UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended June 29, 2007

OR

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

For the transition period from to

Commission file number 000-51642

Aviza Technology, Inc.

(Exact name of Registrant as Specified in its Charter)

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

440 Kings Village Road

Scotts Valley, California 95066

(Address of Principal Executive Offices including Zip Code)

(831) 438-2100

(Registrant’s Telephone Number, Including Area Code)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter 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 a large accelerated filer, an accelerated filer, or a non-accelerated filer. 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 a shell company (as defined in Rule 12b-2 of the Exchange Act).

YES o NO x

As of August 7, 2007, the registrant had 20,845,273 shares of its common stock, par value $0.0001 per share, outstanding.

Aviza Technology, Inc.

Table of Contents

		Page No.

PART I.	FINANCIAL INFORMATION
Item 1.	Financial Statements (unaudited):
	Condensed Consolidated Balance Sheets — at June 29, 2007 and September 29, 2006	3
	Condensed Consolidated Statements of Operations — for the Three and Nine Months Ended June 29, 2007 and June 30, 2006	4
	Condensed Consolidated Statements of Cash Flows — for the Nine Months Ended June 29, 2007 and June 30, 2006	5
	Notes to Condensed Consolidated Financial Statements	6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	18
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	30
Item 4.	Controls and Procedures	30
PART II.	OTHER INFORMATION	31
Item 1.	Legal Proceedings	31
Item 1A.	Risk Factors	31
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	43
Item 3.	Defaults Upon Senior Securities	43
Item 4.	Submission of Matters to a Vote of Security Holders	43
Item 5.	Other Information	43
Item 6.	Exhibits	43

ITEM 1. FINANCIAL STATEMENTS

AVIZA TECHNOLOGY, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

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

(unaudited)

	June 29, 2007			September 29, 2006
ASSETS
CURRENT ASSETS:
Cash and cash equivalents	$	21,992		$	10,722
Accounts receivable, net of allowance of $255 and $262, respectively	41,478			26,763
Inventory	47,401			54,499
Prepaid expenses and other current assets	7,373			6,638
Total current assets	118,244			98,622

PROPERTY, PLANT AND EQUIPMENT—net	30,878			25,266
INTANGIBLE ASSETS—net	3,939			4,755
OTHER ASSETS	874			463
TOTAL	$	153,935		$	129,106

LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES:
Short term borrowings and current portion of notes payable	$	18,155		$	28,632
Accounts payable	20,369			30,792
Warranty liability	12,025			10,816
Accrued liabilities	15,658			13,716
Total current liabilities	66,207			83,956
NOTES PAYABLE—Long term	15,014			6,256
Total liabilities	81,221			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; 20,844,260 and 16,150,752 shares issued and outstanding at June 29, 2007 and September 29, 2006, respectively	2			2
Additional paid-in capital	117,874			88,655
Accumulated other comprehensive income	2,207			594
Accumulated deficit	(47,369		)	(50,357		)
Total stockholders’ equity	72,714			38,894
TOTAL	$	153,935		$	129,106

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

AVIZA TECHNOLOGY, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except share and per share amounts)

(unaudited)

	Quarter Ended						Nine Months Ended
	June 29, 2007			June 30, 2006			June 29, 2007			June 30, 2006
NET SALES	$	57,421		$	43,662		$	181,251		$	108,846
COST OF GOODS SOLD	39,246			32,916			125,304			81,774
GROSS PROFIT	18,175			10,746			55,947			27,072

OPERATING EXPENSES:
Research and development	8,101			6,547			23,815			17,743
Selling, general and administrative	8,217			6,795			24,846			18,392
In-process research and development	—			(29		)	—			373
Total operating expenses	16,318			13,313			48,661			36,508

INCOME (LOSS) FROM OPERATIONS	1,857			(2,567		)	7,286			(9,436		)

OTHER INCOME (EXPENSE):
Interest income	146			79			283			132
Interest expense	(663		)	(1,424		)	(2,978		)	(4,166		)
Other income (expense) - net	(449		)	16			(425		)	(129		)
Total other expense -net	(966		)	(1,329		)	(3,120		)	(4,163		)

INCOME (LOSS) BEFORE INCOME TAXES	891			(3,896		)	4,166			(13,599		)
INCOME TAXES	382			70			1,178			310

NET INCOME (LOSS)	$	509		$	(3,966	)	$	2,988		$	(13,909	)

Income (loss) per share:
Basic	$	0.02		$	(0.27	)	$	0.16		$	(1.45	)
Diluted	$	0.02		$	(0.27	)	$	0.16		$	(1.45	)

Weighted average common shares:
Basic	20,763,221			14,667,980			18,150,976			9,563,903
Diluted	21,607,161			14,667,980			18,964,575			9,563,903

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

AVIZA TECHNOLOGY, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)

	Nine Months Ended
	June 29 2007			June 30 2006
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)	$	2,988		$	(13,909	)
Adjustments to reconcile net income (loss) to net cash (used in) provided by operating activities:
Depreciation	2,908			2,500
Amortization	945			1,611
Tax benefit from use of acquired net operating losses	509			—
Fair value of common stock warrants issued for loan guarantee	—			251
Stock based compensation	1,530			700
Mandatorily redeemable preferred stock dividend accrued	—			497
(Gain) loss on disposal of equipment	—			(75		)
Provision for allowance for doubtful accounts	(19		)	(156		)
Write off of costs of prior financing agreements	176			—
Write off in-process research and development from purchase of Trikon	—			373
Changes in assets and liabilities (net of assets and liabilities acquired):
Accounts receivable	(13,936		)	5,656
Inventory	8,829			(6,476		)
Prepaid expenses and other current assets	104			4,584
Accounts payable	(11,199		)	3,504
Warranty liability	1,104			(2,088		)
Accrued liabilities	1,609			3,550
Net cash (used in) provided by operating activities	(4,452		)	522
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash acquired from Trikon net of direct merger costs	—			7,366
Purchases of property and equipment	(7,479		)	(4,248		)
Proceeds from sale of equipment	—			175
Net cash (used in) provided by investing activities	(7,479		)	3,293
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds (payments) from credit lines	(12,341		)	260
Proceeds from the issuance of common stock	27,689			15,041
Net proceeds on refinancing of mortgage loan	5,635
Proceeds from equipment loan	4,000
Payments on mortgage loan	(253		)	(210		)
Payments on other borrowings	(958		)	(8,658		)
Payment on equipment loan	(95		)
Payments on capital lease obligations	(195		)	(44		)
Net cash provided by financing activities	23,482			6,389
Effect of exchange rates on foreign cash balances	(281		)	210
NET INCREASE IN CASH AND CASH EQUIVALENTS	11,270			10,414
CASH AND CASH EQUIVALENTS:
Beginning of period	10,722			7,437
End of period	$	21,992		$	17,851
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid	$	2,560		$	2,368
Income taxes paid	$	353		$	139
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.	$	—		$	24,131
Conversion of preferred stock, Series A, to common stock	$	—		$	11,594
Fair value of common stock warrants issued in exchange for loan guarantee	$	—		$	251
Property and equipment included in accounts payable at end of quarter	$	537		$	134

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

AVIZA TECHNOLOGY, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with United States (U.S.) generally accepted accounting principles for interim financial information and applicable regulations of the U.S. Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted pursuant to such rules and regulations. In the opinion of management, all adjustments (consisting only of normal recurring adjustments) considered necessary for a fair statement of financial position and results of operations have been included. Our operating results for the quarter and nine months ended June 29, 2007 are not necessarily indicative of the results that may be expected for future quarters and the fiscal year ending September 28, 2007. The accompanying unaudited condensed consolidated financial statements should be read in conjunction with our audited consolidated financial statements for the year ended September 29, 2006, which are included in our Annual Report on Form 10-K and the risk factors contained herein and therein.

The preparation of the accompanying unaudited condensed consolidated financial statements requires the use of estimates that affect the reported amounts of assets, liabilities, revenues, expenses and contingencies. These estimates include, but are not limited to, 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 historical experience and current circumstances. Changes in facts and circumstances in the future may give rise to changes in these estimates which may cause actual results to differ from current estimates.

Aviza Technology Inc.’s (the “Company” or “Aviza”) current fiscal year will end on September 28, 2007 and includes 52 weeks. We close our fiscal quarters on the last Friday of December, March, June and September.

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

1) the financial position of the Company and its subsidiaries as of June 29, 2007 and September 29, 2006;

2) the results of operations of the Company and its subsidiaries for the quarter and nine months ended June 29, 2007;

3) the cash flows of the Company and its subsidiaries for the nine months ended June 29, 2007;

4) the results of operations of the Company and its subsidiaries for the quarter and nine months ended June 30, 2006, including Trikon from December 2, 2005; and

5) the cash flows of the Company and its subsidiaries for the nine months ended June 30, 2006, including Trikon from December 2, 2005.

See Note 5 for additional information related to the merger transaction.

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

2. Recent Accounting Pronouncements

During the quarter ended September 29, 2006, the Securities and Exchange Commission (“SEC”) released Staff Accounting Bulletin 108, “Considering the Effects of Prior Year Misstatements in Current Year Financial Statements” (“SAB 108”), which provides guidance on how the effects of the carryover or reversal of prior year misstatements should be considered in quantifying a current year misstatement. SAB 108 calls for the quantification of errors using both a balance sheet and income statement approach based on the effects of such errors on each of the company’s financial statements and the related financial statement disclosures. SAB 108 is effective for financial statements issued for the fiscal year ending after November 15, 2006. Adoption of SAB 108 did not have an impact on our results of operations or financial condition.

