ** ** | **2007** | ** ** | **2006** | ** ** |
| Expected life  (years)   |       | 4.1                    |       | 4.8                            |       | 4.4 |   | 5.4 |   |
| Risk-free  interest rate |       | 4.8                    | %          | 4.6                            | %          | 4.7 | % | 4.5 | % |
| Stock price  volatility  |       | 59.9                   | %          | 73.7                           | %          | 61.8 | % | 74.8 | % |
| Dividend yield           |       | 0.0                    | %          | 0.0                            | %          | 0.0 | % | 0.0 | % |

 

Thefollowing table summarizes our stock option activity under the stock plansduring the quarter and six months ended March 30, 2007:
| ** **                                                                | ** ** | **Shares** | ** ** | **Weighted  Average  Exercise Price** | ** ** | **Weighted  Average  Remaining  Contractual  Term (years)** | ** ** | **Aggregate  Intrinsic  Value** | ** ** |
|---------------------------------------------------------------------------|------------|------------|------------|--------------------------------------------|------------|------------------------------------------------------------------|------------|---------------------------------|------------|
| Outstanding at  September 29, 2006                                        |       | 3,791,164  |       | $                                          | 5.08       |                                                             | 7.50       |                            | $          | 4,181,950 |   |
| Granted                                                                   |       | 111,500    |       | 4.55                                       |       |                                                             |       | —                          |       |
| Forfeited                                                                 |       | (44,433    | )          | 17.23                                      |       |                                                             |       | —                          |       |
| Outstanding at  December 29, 2006                                         |       | 3,858,231  |       | 4.92                                       |       | 7.26                                                             |       | 4,876,582                       |       |
| Granted                                                                   |       | 170,000    |       | 6.06                                       |       |                                                             |       | —                          |       |
| Exercised                                                                 |       | (64,500    | )          | 2.49                                       |       |                                                             |       | —                          |       |
| Forfeited                                                                 |       | (38,565    | )          | 9.88                                       |       |                                                             |       | —                          |       |
| Outstanding at  March 30, 2007                                            |       | 3,925,166  |       | 4.97                                       |       | 7.00                                                             |       | 13,476,757                      |       |
| Options  exercisable at March 30, 2007 and expected to become exercisable |       | 3,418,350  |       | 5.00                                       |       | 7.00                                                             |       | 12,181,436                      |       |
| Options vested and  exercisable at March 30,2007                          |       | 1,862,942  |       | $                                          | 5.38       |                                                             | 6.97       |                            | $          | 7,918,114 |   |

 

The aggregate intrinsic valuerepresents total pre-tax intrinsic value based on the closing stock price of$3.80, $4.27 and $7.24 per share at September 29, 2006, December 29, 2006 andMarch 30, 2007, respectively.

As of March 30, 2007, there was $4.1million of unrecognized compensation cost related to unvested stock optionsgranted and outstanding, net of estimated forfeitures.  The cost isexpected to be recognized over a weighted average period of approximately 2.89years.

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The following table details total stock-basedcompensation expense for the quarter and six months ended March 30, 2007 andMarch 31, 2006, respectively:
| ** **                                | ** ** | **Quarter Ended**   | ** ** | **Six Months Ended** | ** ** |
|-------------------------------------------|------------|--------------------------|------------|--------------------------------|------------|
| ** **                                | ** ** | **March 30,  2007** | ** ** | **March 31,  2006**       | ** ** | **March 30,  2007** | ** ** | **March 31,  2006** | ** ** |
| ** **                                | ** ** | **(in  thousands)**      | ** ** |
| Cost of goods  sold                       |       | $                        | 52         |                           | $          | 75 |   | $ | 101 |   | $ | 87 |   |
| Research and  development                 |       | 109                      |       | 129                            |       | 223 |   | 143 |   |
| Selling, general  and administrative      |       | 316                      |       | 328                            |       | 590 |   | 409 |   |
| Pre-tax  stock-based compensation expense |       | 477                      |       | 532                            |       | 914 |   | 639 |   |
| Income tax  benefits                      |       | —                   |       | —                         |       | — |   | — |   |
| Net stock-based  compensation expense     |       | $                        | 477        |                           | $          | 532 |   | $ | 914 |   | $ | 639 |   |

 

The options outstanding andexercisable at March 30, 2007 were in the following exercise price ranges:
| ** **                              | ** ** | **Options Outstanding**            | ** ** | **Options Exercisable**                                         | ** ** |
|-----------------------------------------|------------|-----------------------------------------|------------|----------------------------------------------------------------------|------------|
| **Range of Exercise  Prices** | ** ** | **Number of  Shares  Outstanding** | ** ** | **Weighted  Average  Remaining  Contractual  Life  (in years)** | ** ** | **Weighted  Average  Exercise Price** | ** ** | **Number  Vested and  Exercisable** | ** ** | **Weighted  Average  Exercise Price** | ** ** |
| $0.83 - $0.83                           |       | 1,107,574                               |       | 6.88                                                                 |       | $ | 0.83 |   | 899,796 |   | $ | 0.83 |   |
| $0.84 - $4.98                           |       | 1,506,120                               |       | 6.30                                                                 |       | 4.14 |   | 405,273 |   | 3.30 |   |
| $4.99 - $5.60                           |       | 894,750                                 |       | 8.72                                                                 |       | 5.57 |   | 318,441 |   | 5.58 |   |
| $5.61 - $87.07                          |       | 416,722                                 |       | 6.15                                                                 |       | 17.64 |   | 239,432 |   | 25.74 |   |
| $0.83 - $87.07                          |       | 3,925,166                               |       | 7.00                                                                 |       | $ | 4.97 |   | 1,862,942 |   | $ | 5.38 |   |

Theweighted average fair value of options on the grant date, as determined underSFAS 123(R), granted during the quarter and six months ended March 30, 2007 was$3.07 and $2.89 per share, respectively, and $3.13 and $3.42 per share for thequarter and six months ended March 31, 2006, respectively.

The total intrinsic value of optionsexercised during the quarter and six months ended March 30, 2007 was $290,000.For the quarter and six months ended March 31, 2006, the intrinsic value was$51,000 and $118,000, respectively.  Thetotal cash received from employees as a result of employee stock optionexercises during the quarter and six months ended March 30, 2007 was$161,000.  For the quarter and six monthsended March 31, 2006 the amount received was $14,000 and $40,000, respectively.

**5.             Merger and Other Transactions withTrikon Technologies, Inc.**

On December 1, 2005, the stockholdersof Trikon approved the merger of Trikon with the Company.  Trikon designs,manufactures and services wafer processing semiconductor manufacturingequipment primarily for semiconductor devices.  Its products are used forchemical and physical vapor deposition and for etch applications and are soldto semiconductor manufacturers worldwide.  In accordance with theprovisions of SFAS No. 141, Aviza was treated as the acquirer for financialreporting purposes.  In the merger transaction, a wholly owned subsidiaryof the Company was merged with and into Trikon.  Trikon stockholdersreceived 0.29 of a share of Aviza common stock in exchange for each share ofTrikon common stock they owned.  A total of 4,568,946 shares of Avizacommon stock were issued in exchange for the outstanding common stock of Trikonas of December 1, 2005.  In addition, 629,126 shares of common stock werereserved for issuance upon exercise of Trikon common stock options and warrantsassumed at December 1, 2005.  The optionsand warrants were valued using the Black-Scholes option pricing model.

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A summary of the total considerationgiven in the merger with Trikon is as follows (in thousands, except share andper share amounts):

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

Underthe purchase method of accounting, the total consideration issued for Trikoncommon stock, options and warrants as shown in the table above was allocated tothe Trikon tangible and intangible assets, and liabilities based on theirestimated fair values as of the date of the merger transaction.

**ProForma Financial Information for the Merger with Trikon**

Theresults of operations of Trikon have been included in our results of operationsfor all periods subsequent to the December 1, 2005 merger date.  Thefollowing pro forma financial information includes adjustments related to theamortization of purchased intangibles, depreciation of purchased fixed assets,elimination of deferred rent liability and stock-based compensation costs thatwould have been recorded if the acquisition had occurred at the beginning ofthe period presented.  The pro forma financialinformation for the combined entities has been prepared for comparativepurposes only and is not necessarily indicative of what the actual results mayhave been if the acquisition had in fact occurred at the beginning of theperiod presented or of future results. Pro forma results for the six months ended March 31, 2006 were (inthousands, except per share amounts):

|                                  | ** ** | **Six Months Ended  March 31, 2006** | ** ** |
|----------------------------------|------------|----------------------------------------------------------|------------|
| Net sales                        |       | $                                                        | 71,649     |   |
| Net loss                         |       | $                                                        | (12,070    | ) |
| Net loss per  share:             |       |                                                     |       |
| Basic and diluted                |       | $                                                        | (1.17      | ) |
| Weighted average  common shares: |       |                                                     |       |
| Basic and diluted                |       | 10,295                                                   |       |

 

**6.             Borrowing Facilities**

Borrowings consist of the following(in thousands):

|                                        | ** ** | **March 30,  2007** | ** ** | **September 29,  2006** | ** ** |
|----------------------------------------|------------|--------------------------|------------|------------------------------|------------|
| Bank loans (revolving  line of credit) |       | $                        | 30,396     |                         | $          | 28,277 |   |
| Mortgage note payable                  |       | 6,323                    |       | 6,463                        |       |
| Other notes payable                    |       | 1,155                    |       | —                       |       |
| Capital lease  obligations             |       | 739                      |       | 148                          |       |
| Total                                  |       | 38,613                   |       | 34,888                       |       |
| Less current portion                   |       | 37,727                   |       | 28,632                       |       |
| Long term portion                      |       | $                        | 886        |                         | $          | 6,256 |   |

 

DuringApril 2007, we entered into a new credit agreement with a syndication of banksto refinance our existing bank loan and mortgage note payable.  The new credit facility includes a revolvingline of credit secured by accounts receivable and inventory, an equipment termloan and a commercial real estate term loan. We may borrow up to $55,000,000 under the new credit facility.  The revolving portion of the loan has atwo-year term.  The

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equipmentterm loan has a three year amortization period with monthly payments ofprincipal and accrued interest.  Maximumborrowings under this provision of the facility are $4,000,000 and are securedby a lien on the equipment of the Company. The real estate portion of the facility has a four year term and issecured by a deed of trust on our Scotts Valley facility.  Monthly payments of principal and accruedinterest will be based on a 20 year amortization period of the loanprincipal.  Based on the currentappraised value, the maximum borrowing under the real estate portion of thefacility is $11,935,000.  As principal ispaid down under the equipment and real estate portions of the facility,additional borrowing availability will be created under the revolving portionof the credit facility so that we have a maximum of $55,000,000 in borrowingavailability at all times under the agreement. Borrowings under the new credit facility will bear interest of one-monthLondon Interbank Offering Rate (LIBOR) plus 2.43%.  The interest rate will be reduced by 0.25% ifwe achieve a certain level of net income during the quarter ending June 29,2007.  The credit agreement containscertain financial and operating covenants. Loan commitment fees totaling $210,000 and other direct expensesincurred to secure the facility will be amortized over the life of the loans.

In connection with the refinancingabove, approximately $525,000 of costs relating to the prior financingagreements will be expensed during the quarter ending June 29, 2007.

**7.             Intangible Assets**

Intangible assets are recorded atcost, net of accumulated amortization, and are amortized over their estimateduseful lives using the straight-line method. The estimated useful lives for our intangible assets are as follows:

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

Weevaluate intangibles for indicators of possible impairment when events orcircumstances indicate the carrying amount of the asset may not be recoverable.

Intangible assets at March 30, 2007and September 29, 2006 consist of the following (in thousands):
| ** **             | ** ** | **March 31, 2007** | ** ** | **September 29, 2006** | ** ** |
|------------------------|------------|------------------------------|------------|----------------------------------|------------|
| ** **             | ** ** | **Cost**                     | ** ** | **Income Tax  Adjustment**  | ** ** | **Accumulated  Amortization** | ** ** | **Net Book  Value** | ** ** | **Cost** | ** ** | **Accumulated  Amortization** | ** ** | **Net Book  Value** | ** ** |
| Licenses               |       | $                            | 4,028      |                             | $          | (8 | ) | $ | (469 | ) | $ | 3,551 |   | $ | 4,026 |   | $ | (268 | ) | $ | 3,758 |   |
| Developed technology   |       | 729                          |       | (205                             | )          | (95 | ) | 429 |   | 694 |   | (58 | ) | 636 |   |
| Brands and trademarks  |       | 101                          |       | (29                              | )          | (13 | ) | 59 |   | 96 |   | (8 | ) | 88 |   |
| Customer relationships |       | 232                          |       | (65                              | )          | (30 | ) | 137 |   | 220 |   | (18 | ) | 202 |   |
| Patents                |       | 82                           |       | (23                              | )          | (11 | ) | 48 |   | 78 |   | (7 | ) | 71 |   |
| Total                  |       | $                            | 5,172      |                             | $          | (330 | ) | $ | (618 | ) | $ | 4,224 |   | $ | 5,114 |   | $ | (359 | ) | $ | 4,755 |   |

Duringthe six months ended March 30, 2007, one of the subsidiaries we acquired inconnection with the merger with Trikon generated sufficient taxable income torecognize a portion of the net deferred tax assets acquired in the mergerrelated to net operating loss carryforwards. Management has previously been unable to assert that it was more likelythan not that the Company would generate sufficient taxable income to realizethe net deferred tax assets in excess of the deferred tax liabilities recordedin relation to the write-up of inventory and intangibles to fair value atDecember 1, 2005, the date of the consummation of the merger transaction.  Accordingly, the net deferred tax assets hadbeen previously offset in full by a valuation allowance on that date.  In the absence of goodwill, under generallyaccepted accounting principles, the tax benefit derived from reversal of thisvaluation allowance must be applied first to reduce non-current intangibleassets related to the merger transaction, and second to reduce income taxexpense.  Approximately $180,000 and$330,000 of the valuation allowance attributed to net deferred tax assetsrelating to the net operating loss carry forward acquired in the mergertransaction was recognized during the quarter

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andsix months ended March 30, 2007, respectively and the intangible assetsacquired in the merger transaction have been reduced accordingly.  The remaining net deferred tax assetscontinue to be offset in full by a valuation allowance at March 30, 2007.

Amortization expenses relating to allintangibles, excluding in-process research and development acquired from Trikonwas $125,000 and $253,000 for the quarter and six months ended March 30, 2007,respectively, and $98,000 and $107,000 for the quarter and six months endedMarch 31, 2006, respectively.  Based onthe intangible assets recorded at March 30, 2007, and assuming no subsequentadditions to, or impairment of the underlying assets, the remainingamortization expense is expected to be as follows (in thousands):

| **Year Ending:**                           |   |   |   |
|--------------------------------------------|--------|--------|--------|
| September 28, 2007  (remaining six months) |   | $      | 243    |   |
| September 26, 2008                         |   | 487    |   |
| September 25, 2009                         |   | 487    |   |
| September 24, 2010                         |   | 487    |   |
| September 30, 2011                         |   | 487    |   |
| Thereafter                                 |   | 2,033  |   |
| Total                                      |   | $      | 4,224  |   |

**8.             Warrantyand Guarantees**

***Warranty***—The Company accrues for theestimated cost of the warranty on its systems, which includes the cost of thelabor and parts necessary to repair systems during the warranty period. Theamounts recorded in the warranty accrual are estimated based on actualhistorical costs incurred and on estimated probable future expenses related tocurrent sales.  New systems typicallyhave warranty periods ranging from one to three years. The components of thewarranty accrual are as follows:
| ** **                                                                         | ** ** | **Quarter Ended**   | ** ** | **Six Months Ended** | ** ** |
|------------------------------------------------------------------------------------|------------|--------------------------|------------|--------------------------------|------------|
| ** **                                                                         | ** ** | **March 30,  2007** | ** ** | **March 31,** 2006        | ** ** | **March 30,  2007** | ** ** | **March 31,  2006** | ** ** |
| ** **                                                                         | ** ** | **(in thousands)**  | ** ** |
| Beginning warranty  accrual                                                        |       | $                        | 12,099     |                           | $          | 13,774 |   | $ | 10,816 |   | $ | 13,599 |   |
| Additional accruals for  new shipments                                             |       | 2,723                    |       | 1,400                          |       | 5,763 |   | 2,711 |   |
| Warranty liability  assumed in merger                                              |       | —                   |       | —                         |       | — |   | 1,386 |   |
| Warranty costs incurred                                                            |       | (1,915                   | )          | (1,942                         | )          | (3,754 | ) | (3,228 | ) |
| Expirations and change  in liability for pre-existing warranties during the period |       | (4                       | )          | (254                           | )          | 78 |   | (1,490 | ) |
| Ending warranty accrual                                                            |       | $                        | 12,903     |                           | $          | 12,978 |   | $ | 12,903 |   | $ | 12,978 |   |

***Guarantees***—In addition to system warranties,the Company, from time to time, in the normal course of business, indemnifiescertain customers against third-party claims that the Company’s systems, whenused for their intended purposes, infringe the intellectual property rights ofsuch third party or other claims made against certain parties. It is notpossible to determine the maximum potential amount of liability under theseindemnification obligations due to the limited history of prior indemnificationclaims and the unique facts and circumstances that are likely to be involved ineach particular claim. Historically, the Company has not made payments underthese obligations and no liabilities have been recorded for these obligationson the balance sheet at March 30, 2007 and September 29, 2006, respectively.

**9.             Stock Issuance**

On February 28, 2007, we sold4,000,000 shares of our common stock in a public offering at $6.50 per sharepursuant to our registration statement on Form S-1 filed under the SecuritiesAct of 1933.  Proceeds from the sale, netof direct costs related to the offering, were approximately $23.9 million.

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During April 2007, the underwriter ofour public offering exercised its right to purchase an additional 600,000shares of our common stock to cover over-allotments. Net proceeds from thesales of these shares, after the underwriting discount, were approximately $3.7million.

**10. Commitments and Contingencies**

In November 2006, we discovered thatwe may have exported certain pressure transducers that are listed on the U.S.Bureau of Industry and Security’s Commerce Control List without properauthorization, either in the form of an export license or pursuant to anexception to the Bureau of Industry and Security’s export license requirements,and on December 20, 2006, we submitted our initial notification of a voluntaryself-disclosure of possible export compliance problems to the Office of ExportEnforcement in accordance with applicable Export AdministrationRegulations.  Since December 20, 2006, weconducted a comprehensive review of our exports of pressure transducers anddetermined that during the period between September 2003 and November 2006,controlled pressure transducers had been exported on 38 occasions withoutproper export licenses or other authorization from the U.S. Bureau of Industryand Security. Accordingly, we voluntarily submitted a supplementaryself-disclosure letter to the Office of Export Enforcement on April 13,2007.  The matter is now pending with theOffice of Export Enforcement, and we do not know whether we will ultimatelyhave to pay any fines or penalties or, if we do, whether those fines orpenalties will be substantial.

On April 11, 2006,IPS, Ltd. filed a lawsuit against us in the United States DistrictCourt for the Central District of California. The complaint alleges that weimproperly used IPS’s confidential information to develop our Celsiorsingle-wafer processing type atomic layer deposition technology. We have filedan answer denying the claim. The complaint is for unspecified monetary damages,injunctive relief and an order rescinding the settlement and distributor agreementsthat IPS and Aviza entered into in May 2004 in settlement of a priorlawsuit that IPS filed against ASML U.S., Inc. and Aviza inMarch 2004 relating to assets that we acquired from ASML inOctober 2003. We believe that we have complied with the settlement anddistributor agreements and that the allegations contained in IPS’s complaintare without merit. We intend to contest the lawsuit vigorously. Discovery inthe litigation has not yet begun because the parties disagree about the properforum in which to resolve the claims asserted by IPS. On May 12, 2006, wefiled with the United States District Court for the Northern District ofCalifornia a petition to compel arbitration in Santa Clara County, California.On August 3, 2006, Judge Ware of the Northern District of California foundthat one or more of the claims asserted by IPS were likely arbitrable andordered the parties to arbitration to determine which claims were properlysubject to arbitration. On October 23, 2006, Judge Cooper of the Central Districtof California stayed proceedings pending resolution of the question ofarbitrability.  Briefing regarding thequestion of arbitrability is complete, and the matter will be argued on May 11,2007 before a panel of arbitrators.  IPShas also indicated that it will file a motion before Judge Cooper to amend itscomplaint to modify two of its claims.

Prior to our merger transaction withTrikon Technologies, Inc., Trikon was a party to an employment lawsuit inFrance. On March 10, 2004, Dr. Jihad Kiwan departed Trikon asDirector and Chief Executive Officer. On March 29, 2004 and April 2,2004, Trikon received letters from a United Kingdom law firm and from aFrench law firm, respectively, on behalf of Dr. Kiwan, detailing certainmonetary claims for severance amounts due to Dr. Kiwan with respect to hisemployment with Trikon. On April 28, 2004, Dr. Kiwan filed a lawsuitin France and on June 10, 2004, filed similar proceedings in theUnited Kingdom. Dr. Kiwan has subsequently withdrawn the proceedingsin the United Kingdom. We are in the process of vigorously contesting theFrench claim and do not believe that the outcome of the claim will be materialto our business, financial condition or results of operations.

Our Scotts Valley location is afederal Superfund site. Chlorinated solvent and other contamination wasidentified at the site in the early 1980’s, and by the late 1980’s WatkinsJohnson Corporation (“WJ”) (a previous owner of the Company) had installeda groundwater extraction and treatment system. In 1991, WJ entered into aconsent decree with the United States Environmental Protection Agencyproviding for remediation of the site. In July 1999, WJ signed aremediation agreement with an environmental consulting firm, ARCADIS Geraghty andMiller (“ARCADIS”). Pursuant to this remediation agreement, WJ paidapproximately $3 million in exchange for which ARCADIS agreed to performthe work necessary to assure satisfactory completion of WJ’s obligation underthe consent decree. The agreement also includes a cost overrun guaranty fromARCADIS up to a total project cost of $15 million. In addition, theagreement included procurement of a ten-year, claims-made insurance policy tocover overruns of up to $10 million from American International Specialty(“AIS”), along with a ten-year, claims-made $10 million policy to coverunknown pollution conditions at the site.

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Failure of WJ, ARCADIS, or AIS tofulfill their obligations may subject the Company to substantial fines, and theCompany could be forced to suspend production, alter manufacturing processes orcease business operations, any of which could have a material negative effecton the Company’s sales, income and business operations.

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

Other than operating leases forcertain equipment and real assets, Aviza has no significant off-balance sheettransactions or unconditional purchase obligations.

As of March 30, 2007, Aviza’s cashobligations and commitments relating to its debt obligations and lease paymentswere as follows:
| ** **                            | ** ** | **Payments due by period** | ** ** |
|---------------------------------------|------------|-------------------------------------------|------------|
| ** **                            | ** ** | ** **                                | ** ** | **Less Than** | ** ** | **One to** | ** ** | **Three to** | ** ** | **Greater than** | ** ** |
| ** **                            | ** ** | **Total**                                 | ** ** | **One Year** | ** ** | **Three Years** | ** ** | **Five Years** | ** ** | **Five Years** | ** ** |
| ** **                            | ** ** | **(in thousands)**                   | ** ** |
| Bank loan  (revolving line of credit) |       | $                                         | 30,396     |   | $ | 30,396 |   | $ | — |   | $ | — |   | $ | — |   |
| Note payable                          |       | 6,323                                     |       | 6,323 |   |   |   | — |   | — |   |
| Other short-term  borrowings          |       | 1,209                                     |       | 765 |   | 444 |   | — |   | — |   |
| Operating lease  obligations          |       | 6,487                                     |       | 2,742 |   | 3,462 |   | 118 |   | 165 |   |
| Capital lease  obligations            |       | 789                                       |       | 308 |   | 450 |   | 31 |   | — |   |
|                                       |            |                                           |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

Paymentsdue by period include interest expense on all debt and capital leaseobligations with fixed interest rates. This excludes our revolving line of credit and mortgage note payable.

See Note 6 for disclosure regardingthe refinancing of our line of credit and mortgage note payable during April,2007.

**11. Major Customers**

During the quarter and six monthsended March 30, 2007, one customer accounted for 43% and 42% of total netsales, respectively.  For the quarterended March 31, 2006, three customers accounted for 19%, 12% and 10% of totalnet sales, respectively.  During the sixmonths ended March 31, 2006, two of these customers accounted for 16% and 13%of total net sales, respectively. A different customer accounted for 20% oftotal net sales during the six months ended March 31, 2006.

**12. Comprehensive Income (Loss)**

The components of comprehensiveincome (loss) are as follows:
| ** **                          | ** ** | **Quarter Ended**  | ** ** | **Six Months Ended** | ** ** |
|-------------------------------------|------------|-------------------------|------------|--------------------------------|------------|
| ** **                          | ** ** | **March 30,**      | ** ** | **March 31,**             | ** ** | **March 30,** | ** ** | **March 31,** | ** ** |
| ** **                          | ** ** | **2007**                | ** ** | **2006**                       | ** ** | **2007** | ** ** | **2006** | ** ** |
| ** **                          | ** ** | **(in thousands)** | ** ** |
| Net income  (loss)                  |       | $                       | 1,355      |                           | $          | (5,312 | ) | $ | 2,480 |   | $ | (9,943 | ) |
| Currency  translation adjustment    |       | 203                     |       | (28                            | )          | 1,209 |   | (16 | ) |
| Total comprenhensive  income (loss) |       | $                       | 1,558      |                           | $          | (5,340 | ) | $  | 3,689 |   | $ | (9,959 | ) |

 

15

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

Basicincome (loss) per share has been computed based upon the weighted averagenumber of common shares outstanding for the periods presented. Diluted income(loss) per share is calculated as though all potentially dilutive shares wereoutstanding during the period, based upon the application of the treasury stockmethod.  The following details thecalculation of net income (loss) per share for the periods presented (inthousands except share and per share data):
| ** **                                    | ** ** | **Quarter Ended** | ** ** | **Six Months Ended** | ** ** |
|-----------------------------------------------|------------|------------------------|------------|--------------------------------|------------|
| ** **                                    | ** ** | **March 30,**     | ** ** | **March 31,**             | ** ** | **March 30,** | ** ** | **March 31,** | ** ** |
| ** **                                    | ** ** | **2007**               | ** ** | **2006**                       | ** ** | **2007** | ** ** | **2006** | ** ** |
| Numerator:                                    |       |                   |       |                           |       |   |   |   |   |
| Net income  (loss)                            |       | $                      | 1,355      |                           | $          | (5,312 | ) | $ | 2,480 |   | $ | (9,943 | ) |
| Denominator:                                  |       |                   |       |                           |       |   |   |   |   |
| Weighted average shares, basic                |       | 17,538,955             |       | 10,305,831                     |       | 16,844,853 |   | 7,011,864 |   |
| Effect of potentially dilutive securities:    |       |                   |       |                           |       |   |   |   |   |
| Stock options                                 |       | 835,282                |       | —                         |       | 792,778 |   | — |   |
| Dilutive  weighted average shares outstanding |       | 18,374,237             |       | 10,305,831                     |       | 17,637,631 |   | 7,011,864 |   |
| Net income  (loss) per share - basic          |       | $                      | 0.08       |                           | $          | (0.52 | ) | $ | 0.15 |   | $ | (1.42 | ) |
| Net income (loss) per  share - diluted        |       | $                      | 0.07       |                           | $          | (0.52 | ) | $ | 0.14 |   | $ | (1.42 | ) |