On December 21, 2006, the Financial Accounting Standards Board (“FASB”) issued FASB Staff Position (“FSP”) Emerging Issues Task Force (“EITF”) 00-19-2, “Accounting for Registration Payment Arrangements,” which requires an issuer to account for a contingent obligation to transfer consideration under a registration payment arrangement in accordance with FASB Statement No. 5, “Accounting for Contingencies” and FASB Interpretation 14, “Reasonable Estimation of the Amount of Loss.” Registration payment arrangements are frequently entered into in connection with issuance of unregistered financial instruments, such as equity shares or warrants. A registration payment arrangement contingently obligates the issuer to make future payments or otherwise transfer consideration to another party if the issuer fails to file a registration statement with the SEC for the resale of specified financial instruments or fails to have the registration statement declared effective within a specific period. The FSP requires issuers to make certain disclosures for each registration payment arrangement or group of similar arrangements. The FSP is effective immediately for registration payment arrangements and financial instruments entered into or modified after the FSP’s issuance date. For previously issued registration payment arrangements and financial instruments subject to those arrangements, the FSP is effective for financial statements issued for fiscal years beginning after December 15, 2006. The adoption of this FSP did not have a significant impact on our financial condition or results of operations.

In June 2006, the FASB issued FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes (“FIN No. 48”), which clarifies the accounting for uncertainty in income taxes recognized in the financial statements in accordance with SFAS No. 109, Accounting For Income Taxes (“SFAS 109”). The interpretation prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. The interpretation also provides guidance in derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. FIN No. 48 requires that tax positions previously held which no longer meet the more-likely-than-not recognition threshold should be derecognized in the first financial reporting period in which the threshold is no longer met. Use of a valuation allowance as per SFAS 109 is no longer an appropriate substitute for the derecognition of a tax position. The interpretation is effective for fiscal years beginning after December 15, 2006. We have not yet evaluated the impact of the adoption of FIN No. 48 on our financial position, results of operations or cash flows.

3. Balance Sheet Details

	June 29, 2007			September 29, 2006
	(in thousands)
Inventory:
Raw materials	$	28,250		$	29,414
Work-in-process	16,636			21,337
Finished goods and evaluation systems	2,515			3,748
Total	$	47,401		$	54,499
Prepaid expenses and other current assets:
Deferred installation costs	$	1,294		$	1,301
Taxes	2,575			2,003
Other	3,504			3,334
Total	$	7,373		$	6,638
Property, plant and equipment, net:
Land	$	1,839		$	1,839
Buildings and improvements	12,181			12,047
Machinery and equipment	16,833			12,947
Office furnishings, fixtures and equipment	2,874			2,659
Construction in process	7,236			2,840
Total	40,963			32,332
Accumulated depreciation	(10,085		)	(7,066		)
Net property, plant and equipment	$	30,878		$	25,266
Accrued liabilities:
Accrued payroll and payroll taxes	$	6,718		$	4,584
Deferred revenue	1,623			2,023
Other taxes payable	2,463			2,153
Other	4,854			4,956
Total	$	15,658		$	13,716

4. Stock-Based Compensation

Effective October 1, 2005, we adopted the 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 which an entity exchanges its equity instruments for goods or services. It also addresses transactions in which an entity incurs liabilities in exchange for goods or services that are based on the fair value of the entity’s equity instruments or that may be settled by the issuance 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 the employee’s requisite service period. The measurement of stock-based compensation cost is based on several criteria including, but not limited to, the valuation model used and associated input factors such as expected term of the award, stock price volatility, dividend rate, risk-free interest rate and award cancellation rate. The input factors used in the valuation model are based on subjective future expectations combined with management judgment. If there is a difference between the assumption used in determining stock-based compensation costs and the actual factors, which become known over time, we may change future input factors used in determining stock-based compensation costs. These changes may materially impact our results of operations in the period such changes are made.

We adopted the modified prospective application method as provided by SFAS 123(R). Under this method, SFAS 123R was applied to new awards and to awards modified, repurchased or cancelled after the effective date. Accordingly, prior period amounts have not been restated. Additionally, compensation cost for the portion of awards for which the requisite service has not been rendered, such as unvested stock options, that were outstanding as of the date of adoption are being recognized as the remaining requisite services are rendered. The compensation cost relating to unvested awards at the date of adoption was based on the grant-date fair value for those awards granted after June 24, 2005, the date of the Company’s initial filing of a Form S-4 registration statement relating to the merger transaction as discussed in Note 5, and based on the intrinsic values as previously recorded under APB Opinion No. 25 for awards granted prior to that date.

The fair value of each option is estimated at the date of grant using the Black-Scholes option valuation model. We estimate expected stock price volatility based on historical volatility within a representative peer group. We believe that because of our limited history and our merger transaction with Trikon, the expected life of our options should be determined by using the methodology under the safe harbor provisions of Staff Accounting Bulletin 107, “Share-Based Payment” (“SAB 107”), released by the SEC. The risk-free interest rate for 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 may grant options to purchase up to a maximum of 5,644,000 shares of common stock, including outstanding options, to employees, directors and consultants at prices not less than the fair market value on the date of the grant. These options generally vest over four to five years and generally expire seven to ten years from the date of the grant.

We recognized stock-based compensation expense of $616,000 and $1,530,000 during the quarter and nine months ended June 29, 2007, respectively, and $61,000 and $700,000 during the quarter and nine months ended June 30, 2006, respectively. Due to uncertainty surrounding the realization of the income tax benefit related to stock-based compensation expense, there is no related income tax benefit recognized in the consolidated statements of operations for the quarters and nine months ended June 29, 2007 and June 30, 2006, respectively, as a full valuation allowance has been provided against the deferred tax asset.

The fair value of our stock options granted in the quarter and nine month periods ended June 29, 2007 and June 30, 2006, respectively, was estimated using the following weighted average assumptions:

	Quarter Ended				Nine Months Ended
	June 29, 2007		June 30, 2006		June 29, 2007		June 30, 2006
Expected life (years)	4.8		4.8		4.6		5.3
Risk-free interest rate	4.6	%	5.0	%	4.7	%	4.5	%
Stock price volatility	60.1	%	67.2	%	60.8	%	74.6	%
Dividend yield	0.0	%	0.0	%	0.0	%	0.0	%

The following table summarizes our stock option activity under the stock plans during the quarter and nine months ended June 29, 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
Granted	356,000		5.91		—	—
Exercised	(29,008	)	1.92		—	—
Forfeited	(16,155	)	9.05		—	—
Outstanding at June 29, 2007	4,236,003		5.05		6.76	8,441,317
Options exercisable at June 29, 2007 and expected to become exercisable	3,691,602		5.07		6.76	7,885,079
Options vested and exercisable at June 29, 2007	2,108,707		$	5.25	6.72	$	6,126,444

The aggregate intrinsic value represents total pre-tax intrinsic value based on the closing stock price of $3.80, $4.27, $7.24 and $5.90 per share at September 29, 2006, December 29, 2006, March 30, 2007 and June 29, 2007, respectively.

As of June 29, 2007, there was $4.6 million of unrecognized compensation cost related to unvested stock options granted and outstanding, net of estimated forfeitures. The cost is expected to be recognized over a weighted average period of approximately 3.01 years.

The following table details total stock-based compensation expense for the quarter and nine months ended June 29, 2007 and June 30, 2006, respectively:

	Quarter Ended					Nine Months Ended
	June 29, 2007		June 30, 2006			June 29, 2007		June 30, 2006
	(in thousands)
Cost of goods sold	$	58	$	(21	)	$	159	$	66
Research and development	140		(44		)	363		99
Selling, general and administrative	418		126			1,008		535
Pre-tax stock-based compensation expense	616		61			1,530		700
Income tax benefits	—		—			—		—
Net stock-based compensation expense	$	616	$	61		$	1,530	$	700

The options outstanding and exercisable at June 29, 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	1,104,624	6.63	$	0.83	969,608	$	0.83
$0.84 - $4.98	1,476,639	6.03	4.17		457,521	3.51
$4.99 - $5.60	894,750	8.47	5.57		365,318	5.58
$5.61 - $87.07	759,990	6.36	12.27		316,260	20.96
$0.83 - $87.07	4,236,003	6.76	$	5.05	2,108,707	$	5.25

The weighted average fair value of options on the grant date, as determined under SFAS 123(R), granted during the quarter and nine months ended June 29, 2007 was $3.21 and $3.07 per share, respectively, and $2.92 and $3.45 per share for the quarter and nine months ended June 30, 2006, respectively.

The total intrinsic value of options exercised during the quarter and nine months ended June 29, 2007 was $129,000 and $419,000, respectively. For the quarter and nine months ended June 30, 2006, the intrinsic value was $34,000 and $152,000, respectively. The total cash received from employees as a result of employee stock option exercises during the quarter and nine months ended June 29, 2007 was $56,000 and $216,000, respectively. For the quarter and nine months ended June 30, 2006 the amount received was $7,000 and $48,000, respectively.

5. Merger and Other Transactions with Trikon Technologies, Inc.

On December 1, 2005, the stockholders of Trikon approved the merger of Trikon with the Company. Trikon designs, manufactures and services wafer processing semiconductor manufacturing equipment primarily for semiconductor devices. Its products are used for chemical and physical vapor deposition and for etch applications and are sold to semiconductor manufacturers worldwide. In accordance with the provisions of SFAS No. 141, Aviza was treated as the acquirer for financial reporting purposes. In the merger transaction, a wholly owned subsidiary of the Company was merged with and into Trikon. Trikon stockholders received 0.29 of a share of Aviza common stock in exchange for each share of Trikon common stock they owned. A total of 4,568,946 shares of Aviza common stock were issued in exchange for the outstanding common stock of Trikon as of December 1, 2005. In addition, 629,126 shares of common stock were reserved for issuance upon exercise of Trikon common stock options and warrants assumed at December 1, 2005. The options and warrants were valued using the Black-Scholes option pricing model.