 

For the six months ended March 30,2007 and March 31, 2006, the Company had securities outstanding that couldpotentially dilute basic earnings per share in the future, but were excluded inthe computation of diluted net income (loss) per share in the periodspresented, as their effect would have been anti-dilutive. The shares of commonstock issuable upon conversion or exercise of such outstanding securitiesconsist of the following:

|                                                             | ** ** | **Six months ended** | ** ** |
|-------------------------------------------------------------|------------|--------------------------------|------------|
| ** **                                                  | ** ** | **March 30,**             | ** ** | **March 31,** | ** ** |
| ** **                                                  | ** ** | **2007**                       | ** ** | **2006** | ** ** |
|                                                        |       |                           |       |   |   |
| Stock options                                               |       | 2,390,999                      |       | 2,748,459 |   |
| Common stock  warrants                                      |       | 406,725                        |       | 406,725 |   |
| Series B and B-1  preferred stock converted to common stock |       | —                         |       | 2,536,974 |   |

 

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

**OPERATIONS**

**CautionaryStatement Regarding Forward-Looking Statements**

*The statements in this reportinclude forward-looking statements. These forward-looking statements are basedon our management’s current expectations and beliefs and involve numerous risksand uncertainties that could cause actual results to differ materially fromexpectations. You should not rely upon these forward-looking statements aspredictions of future events because we cannot assure you that the events orcircumstances reflected in these statements will be achieved or will occur. Youcan identify forward-looking statements by the use of forward-lookingterminology, including the words “believes,” “expects,” “may,” “will,” “should,”“seeks,” “intends,” “plans,” “estimates” or “anticipates” or the negative ofthese words and phrases or other variations of these words and phrases orcomparable terminology. These forward-looking statements relate to, among otherthings: our sales, results of operations and anticipated cash flows; capitalexpenditures; depreciation and amortization expenses; research and developmentexpenses; sales, general and administrative expenses; the development andtiming of the introduction of new products and technologies; our ability tomaintain and develop relationships with our existing and potential futurecustomers and our ability to maintain the level of investment in research anddevelopment and capacity that is required to remain competitive.  Manyfactors could cause our actual results to differ materially from thoseprojected in these forward-looking statements, including, but not limited to:variability of our revenues and financial performance; risks associated withproduct development and technological changes; the acceptance of our systems inthe marketplace by existing and potential future customers; disruption ofoperations or increases in expenses due to our involvement in litigation orcaused by civil or political unrest or other catastrophic events; generaleconomic conditions and conditions in the semiconductor industry in particular;the continued employment of our key personnel and risks associated withcompetition.*

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

**Overview**

We design, manufacture, sell andsupport advanced semiconductor capital equipment and process technologies forthe global semiconductor industry and related markets. We offer bothfront-end-of-line and back-end-of-line systems and process technologies usedfor these markets addressing critical thin film formation technologies,including ALD, PEC, which consists of PVD, Etch and CVD, and thermal processingsystems.

Our customer base is geographicallydiverse and includes both integrated device manufacturers and foundry-basedmanufacturers. We have a broad installed base, with approximately2,500 systems in active operation for which we are providing ongoing partsand services worldwide. We sell our systems globally primarily through a directsales force and in some instances through local independent salesrepresentatives.  For the six months ended March 30, 2007, one customer,Inotera Memories Inc., accounted for 42% of our net sales and approximately 73%of our net sales was attributable to our top ten customers.  For thefiscal year ended September 29, 2006, two customers, Winbond ElectronicsCorp. and Inotera Memories Inc., accounted for 24% and 11% of our netsales, respectively, and approximately 74% of our net sales in fiscal 2006 wasattributable to our top ten customers. For the fiscal year endedSeptember 30, 2005, three customers, Inotera Memories, Inc., InfineonTechnologies AG and Winbond Electronics Corp., accounted for 43%, 15% and 11%of our net sales, respectively, and approximately 84% of our net sales infiscal 2005 was attributable to our top ten customers.  Our largestcustomers may vary from year to year depending upon, among other things, thecustomer’s annual budget for capital expenditures, plans for new fabricationfacilities and expansions and new system introductions by us. We expect salesof our systems to relatively few customers will continue to account for a highpercentage of net sales during future periods.

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Aviza Technology, Inc. wasincorporated on December 8, 2004 to facilitate the merger transaction ofour subsidiaries, Aviza, Inc. and Trikon Technologies, Inc.Aviza, Inc. was incorporated on September 18, 2003 by affiliates ofVantagePoint as Thermal Acquisition Corporation, a Delaware corporation, forthe purpose of acquiring the business of the Thermal Division of ASMLHolding, N.V., a Netherlands corporation, which division of ASML isreferred to in this discussion as the Predecessor. On October 10, 2003,Thermal Acquisition Corporation acquired the business of the Predecessor andchanged its name to Aviza Technology, Inc., which name was subsequentlychanged to Aviza, Inc. in connection with the merger transactionwith Trikon.

On December 1, 2005, wecompleted the merger transaction with Trikon, and our common stock is publiclytraded on the Nasdaq Global Market under the symbol “AVZA.” We accounted forthe merger transaction as a purchase of Trikon, using the purchase method ofaccounting. As a result of the merger transaction, our results of operationsinclude Trikon’s results of operations for all periods after December 1,2005.

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

We intend to pursue strategicacquisitions of other semiconductor equipment companies and other complementarytechnologies that we believe will enable us to expand our system offerings inthe IC fabrication equipment market.

**Critical AccountingPolicies**

Our discussion and analysis of ourfinancial condition and results of operations is based on our consolidated financialstatements that have been prepared in accordance with accounting principlesgenerally accepted in the United States of America. The preparation ofthese financial statements requires us to make estimates and judgments thataffect the reported amounts of assets, liabilities, revenue and expenses. Webase our estimates on historical experience and on various other assumptionsthat we believe to be reasonable under the circumstances, the results of whichform the basis for making judgments about the carrying values of assets andliabilities that are not readily apparent from other sources. Actual resultsmay differ from these estimates under different assumptions or conditions.

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

***Acquisitions of the Businesses of the Predecessor andTrikon***

In connection with our acquisitionsof the businesses of the Predecessor and Trikon, we allocated the purchaseprice associated with the acquisition of the tangible and intangible assetsacquired and liabilities assumed based on their estimated fair values. Thevaluations of these intangible assets required us to make significant estimatesand assumptions.

The critical estimates we used inallocating the purchase price included future expected cash flows from customercontracts, distribution agreements and acquired developed technologies, as wellas assumptions about the periods of time the systems would continue to be usedin our portfolio of systems. Our estimates of fair value at the time they weremade were based upon assumptions that we believed to be reasonable, but whichare inherently uncertain and unpredictable.

***Revenue Recognition***

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

(1) persuasive evidence of anarrangement exists; (2) delivery has occurred or services have beenrendered; (3) the price is fixed or determinable; and(4) collectability is reasonably assured. Determination of criteria foritems (3) and (4) above is based on our judgment regarding the fixednature of the amounts charged for the systems delivered and the collectabilityof those amounts.

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

We typically sell equipment andinstallation services as a bundled arrangement. In accordance withEITF 00-21, the fair value of installation is determined as the price wecharge for similar installation services provided to our customers withoutregard to the warranty provisions. Upon shipment of “proven technology,” werecord revenue upon shipment at the lesser of (i) the residual amountafter deducting the fair value of undelivered services from the contractualvalue or (ii) the non-contingent amount. The remaining contractual revenueis recorded upon successful installation of the system. Cost of the equipmentrelating to “proven technology” is recorded upon shipment. To the extent a lossis calculated on shipment due to the foregoing deferral of revenue, a portionof the cost is also deferred to reflect zero gross profit at the time ofshipment. The residual revenue, deferred costs and installation costs arerecorded upon successful installation of the system. Revenue and cost ofequipment relating to “new technology” is deferred until installation andacceptance at the customer’s premises is completed.

The result of these accountingpolicies is that for “new technology,” our recognition of both revenue and costof goods sold is delayed until customer acceptance, at which time both revenueand cost of goods sold are recognized in full in determining our gross margin.However, for “proven technology,” our cost of goods sold may be recognized infull upon shipment, but recognition of a portion of our revenue is delayeduntil successful installation of the system. This can result in diminishedgross margins at the time of shipment.

Revenue from services is recognizedas the services are performed. Revenue from prepaid service contracts isrecognized ratably over the life of the contract. Revenue from spare parts isrecorded upon shipment.

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

***Inventory Valuation***

We assess the recoverability of ourinventory at the end of each quarter based on assumptions about customer demandand market conditions. Obsolete inventory or inventory in excess of ourestimated usage is written down to its estimated market value less costs tosell. The inventory write-downs are recorded as an inventory valuationallowance established on the basis of obsolete inventory or specificallyidentified inventory in excess of established usage. Inherent in our estimatesof market value in determining inventory valuation are estimates related toeconomic trends, future demand for our systems and technological obsolescenceof our systems. If actual market conditions are less favorable than our projections,we may be required to write down additional inventory.

***Warranty***

We accrue for the estimated cost ofthe warranty on our systems as cost of goods sold, which includes the cost ofthe labor and parts necessary to repair systems during the warranty period. Theamounts recorded in the warranty accrual are estimated based on actualhistorical expenses incurred and on estimated probable future expenses relatedto our current sales. The warranty service is generally incurred ratably overthe warranty period. Our systems typically have warranty periods ranging fromone to three years. Our actual warranty costs in the future may vary from ourhistorical warranty costs, which could result in adjustments to our warrantyreserves in future periods.

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***Income Taxes***

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

We record a valuation allowance toreduce our deferred tax assets to the amount that is more likely than not to berealized. While we have considered future taxable income and any ongoingprudent and feasible tax planning strategies in assessing the need for thevaluation allowance, if we were to determine that we would be able to realizeour deferred tax assets in the future in excess of our net recorded amount, anadjustment to the deferred tax asset would increase income in the period suchdetermination was made. Likewise, if we were to determine that we would not beable to realize all or part of a net deferred tax asset in the future, anadjustment to the deferred tax asset would be charged to income in the periodsuch determination was made. As of March 30, 2007, we had a full valuation allowancefor our net deferred tax assets.

***Stock-Based Compensation***

Effective October 1, 2005, weadopted the provisions of Statement of Financial Accounting Standards (“SFAS”)No. 123(R), *Share-Based Payment*(“SFAS 123(R)”). SFAS 123(R) establishes accounting for stock-basedawards exchanged for employee services. Accordingly, stock-based compensationcost is measured at grant date, based on the fair value of the award, and isrecognized as an expense over the employee’s requisite service period. Wepreviously applied Accounting Principles Board (“APB”) Opinion No. 25, “*Accounting for Stock Issued to Employees*,”and related Interpretations and provided the pro forma disclosures ofSFAS No. 123, *Accountingfor Stock-Based Compensation* (“SFAS 123”).

We adopted the modified prospectiveapplication method as provided by SFAS 123(R). Under this method,SFAS 123(R) was applied to new awards and to awards modified, repurchasedor cancelled after the effective date. Additionally, compensation cost for theportion of awards for which the requisite service has not been rendered, suchas unvested stock options, that are outstanding as of the date of adoption willbe recognized as the remaining requisite services are rendered. Thecompensation cost relating to unvested awards on the date of adoption was basedon the grant-date fair value for those awards granted after June 24, 2005,the date of our initial filing of our Form S-4 registration statementrelating to our merger transaction with Trikon, and based on the intrinsic valuesas previously recorded under APB Opinion No. 25 for awards grantedprior to that date.

The fair value of each option isestimated at the date of grant using the Black-Scholes option valuation model.We estimate expected stock price volatility based on historical volatilitywithin a representative peer group. We use historical data to estimate expectedlife and forfeiture rates. The risk-free interest rate for periods within theexpected life of the option is based on the U.S. Treasury yield.