A summary of the total consideration given in the merger with Trikon is as follows (in thousands, except share and per share amounts):

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

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

Pro Forma Financial Information for the Merger with Trikon

The results of operations of Trikon have been included in our results of operations for all periods subsequent to the December 1, 2005 merger date. The following pro forma financial information includes adjustments related to the amortization of purchased intangibles, depreciation of purchased fixed assets, elimination of deferred rent liability and stock-based compensation costs that would have been recorded if the acquisition had occurred at the beginning of the period presented. The pro forma financial information for the combined entities has been prepared for comparative purposes only and is not necessarily indicative of what the actual results may have been if the acquisition had in fact occurred at the beginning of the period presented or of future results. Pro forma results for the nine months ended June 30, 2006 were (in thousands, except per share amounts):

	Nine Months Ended
	June 30, 2006
Net sales	$	115,979
Net loss	$	(15,368	)
Net loss per share:
Basic and diluted	$	(1.31	)
Weighted average common shares:
Basic and diluted	11,753

6. Borrowing Facilities

Borrowings consist of the following (in thousands):

	June 29, 2007		September 29, 2006
Bank loans (revolving line of credit)	$	15,936	$	28,277
Equipment note payable	3,905		—
Mortgage note payable	11,846		6,463
Other notes payable	779		—
Capital lease obligations	703		148
Total	33,169		34,888
Less current portion	18,155		28,632
Long term portion	$	15,014	$	6,256

During April 2007, we entered into a new credit agreement with a syndication of banks to refinance our existing bank loan and mortgage note payable. The new credit facility includes a revolving line of credit secured by accounts receivable and inventory, an equipment term loan 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 a two-year term. The equipment term loan has a three-year amortization period with monthly payments of principal and accrued interest and is secured by a lien on the equipment of the Company. Maximum borrowings under this provision of the facility are $4,000,000, which we borrowed during the quarter ended June 29, 2007. The real estate portion of the facility has a four-year term and is secured by a deed of trust on our Scotts Valley facility. Monthly payments of principal and accrued interest will be based on a 20-year amortization period of the loan principal. Maximum borrowing under the real estate portion of the facility is $11,935,000, which we borrowed during the quarter ended June 29, 2007. As principal is paid down under the equipment and real estate portions of the facility, additional borrowing availability will be created under the revolving portion of the credit facility so that we have a maximum of $55,000,000 in borrowing availability at all times under the agreement. The weighted-average interest rate for the quarter ended and at June 29, 2007 for these loans was 7.75%. The credit agreement contains certain financial and operating covenants. As of June 29, 2007, we were in compliance with these financial and operating covenants. Loan commitment fees and other direct expenses totaling $302,000, incurred to secure the facility, will be amortized over the lives of the revolving line of credit, equipment term loan and commercial real estate loan, as applicable.

In connection with the refinancing above, approximately $461,000 of costs relating to the prior financing agreements was expensed under other income (expenses)-net during the quarter ended June 29, 2007. This included the write-off of approximately $176,000 in deferred costs related to the prior financing.

7. Intangible Assets

Intangible assets are recorded at cost, net of accumulated amortization, and are amortized over their estimated useful 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

We evaluate intangibles for indicators of possible impairment when events or circumstances indicate the carrying amount of the asset may not be recoverable.

Intangible assets at June 29, 2007 and September 29, 2006 consist of the following (in thousands):

	June 29, 2007										September 29, 2006
	Cost		Income Tax Adjustment			Accumulated Amortization			Net Book Value		Cost		Accumulated Amortization			Net Book Value
Licenses	$	4,028	$	(12	)	$	(570	)	$	3,446	$	4,026	$	(268	)	$	3,758
Developed technology	744		(321		)	(109		)	314		694		(58		)	636
Brands and trademarks	104		(45		)	(15		)	44		96		(8		)	88
Customer relationships	236		(101		)	(35		)	100		220		(18		)	202
Patents	83		(36		)	(12		)	35		78		(7		)	71
Total	$	5,195	$	(515	)	$	(741	)	$	3,939	$	5,114	$	(359	)	$	4,755

During the nine months ended June 29, 2007, one of the subsidiaries we acquired in connection with the merger with Trikon generated sufficient taxable income to recognize a portion of the net deferred tax assets acquired in the merger related to net operating loss carryforwards. Management has previously been unable to assert that it was more likely than not that the Company would generate sufficient taxable income to realize the net deferred tax assets in excess of the deferred tax liabilities recorded in relation to the write-up of inventory and intangibles to fair value at December 1, 2005, the date of the consummation of the merger transaction. Accordingly, the net deferred tax assets had been previously offset in full by a valuation allowance on that date. In the absence of goodwill, under generally accepted accounting principles, the tax benefit derived from reversal of this valuation allowance must be applied first to reduce non-current intangible assets related to the merger transaction, and second to reduce income tax expense. Approximately $179,000 and $515,000 of the valuation allowance attributed to net deferred tax assets relating to the net operating loss carry-forward acquired in the merger transaction was recognized during the quarter and nine months ended June 29, 2007, respectively, and the intangible assets acquired in the merger transaction have been reduced accordingly. The remaining net deferred tax assets continue to be offset in full by a valuation allowance at June 29, 2007.

Amortization expenses relating to all intangibles, excluding in-process research and development acquired from Trikon, was $116,000 and $369,000 for the quarter and nine months ended June 29, 2007, respectively, and $123,000 and $231,000 for the quarter and nine months ended June 30, 2006, respectively. Based on the intangible assets recorded at June 29, 2007, and assuming no subsequent additions to, or impairment of the underlying assets, the remaining amortization expense is expected to be as follows (in thousands):

Year Ending:
September 28, 2007 (remaining three months)	$	117
September 26, 2008	467
September 25, 2009	467
September 24, 2010	467
September 30, 2011	467
Thereafter	1,954
Total	$	3,939

8. Warranty and Guarantees

Warranty—The Company accrues for the estimated cost of the warranty on its systems, which includes the cost of the labor and parts necessary to repair systems during the warranty period. The amounts recorded in the warranty accrual are estimated based on actual historical costs incurred and on estimated probable future expenses related to current sales. New systems typically have warranty periods ranging from one to three years. The components of the warranty accrual are as follows:

	Quarter Ended						Nine Months Ended
	June 29, 2007			June 30, 2006			June 29, 2007			June 30, 2006
	(in thousands)
Beginning warranty accrual	$	12,903		$	12,978		$	10,816		$	13,599
Additional accruals for new shipments	2,484			2,473			8,248			5,184
Warranty liability assumed in merger	—			—			—			1,386
Warranty costs incurred	(2,806		)	(1,633		)	(6,560		)	(4,861		)
Expirations and change in liability for pre-existingwarranties during the period	(556		)	(919		)	(479		)	(2,409		)
Ending warranty accrual	$	12,025		$	12,899		$	12,025		$	12,899

Guarantees—In addition to system warranties, the Company, from time to time, in the normal course of business, indemnifies certain customers against third-party claims that the Company’s systems, when used for their intended purposes, infringe the intellectual property rights of such third party or other claims made against certain parties. It is not possible to determine the maximum potential amount of liability under these indemnification obligations due to the limited history of prior indemnification claims and the unique facts and circumstances that are likely to be involved in each particular claim. Historically, the Company has not made payments under these obligations and no liabilities have been recorded for these obligations on the balance sheet at June 29, 2007 or September 29, 2006, respectively.

9. Stock Issuance

On February 28, 2007, we sold 4,000,000 shares of our common stock in a public offering at $6.50 per share pursuant to our registration statement on Form S-1 filed under the Securities Act of 1933. Proceeds from the sale, net of direct costs related to the offering, were approximately $23.9 million.

During April 2007, the underwriter of our public offering exercised its right to purchase an additional 600,000 shares of our common stock to cover over-allotments. Net proceeds from the sale of these shares, after the underwriting discount, were approximately $3.6 million.

10. Commitments and Contingencies

In November 2006, we discovered that we may have exported certain pressure transducers that are listed on the U.S. Bureau of Industry and Security’s Commerce Control List without proper authorization, either in the form of an export license or pursuant to an exception to the Bureau of Industry and Security’s export license requirements, and on December 20, 2006, we submitted our initial notification of a voluntary self-disclosure of possible export compliance problems to the Office of Export Enforcement in accordance with applicable Export Administration Regulations. Since December 20, 2006, we conducted a comprehensive review of our exports of pressure transducers and determined that during the period between September 2003 and November 2006, controlled pressure transducers had been exported on 38 occasions without proper export licenses or other authorization from the U.S. Bureau of Industry and Security. Accordingly, we voluntarily submitted a supplementary self-disclosure letter to the Office of Export Enforcement on April 13, 2007. During July 2007, we received a letter from the United States Department of Commerce stating that the Office of Export Enforcement decided not to refer this matter for criminal or administrative prosecution and is closing this matter with the issuance of such letter.

ASML U.S., Inc. and Aviza in March 2004 relating to assets that we acquired from ASML in October 2003. We believe that we have complied with the settlement and distributor agreements and that the allegations contained in IPS’s complaint are without merit. We intend to contest the lawsuit vigorously. In May 2007, Aviza successfully moved the dispute into arbitration. Discovery commenced in June 2007.

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

Our Scotts Valley location is a federal Superfund site. Chlorinated solvent and other contamination was identified at the site in the early 1980’s, and by the late 1980’s Watkins Johnson Corporation (“WJ”) (a previous owner of the Company) had installed a groundwater extraction and treatment system. In 1991, WJ entered into a consent decree with the United States Environmental Protection Agency providing for remediation of the site. In July 1999, WJ signed a remediation agreement with an environmental consulting firm, ARCADIS Geraghty and Miller (“ARCADIS”). Pursuant to this remediation agreement, WJ paid approximately $3 million in exchange for which ARCADIS agreed to perform the work necessary to assure satisfactory completion of WJ’s obligation under the consent decree. The agreement also includes a cost overrun guaranty from ARCADIS up to a total project cost of $15 million. In addition, the agreement included procurement of a ten-year, claims-made insurance policy to cover overruns of up to $10 million from American International Specialty (“AIS”), along with a ten-year, claims-made $10 million policy to cover unknown pollution conditions at the site.

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

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

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

11. Major Customers

During the quarter and nine months ended June 29, 2007, one customer accounted for 20% and 35% of total net sales, respectively. During the quarter ended June 29, 2007, a different customer accounted for 27% of the total net sales. For the quarter ended June 30, 2006, two customers accounted for 31% and 11% of total net sales, respectively. During the nine months ended June 30, 2006, three customers accounted for 24%, 12% and 12% of total net sales, respectively.