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***Results of Operations***

The financial information in thetable below is for the quarters and six months ended March 30, 2007 and March31, 2006:
| ** **                           | ** ** | **Quarter Ended** | ** ** | **Six Months Ended** | ** ** |
|--------------------------------------|------------|-------------------|------------|----------------------|------------|
| ** **                           | ** ** | **March 30,**     | ** ** | **March 31,**        | ** ** | **March 30,** | ** ** | **March 31,** | ** ** |
| ** **                           | ** ** | **2007**          | ** ** | **2006**             | ** ** | **2007** | ** ** | **2006** | ** ** |
| Net sales                            |       | 100               | %          | 100                  | %          | 100 | % | 100 | % |
| Cost of goods sold                   |       | 69                | %          | 75                   | %          | 69 | % | 75 | % |
| Gross margin                         |       | 31                | %          | 25                   | %          | 31 | % | 25 | % |
| Operating expenses:                  |       |              |       |                 |       |   |   |   |   |
| Research and  development            |       | 13                | %          | 18                   | %          | 13 | % | 17 | % |
| Selling, general and  administrative |       | 13                | %          | 17                   | %          | 13 | % | 18 | % |
| In-process research and  development |       | 0                 | %          | 0                    | %          | 0 | % | 1 | % |
| Total operating  expenses            |       | 26                | %          | 35                   | %          | 26 | % | 36 | % |
| Income (loss) from operations        |       | 5                 | %          | (10                  | )%         | 5 | % | (11 | )% |
| Other income (expense):              |       |              |       |                 |       |   |   |   |   |
| Interest income                      |       | 0                 | %          | 0                    | %          | 0 | % | 0 | % |
| Interest expense                     |       | (2                | )%         | (4                   | )%         | (2 | )% | (4 | )% |
| Other income (expense),  net         |       | 0                 | %          | 0                    | %          | 0 | % | 0 | % |
| Total other income  (expense)        |       | (2                | )%         | (4                   | )%         | (2 | )% | (4 | )% |
| Income (loss) before income taxes    |       | 3                 | %          | (14                  | )%         | 3 | % | (15 | )% |
| Income taxes                         |       | 1                 | %          | 0                    | %          | 1 | % | 0 | % |
| Net income (loss)                    |       | 2                 | %          | (14                  | )%         | 2 | % | (15 | )% |

 

***Net Sales***

|            | ** ** | **Quarter Ended**  | ** ** | **Six Months Ended** | ** ** |
|------------|------------|-------------------------|------------|--------------------------------|------------|
| ** ** | ** ** | **March 30,**      | ** ** | **March 31,**             | ** ** | **March 30,** | ** ** | **March 31,** | ** ** |
| ** ** | ** ** | **2007**                | ** ** | **2006**                       | ** ** | **2007** | ** ** | **2006** | ** ** |
| ** ** | ** ** | **(in thousands)** | ** ** |
| Net sales  |       | $                       | 61,638     |                           | $          | 36,241 |   | $ | 123,829 |   | $ | 65,184 |   |
|            |            |                         |            |                                |            |  |  |  |  |  |  |  |  |

 

Net sales for the quarter ended March30, 2007 increased by approximately $25.4 million, or 70%, from the quarterended March 31, 2006.  This increase wasdue primarily to the following:

·                                          Approximately $2.3 million increasein net sales of our PVD, Etch and CVD system lines primarily related toincreased field acceptances of our systems during the quarter ended March 30,2007 over the quarter ended March 31, 2006.

·                                          Approximately $23.1 million increasein net sales related to our deposition and thermal processing systems.  Sales recognized upon shipment of our RVP 300*plus*and ALD systems increased by approximately $22.9million.  Unit shipment of our depositionand thermal processing systems increased by 127% during the quarter ended March30, 2007 over the quarter ended March 31, 2006. Service and spare parts sales increased by approximately 7% over thequarter ended March 31, 2006 due primarily to higher volume in the Asia Pacificregion.

Net sales for the six months endedMarch 30, 2007 increased by approximately $58.6 million, or 90%, over the sixmonths ended March 31, 2006.  Thisincrease was due primarily to the following:

·                                          The integration of our PVD, Etch andCVD system lines into our suite of products and customer base.  Because our merger with Trikon occurred onDecember 1, 2005, the six-month period ended March 31, 2006 included only $9.6million of net sales contributed by our Trikon subsidiary.  Net sales related to these systems during thesix months ended March 30, 2007 increased by approximately $21.4 million overthe six months ended March 31, 2006.

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·                                          Approximately $37.2 million increasein net sales related to our deposition and thermal processing equipment.  Unit shipments of our deposition and thermalprocessing equipment increased by 85% during the six months ended March 30,2007 over the six months ended March 31, 2006. Net sales recognized upon shipment increased by $36.2 million due to theincrease in shipments, lower average revenue deferrals on our RVP 300*plus*systems and sales recognized on our ALD Celsior systemshipments.  The lower average revenue deferralson the RVP 300*plus* systems are primarily theresult of more favorable payment terms negotiated with our customers.  The change in payment terms in most instancesreduces the amount of contingent revenue that we need to defer upon systemshipment.  Service and spare parts salesincreased by approximately 16% due primarily to increased demand in the AsiaPacific region and field option upgrade sales. These increases were partially offset by a decrease of $1.6 million innet sales recognized on field acceptances of our deposition and thermal batchprocessing systems related to the timing of such acceptances during the sixmonths ended March 30, 2007 versus the six months ended March 31, 2006.

During the quarter and six monthsended March 31, 2006, our ALD Celsior system was considered to be “newtechnology” for revenue recognition purposes. Under our revenue recognition policy, sales of systems considered to benew technology are 100% deferred at shipment and not recognized until customeracceptance.  Upon achievement of therequired number of customer acceptances necessary to transition a system toproven technology, all non-contingent revenue associated with shipments of thatparticular system is recognized upon shipment. During the quarter and six months ended March 30, 2007, we recognized$8.8 million and $15.2 million in net sales upon shipment of our ALD systems,respectively.

During thequarter ended December 29, 2006, our Deep Silicon Etch Chamber, or DSi Chamber,which offers benefits to production users in system-in-package, wafer levelpackaging and conventional micro electro mechanical systems applications,became “proven technology” after sufficient successful installations andacceptances at our customer sites to warrant the change from “new technology”to “proven technology.”

***Gross Profit and Gross Margin***

Gross profit is the differencebetween net sales and cost of goods sold. Cost of goods sold consists ofpurchased material, labor and overhead to manufacture equipment or spare partsand the cost of service and factory and field support to customers forwarranty, installation and paid service calls. In addition, the cost ofoutsourcing the assembly or manufacturing of systems and subsystems to thirdparties is included in cost of goods sold. Gross margin is gross profitexpressed as a percentage of net sales.

|              | ** ** | **Quarter Ended**               | ** ** | **Six Months Ended** | ** ** |
|--------------|------------|--------------------------------------|------------|--------------------------------|------------|
| ** **   | ** ** | **March 30,**                   | ** ** | **March 31,**             | ** ** | **March 30,** | ** ** | **March 31,** | ** ** |
| ** **   | ** ** | **2007**                             | ** ** | **2006**                       | ** ** | **2007** | ** ** | **2006** | ** ** |
| ** **   | ** ** | **(dollars in thousands)** | ** ** |
| Gross profit |       | $                                    | 18,924     |                           | $          | 9,191 |   | $ | 37,772 |   | $ | 16,326 |   |
| Gross margin |       | 31                                   | %          | 25                             | %          | 31 | % | 25 | % |
|              |            |                                      |            |                                |            |  |  |  |  |  |  |  |  |

 

The increase in gross margin of 6%during the quarter ended March 30, 2007 as compared to the quarter ended March31, 2006 was primarily the result of improved gross margin on the ALD, thermalprocessing and PEC systems on both the net sales recorded at shipment and netsales recorded on customer acceptance. These improvements are summarized as follows:

·                                          Gross margin recognized on shipmentof the RVP300*plus*systems increased byapproximately 6% over the March 2006 quarter. This was due primarily to certainreconfigurations of the systems, which more than offset lower average sellingprices.  Net sales on RVP 300*plus* constituted 44% of net sales during the quarter endedMarch 30, 2007 as compared to 33% during the quarter ended March 31, 2006.

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·                                          Gross margin recognized on shipmentof our PEC systems increased by 27% during the quarter ended March 30, 2007over the quarter ended March 31, 2006. This was primarily due to the impact of purchase accounting adjustmentson inventory costs during the March 2006 quarter resulting from our acquisitionof Trikon during December 2005.

·                                          Net sales related to the shipment ofALD Celsior systems increased to 15% of total net sales which contributed to highergross margins during the quarter ended March 30, 2007.

·                                          Gross margin recognized uponcustomer acceptance of our systems increased by approximately 22% due primarilyto lower costs deferred on the RVP 300*plus*systemsdue to lower manufacturing costs.

·                                          These gross margin improvements werepartially offset by lower service revenue as a percentage of total revenue.

During the six months ended March 30,2007, gross margin increased by 6% as compared with the six months ended March31, 2006.  The increase was primarily dueto the following:

·                                          Changes in the product mix of thesystems sold.  The percentage of netsales attributable to the RVP 300*plus*batchthermal processing system increased by 2%, to 40% of total net sales.  Higher gross margin ALD and PEC systemsincreased by 5% and 10%, to 13% and 20% of total net sales, respectively.  These product mix improvements were partiallyoffset by lower service revenues as a percentage of total revenue during thesix months ended March 30, 2007 as compared to the six months ended March 31,2006.

·                                          Gross margins recognized on shipmentof our RVP 300*plus* systems increased by 5% dueto lower manufacturing costs which more than offset lower average sellingprices.

·                                          The ALD Celsior system achievedsignificantly higher gross margins than its predecessor, the ALD Pantheonsystem.

·                                          Gross margins recognized on shipmentof our PEC systems that we acquired in our merger with Trikon in December 2005increased by 22% during the six months ended March 30, 2007 as compared to thesix months ended March 31, 2006.  Thiswas primarily due to purchase accounting adjustments related to inventory thatwe acquired in our merger with Trikon in December 2005.

***Research and Development***

Research and development expenseconsists of employment costs attributable to employees, consultants andcontractors who primarily spend their time on system design, engineering andprocess development; materials and supplies used in system prototyping,including wafers, chemicals and process gases; depreciation and amortizationexpense allocable to research and development activities and facilities; directcharges for repairs to research equipment and laboratories; and costs ofoutside services for facilities, process engineering support and wafer analyticalservices. We also include in research and development expenses associated withthe preparation, filing and prosecution of patents and other intellectualproperty.

|                           | ** ** | **Quarter Ended**               | ** ** | **Six Months Ended** | ** ** |
|---------------------------|------------|--------------------------------------|------------|--------------------------------|------------|
| ** **                | ** ** | **March 30,**                   | ** ** | **March 31,**             | ** ** | **March 30,** | ** ** | **March 31,** | ** ** |
| ** **                | ** ** | **2007**                             | ** ** | **2006**                       | ** ** | **2007** | ** ** | **2006** | ** ** |
| ** **                | ** ** | **(dollars in thousands)** | ** ** |
| Research and  development |       | $                                    | 8,011      |                           | $          | 6,553 |   | $ | 15,714 |   | $ | 11,196 |   |
| Percent of net sales      |       | 13                                   | %          | 18                             | %          | 13 | % | 17 | % |
|                           |            |                                      |            |                                |            |  |  |  |  |  |  |  |  |

 

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The increase in research anddevelopment costs of approximately $1.5 million, or 22%, during the quarterended March 30, 2007 over the quarter ended March 31, 2006 was primarily due toincreased prototype supply spending; salaries and benefits; demonstration labcosts, including facilities, supplies and gases and depreciation on labequipment.  These increases were relatedto ongoing research and development activities in support of the PEC, ALD andthermal batch processing system lines.

During the six months ended March 30,2007, research and development costs increased by approximately $4.5 million,or 40%, as compared to the six months ended March 31, 2006.  The increase in research and developmentcosts was due to the following:

·                                          Increased costs related to ongoingresearch and development of PEC related products totaling $3.1 million.  Approximately $1.4 million of the increasewas related to prototype supplies supporting a next generation productdevelopment project.  In addition, thesix months ended March 31, 2006 only included costs incurred subsequent to theDecember 2005 merger with Trikon.

·                                          Increased salaries, benefits anddevelopment lab related costs, including facilities, supplies, chemicals andgases, and depreciation, made up the majority of a $1.4 million increase incosts related to our ongoing ALD and thermal batch processing research anddevelopment efforts.

***Selling, General and Administrative***

Selling, general and administrativeexpense consists of employment costs attributable to employees, consultants andcontractors who primarily spend their time on sales, marketing and orderadministration and corporate administrative services; occupancy costsattributable to employees performing these functions; sales commissions;promotional marketing expenses; and legal and accounting expenses.

|                                      | ** ** | **Quarter Ended**               | ** ** | **Six Months Ended** | ** ** |
|--------------------------------------|------------|--------------------------------------|------------|--------------------------------|------------|
| ** **                           | ** ** | **March 30,**                   | ** ** | **March 31,**             | ** ** | **March 30,** | ** ** | **March 31,** | ** ** |
| ** **                           | ** ** | **2007**                             | ** ** | **2006**                       | ** ** | **2007** | ** ** | **2006** | ** ** |
| ** **                           | ** ** | **(dollars in thousands)** | ** ** |
| Selling, general  and administrative |       | $                                    | 8,221      |                           | $          | 6,482 |   | $ | 16,628 |   | $ | 11,597 |   |
| Percent of net sales                 |       | 13                                   | %          | 17                             | %          | 13 | % | 18 | % |
|                                      |            |                                      |            |                                |            |  |  |  |  |  |  |  |  |

 

The increase in selling, general andadministrative expense of approximately $1.7 million, or 27%, in the quarterended March 30, 2007 as compared to the quarter ended March 31, 2006 wasprimarily due to approximately $0.6 million of increases in salaries, benefitsand commissions, $0.2 million in increased cost related to internationalinfrastructure build-up, a $0.2 million increase in allocated facilitiescharges and approximately $0.4 million related to a lower net gain on foreigncurrency exchange transactions.

Selling, general and administrative expenses increasedby approximately $5.0 million, or 43%, during the six months ended March 30,2007 as compared to the six months ended March 31, 2006.  The increase was related primarily toincreased salaries and benefits of approximately $1.4 million, $0.6 million inincreased litigation costs, a $0.5 million increase in export, licensing andfranchise tax fees, a $0.4 million increase in commissions related to increasedsales activity, $0.4 million of increased costs related to internationalinfrastructure build-up and approximately $0.3 million increase in allocatedfacilities charges.  In addition, $0.6million in increased selling, general and administrative costs was due to theinclusion of the merged Trikon subsidiary for only a portion of the six-monthperiod ended March 31, 2006 subsequent to our December 2005 merger transactionwith Trikon.

 

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

|                                      | ** ** | **Quarter Ended**               | ** ** | **Six Months Ended** | ** ** |
|--------------------------------------|------------|--------------------------------------|------------|--------------------------------|------------|
| ** **                           | ** ** | **March 30,**                   | ** ** | **March 31,**             | ** ** | **March 30,** | ** ** | **March 31,** | ** ** |
| ** **                           | ** ** | **2007**                             | ** ** | **2006**                       | ** ** | **2007** | ** ** | **2006** | ** ** |
| ** **                           | ** ** | **(dollars in thousands)** | ** ** |
| In-process research and  development |       | $                                    | —     |                           | $          | 9 |   | $ | — |   | $ | 402 |   |
| Percent of net sales                 |       | 0                                    | %          | 0                              | %          | 0 | % | 1 | % |
|                                      |            |                                      |            |                                |            |  |  |  |  |  |  |  |  |

 

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

***Interest Expense***

|                      | ** ** | **Quarter Ended**               | ** ** | **Six Months Ended** | ** ** |
|----------------------|------------|--------------------------------------|------------|--------------------------------|------------|
| ** **           | ** ** | **March 30,**                   | ** ** | **March 31,**             | ** ** | **March 30,** | ** ** | **March 31,** | ** ** |
| ** **           | ** ** | **2007**                             | ** ** | **2006**                       | ** ** | **2007** | ** ** | **2006** | ** ** |
| ** **           | ** ** | **(dollars in thousands)** | ** ** |
| Interest expense     |       | $                                    | 1,063      |                           | $          | 1,356 |   | $ | 2,315 |   | $ | 2,742 |   |
| Percent of net sales |       | 2                                    | %          | 4                              | %          | 2 | % | 4 | % |
|                      |            |                                      |            |                                |            |  |  |  |  |  |  |  |  |

 

Our interest expense for the quartersand six months ended March 30, 2007 and March 31, 2006 consisted primarily ofinterest incurred on our revolving line of credit, another line of credit,which is secured by a mortgage on our land and buildings, amortization of debtissuance costs and amortization of the fair value of the warrants issued toaffiliates of VantagePoint Venture Partners, or VPVP, in consideration for VPVP’sagreement to guarantee a portion of Aviza’s revolving line of credit.  Inaddition, dividends that were accrued on our mandatorily redeemable Series Band B-1 preferred stock were charged to interest during the quarter and sixmonths ended March 31, 2006.

Aggregate borrowings under ourrevolving line of credit and mortgage line of credit were $36.7 million as ofMarch 30, 2007 and $34.1 million as of March 31, 2006.  The average interest rates on our revolvingand mortgage lines of credit increased from approximately 7.4% and 9.3%,respectively, during the quarter ended March 31, 2006, and 7.7% and 9.5%,respectively, during the six months ended March 31, 2006, to approximately 8.3%and 10.6%, respectively, during the quarter and six months ended March 30,2007.   We recorded amortization of debtissue costs of $129,000 and $516,000 during the quarter and six months endedMarch 30, 2007, respectively, as compared to $438,000 and $851,000 during thequarter and six months ended March 31, 2006, respectively.  During the quarter and six months ended March31, 2006, dividends earned of $219,000 and $439,000, respectively, on ourmandatorily redeemable Series B and B-1 preferred stock were recorded asinterest expense.  In connection with theclosing of our private placement of 3,282,275 shares of our common stock onApril 24, 2006, all outstanding shares of our mandatorily redeemable Series Band B-1 preferred stock were converted into shares of our common stock.  As a result of the conversion, dividendsceased accruing as of April 24, 2006.

***Income Taxes***

Because we have incurred significantoperating losses, we have recorded no material federal or state income taxes.We recorded income taxes relating to certain profitable internationalsubsidiaries.

**Liquidity and CapitalResources**

At March 30, 2007, we had $9.6million available for additional borrowings under our revolving line of credit,subject to certain conditions, and $5.0 million available for additionalborrowings under our mortgage line of credit, subject to our ability to meetcertain financial and property zoning criteria.

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At March 30, 2007, our cash and cashequivalents were $21.5 million as compared to $10.7 million at September 29,2006.  The increase in cash and cashequivalents is primarily related to our public offering of 4,000,000 shares at$6.50 per share in February 2007. Proceeds from the sale, net of direct offering costs, were approximately$23.9 million.  These proceeds werepartially offset by cash used in operations of approximately $10.1 millionrelated to increased accounts receivable related to higher shipment volumeduring the six months ended March 30, 2007 and the acquisition of approximately$4.2 million in plant and equipment primarily related to our development anddemonstration laboratories.

During April 2007, we entered into anew credit agreement with a syndication of banks to refinance our existing bankloan and mortgage note payable.  The newcredit facility includes a revolving line of credit secured by accountsreceivable and inventory, an equipment term loan and a commercial real estateterm loan.  We may borrow up to$55,000,000 under the new credit facility. The revolving portion of the loan has a two-year term.  The equipment term loan has a three-yearamortization period with monthly payments of principal and accruedinterest.  Maximum borrowings under thisprovision of the facility are $4,000,000 and are secured by a lien on ourequipment.  The real estate portion ofthe facility has a four -year term and is secured by a deed of trust on ourScotts Valley facility.  Monthly paymentsof principal and accrued interest will be based on a 20-year amortizationperiod of the loan principal.  Based onthe current appraised value the maximum borrowing under the real estate portionof the facility is $11,935,000.  Asprincipal is paid down under the equipment and real estate portions of thefacility, additional borrowing availability will be created under the revolvingportion of the credit facility so that we have a maximum of  $55,000,000 in borrowing availability at alltimes under the agreement.  Borrowingsunder the new credit facility will bear interest of one-month LIBOR plus2.43%.  The interest rate will be reducedby 0.25% if we achieve a certain level of net income during the quarter endingJune 29, 2007.  The credit agreementcontains certain financial and operating covenants.  Loan commitment fees totaling $210,000 andother direct expenses incurred to secure the facility will be amortized overthe life of the loans.

During April 2007, the underwriter ofour public offering exercised its right to purchase an additional 600,000shares of our common stock to cover over-allotments. Net proceeds from thesales of these shares, after the underwriting discount, were approximately $3.7million.

We currently anticipate that ourexisting cash balances, cash provided by operations, and available borrowingsunder our new credit agreement will be sufficient to meet our anticipated cashneeds for at least the next 12 months. However, we may choose to raise additional capital from the sale of debtor equity securities or from other sources in order to support our operationsand expansion plans.  We may not be ableto obtain any additional capital on acceptable terms, if at all.

***Cash Flows from Operating Activities***

Cash used in operating activities forthe six months ended March 30, 2007 was $10.1 million.  Net incomeduring the six months ended March 30, 2007 of approximately $2.5 million,together with non-cash expense adjustments (depreciation, amortization,stock-based compensation, bad debt and net operating loss utilization)aggregating $3.8 million, provided cash from operating activities to offsetcash used to fund changes in operating assets and liabilities.  Net changes in operating assets andliabilities during the six months ended March 30, 2007 used approximately $16.4million of cash.  Cash used to fundincreases in accounts receivable and inventory and a reduction in accountspayable was $15.6 million, $1.2 million and $3.1 million, respectively.  These uses of cash were partially offset bycash generated through increases in warranty liability and accrued liabilitiesof $2.0 million and $1.5 million, respectively.

***Cash Flows from Investing Activities***

Cash used in investing activities forthe six months ended March 30, 2007 was $4.2 million.  Investing activities during the six monthsended March 30, 2007 consisted of purchasing equipment primarily used in ourdevelopment and demonstration laboratories.

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***Cash Flows from Financing Activities***

Netcash generated by financing activities for the six months ended March 30, 2007was $25.3 million.  Net proceeds from ourpublic offering during February 2007 provided $23.9 million in cash, withincremental short term borrowings under our revolving line of credit providinganother $2.1 million in cash.

**Off-Balance SheetArrangements**

As of March 30, 2007, we had nooff-balance sheet arrangements as defined in Item 303(a)(4) ofRegulation S-K promulgated by the Securities and Exchange Commission.

**Contractual Obligations**

Other than operating leases forcertain equipment and real estate, we have no significant off-balance sheettransactions or unconditional purchase obligations.  As of March 30, 2007, our cash obligationsand commitments relating to our debt obligations and lease payments were asfollows:
| ** **                            | ** ** | **Payments due by period** | ** ** |
|---------------------------------------|------------|-------------------------------------------|------------|
| ** **                            | ** ** | ** **                                | ** ** | **Less Than** | ** ** | **One to** | ** ** | **Three to** | ** ** | **Greater than** | ** ** |
| ** **                            | ** ** | **Total**                                 | ** ** | **One Year** | ** ** | **Three Years** | ** ** | **Five Years** | ** ** | **Five Years** | ** ** |
| ** **                            | ** ** | **(in thousands)**                   | ** ** |
| Bank loan  (revolving line of credit) |       | $                                         | 30,396     |   | $ | 30,396 |   | $ | — |   | $ | — |   | $ | — |   |
| Note payable                          |       | 6,323                                     |       | 6,323 |   | — |   | — |   | — |   |
| Other short-term  borrowings          |       | 1,209                                     |       | 765 |   | 444 |   | — |   | — |   |
| Operating lease  obligations          |       | 6,487                                     |       | 2,742 |   | 3,462 |   | 118 |   | 165 |   |
| Capital lease  obligations            |       | 789                                       |       | 308 |   | 450 |   | 31 |   | — |   |
|                                       |            |                                           |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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

Forquantitative and qualitative disclosures about market risk currently affectingAviza, see Item 7A: “Quantitative and Qualitative Disclosures About Market Risk”included in our Annual Report on Form 10-K for the fiscal year ended September29, 2006.  The Company’s exposure to market risk has not changedmaterially since September 29, 2006.

**ITEM4.    CONTROLS AND PROCEDURES**

***Disclosure Controls and Procedures***

We maintain disclosure controls andprocedures that are designed with the objective of providing reasonableassurance that information required to be disclosed in our Exchange Act reportsis recorded, processed, summarized and reported within the time periodsspecified in the SEC’s rules and forms, and that such information isaccumulated and communicated to our management, including our Chief ExecutiveOfficer and Chief Financial Officer, as appropriate, to allow timely decisionsregarding required disclosure. In designing and evaluating our disclosurecontrols and procedures, management recognizes that any controls andprocedures, no matter how well designed and operated, can provide onlyreasonable assurance of achieving the desired control objectives, and ourmanagement is required to apply its judgment in evaluating the cost-benefitrelationship of possible controls and procedures.

As of March 30, 2007, the end of theperiod covered by this report, based on the evaluation of our Chief ExecutiveOfficer and Chief Financial Officer of the effectiveness of the design andoperation of our disclosure controls and procedures, our Chief ExecutiveOfficer and Chief Financial Officer concluded that our disclosure controls andprocedures were effective at the reasonable assurance level.

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

There was no change in our internalcontrol over financial reporting during the first six months of fiscal 2007that has materially affected, or is reasonably likely to materially affect, ourinternal control over financial reporting.

**PART II.  OTHER INFORMATION**

**ITEM 1. LEGAL PROCEEDINGS**

On April 11, 2006, IPS, Ltd. (IPS)filed a lawsuit against us in the United States District Court for the CentralDistrict of California. The complaint alleges that we improperly used IPS’s confidentialinformation to develop our Celsior single-wafer processing type atomic layerdeposition technology. We have filed an answer denying the claim. The complaintis for unspecified monetary damages, injunctive relief and an order rescindingthe settlement and distributor agreements that IPS and Aviza entered into inMay 2004 in settlement of a prior lawsuit that IPS filed against ASML U.S.,Inc. and Aviza in March 2004 relating to assets that we acquired from ASML inOctober 2003. We believe that we have complied with the settlement anddistributor agreements and that the allegations contained in IPS’s complaintare without merit. We intend to contest the lawsuit vigorously.

Discovery in the litigation has notyet begun because the parties disagree about the proper forum in which toresolve the claims asserted by IPS. On May 12, 2006, we filed with the UnitedStates District Court for the Northern District of California a petition tocompel arbitration in Santa Clara County, California. On August 3, 2006, JudgeWare of the Northern District of California found that one or more of theclaims asserted by IPS was likely arbitrable and ordered the parties toarbitration to determine which claims were properly subject to arbitration. OnOctober 23, 2006, Judge Cooper of the Central District of California stayedproceedings pending resolution of the question of arbitrability.  Briefing regarding the question ofarbitrability is complete, and the matter will be argued on May 11, 2007 beforea panel of arbitrators.  IPS has alsoindicated that it will file a motion before Judge Cooper to amend its complaintto modify two of its claims.

**ITEM1A.  RISK FACTORS**

There are no material changes to therisk factors described in the section entitled “Risk Factors” in Item 1A inPart II of our Quarterly Report on Form 10-Q for the fiscal quarter endedDecember 29, 2006, except for updating the risk factor entitled “We are subjectto export regulations and could be required to pay substantial fines andpenalties if we fail to comply with these regulations.”

***We receive most of our net sales from a small numberof customers, and the loss of, or a significant reduction or fluctuation in,orders from those customers could seriously harm our business.***

For the six months ended March 30,2007, approximately 42% of our net sales were attributable to Inotera MemoriesInc. and approximately 73% of our sales were attributable to our top 10customers.   For our fiscal yearended September 29, 2006, approximately 35% of our net sales were attributableto two customers and approximately 74% of our net sales were attributable toour top 10 customers.  Winbond Electronics Corp. and Inotera Memories,Inc. accounted for 24% and 11% of our net sales in fiscal 2006,respectively.  For our fiscal year ended September 30, 2005,approximately 69% of our net sales were attributable to three customers andapproximately 84% of our net sales were attributable to our top 10customers.  Inotera Memories, Inc., Infineon Technologies AG and WinbondElectronics Corp. accounted for 43%, 15% and 11% of our net sales in fiscal2005, respectively.  We expect to continue to receive a substantialportion of our net sales from a small number of customers for the foreseeablefuture.  If our largest customers delay, cancel or do not place orders, wemay not be able to replace those orders with new orders.  As we expect toconfigure our systems to customer specifications, changing, rescheduling orcanceling orders may result in significant non-recoverable costs.  Theloss of, or a significant reduction in, orders from any of our major customerscould seriously harm our business.