12. Comprehensive Income (Loss)

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

	Quarter Ended					Nine Months Ended
	June 29, 2007		June 30, 2006			June 29, 2007		June 30, 2006
	(in thousands)
Net income (loss)	$	509	$	(3,966	)	$	2,988	$	(13,909	)
Currency translation adjustment	404		451			1,613		435
Total comprenhensive income (loss)	$	913	$	(3,515	)	$	4,601	$	(13,474	)

13. Income (Loss) Per Share

Basic income (loss) per share has been computed based upon the weighted average number of common shares outstanding for the periods presented. Diluted income (loss) per share is calculated as though all potentially dilutive shares were outstanding during the period, based upon the application of the treasury stock method. The following details the calculation of net income (loss) per share for the periods presented (in thousands except share and per share data):

	Quarter Ended					Nine Months Ended
	June 29, 2007		June 30, 2006			June 29, 2007		June 30, 2006
Numerator:
Net income (loss)	$	509	$	(3,966	)	$	2,988	$	(13,909	)
Denominator:
Weighted average shares, basic	20,763,221		14,667,980			18,150,976		9,563,903
Effect of potentially dilutive securities:
Stock options	843,940		—			813,599		—
Dilutive weighted average shares outstanding	21,607,161		14,667,980			18,964,575		9,563,903
Net income (loss) per share - basic	$	0.02	$	(0.27	)	$	0.16	$	(1.45	)
Net income (loss) per share - diluted	$	0.02	$	(0.27	)	$	0.16	$	(1.45	)

For the quarter and nine months ended June 29, 2007 and June 30, 2006, the Company had securities outstanding that could potentially dilute basic earnings per share in the future, but were excluded in the computation of diluted net income (loss) per share in the periods presented, as their effect would have been anti-dilutive. The shares of common stock issuable upon conversion or exercise of such outstanding securities consist of the following:

	Quarter Ended		Nine Months Ended
	June 29, 2007	June 30, 2006	June 29, 2007	June 30, 2006
Stock options	2,261,110	3,804,623	2,413,741	3,100,513
Common stock warrants	406,725	406,725	406,725	406,725
Series B and B-1 preferred stock converted to common stock	—	2,536,974	—	2,536,974

ITEM 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Cautionary Statement Regarding Forward-Looking Statements

The statements in this report include forward-looking statements. These forward-looking statements are based on our management’s current expectations and beliefs and involve numerous risks and uncertainties that could cause actual results to differ materially from expectations. You should not rely upon these forward-looking statements as predictions of future events because we cannot assure you that the events or circumstances reflected in these statements will be achieved or will occur. You can identify forward-looking statements by the use of forward-looking terminology, including the words “believes,” “expects,” “may,” “will,” “should,” “seeks,” “intends,” “plans,” “estimates” or “anticipates” or the negative of these words and phrases or other variations of these words and phrases or comparable terminology. These forward-looking statements relate to, among other things:

· our sales, results of operations and anticipated cash flows;

· capital expenditures; depreciation and amortization expenses;

· research and development expenses;

· sales, general and administrative expenses;

· the development and timing of the introduction of new products and technologies; and

· our ability to maintain and develop relationships with our existing and potential future customers and our ability to maintain the level of investment in research and development and capacity that is required to remain competitive.

Many factors could cause our actual results to differ materially from those projected in these forward-looking statements, including:

· variability of our revenues and financial performance;

· risks associated with product development and technological changes;

· the acceptance of our products in the marketplace by existing and potential future customers;

· disruption of operations or increases in expenses due to our involvement in litigation or caused by civil or political unrest or other catastrophic events;

· general economic conditions and conditions in the semiconductor industry in particular; and

· the continued employment of our key personnel and risks associated with competition.

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

Overview

We design, manufacture, sell and support advanced semiconductor capital equipment and process technologies for the global semiconductor industry and related markets. We offer both front-end-of-line and back-end-of-line systems and process technologies used for these markets addressing critical thin film formation technologies, including ALD, PEC, which consists of PVD, Etch and CVD, and thermal processing systems.

Our customer base is geographically diverse and includes both integrated device manufacturers and foundry-based manufacturers. We have a broad installed base, with approximately 2,500 systems in active operation for which we are providing ongoing parts and services worldwide. We sell our systems globally primarily through a direct sales force and in some instances through local independent sales representatives. For the nine months ended June 29, 2007, one customer, Inotera Memories Inc., accounted for 35% of our net sales and approximately 69% of our net sales was attributable to our top ten customers. For the fiscal year ended September 29, 2006, two customers, Winbond Electronics Corp. and Inotera Memories Inc., accounted for 24% and 11% of our net sales, respectively, and approximately 74% of our net sales in fiscal 2006 was attributable to our top ten customers. For the fiscal year ended September 30, 2005, three customers, Inotera Memories, Inc., Infineon Technologies AG and Winbond Electronics Corp., accounted for 43%, 15% and 11% of our net sales, respectively, and approximately 84% of our net sales in fiscal 2005 was attributable to our top ten customers. Our largest customers may vary from year to year depending upon, among other things, the customer’s annual budget for capital expenditures, plans for new fabrication facilities and expansions and new system introductions by us. We expect sales of our systems to relatively few customers will continue to account for a high percentage of net sales during future periods.

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

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

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

We intend to pursue strategic acquisitions of other semiconductor equipment companies and other complementary technologies that we believe will enable us to expand our system offerings in the IC fabrication equipment market.

Critical Accounting Policies

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

We believe that the following critical accounting policies affect our more significant judgments used in the preparation of our consolidated financial statements:

Acquisitions of the Businesses of the Predecessor and Trikon

In connection with our acquisitions of the businesses of the Predecessor and Trikon, we allocated the purchase price associated with the acquisition of the tangible and intangible assets acquired and liabilities assumed based on their estimated fair values. The valuations of these intangible assets required us to make significant estimates and assumptions.

The critical estimates we used in allocating the purchase price included future expected cash flows from customer contracts, distribution agreements and acquired developed technologies, as well as assumptions about the periods of time the systems would continue to be used in our portfolio of systems. Our estimates of fair value at the time they were made were based upon assumptions that we believed to be reasonable, but which are inherently uncertain and unpredictable.

Revenue Recognition

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

(1) persuasive evidence of an arrangement exists; (2) delivery has occurred or services have been rendered; (3) the price is fixed or determinable; and (4) collectability is reasonably assured. Determination of criteria for items (3) and (4) above is based on our judgment regarding the fixed nature of the amounts charged for the systems delivered and the collectability of those amounts.

We often undertake significant system development efforts in advance of any of our customers expressly indicating demand for our systems. As a result of the length of our sales cycles, our net sales for any period are generally weighted toward systems that we introduced for sale in prior years. For purposes of revenue recognition, we classify our systems into two categories, “proven technology” and “new technology.” “Proven technology” systems are those systems with respect to which we have a history of successful installations within a reasonable time frame of delivery and the costs to complete installation do not vary materially from one instance to another. “New technology” systems are those systems with respect to which we cannot demonstrate that we can meet the provisions of customer acceptance at the time of shipment.

We typically sell equipment and installation services as a bundled arrangement. In accordance with EITF 00-21, the fair value of installation is determined as the price we charge for similar installation services provided to our customers without regard to the warranty provisions. Upon shipment of “proven technology,” we record revenue upon shipment at the lesser of (i) the residual amount after deducting the fair value of undelivered services from the contractual value or (ii) the non-contingent amount. The remaining contractual revenue is recorded upon successful installation of the system. Cost of the equipment relating to “proven technology” is recorded upon shipment. To the extent a loss is calculated on shipment due to the foregoing deferral of revenue, a portion of the cost is also deferred to reflect zero gross profit at the time of shipment. The residual revenue, deferred costs and installation costs are recorded upon successful installation of the system. Revenue and cost of equipment and installation relating to “new technology” is deferred until installation and acceptance at the customer’s premises is completed.

The result of these accounting policies is that for “new technology,” our recognition of both revenue and cost of goods sold is delayed until customer acceptance, at which time both revenue and 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 in full upon shipment, but recognition of a portion of our revenue is delayed until successful installation of the system. This can result in diminished gross margins at the time of shipment.

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

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

Inventory Valuation

We assess the recoverability of our inventory at the end of each quarter based on assumptions about customer demand and market conditions. Obsolete inventory or inventory in excess of our estimated usage is written down to its estimated market value less costs to sell. The inventory write-downs are recorded as an inventory valuation allowance established on the basis of obsolete inventory or specifically identified inventory in excess of established usage. Inherent in our estimates of market value in determining inventory valuation are estimates related to economic trends, future demand for our systems and technological obsolescence of 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 of the warranty on our systems as cost of goods sold, which includes the cost of the labor and parts necessary to repair systems during the warranty period. The amounts recorded in the warranty accrual are estimated based on actual historical expenses incurred and on estimated probable future expenses related to our current sales. The warranty service is generally incurred ratably over the warranty period. Our systems typically have warranty periods ranging from one to three years. Our actual warranty costs in the future may vary from our historical warranty costs, which could result in adjustments to our warranty reserves in future periods.

Income Taxes

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

We record a valuation allowance to reduce our deferred tax assets to the amount that is more likely than not to be realized. While we have considered future taxable income and any ongoing prudent and feasible tax planning strategies in assessing the need for the valuation allowance, if we were to determine that we would be able to realize our deferred tax assets in the future in excess of our net recorded amount, an adjustment to the deferred tax asset would increase income in the period such determination was made. Likewise, if we were to determine that we would not be able to realize all or part of a net deferred tax asset in the future, an adjustment to the deferred tax asset would be charged to income in the period such determination was made. As of June 29, 2007, we had a full valuation allowance for our net deferred tax assets.

Stock-Based Compensation

Effective October 1, 2005, we adopted 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-based awards exchanged for employee services. Accordingly, stock-based compensation cost is measured at grant date, based on the fair value of the award, and is recognized as an expense over the employee’s requisite service period. We previously applied Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees,” and related Interpretations and provided the pro forma disclosures of SFAS No. 123, Accounting for Stock-Based Compensation (“SFAS 123”).

We adopted the modified prospective application method as provided by SFAS 123(R). Under this method, SFAS 123(R) was applied to new awards and to awards modified, repurchased or cancelled after the effective date. Additionally, compensation cost for the portion of awards for which the requisite service has not been rendered, such as unvested stock options, that are outstanding as of the date of adoption will be recognized as the remaining requisite services are rendered. The compensation cost relating to unvested awards on the date of adoption was based on the grant-date fair value for those awards granted after June 24, 2005, the date of our initial filing of our Form S-4 registration statement relating to our merger transaction with Trikon, and based on the intrinsic values as previously recorded under APB Opinion No. 25 for awards granted prior to that date.

The fair value of each option is estimated at the date of grant using the Black-Scholes option valuation model. We estimate expected stock price volatility based on historical volatility within a representative peer group. We believe that because of our limited history and our merger transaction with Trikon, the expected life of our options should be determined by using the methodology under the safe harbor provisions of Staff Accounting Bulletin 107, “Share-Based Payment” (“SAB 107”), released by the SEC. The risk-free interest rate for periods within the expected life of the option is based on the U.S. Treasury yield.

Results of Operations

The financial information in the table below is for the quarters and nine months ended June 29, 2007 and June 30, 2006:

	Quarter Ended				Nine Months Ended
	June 29, 2007		June 30, 2006		June 29, 2007		June 30, 2006
Net sales	100	%	100	%	100	%	100	%
Cost of goods sold	68	%	75	%	69	%	75	%
Gross margin	32	%	25	%	31	%	25	%
Operating expenses:
Research and development	14	%	15	%	13	%	17	%
Selling, general and administrative	15	%	16	%	14	%	17	%
In-process research and development	0	%	0	%	0	%	0	%
Total operating expenses	29	%	31	%	27	%	34	%
Income (loss) from operations	3	%	(6	)%	4	%	(9	)%
Other income (expense):
Interest income	0	%	0	%	0	%	0	%
Interest expense	(1	)%	(3	)%	(2	)%	(4	)%
Other income (expense), net	0	%	0	%	0	%	0	%
Total other income (expense)	(1	)%	(3	)%	(2	)%	(4	)%
Income (loss) before income taxes	2	%	(9	)%	2	%	(13	)%
Income taxes	1	%	0	%	1	%	0	%
Net income (loss)	1	%	(9	)%	1	%	(13	)%

Net Sales

	Quarter Ended				Nine Months Ended
	June 29, 2007		June 30, 2006		June 29, 2007		June 30, 2006
	(in thousands)
Net sales	$	57,421	$	43,662	$	181,251	$	108,846

Net sales for the quarter ended June 29, 2007 increased by approximately $13.8 million, or 32%, from the quarter ended June 30, 2006. This increase was due primarily to the following:

· Approximately $5.7 million increase in net sales of our PVD, Etch and CVD systems primarily related to increased unit shipments of our systems during the quarter ended June 29, 2007 over the quarter ended June 30, 2006. The increase also reflects greater penetration of these products into the Asia Pacific markets.

· Approximately $8.2 million increase in net sales related to our deposition and thermal processing systems. Sales recognized upon shipment of our ALD systems increased by approximately $6.9 million. Overall unit shipments of our deposition and thermal processing systems increased by 4% during the quarter ended June 29, 2007 over the quarter ended June 30, 2006. Sales recognized upon customer acceptance of our systems increased by approximately $2.3 million due to higher RVP 300plus and ALD system acceptances. Service and spare parts sales decreased by approximately 12% over the quarter ended June 30, 2006 due primarily to lower volume in the Asia Pacific region.

Net sales for the nine months ended June 29, 2007 increased by approximately $72.4 million, or 67%, over the nine months ended June 30, 2006. This increase was due primarily to the following:

· The integration of our PVD, Etch and CVD system lines into our suite of products and customer base. Because our merger with Trikon occurred on December 1, 2005, the nine-month period ended June 30, 2006 included only $17.9 million of net sales contributed by our Trikon subsidiary. Net sales related to these systems during the nine months ended June 29, 2007 increased by approximately $27.0 million over the nine months ended June 30, 2006. Unit shipments of our PEC systems increased by approximately 200% during the nine months ended June 29, 2007 as compared to the nine months ended June 30, 2006. In addition to the timing of the merger transaction, increased penetration of these systems, particularly our Etch systems into the Asia Pacific market contributed significantly to the growth in system sales. Service and spare parts related to the PEC systems increased approximately 45% during the nine months ended June 29, 2007 as compared to the nine months ended June 30, 2006.

· Approximately $45.4 million increase in net sales related to our deposition and thermal processing equipment. Unit shipments of our deposition and thermal processing equipment increased by 50% during the nine months ended June 29, 2007 over the nine months ended June 30, 2006. Net sales recognized upon shipment increased by $43.0 million due to the increase in shipments, lower average revenue deferrals on our RVP 300plus systems and sales recognized on our ALD Celsior system shipments. The lower average revenue deferrals on the RVP 300plus systems are primarily the result of more favorable payment terms negotiated with our customers. The change in payment terms in most instances reduces the amount of contingent revenue that we need to defer upon system shipment. Service and spare parts sales increased by approximately 7% due primarily to increased demand in the Asia Pacific region and field option upgrade sales.

During the quarter and nine months ended June 30, 2006, our ALD Celsior system was considered to be “new technology” for revenue recognition purposes. Under our revenue recognition policy, sales of systems considered to be new technology are 100% deferred at shipment and not recognized until customer acceptance. Upon achievement of the required number of customer acceptances necessary to transition a system to proven technology, all non-contingent revenue associated with shipments of that particular system is recognized upon shipment. During the quarter and nine months ended June 29, 2007, we recognized $10.1 million and $25.9 million in net sales upon shipment of our ALD systems, respectively.

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

Gross Profit and Gross Margin

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

	Quarter Ended						Nine Months Ended
	June 29, 2007			June 30, 2006			June 29, 2007			June 30, 2006
	(dollars in thousands)
Gross profit	$	18,175		$	10,746		$	55,947		$	27,072
Gross margin	32		%	25		%	31		%	25		%

The increase in gross margin of 7% during the quarter ended June 29, 2007 as compared to the quarter ended June 30, 2006 was primarily the result of improved gross margins on net sales recorded at shipment of our thermal processing systems and improved gross margins on the net sales recorded on customer acceptance of our systems. These improvements are summarized as follows:

· Gross margin recognized on shipment of the RVP 300plus systems increased by approximately 11% over the June 2006 quarter. This was due primarily to certain reconfigurations of the systems, which more than offset lower average selling prices. Net sales on RVP 300plus systems constituted 33% of net sales during the quarter ended June 29, 2007 as compared to 38% during the quarter ended June 30, 2006.

· Net sales related to the shipment of our higher gross margin PEC systems increased to 20% of net sales during the quarter ended June 29, 2007 from 13% during the quarter ended June 30, 2006.

· Net sales related to the shipment of higher gross margin ALD Celsior systems increased to 20% of total net sales which contributed to higher gross margins during the quarter ended June 29, 2007. Net sales on the shipment of ALD Celsior systems during the quarter ended June 30, 2006 constituted 5% of total net sales.

· Gross margin recognized upon customer acceptance of our systems increased by approximately 25% due primarily to lower costs deferred at shipment on the RVP 300plus systems related to lower manufacturing costs and increased PEC system acceptance.

· Lower service revenue as a percentage of total revenue partially offset gross margin improvements in other areas.

During the nine months ended June 29, 2007, gross margin increased by 6% as compared with the nine months ended June 30, 2006. The increase was primarily due to the following:

· Changes in the product mix of the systems sold. The percentage of net sales attributable to the higher gross margin ALD and PEC systems increased by 7% and 9%, to 15% and 20% of total net sales, respectively. These product mix improvements were partially offset by lower service revenues as a percentage of total revenue during the nine months ended June 29, 2007 as compared to the nine months ended June 30, 2006.

· Gross margins recognized on shipment of our RVP 300plus systems increased by 7% due to lower manufacturing costs which more than offset lower average selling prices.

· The ALD Celsior system achieved significantly higher gross margins than its predecessor, the ALD Pantheon system.

· Gross margins recognized on shipment of our PEC systems that we acquired in our merger with Trikon in December 2005 increased by 4% during the nine months ended June 29, 2007 as compared to the nine months ended June 30, 2006. This was primarily due to purchase accounting adjustments related to inventory that we acquired in our merger with Trikon in December 2005.

· Gross margins recognized on acceptance of our systems increased by 16% primarily due to lower costs deferred at shipment on the RVP 300plus system contributed by lower manufacturing costs and increased PEC systems acceptance related gross margin.

Research and Development

Research and development expense consists of employment costs attributable to employees, consultants and contractors who primarily spend their time on system design, engineering and process development; materials and supplies used in system prototyping, including wafers, chemicals and process gases; depreciation and amortization expense allocable to research and development activities and facilities; direct charges for repairs to research equipment and laboratories; and costs of outside services for facilities, process engineering support and wafer analytical services. We also include in research and development expenses associated with the preparation, filing and prosecution of patents and other intellectual property.

	Quarter Ended						Nine Months Ended
	June 29, 2007			June 30, 2006			June 29, 2007			June 30, 2006
	(dollars in thousands)
Research and development	$	8,101		$	6,547		$	23,815		$	17,743
Percent of net sales	14		%	15		%	13		%	17		%

The increase in research and development costs of approximately $1.6 million, or 24%, during the quarter ended June 29, 2007 over the quarter ended June 30, 2006 was primarily due to increased prototype supply spending, salaries and benefits, stock based compensation and demonstration lab costs. These increases were related to ongoing research and development activities in support of the PEC, ALD and thermal batch processing system lines. Lower patent related legal costs and other outside services costs partially offset these increases.

During the nine months ended June 29, 2007, research and development costs increased by approximately $6.1 million, or 34%, as compared to the nine months ended June 30, 2006. The increase in research and development costs was due to the following:

· Increased costs related to ongoing research and development of PEC related products totaling $4.1 million. Approximately $1.2 million of the increase was related to prototype materials supporting a next generation product development project. In addition, the nine months ended June 30, 2006 only included costs incurred subsequent to the December 2005 merger with Trikon.