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

Our business depends upon the capitalexpenditures of semiconductor manufacturers, which in turn depend on thecurrent anticipated market demand for ICs and, in particular, the DRAM segmentof the semiconductor industry, which accounted for a majority of our net salesfor six months ended March 30, 2007 and the fiscal year ended September 29,2006. The semiconductor industry has historically been cyclical due to suddenchanges in manufacturing capacity.  These changes in capacity haveaffected the timing and amounts of our customers’ capital equipment purchasesand investments in technology, and continue to affect our orders, net sales,gross margins and results of operations.

During periods of decreasing demandfor IC manufacturing equipment, we must be able to align our cost structureappropriately with prevailing market conditions and motivate and retain keyemployees effectively.  Conversely, during periods of increasing demand,we must have sufficient manufacturing capacity and inventory to meet customerdemand and must be able to attract, retain and motivate a sufficient number of qualifiedindividuals.  If we are unable to align our cost structure with businessconditions in a timely manner and manage our resources and production capacityeffectively, it could harm our business, financial condition and results ofoperations.

***We have incurred losses for most of our existence, andwe may never again be able to achieve profitability.***

We achieved profitability for thefirst time with net income of approximately $2.5 million for the six monthsended March 30, 2007.  However, we incurred net losses of $14.7 million,$16.0 million and $19.7 million for the fiscal years endedSeptember 29, 2006 (fiscal 2006), September 30, 2005 (fiscal 2005)and the fiscal period from October 7, 2003 through September 24, 2004(fiscal 2004), respectively.  As a result, we will need to continue toincrease our sales and reduce our costs in order to sustainprofitability.  However, we may never again generate sufficient net salesor reduce our costs sufficiently to achieve profitability.  Even if weagain achieve profitability, we may not have sustainable profitability on aquarterly or annual basis in the future.  If we are unable to sustainprofitability, we may be forced to implement expense reduction measures,including selling assets, consolidating operations, reducing our workforce ordelaying, canceling or reducing certain system development, marketing or otheroperational programs, any of which could harm our business.

***Claims or litigation regarding our intellectualproperty rights could seriously harm our business or require us to incursignificant costs.***

In recent years, there has beensignificant litigation in the semiconductor equipment industry involvingpatents and other intellectual property rights.  Infringement claims havebeen asserted against us and may be asserted against us in the future, and wemay not be able to defend ourselves against such claims successfully.  Anyclaim that our systems infringe the proprietary rights of others would force usto defend ourselves and possibly our customers against the allegedinfringement.  These claims and any resulting lawsuits, if successful,could subject us to significant liability for damages and invalidate ourproprietary rights.  These lawsuits, regardless of their outcome, wouldlikely be time-consuming and expensive to resolve and would divert management’stime and attention.  Any potential intellectual property litigation couldforce us to do one or more of the following:

·                                          lose or forfeit our proprietaryrights;

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

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

·                                          pay damages and attorneys’ fees insome circumstances; or

·                                          redesign those systems that use thechallenged intellectual property.

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

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On April 11, 2006, IPS, Ltd.filed a lawsuit against us in the United States District Court for the CentralDistrict of California.  The complaint alleges that we improperly used IPS’sconfidential information to develop our Celsior single-wafer processing typeatomic layer deposition technology. The complaint is for unspecified monetarydamages, injunctive relief and an order rescinding the settlement anddistributor agreements that we and IPS entered into in May 2004 in settlementof a prior lawsuit that IPS filed against ASML U.S., Inc. and us in March 2004relating to assets that we acquired from ASML in October 2003.  We intendto contest the lawsuit vigorously.

Discovery in the litigation has notyet begun because the parties disagree about the proper forum in which toresolve the claims asserted by IPS.  On May 12, 2006, we filed with theUnited States District Court for the Northern District of California a petitionto compel arbitration in Santa Clara County, California.  On August 3, 2006,Judge Ware of the Northern District of California found that one or more of theclaims asserted by IPS was likely arbitrable and ordered the parties toarbitration to determine which claims were properly subject toarbitration.  On October 23, 2006, Judge Cooper of the Central District ofCalifornia stayed proceedings pending resolution of the question ofarbitrability.  Briefing regarding the question of arbitrability iscomplete, and the matter will be argued on May 11, 2007 before a panel ofarbitrators.  IPS has also indicated thatit will file a motion before Judge Cooper to amend its complaint to modify twoof its claims.

In the event of a negative outcome inthis dispute, we may be required to discontinue sales of our Celsior system,forgo development of other atomic layer deposition systems and pay monetarydamages and attorneys’ fees, which could harm our business, financial conditionand results of operations.

***We are subject to export regulations and could berequired to pay substantial fines and penalties if we fail to comply with theseregulations.***

We are subject to governmentalregulations relating to the export of certain parts used in the manufacturingand maintenance of our systems.  If we fail to comply with theseregulations, we could be required to pay substantial fines and penalties.

In November 2006, we discovered thatwe may have exported certain pressure transducers that are listed on the U.S.Bureau of Industry and Security’s Commerce Control List without properauthorization, either in the form of an export license or pursuant to anexception to the Bureau of Industry and Security’s export license requirements,and on December 20, 2006, we submitted our initial notification of avoluntary self-disclosure of possible export compliance problems to the Officeof Export Enforcement in accordance with applicable Export AdministrationRegulations.  Since December 20, 2006, we conducted a comprehensive reviewof our exports of pressure transducers and determined that during the periodbetween September 2003 and November 2006, controlled pressure transducers hadbeen exported on 38 occasions without proper export licenses or otherauthorization from the U.S. Bureau of Industry and Security.  Accordingly, we voluntary submitted asupplementary self-disclosure letter to the Office of Export Enforcement onApril 13, 2007.  The matter is nowpending with the Office of Export Enforcement, and we do not know whether wewill ultimately have to pay any fines or penalties or, if we do, whether thosefines or penalties will be substantial.  If we have to pay substantialfines or penalties to the U.S. government, it could harm our financialcondition and results of operations.

***We will not be able to compete effectively if we failto address the technology needs of our customers.***

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

·                                          develop and market new systems andtechnologies;

·                                          improve our existing systems andtechnologies;

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

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

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·                                          achieve cost efficiencies across oursystem offerings;

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

·                                          lower our customers’ cost ofownership.

We may not be able to forecast orrespond accurately to the technological trends in the semiconductor industry orrespond to specific product announcements by competitors that may be developingtechnologies and systems that are more effective or that achieve morewidespread acceptance than ours.  We also may not be able to developstrategic alliances with equipment and materials suppliers to the semiconductorindustry to produce next-generation films and processes.  In addition, wemay incur substantial costs to ensure the functionality and reliability of ourcurrent and future systems.  If our newly developed systems are unreliableor do not meet our customers’ expectations, then we could experience reducedorders, higher manufacturing costs, delays in collecting accounts receivable oradditional service and warranty expenses.  Our failure to meet ourcustomers’ technology needs and other demands will impair our ability tocompete effectively, which in turn could harm our business, financial conditionand results of operations.

***We are substantially leveraged, which could limit ourability to adjust our business to respond to competitive pressures and toobtain sufficient funds to satisfy our future manufacturing capacity andresearch and development needs.***

We have significant indebtedness. AtMarch 30, 2007, we had total debt of approximately $38.6 million. Ourindebtedness could have serious consequences for our business, includinglimiting our ability to obtain additional financing in the future for workingcapital, capital expenditures, acquisitions and general corporate or otherpurposes.

Our ability to pay the principal of,and interest on, our indebtedness and to make planned expenditures will dependon our future operating performance, which could be affected by changes ineconomic conditions and other factors, some of which are beyond our control.Our failure to comply with the covenants and other provisions contained in theagreements governing our indebtedness could result in events of default underthese agreements, which in turn could permit our lenders to accelerate paymentof our indebtedness. If we are at any time unable to generate sufficient cash flowsfrom operations to service our indebtedness, we may be required to attempt torenegotiate the terms of our indebtedness, refinance all or a portion of ourindebtedness or obtain additional financing. We cannot assure you that we willbe able to successfully renegotiate or refinance our indebtedness or obtain anyadditional financing on acceptable terms, or at all.

***We may need to raise capital in order to support ouroperations, which capital may not be available on terms acceptable to us, or atall.***

At March 30, 2007, we had cash andcash equivalents of approximately $21.5 million and short-term and long termdebt of approximately $38.6 million.  We may need to raise capital fromthe sale of debt or equity securities or other sources in order to support ouroperations.  We may not be able to obtain this capital on acceptableterms, or at all.  If we issue additional equity or convertible debtsecurities to raise capital, your percentage ownership of Aviza will bereduced, and you may experience significant dilution.  In addition, newinvestors in Aviza may demand rights, preferences or privileges that differfrom, or are senior to, yours, including warrants in addition to the securitiespurchased and protection against future dilutive transactions.

***We have long sales cycles for our systems, which maycause our results of operations to fluctuate from period to period.***

Our systems are technologicallycomplex.  Our prospective customers generally must commit significantresources to test and evaluate our systems and to install and integrate theminto their manufacturing lines.  In addition, our customers often requirea significant number of system presentations and demonstrations, in someinstances evaluating equipment on site, before reaching a sufficient level ofconfidence in our systems’ performance and compatibility with theirrequirements to place an order.  As a result, our sales process is oftensubject to delays

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associatedwith lengthy approval processes that typically accompany the design and testingof new systems.  Our sales cycles often have lasted for many months oreven years and require us to invest significant resources.  In addition,we may incur significant costs in supporting evaluation equipment at customers’facilities, and orders expected in one quarter could shift to another quarterbecause of the timing of our customers’ purchase decisions.  All of thesefactors could cause our results of operations to fluctuate from period toperiod.

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

We generally do not enter intolong-term purchase contracts with our customers.  Our business ischaracterized by short-term purchase orders and shipment schedules, and ourcustomers may cancel or delay their orders without penalty.  As a result,it is difficult for us to forecast our net sales and to determine theappropriate levels of inventory that we need to carry in order to meet futuredemand.  In addition, because we do not have long-term contracts with ourcustomers, we forecast our net sales and plan our production and inventorylevels based upon the demand forecasts of our customers, which are highlyunpredictable and can fluctuate substantially.  This could lead toincreased inventory levels and increased carrying costs and risk of excess orobsolete inventory due to unanticipated reductions in purchases by ourcustomers.

***Our deferred revenue from sales of our systems thatconstitute “new technology” and our backlog of customer orders may not resultin future net sales.***

We defer revenue and any associatedprofit from the sale of newly introduced systems that are subject tocontractual customer acceptance provisions and substantive installationobligations, which we refer to as “new technology,” until our customer hasacknowledged its acceptance of the system or the installation work iscompleted.  If the system does not meet the agreed specifications and thecustomer refuses to accept the system, we will not realize the deferred revenueand any associated deferred profit and we may be required to refund any cashpayments previously received from the customer, which may harm our business,financial condition and results of operations.

We schedule the production of oursystems based in part upon our backlog.  Due to possible customer changesin delivery schedules and cancellations of orders, our backlog at anyparticular date will not necessarily be indicative of actual sales for anyfuture period.  In addition, while we evaluate each customer order on acase-by-case basis to determine qualification for inclusion in backlog, wecannot assure you that amounts that we include in backlog will ultimatelyresult in future sales.  As a result, our backlog may not be a reliableindication of our future net sales.  A reduction in backlog during anyparticular period, or the failure of our backlog to result in future net sales,could harm our business, financial condition and results of operations, andcause our net sales to fall below our expectations and the expectations ofanalysts and investors.

***Our results of operations may suffer if we fail tomanage our inventory effectively.***

We need to manage our inventory ofcomponent parts, work-in-process and finished goods effectively to meetcustomer delivery demands at an acceptable risk and cost.  Our customersare increasingly requiring very short lead times for delivery, which mayrequire us to purchase and carry additional inventory.  For both theinventories that support the manufacture of our systems and our spare partsinventories, if the customer demand we anticipate does not materialize in atimely manner, we will incur increased carrying costs and some inventory couldbecome obsolete or otherwise unfit for sale, resulting in write-offs whichwould harm our results of operations.  Conversely, if customer demand forour systems materializes more quickly than we anticipate, our inventories maybe insufficient, which could result in lost sales opportunities that could harmour results of operations.

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

We face competition or potentialcompetition from many companies that have greater resources than we have. If we are unable to compete effectively with these companies, our market sharemay decline and our business could be harmed.  Virtually all of ourprincipal competitors are substantially larger than we are and most of them

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havebroader product lines than we do.  These competitors have well-establishedreputations in the markets in which we compete, greater experience withhigh-volume manufacturing, broader name recognition, substantially largercustomer bases and substantially greater financial, technical, manufacturingand marketing resources than we do.  We also face potential competitionfrom new market entrants, including established manufacturers in other segmentsof the semiconductor capital equipment market who may decide to diversify anddevelop and market products that compete with our system offerings.

***Semiconductor manufacturers are typically loyal totheir existing semiconductor equipment suppliers, which may make it difficultfor us to obtain new customers.***

Because semiconductor manufacturersmust make substantial investments to install and integrate capital equipmentinto their semiconductor fabrication facilities, they tend to choosesemiconductor equipment manufacturers based on established relationships, productcompatibility and proven system performance.