· Increased salaries and benefits, stock based compensation and development lab related costs, including facilities, supplies, chemicals and gases, and depreciation, partially offset by lower patent related legal costs, made up the majority of a $1.9 million increase in costs related to our ongoing ALD and thermal batch processing research and development efforts.

Selling, General and Administrative

Selling, general and administrative expense consists of employment costs attributable to employees, consultants and contractors who primarily spend their time on sales, marketing and order administration and

corporate administrative services; occupancy costs attributable to employees performing these functions; sales commissions; promotional marketing expenses; and legal and accounting expenses.

	Quarter Ended						Nine Months Ended
	June 29, 2007			June 30, 2006			June 29, 2007			June 30, 2006
	(dollars in thousands)
Selling, general and administrative	$	8,217		$	6,795		$	24,846		$	18,392
Percent of net sales	15		%	16		%	14		%	17		%

The increase in selling, general and administrative expense of approximately $1.4 million, or 21%, in the quarter ended June 29, 2007 as compared to the quarter ended June 30, 2006 was primarily due to approximately $0.6 million of increases in salaries, stock compensation expense and commissions, $0.3 million in increased cost related to international infrastructure build-up, a $0.2 million increase in outside service costs related primarily to the upgrade of our Oracle system and preparing to implement the requirements of Sarbanes-Oxley and approximately $0.5 million related to foreign currency exchange transactions. These increases were partially offset by lower legal and accounting costs and lower licensing and franchise tax fees totaling approximately $0.5 million.

Selling, general and administrative expenses increased by approximately $6.5 million, or 35%, during the nine months ended June 29, 2007 as compared to the nine months ended June 30, 2006. The increase was related primarily to increased salaries and benefits, stock compensation expense and commission of approximately $2.4 million, increased legal and accounting costs of $0.6 million, increases in export, licensing and franchise tax fees of $0.2 million, increased costs related to international infrastructure build-up of $0.7 million and approximately $0.5 million increase in fees for outside services related primarily to the Oracle upgrade and preparing to implement the requirements of Sarbanes-Oxley. A lower net gain on foreign currency transaction and an increase in allocated facility costs of $0.4 million and $0.3 million, respectively, also contributed to the increase. In addition, $0.8 million in increased selling, general and administrative costs was due to the inclusion of the merged Trikon subsidiary for only a portion of the nine-month period ended June 30, 2006 subsequent to our December 2005 merger transaction with Trikon.

In-process Research and Development

	Quarter Ended						Nine Months Ended
	June 29, 2007			June 30, 2006			June 29, 2007			June 30, 2006
	(dollars in thousands)
In-process research and development	$	—		$	(29	)	$	—		$	373
Percent of net sales	0		%	0		%	0		%	0		%

In-process research and development costs incurred during the nine months ended June 30, 2006 were the result of our merger transaction with Trikon in December 2005 and represent the write-off of technology that had not reached technological feasibility at the time of the merger.

Interest Expense

	Quarter Ended						Nine Months Ended
	June 29, 2007			June 30, 2006			June 29, 2007			June 30, 2006
	(dollars in thousands)
Interest expense	$	663		$	1,424		$	2,978		$	4,166
Percent of net sales	1		%	3		%	2		%	4		%

Our interest expense for the quarters and nine months ended June 29, 2007 and June 30, 2006 consisted primarily of interest incurred on our revolving line of credit, another line of credit, which is secured by a mortgage on our land and buildings, amortization of debt issuance costs and amortization of the fair value of the warrants issued to affiliates of VantagePoint Venture Partners, or VPVP, in consideration for VPVP’s agreement to guarantee a portion of Aviza’s revolving line of credit. In addition, dividends that were accrued on our mandatorily redeemable Series B and B-1 preferred stock were charged to interest during the quarter and nine months ended June 30, 2006.

During April 2007, we entered into a new credit agreement with a syndication of banks to refinance our existing bank loans and mortgage note payable. The new credit facility includes a revolving line of credit, an equipment term loan and commercial real estate loan.

Aggregate borrowings under our new revolving line of credit, equipment term loan and commercial real estate loan were $31.7 million at June 29, 2007. Aggregate borrowings under the prior credit facilities were $37.1 million at June 30, 2006.

During the quarter ended June 29, 2007, interest expense decreased by approximately $0.8 million from the quarter ended June 30, 2006 due to a combination of lower average borrowings and lower interest rates on our new credit facility. In addition lower debt issuance costs and warrant amortization contributed to lower interest expense for the quarter.

Interest expense during the nine months ended June 29, 2007 was approximately $1.2 million less than the nine months ended June 30, 2006 due primarily to the lower interest rate on our new credit facilities, lower debt issuance and warrant amortization costs and no dividends being recorded on our mandatorily redeemable Series B and B-1 preferred stock during the nine months ended June 29, 2007, as these shares were converted to our common stock in April 2006. Dividends recorded during the nine months ended June 30, 2006 were approximately $0.5 million.

Other Income (Expense)-net

	Quarter Ended						Nine Months Ended
	June 29, 2007			June 30, 2006			June 29, 2007			June 30, 2006
	(dollars in thousands)
Other income (expense)-net	$	(449	)	$	16		$	(425	)	$	(129	)
Percent of net sales	0		%	0		%	0		%	0		%

Other income (expense)-net during the quarter and nine months ended consisted primarily of the write off of approximately $461,000 in costs related to our prior financing agreements, which were refinanced through a different lender during the quarter ended June 29, 2007.

Income Taxes

Because we have incurred significant operating losses, we have recorded no material federal or state income taxes. We recorded income taxes relating to certain profitable international subsidiaries.

Liquidity and Capital Resources

At June 29, 2007, our cash and cash equivalents were $22.0 million as compared to $10.7 million at September 29, 2006. The net increase in cash and cash equivalents was primarily due to the following:

· Proceeds from our public offering of 4,600,000 shares of our commons stock at $6.50 per share. Cash received from this offering net of direct offering costs was approximately $27.5 million;

· Reductions in borrowings of approximately $4.2 million;

· Cash used in operations of approximately $4.5 million primarily related to increased accounts receivable and reductions in accounts payable, which more than offset net income adjusted for non-cash reconciling items and reductions in inventories; and

· Cash used in our acquisition of approximately $7.5 million in plant and equipment related primarily to our development and demonstration laboratories.

During April 2007, we entered into a new credit agreement with a syndication of banks to refinance our existing bank loan and mortgage note payable. The new credit facility includes a revolving line of credit secured by accounts receivable and inventory, an equipment term loan 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 a two-year term. The equipment term loan has a three-year amortization period with monthly payments of principal and accrued interest and is secured by a lien on the equipment of the Company. Maximum borrowings under this provision of the facility are $4,000,000, which we borrowed during the quarter ended June 29, 2007. The real estate portion of the facility has a four-year term and is secured by a deed of trust on our Scotts Valley facility. Monthly payments of principal and accrued interest will be based on a 20-year amortization period of the loan principal. Maximum borrowing under the real estate portion of the facility is $11,935,000, which we borrowed during the quarter ended June 29, 2007. As principal is paid down under the equipment and real estate portions of the facility, additional borrowing availability will be created under the revolving portion of the credit facility so that we have a maximum of $55,000,000 in borrowing availability at all times under the agreement. The weighted-average interest rate for the quarter ended and at June 29, 2007 for these loans was 7.75%. The credit agreement contains certain financial and operating covenants. As of June 29, 2007, we were in compliance with these financial and operating covenants. Loan commitment fees and other direct expenses totaling $302,000 incurred to secure the facility, will be amortized over the life of the loans.

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

Cash Flows from Operating Activities

Cash used in operating activities for the nine months ended June 29, 2007 was $4.5 million. Net income during the nine months ended June 29, 2007 of approximately $3.0 million, together with non-cash expense adjustments (primarily depreciation, amortization, stock-based compensation, bad debt and net operating loss utilization) aggregating $6.0 million, provided cash from operating activities to offset cash used to fund changes in operating assets and liabilities. Net changes in operating assets and liabilities during the nine months ended June 29, 2007 used approximately $13.5 million of cash. Cash used to fund increases in accounts receivable and a reduction in accounts payable was $13.9 million and $11.2 million, respectively. These uses of cash were partially offset by cash generated through reductions in inventory, decreases in prepaid and other assets and increases in warranty liability and accrued liabilities of approximately $8.8 million, $0.1 million, $1.1 million and $1.6 million, respectively.

Cash Flows from Investing Activities

Cash used in investing activities for the nine months ended June 29, 2007 was $7.5 million. Investing activities during the nine months ended June 29, 2007 consisted of purchasing equipment primarily used in our development and demonstration laboratories.

Cash Flows from Financing Activities

Net cash generated by financing activities for the nine months ended June 29, 2007 was $23.5 million. Net proceeds from our public offering of 4,600,000 shares of our common stock and exercise of stock options provided $27.7 million in cash. Reduction of our aggregate borrowings partially offset proceeds from the issuance of our common stock.

Off-Balance Sheet Arrangements

As of June 29, 2007, we had no off-balance sheet arrangements as defined in Item 303(a)(4) of Regulation S-K promulgated by the Securities and Exchange Commission.

Contractual Obligations

Other than operating leases for certain equipment and real assets, we have no significant off-balance sheet transactions or unconditional purchase obligations. As of June 29, 2007, our cash obligations and commitments relating to our debt obligations and lease payments were as follows:

	Payments due by period
	Total		Less Than One Year		One to Three Years		Three to Five Years		Greater than Five Years
	(in thousands)
Bank loan (Revolving line of Credit)	$	15,936	$	15,936	$	—	$	—	$	—
Equipment note payable	3,905		1,239		2,666		—		—
Mortgage note payable	11,846		257		583		11,006		—
Other notes payable	818		454		364		—		—
Operating lease obligations	6,232		2,772		3,192		109		159
Capital lease obligations	742		322		394		26		—

Payments due by period include interest expense on all debt and capital lease obligations with fixed interest rates. This excludes interest on our revolving line of credit, equipment and mortgage notes payable.

Recent Accounting Pronouncements

FSP is effective immediately for registration payment arrangements and financial instruments entered into or modified after the FSP’s issuance date. For previously issued registration payment arrangements and financial instruments subject to those arrangements, the FSP is effective for financial statements issued for fiscal years beginning after December 15, 2006. The adoption of this FSP did not have a significant impact on our financial condition or results of operations.

In June 2006, the FASB issued FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes (“FIN No. 48”), which clarifies the accounting for uncertainty in income taxes recognized in the financial statements in accordance with SFAS No. 109, Accounting For Income Taxes (“SFAS 109”). The interpretation prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. The interpretation also provides guidance in derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. FIN No. 48 requires that tax positions previously held which no longer meet the more-likely-than-not recognition threshold should be derecognized in the first financial reporting period in which the threshold is no longer met. Use of a valuation allowance as per SFAS 109, is no longer an appropriate substitute for the derecognition of a tax position. The interpretation is effective for fiscal years beginning after December 15, 2006. We have not yet evaluated the impact of the adoption of FIN No. 48 on our financial position, results of operations or cash flows.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

ITEM 4. CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

We maintain disclosure controls and procedures that are designed with the objective of providing reasonable assurance that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating our disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and our management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

As of June 29, 2007, the end of the period covered by this report, based on the evaluation of our Chief Executive Officer and Chief Financial Officer of the effectiveness of the design and operation of our disclosure controls and procedures, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective.

Changes in Internal Control Over Financial Reporting

There was no change in our internal control over financial reporting during the three months ended June 29, 2007 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

On April 11, 2006, IPS, Ltd. filed a lawsuit against us in the United States District Court for the Central District of California. The complaint alleges that we improperly used IPS’s confidential information to develop our Celsior single-wafer atomic layer deposition technology. We have filed an answer denying the claim. The complaint is for unspecified monetary damages, injunctive relief and an order rescinding the settlement and distributor agreements that IPS and Aviza entered into in May 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 in October 2003. We believe that we have complied with the settlement and distributor agreements and that the allegations contained in IPS’s complaint are without merit. We intend to contest the lawsuit vigorously. In May 2007, Aviza successfully moved the dispute into arbitration. Discovery commenced in June 2007.

ITEM 1A. RISK FACTORS

There are no material changes to the risk factors described in the section entitled “Risk Factors” in Item 1A in Part II of our Quarterly Report on Form 10-Q for the fiscal quarter ended March 30, 2007, except for the deletion of the risk factor entitled, “We are subject to export regulations and could be required to pay substantial fines and penalties if we fail to comply with these regulations.”

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

For the nine months ended June 29, 2007, approximately 35% of our net sales were attributable to Inotera Memories Inc. and approximately 69% of our sales were attributable to our top 10 customers. For our fiscal year ended September 29, 2006, approximately 35% of our net sales were attributable to two customers and approximately 74% of our net sales were attributable to our 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 and approximately 84% of our net sales were attributable to our top 10 customers. Inotera Memories, Inc., Infineon Technologies AG and Winbond Electronics Corp. accounted for 43%, 15% and 11% of our net sales in fiscal 2005, respectively. We expect to continue to receive a substantial portion of our net sales from a small number of customers for the foreseeable future. If our largest customers delay, cancel or do not place orders, we may not be able to replace those orders with new orders. As we expect to configure our systems to customer specifications, changing, rescheduling or canceling orders may result in significant non-recoverable costs. The loss of, or a significant reduction in, orders from any of our major customers could seriously harm our business.

The semiconductor industry is highly cyclical and unpredictable.

Our business depends upon the capital expenditures of semiconductor manufacturers, which in turn depend on the current anticipated market demand for ICs and, in particular, the DRAM segment of the semiconductor industry, which accounted for a majority of our net sales for nine months ended June 29, 2007 and the fiscal year ended September 29, 2006. The semiconductor industry has historically been cyclical due to sudden changes in manufacturing capacity. These changes in capacity have affected the timing and amounts of our customers’ capital

equipment purchases and investments in technology, and continue to affect our orders, net sales, gross margins and results of operations.

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

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

We achieved net income of approximately $3.0 million for the nine months ended June 29, 2007. However, we incurred net losses of $14.7 million, $16.0 million and $19.7 million for the fiscal years ended September 29, 2006 (fiscal 2006), September 30, 2005 (fiscal 2005) and the fiscal period from October 7, 2003 through September 24, 2004 (fiscal 2004), respectively. As a result, we will need to continue to increase our sales and reduce our costs in order to sustain profitability. However, we may never again generate sufficient net sales or reduce our costs sufficiently to achieve profitability. Even if we again achieve profitability, we may not have sustainable profitability on a quarterly or annual basis in the future. If we are unable to sustain profitability, we may be forced to implement expense reduction measures, including selling assets, consolidating operations, reducing our workforce or delaying, canceling or reducing certain system development, marketing or other operational programs, any of which could harm our business.

Claims or litigation regarding our intellectual property rights could seriously harm our business or require us to incur significant costs.

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

· lose or forfeit our proprietary rights;

· stop manufacturing or selling systems that incorporate the challenged intellectual property;

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

· pay damages and attorneys’ fees in some circumstances; or

· redesign those systems that use the challenged intellectual property.

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

assets that we acquired from ASML in October 2003. We intend to contest the lawsuit vigorously. In May 2007, Aviza successfully moved the dispute into arbitration. Discovery commenced in June 2007.

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

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

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

· develop and market new systems and technologies;

· improve our existing systems and technologies;

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

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

· achieve cost efficiencies across our system offerings;

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

· lower our customers’ cost of ownership.

We may not be able to forecast or respond accurately to the technological trends in the semiconductor industry or respond to specific product announcements by competitors that may be developing technologies and systems that are more effective or that achieve more widespread acceptance than ours. We also may not be able to develop strategic alliances with equipment and materials suppliers to the semiconductor industry to produce next-generation films and processes. In addition, we may incur substantial costs to ensure the functionality and reliability of our current and future systems. If our newly developed systems are unreliable or do not meet our customers’ expectations, then we could experience reduced orders, higher manufacturing costs, delays in collecting accounts receivable or additional service and warranty expenses. Our failure to meet our customers’ technology needs and other demands will impair our ability to compete effectively, which in turn could harm our business, financial condition and results of operations.

We are substantially leveraged, which could limit our ability to adjust our business to respond to competitive pressures and to obtain sufficient funds to satisfy our future manufacturing capacity and research and development needs.

We have significant indebtedness. At June 29, 2007, we had total debt of approximately $33.2 million. Our indebtedness could have serious consequences for our business, including limiting our ability to obtain additional financing in the future for working capital, capital expenditures, acquisitions and general corporate or other purposes.

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

We may need to raise capital in order to support our operations, which capital may not be available on terms acceptable to us, or at all.

At June 29, 2007, we had cash and cash equivalents of approximately $22.0 million and short-term and long term debt of approximately $33.2 million. We may need to raise capital from the sale of debt or equity securities or other sources in order to support our operations. We may not be able to obtain this capital on acceptable terms, or at all. If we issue additional equity or convertible debt securities to raise capital, your percentage ownership of Aviza will be reduced, and you may experience significant dilution. In addition, new investors in Aviza may demand rights, preferences or privileges that differ from, or are senior to, yours, including warrants in addition to the securities purchased and protection against future dilutive transactions.

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

Our systems are technologically complex. Our prospective customers generally must commit significant resources to test and evaluate our systems and to install and integrate them into their manufacturing lines. In addition, our customers often require a significant number of system presentations and demonstrations, in some instances evaluating equipment on site, before reaching a sufficient level of confidence in our systems’ performance and compatibility with their requirements to place an order. As a result, our sales process is often subject to delays associated with lengthy approval processes that typically accompany the design and testing of new systems. Our sales cycles often have lasted for many months or even 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 quarter because of the timing of our customers’ purchase decisions. All of these factors could cause our results of operations to fluctuate from period to period.

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

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

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

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

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

Our results of operations may suffer if we fail to manage our inventory effectively.

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

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

We face competition or potential competition from many companies that have greater resources than we have. If we are unable to compete effectively with these companies, our market share may decline and our business could be harmed. Virtually all of our principal competitors are substantially larger than we are and most of them have broader product lines than we do. These competitors have well-established reputations in the markets in which we compete, greater experience with high-volume manufacturing, broader name recognition, substantially larger customer bases and substantially greater financial, technical, manufacturing and marketing resources than we do. We also face potential competition from new market entrants, including established manufacturers in other segments of the semiconductor capital equipment market who may decide to diversify and develop and market products that compete with our system offerings.

Semiconductor manufacturers are typically loyal to their existing semiconductor equipment suppliers, which may make it difficult for us to obtain new customers.

Because semiconductor manufacturers must make substantial investments to install and integrate capital equipment into their semiconductor fabrication facilities, they tend to choose semiconductor equipment manufacturers based on established relationships, product compatibility and proven system performance.

Once a semiconductor manufacturer selects a particular vendor’s capital equipment, the manufacturer generally relies for a significant period of time upon the equipment from this vendor of choice for the specific production line application. To do otherwise creates risk for the manufacturer because manufacturing a semiconductor requires many process steps and a fabrication facility will contain many different types of machines that must work cohesively to produce products that meet the customers’ specifications. If any piece of equipment fails to perform as expected, the customer could incur significant costs related to defective products, production line downtime or low production yields.

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

A semiconductor manufacturer frequently will attempt to consolidate its other capital equipment requirements with the same vendor. As a result, we may face narrow windows of opportunity to be selected as the “vendor of choice” by potential new customers. It may be difficult for us to sell to a particular customer for a significant period of time once that customer selects a competitor’s product, and we may not be successful in obtaining broader acceptance of our systems and technology. If we are not able to achieve broader market acceptance of our systems and technology, it could harm our business, financial condition and results of operations.

We depend upon sole suppliers for certain key components.