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

Since most new fabrication facilitiesare similar to existing ones, semiconductor manufacturers tend to continueusing equipment that has a proven track record.  Based on our experiencewith our major customers, we have observed that once a particular piece ofequipment is selected from a vendor, the customer is likely to continuepurchasing that same piece of equipment from the vendor for similarapplications in the future.  Broadening our market share remains difficultdue to choices made by customers that continue to be influenced by pre-existingbases installed by competing vendors.  As a result, our ability to obtainnew customers and additional orders may be limited.

A semiconductor manufacturerfrequently will attempt to consolidate its other capital equipment requirementswith the same vendor.  As a result, we may face narrow windows ofopportunity to be selected as the “vendor of choice” by potential newcustomers.  It may be difficult for us to sell to a particular customerfor a significant period of time once that customer selects a competitor’sproduct, and we may not be successful in obtaining broader acceptance of oursystems and technology.  If we are not able to achieve broader marketacceptance of our systems and technology, it could harm our business, financialcondition and results of operations.

***We depend upon sole suppliers for certain keycomponents.***

Substantially all of our net saleshave come from the sale of systems that contain key components that areavailable only from a single source or limited sources.  As a result, wedepend on a number of sole suppliers for key components used in themanufacturing of our systems.  If we are unable to obtain timely deliveryof sufficient quantities of these components, we will be unable to manufacturesystems to meet customer demand on a timely basis.  Most significantly,certain systems are designed around automation modules supplied by solesuppliers.  Due to the high cost of these modules, we keep very few ininventory.  Although we have never been unable to manufacture or ship asystem due to an inability to obtain a component sourced from a sole supplier,if a sole supplier fails to deliver the component on a timely basis, deliveryof certain systems could be delayed.  If a sole supplier is unable todeliver any such components for a prolonged period of time, we may have toredesign certain systems.  Redesigning systems could take significant timeand be expensive, and we cannot assure you that we will be able to do so, orthat customers will adopt the redesigned systems.

***Warranty claims in excess of our estimates couldseriously harm our business.***

We offer a warranty on all of oursystems.  If our customers make claims under our warranties that exceedour estimates of the cost of our warranties, it could harm our business,financial condition and results of operations.

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***If we deliver systems with defects, our credibilitymay be harmed, sales and market acceptance of our systems may decrease and wemay incur liabilities associated with those defects*.**

Our systems are complex and sometimes have containederrors, defects and bugs when introduced.  If we deliver systems witherrors, defects or bugs, our credibility and the market acceptance and sales ofour systems could be harmed.  Further, if our systems contain errors,defects or bugs, we may be required to expend significant capital and resourcesto alleviate these problems.  Defects could also lead to commercial orproduct liability as a result of lawsuits against us or against ourcustomers.  We have agreed to product liability indemnities with some ofour customers, and our product and commercial liability insurance policiescurrently provide only limited coverage per claim.  In the event of asuccessful product liability or commercial claim, we could be obligated to paydamages that may not be covered by insurance or that significantly exceed ourinsurance coverage.

***Our employment costs in the short-term are fixed toa large extent, and therefore any unexpected shortfalls in net sales could harmour results of operations.***

Our operating expense levels arebased in significant part on our headcount, which generally is driven by ourlong-term net sales goals.  For a variety of reasons, particularly thehigh cost and disruption of layoffs and the costs of recruiting and training,our headcount in the short-term is fixed to a large extent.  As a result,we may be unable to reduce our employment costs in a timely manner tocompensate for any unexpected shortfalls in net sales, which could harm ourresults of operations.

***Our high spending levels on research and developmentand our need to maintain a high level of customer service and support couldharm our results of operations.***

In order to remain competitive, weneed to maintain high levels of investment in research and development,marketing and customer service, while at the same time controlling ouroperating expenses.

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

We cannot assure you that we willhave sufficient resources to make a high level of investment in research anddevelopment, marketing and customer service while controlling our operatingexpenses or that our systems will be viewed as competitive as a result oftechnological advances by our competitors or changes in semiconductorprocessing technology.  Any such competitive pressures may require us toreduce prices significantly or result in lost customer orders, which could harmour business, financial condition and results of operations.

***A disruption of our manufacturing operations couldharm our business.***

Although we outsource themanufacturing for certain of our systems or sub-assemblies to third parties, weproduce most of our systems at our manufacturing facilities in Scotts Valley,California and Newport, South Wales, U.K.  In the event of a disruption ofoperations at our facilities, our third-party manufacturers would not be ableto make up the capacity loss.  Our manufacturing operations could besubject to disruption for a variety of reasons, including natural disasters,work stoppages, operational facility constraints and terrorism.  Any suchdisruption could cause delays in shipments of systems to our customers, resultin cancellation of customer orders or loss of customers and seriously harm ourbusiness.

***We outsource manufacturing and logistics activities tothird-party service providers, which decreases our control over the performanceof these functions.***

We currently outsource certainmanufacturing and spare parts logistics functions to third-party serviceproviders, and we may outsource more of those functions in the future. While we expect to achieve operational flexibility and cost savings as a resultof this outsourcing, outsourcing has a number of risks and reduces our control 

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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 our business, financial condition and results ofoperations.

If for any reason one or more ofthese third-party service providers becomes unable or unwilling to continue toprovide services of acceptable quality, at acceptable costs and in a timelymanner, our ability to deliver our systems or spare parts to our customerscould be severely impaired.  We would quickly need to identify and qualifysubstitute service providers or increase our internal capacity, which could beexpensive, time consuming and difficult, and could result in unforeseenoperations problems. Substitute service providers might not be available or, ifavailable, might be unwilling or unable to offer services on acceptable terms.

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

Our requirements currently representand are expected to continue to represent a small portion of the totalcapacities of our third-party service providers, and they may preferentiallyallocate capacity to other customers, even during periods of high demand forour systems. In addition, these third-party service providers could sufferfinancial difficulties or disruptions in their operations due to causes beyondour control.

***The semiconductor industry is global and has expandedwithin Asia. We have penetrated this market with some of our systems. If we areunable to continue to penetrate this market with those systems and penetratethis market with our other systems, our business could be harmed.***

The percentage of worldwidesemiconductor production that is based in Asia is growing more rapidly than inother regions. Although we derived approximately 60% of our net sales for thesix months ended March 30, 2007 and 64%, 65% and 46% of our net sales forfiscal 2006, 2005 and 2004, respectively, from our sales to customers locatedin the Asia Pacific region, our brand recognition in the region is limited. Inorder to grow our business, we need to penetrate the region with the additionof new customers, new systems and the expansion of our relationships with ourexisting customers. We have traditionally sold our systems primarily throughour direct sales force. Although we have a direct sales force and localrepresentatives in the Asia Pacific region, we cannot assure you that we willbe able to continue penetrating markets in this region. Our failure to continueto penetrate these markets, or failure to attract the additional personnelnecessary to service new and existing customers, may harm our competitiveposition and our future business prospects.

***If we are unable to hire and retain a sufficientnumber of qualified personnel, our results of operations could be negativelyaffected.***

Our success depends in part upon ourability to attract and retain qualified management, technical, sales and supportpersonnel for our operations on a worldwide basis. We believe that our successis particularly dependent on the contributions of the principal members of ourmanagement, operations and engineering staff, including Jerauld J. Cutini, ourPresident and Chief Executive Officer, Patrick C. O’Connor, our Executive VicePresident and Chief Financial Officer, and John Macneil, our Executive VicePresident and Chief Technology Officer. We do not have long-term employmentcontracts with these or any of our other key personnel, and their knowledge ofour business and industry would be extremely difficult for us to replace.Competition for qualified personnel is intense, particularly in the SanFrancisco Bay Area, where our headquarters is located, and we cannot assure youthat we will be able to continue to attract and retain qualified personnel. Ourresults of operations could be negatively affected by our loss of keyexecutives or employees or our inability to attract and retain skilledexecutives and employees.

***Changes in accounting standards for equity-basedcompensation may adversely affect our results of operations and our ability toattract and retain employees.***

Our adoption of SFAS No. 123(R)required us to expense all equity-based compensation that we provide to ouremployees and directors beginning with our fiscal quarter endedDecember 30, 2005. The environment for skilled employees that areknowledgeable about our systems and services is a competitive one, and webelieve that 

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equity-based compensation is an important part of theoverall compensation that we offer to attract and retain such employees. SFASNo. 123(R) has adversely affected and will continue to adversely affect ourresults of operations. If we decide to decrease the amounts of equity-basedcompensation that we offer to our current and prospective employees on accountof the related expenses that we have to incur as a result of SFAS No. 123(R),it could impair our ability to attract and retain employees.

***Our ability to compete could be jeopardized by ourinability to protect our intellectual property rights from challenges by thirdparties.***

Our success and ability to competedepend in large part upon protecting proprietary technology. We have relied ona combination of patent, trade secret, copyright and trademark laws,non-disclosure and other contractual agreements and technical measures toprotect our proprietary rights.

We cannot assure you that patentswill be issued on pending patent applications or that competitors will not beable legitimately to ascertain proprietary information embedded in our systemsthat is not covered by patent or copyright. If this happens, we may not be ableto prevent the competitor from using this information.

In addition, if we assert patentrights against a competitor’s product, we cannot assure you that any claim inany patent will be sufficiently broad nor, if sufficiently broad, that thepatent will not be challenged, invalidated or circumvented. We may not havesufficient resources to establish, monitor and protect our rights. Failure toprotect our intellectual property rights could harm our business.

***Our efforts to protect our intellectual property maybe less effective in some foreign countries where intellectual property rightsare not as well protected as in the United States.***

We derived a significant portion ofour net sales for the six months ended March 30, 2007 and fiscal 2006 fromsales in foreign countries, including certain countries in Asia such asSingapore, Taiwan, Japan, Malaysia, China and Korea. The laws of some foreigncountries do not protect proprietary rights to as great an extent as do thelaws of the United States, and many U.S. companies have encountered substantialproblems in protecting their proprietary rights against infringement in suchcountries, some of which are countries in which we have sold and in which weexpect to continue to sell systems. For example, Taiwan is not a signatory tothe Patent Cooperation Treaty, which is designed to specify rules and methodsfor defending intellectual property internationally. In Taiwan, the publicationof a patent prior to its filing would invalidate the ability of a company toobtain a patent. There is a risk that our means of protecting our proprietaryrights may not be adequate in some foreign countries. Our competitors in thesecountries may independently develop similar technology or duplicate oursystems. If we fail to protect our intellectual property adequately in thosecountries, it would be easier for our competitors to sell competing products inthose countries.

***We will be required to spend significant time, moneyand other resources to determine whether our internal control over financialreporting is effective. If we are unable to achieve and maintain effectiveinternal control over financial reporting, the value of your investment inAviza could decline.***

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

We identified material weaknesses inour internal control over financial reporting as of the end of fiscal 2004, andTrikon Technologies, Inc., or Trikon, with which we completed our mergertransaction in December 2005, restated its financial statements in May2005 as a result of Trikon’s identification of errors which resulted inmaterial weaknesses in its internal control over financial reporting. As aresult of our and Trikon’s identified material weaknesses, we face a significantchallenge in ensuring our operations are designed in a manner 

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that is consistent with the framework of internalcontrol established by the Committee of Sponsoring Organization of the TreadwayCommission.

Our internal control over financialreporting may not be considered effective if, among other things:

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

·                                          we fail to evaluate key controls ina timely fashion; or

·                                          we fail to remediate assesseddeficiencies.

The process of implementing our internal control overfinancial reporting and complying with Section 404 will be expensive and timeconsuming, and will require significant effort by management. We cannot assureyou that we will implement and maintain effective internal control overfinancial reporting.  If managementasserts that our internal control over financial reporting is ineffective or ifour independent registered public accounting firm expresses an adverse opinionon management’s assessment or that our internal control over financialreporting is ineffective, the value of your investment in Aviza coulddecline.  In addition, a delay incomplying with Section 404 may subject us to a variety of administrativeactions, including ineligibility for short-form resale registration, action bythe SEC, the suspension or delisting of our common stock from the Nasdaq GlobalMarket and the inability of registered broker-dealers to make a market in ourcommon stock, which could further reduce our stock price and could harm our business.

***We will not be required to furnish a report on ourinternal control over financial reporting until December 2008.***

We are not currently required tofurnish a report on our internal control over financial reporting pursuant tothe SEC’s rules under Section 404 as part of the Annual Reports that wefile on Form 10-K. These rules will apply to us when we file our AnnualReport on Form 10-K for our fiscal year ending in September 2008,which we are required to file in December 2008. As a result, we cannotassure you that our internal control over financial reporting is effective, andyou will not have a report from us to that effect until December 2008, andour independent registered public accounting firm will not have to provide itsattestation on our management’s report or its opinion as to the effectivenessof our internal control over financial reporting until December 2009.

***Our results of operations could be negatively affectedby currency fluctuations.***

Although our net sales are generallydenominated in U.S. dollars and we report our results of operations in U.S.dollars, our Newport, South Wales operations are based in the United Kingdomand most of the operating expenses attributable to those operations areincurred in British pounds. As a result, a significant portion of our costs aresubject to currency fluctuations. Accordingly, if the British pound increasesin value against the U.S. dollar, our operating expenses as a percentage of ournet sales will increase and our gross margins will decline. In addition, oursales in Japan and other foreign service sales are denominated in localcurrency. As a result, fluctuations in those local currencies could also havean impact on our results of operations.

***Because we have significant operations outside of theUnited States, we are subject to political, economic and other internationalconditions that could increase our operating expenses and the regulation of oursystems and make it more difficult for us to maintain operating and financialcontrols.***

We have manufacturing facilities inNewport, South Wales, U.K., and sales and service offices in many othercountries. In addition, approximately 60% of our net sales for the six monthsended March 30, 2007 and 64% of our net sales for fiscal 2006 were derived fromsales in the Asia Pacific region. In recent years, Asian economies have beenhighly volatile and recessionary, resulting in significant fluctuations inlocal currencies and other instabilities. Instabilities in Asian economies maycontinue and recur in the future or instability could occur in other foreigneconomies, any of which could harm our business, financial condition andresults of operations.

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Our exposure to the business riskspresented by Asian economies and other foreign economies will increase to theextent we continue to expand our global operations. Our internationaloperations will continue to subject us to a number of risks, including:

·                                          longer sales cycles;

·                                          multiple, conflicting and changinggovernmental laws and regulations;

·                                          protectionist laws and businesspractices that favor local companies;

·                                          price and currency exchange ratesand controls;

·                                          difficulties in collecting accountsreceivable;

·                                          travel and transportationdifficulties resulting from actual or perceived health risks, such as SevereAcute Respiratory Syndrome and Avian Influenza, commonly referred to as SARSand Bird Flu, respectively; and

·                                          political and economic instability.

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

***Our operations are subject to health and safety andenvironmental laws that may expose us to liabilities for noncompliance.***

We are subject to a variety ofgovernmental regulations relating to the use, storage, discharge, handling,manufacture and disposal of all materials present at, or are output from, ourfacilities, including toxic or other hazardous chemical byproducts of themanufacturing processes. We are also subject to governmental regulationsaffecting the content, reuse, recycling, distribution and labeling of systemsand parts containing hazardous materials. Environmental claims, or failure tocomply with any present or future regulations, could result in significantcosts to remediate, the assessment of damages or imposition of fines, thesuspension of production of certain systems or the cessation of operations.

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

We own and operate a facility locatedin Scotts Valley, California, or the Scotts Valley Site, which is currentlysubject to an 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. The Scotts Valley Site is listedon the National Priorities List as the “Watkins-Johnson Superfund Site”pursuant to the Comprehensive Environmental Response Compensation and LiabilityAct. The contamination on the Scotts Valley Site includes chlorinated solventsin soil and groundwater. The site is being remediated under the terms of anagreement under which an environmental consultant, ARCADIS Geraghty &Miller International, has agreed to complete the work, and an insurance policyis in place to cover certain remediation costs. If, however, ARCADIS,WJ Communications and the insurance provider fail to fulfill theirobligations, we could be subject to substantial fines and be forced to suspendproduction, alter manufacturing processes or cease business operations, any ofwhich could harm our business, financial condition or results of operations.

***Our ability to use net operating losses to offsetfuture taxable income is subject to limitations.***

In general, under Section 382 of theInternal Revenue Code, a corporation that undergoes an “ownership change” issubject to limitations on its ability to utilize its pre-change net operatinglosses, or NOLs, to offset future taxable income. A corporation generallyundergoes an “ownership change” if the percentage of stock of the 

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corporation owned by one or more of its 5%stockholders (where all stock owned by stockholders who are not 5% stockholdersgenerally is treated as owned by one or more 5% stockholders) has increased bymore than 50 percentage points over a three-year period.

Trikon’s net operating losses aresubject to limitations arising from previous ownership changes and will besubject to additional limitations as a result of our merger transaction withTrikon. Our existing net operating losses also may be subject to limitations,and our merger transaction with Trikon may have resulted in our undergoing anownership change, thus potentially further limiting our ability to use our netoperating losses. It is impossible for us to ensure that we will not experiencean ownership change in the future because changes in our stock ownership, someof which are outside of our control, could result in an ownership change underSection 382 of the Internal Revenue Code.

Generally, the limitations on ourability to use either our or Trikon’s pre-merger transaction NOLs to offsetfuture taxable income are expected to be significant, and thus our liabilityfor future U.S. federal income taxes may be materially higher than thatliability would have been absent such limitations. Similar rules may apply forforeign and state income tax purposes as well.

***Business interruptions could adversely affect ourbusiness.***

Our operations are vulnerable tointerruption by fire, earthquake, power loss, telecommunications failure andother events beyond our control. A disaster could severely damage our abilityto deliver our systems to our customers. In order to manufacture our systems,we will need to maintain and protect our manufacturing facilities and computersystems, many of which will be located in or near our headquarters in ScottsValley, California. Scotts Valley is located near a known earthquake faultzone. Although our facilities are designed to be fault-tolerant, our systemsare susceptible to damage from fire, floods, earthquakes, power loss,telecommunications failures and similar events. Although we maintain generalbusiness insurance against interruptions such as fires and floods, we cannotassure you that the amount of coverage will be adequate in any particular case.

***Any acquisitions we may make could disrupt businessand harm our financial condition.***

We may invest in complementaryproducts, companies or technologies. Such investments involve numerous risks,including:

·                                          diversion of management’s attentionfrom other operational matters;

·                                          inability to complete acquisitionsas anticipated or at all;

·                                          inability to realize synergiesexpected to result from an acquisition;

·                                          failure to commercialize purchasedtechnologies;

·                                          ineffectiveness of an acquiredcompany’s internal controls;

·                                          impairment of acquired intangibleassets as a result of technological advancements or worse-than-expectedperformance of the acquired company or its product offerings;

·                                          unknown and undisclosed commitmentsor liabilities;

·                                          failure to integrate and retain keyemployees; and

·                                          ineffective integration ofoperations.

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

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***Our affiliates own a large amount of our common stock,which will limit your ability to influence our corporate activities.***

At March 30, 2007, affiliates ofVantagePoint Venture Partners, which we refer to collectively as VantagePoint,and Caisse de dépôt et placement du Québec, which we refer to as CDPQ,beneficially owned approximately 37.2% and 16.2%, respectively, of ouroutstanding common stock. VantagePoint and CDPQ exercise significant influenceover our operations, business strategy and the outcome of votes on all mattersrequiring stockholder approval, including the approval of significant corporatetransactions such as mergers or other business combinations. VantagePoint orCDPQ may have interests that differ from the interests of our other stockholders.This concentration of ownership may also have the effect of delaying orpreventing a change of control of Aviza or discouraging others from makingtender offers for shares of our common stock, which could prevent our otherstockholders from receiving a premium for their shares.

***The price our common stock has been and may continueto be volatile, which may lead to losses by investors or to securitieslitigation.***

The market price of our common stockhas been and may continue to be volatile, and our stock price may decline inthe future. For example, for the period from December 2, 2005, the first daythat our common stock was publicly traded, through May 9, 2007, the closingprice range of our common stock was $3.66 to $8.74 per share.

In addition, in recent years, thestock market in general, and the market for shares of high technology stocks inparticular, have experienced extreme price fluctuations, and these fluctuationshave frequently been unrelated to the operating performance of the affected companies.These fluctuations could lead to a decline in the market price of our commonstock. In the past, securities litigation has often been instituted against acompany following periods of volatility in its stock price. This type oflitigation, if filed against us, could result in substantial costs and divertmanagement’s attention and resources.

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

None.

**ITEM3.  DEFAULTS UPON SENIOR SECURITIES**

None.

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

Our annual meeting of stockholderswas held on January 31, 2007.  Thefollowing are the results of the voting on the proposals submitted to ourstockholders at the annual meeting.

ProposalOne:  Election of Directors.  The following individuals were elected asdirectors:

| Name                  | ** ** | **For**    | ** ** | **Withheld** | ** ** |
|-----------------------|------------|------------|------------|--------------|------------|
| Jerauld J. Cutini     |       | 15,143,335 |       | 27,350       |       |
| C. Richard Neely, Jr. |       | 15,143,335 |       | 27,350       |       |

 

ProposalTwo:  Ratification of IndependentRegistered Public Accounting Firm.  The proposalto ratify the appointment of Deloitte & Touche LLP as our independentregistered public accounting firm for fiscal year 2007 was approved.

| For:              |   | 15,152,020 |
|-------------------|--------|------------|
| Against:          |   | 6,785      |
| Abstain:          |   | 11,880     |
| Broker non-votes: |   | 0          |

 

Proposal Three:  Approval of the 2007 Bonus Plan. Theproposal to approve our 2007 Bonus Plan was approved.

| For:              |   | 11,933,211 |
|-------------------|--------|------------|
| Against:          |   | 627,453    |
| Abstain:          |   | 49,666     |
| Broker non-votes: |   | 2,560,355  |

 

 

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**ITEM 5.OTHER INFORMATION**

None.

**ITEM 6. EXHIBITS**
| Exhibit  Number | ** ** | **Description**                                                                                                                                                                                                                                                                                                                      |
|-----------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 3.1             |       | Amended and Restated Certificate of Incorporation of  Aviza Technology, Inc., incorporated by reference to Exhibit 3.1 to the  Annual Report on Form 10-K filed by the registrant with the Commission on  December 29, 2005.                                                                                                         |
|            |       |                                                                                                                                                                                                                                                                                                                                 |
| 3.2             |       | Amended and Restated Bylaws of Aviza Technology,  Inc., incorporated by reference to Exhibit 3.2 to the Annual Report on Form  10-K filed by the registrant with the Commission on December 29, 2005.                                                                                                                                |
|            |       |                                                                                                                                                                                                                                                                                                                                 |
| 4.1             |       | Specimen certificate of common stock of Aviza  Technology, Inc., incorporated by reference to Exhibit 4.1 to the Annual  Report on Form 10-K filed by the registrant with the Commission on December  29, 2005.                                                                                                                      |
|            |       |                                                                                                                                                                                                                                                                                                                                 |
| 10.1            |       | Amendment No. 7, dated as of March 29, 2007, to  Credit Agreement between Bank of America, N.A. and Aviza, Inc., incorporated  by reference to Exhibit 10.1 to the Current Report on Form 8-K filed by the  registrant with the Commission on April 4, 2007.                                                                         |
|            |       |                                                                                                                                                                                                                                                                                                                                 |
| 10.2            |       | Loan and Security Agreement by and among Aviza  Technology, Inc., Aviza, Inc., United Commercial Bank, East West Bank and  Chinatrust Bank (U.S.A.), entered into as of April 13, 2007, incorporated by  reference to Exhibit 10.1 to the Current Report on Form 8-K filed by the  registrant with the Commission on April 19, 2007. |
|            |       |                                                                                                                                                                                                                                                                                                                                 |
| 31.1            |       | Certification of the Chief Executive Officer  pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                             |
|            |       |                                                                                                                                                                                                                                                                                                                                 |
| 31.2            |       | Certification of the Chief Financial Officer  pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                             |
|            |       |                                                                                                                                                                                                                                                                                                                                 |
| 32.1            |       | Certification of the Chief Executive Officer  pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                             |
|            |       |                                                                                                                                                                                                                                                                                                                                 |
| 32.2            |       | Certification of the Chief Financial Officer  pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                             |

 

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**SIGNATURES**

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

 
|                     |       | Aviza Technology, Inc. |           |
|---------------------|------------|------------------------|----------------|
|                | * *   | * *               | *(Registrant)* |
| * *            | * *   | * *               | * *       | * * |
| Dated: May 11, 2007 |       |                   |           |   |
|                |       | By:                    | ** **     | **/s/ PATRICK C. O’CONNOR** |
|                |       |                   |           |   |
|                | ** ** | *** ***           | * *       | **Patrick C. O’Connor*********Executive Vice President and Chief  Financial Officer  (Principal Financial and Accounting Officer)* |
|                |       |                   |           |   |
|                     |            |                        |                |  |  |

 

 

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**EXHIBITINDEX**
| Exhibit  Number | ** ** | **Description**                                                                                                                                                                                                                                                                                                                           |
|-----------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 3.1             |       | Amended and Restated Certificate of Incorporation of  Aviza Technology, Inc., incorporated by reference to Exhibit 3.1 to the  Annual Report on Form 10-K filed by the registrant with the Commission on  December 29, 2005.                                                                                                         |
|            |       |                                                                                                                                                                                                                                                                                                                                      |
| 3.2             |       | Amended and Restated Bylaws of Aviza Technology,  Inc., incorporated by reference to Exhibit 3.2 to the Annual Report on Form  10-K filed by the registrant with the Commission on December 29, 2005.                                                                                                                                     |
|            |       |                                                                                                                                                                                                                                                                                                                                      |
| 4.1             |       | Specimen certificate of common stock of Aviza  Technology, Inc., incorporated by reference to Exhibit 4.1 to the Annual  Report on Form 10-K filed by the registrant with the Commission on December  29, 2005.                                                                                                                           |
|            |       |                                                                                                                                                                                                                                                                                                                                      |
| 10.1            |       | Amendment No. 7, dated as of March 29, 2007, to  Credit Agreement between Bank of America, N.A. and Aviza, Inc., incorporated  by reference to Exhibit 10.1 to the Current Report on Form 8-K filed by the  registrant with the Commission on April 4, 2007.                                                                              |
|            |       |                                                                                                                                                                                                                                                                                                                                      |
| 10.2            |       | Loan and Security Agreement by and among Aviza  Technology, Inc., Aviza, Inc., United Commercial Bank, East West Bank and  Chinatrust Bank (U.S.A.), entered into as of April 13, 2007, incorporated by  reference to Exhibit 10.1 to the Current Report on Form 8-K filed by the  registrant with the Commission on April 19, 2007. |
|            |       |                                                                                                                                                                                                                                                                                                                                      |
| 31.1            |       | Certification of the Chief Executive Officer  pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                  |
|            |       |                                                                                                                                                                                                                                                                                                                                      |
| 31.2            |       | Certification of the Chief Financial Officer  pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                  |
|            |       |                                                                                                                                                                                                                                                                                                                                      |
| 32.1            |       | Certification of the Chief Executive Officer  pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                  |
|            |       |                                                                                                                                                                                                                                                                                                                                      |
| 32.2            |       | Certification of the Chief Financial Officer  pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                  |

 

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