Substantially all of our net sales have come from the sale of systems that contain key components that are available only from a single source or limited sources. As a result, we depend on a number of sole suppliers for key components used in the manufacturing of our systems. If we are unable to obtain timely delivery of sufficient quantities of these components, we will be unable to manufacture systems to meet customer demand on a timely basis. Most significantly, certain systems are designed around automation modules supplied by sole suppliers. Due to the high cost of these modules, we keep very few in inventory. Although we have never been unable to manufacture or ship a system 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, delivery of certain systems could be delayed. If a sole supplier is unable to deliver any such components for a prolonged period of time, we may have to redesign certain systems. Redesigning systems could take significant time and be expensive, and we cannot assure you that we will be able to do so, or that customers will adopt the redesigned systems.

Warranty claims in excess of our estimates could seriously harm our business.

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

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

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

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

Our operating expense levels are based in significant part on our headcount, which generally is driven by our long-term net sales goals. For a variety of reasons, particularly the high 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 to compensate for any unexpected shortfalls in net sales, which could harm our results of operations.

Our high spending levels on research and development and our need to maintain a high level of customer service and support could harm our results of operations.

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

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

We cannot assure you that we will have sufficient resources to make a high level of investment in research and development, marketing and customer service while controlling our operating expenses or that our systems will be viewed as competitive as a result of technological advances by our competitors or changes in semiconductor

processing technology. Any such competitive pressures may require us to reduce prices significantly or result in lost customer orders, which could harm our business, financial condition and results of operations.

A disruption of our manufacturing operations could harm our business.

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

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

We currently outsource certain manufacturing and spare parts logistics functions to third-party service providers, and we may outsource more of those functions in the future. While we expect to achieve operational flexibility and cost savings as a result of this outsourcing, outsourcing has a number of risks and reduces our control over the performance of the outsourced functions. Significant performance problems by these third-party service providers could result in cost overruns, delayed deliveries, shortages, quality issues or other problems that could result in significant customer dissatisfaction and could harm our business, financial condition and results of operations.

If for any reason one or more of these third-party service providers becomes unable or unwilling to continue to provide services of acceptable quality, at acceptable costs and in a timely manner, our ability to deliver our systems or spare parts to our customers could be severely impaired. We would quickly need to identify and qualify substitute service providers or increase our internal capacity, which could be expensive, time consuming and difficult, and could result in unforeseen operations problems. Substitute service providers might not be available or, if available, might be unwilling or unable to offer services on acceptable terms.

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

Our requirements currently represent and are expected to continue to represent a small portion of the total capacities of our third-party service providers, and they may preferentially allocate capacity to other customers, even during periods of high demand for our systems. In addition, these third-party service providers could suffer financial difficulties or disruptions in their operations due to causes beyond our control.

The semiconductor industry is global and has expanded within Asia. We have penetrated this market with some of our systems. If we are unable to continue to penetrate this market with those systems and penetrate this market with our other systems, our business could be harmed.

The percentage of worldwide semiconductor production that is based in Asia is growing more rapidly than in other regions. Although we derived approximately 62% of our net sales for the nine months ended June 29, 2007 and 64%, 65% and 46% of our net sales for fiscal 2006, 2005 and 2004, respectively, from our sales to customers located in the Asia Pacific region, our brand recognition in the region is limited. In order to grow our business, we need to penetrate the region with the addition of new customers, new systems and the expansion of our relationships with our existing customers. We have traditionally sold our systems primarily through our direct sales force. Although we have a direct sales force and local representatives in the Asia Pacific region, we cannot assure you that we will be able to continue penetrating markets in this region. Our failure to continue to penetrate these markets, or failure to attract the additional personnel necessary to service new and existing customers, may harm our competitive position and our future business prospects.

If we are unable to hire and retain a sufficient number of qualified personnel, our results of operations could be negatively affected.

Our success depends in part upon our ability to attract and retain qualified management, technical, sales and support personnel for our operations on a worldwide basis. We believe that our success is particularly dependent on the contributions of the principal members of our management, operations and engineering staff, including Jerauld J. Cutini, our President and Chief Executive Officer, Patrick C. O’Connor, our Executive Vice President and Chief Financial Officer, and John Macneil, our Executive Vice President and Chief Technology Officer. We do not have long-term employment contracts with these or any of our other key personnel, and their knowledge of our business and industry would be extremely difficult for us to replace. Competition for qualified personnel is intense, particularly in the San Francisco Bay Area, where our headquarters is located, and we cannot assure you that we will be able to continue to attract and retain qualified personnel. Our results of operations could be negatively affected by our loss of key executives or employees or our inability to attract and retain skilled executives and employees.

Changes in accounting standards for equity-based compensation may adversely affect our results of operations and our ability to attract and retain employees.

Our adoption of SFAS No. 123(R) required us to expense all equity-based compensation that we provide to our employees and directors beginning with our fiscal quarter ended December 30, 2005. The environment for skilled employees that are knowledgeable about our systems and services is a competitive one, and we believe that equity-based compensation is an important part of the overall compensation that we offer to attract and retain such employees. SFAS No. 123(R) has adversely affected and will continue to adversely affect our results of operations. If we decide to decrease the amounts of equity-based compensation that we offer to our current and prospective employees on account of 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 our inability to protect our intellectual property rights from challenges by third parties.

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

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

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

Our efforts to protect our intellectual property may be less effective in some foreign countries where intellectual property rights are not as well protected as in the United States.

We derived a significant portion of our net sales for the nine months ended June 29, 2007 and fiscal 2006 from sales in foreign countries, including certain countries in Asia such as Singapore, Taiwan, Japan, Malaysia, China and Korea. The laws of some foreign countries do not protect proprietary rights to as great an extent as do the laws of the United States, and many U.S. companies have encountered substantial problems in protecting their proprietary rights against infringement in such countries, some of which are countries in which we have sold and in which we expect to continue to sell systems. For example, Taiwan is not a signatory to the Patent Cooperation Treaty, which is designed to specify rules and methods for defending intellectual property internationally. In Taiwan, the publication of a patent prior to its filing would invalidate the ability of a company to obtain a patent. There is a risk that our means of protecting our proprietary rights may not be adequate in some foreign countries.

Our competitors in these countries may independently develop similar technology or duplicate our systems. If we fail to protect our intellectual property adequately in those countries, it would be easier for our competitors to sell competing products in those countries.

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

Section 404 of the Sarbanes-Oxley Act of 2002, or Section 404, requires that beginning with our Annual Report on Form 10- K for our fiscal year ending in September 2008, we must furnish a report on our internal control over financial reporting. This report will contain an assessment by our management of the effectiveness of our internal control over financial reporting. Beginning with our Annual Report on Form 10-K for our fiscal year ending in September 2009, this report will also contain an opinion by our independent registered public accounting firm as to the effectiveness of our internal control over financial reporting.

We identified material weaknesses in our internal control over financial reporting as of the end of fiscal 2004, and Trikon Technologies, Inc., or Trikon, with which we completed our merger transaction in December 2005, restated its financial statements in May 2005 as a result of Trikon’s identification of errors which resulted in material weaknesses in its internal control over financial reporting. As a result of our and Trikon’s identified material weaknesses, we face a significant challenge in ensuring our operations are designed in a manner that is consistent with the framework of internal control established by the Committee of Sponsoring Organizations of the Treadway Commission.

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

· any material weaknesses in our internal control over financial reporting exist;

· we fail to evaluate key controls in a timely fashion; or

· we fail to remediate assessed deficiencies.

The process of implementing our internal control over financial reporting and complying with Section 404 will be expensive and time consuming, and will require significant effort by management. We cannot assure you that we will implement and maintain effective internal control over financial reporting. If management asserts that our internal control over financial reporting is ineffective or if our independent registered public accounting firm expresses an adverse opinion on the effectiveness of our internal control over financial reporting the value of your investment in Aviza could decline. In addition, a delay in complying with Section 404 may subject us to a variety of administrative actions, including ineligibility for short-form resale registration, action by the SEC, the suspension or delisting of our common stock from the Nasdaq Global Market and the inability of registered broker-dealers to make a market in our common stock, which could further reduce our stock price and could harm our business.

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

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

Our results of operations could be negatively affected by currency fluctuations.

Although our net sales are generally denominated 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 Kingdom and most of the operating expenses attributable to those operations are incurred in British pounds. As a result, a significant portion of our costs are subject to currency fluctuations. Accordingly, if the British pound increases in value against the U.S. dollar, our operating expenses as a percentage of our net sales will increase and our gross margins will decline. In addition, our sales in Japan and other foreign service sales are denominated in local currency. As a result, fluctuations in those local currencies could also have an impact on our results of operations.

Because we have significant operations outside of the United States, we are subject to political, economic and other international conditions that could increase our operating expenses and the regulation of our systems and make it more difficult for us to maintain operating and financial controls.

We have manufacturing facilities in Newport, South Wales, U.K., and sales and service offices in many other countries. In addition, approximately 62% of our net sales for the nine months ended June 29, 2007 and 64% of our net sales for fiscal 2006 were derived from sales in the Asia Pacific region. In recent years, Asian economies have been highly volatile and recessionary, resulting in significant fluctuations in local currencies and other instabilities. Instabilities in Asian economies may continue and recur in the future or instability could occur in other foreign economies, any of which could harm our business, financial condition and results of operations.

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

· longer sales cycles;

· multiple, conflicting and changing governmental laws and regulations;

· protectionist laws and business practices that favor local companies;

· price and currency exchange rates and controls;

· difficulties in collecting accounts receivable;

· travel and transportation difficulties resulting from actual or perceived health risks, such as Severe Acute Respiratory Syndrome and Avian Influenza, commonly referred to as SARS and Bird Flu, respectively; and

· political and economic instability.

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

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

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

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

We own and operate a facility located in Scotts Valley, California, or the Scotts Valley Site, which is currently subject to an Administrative Order on Consent, or Consent Order, dated as of July 16, 1991 entered into by Watkins-Johnson Company (now WJ Communications, Inc.), a prior owner of the Scotts Valley Site, and the United States Environmental Protection Agency. The Scotts Valley Site is listed on the National Priorities List as the “Watkins-Johnson Superfund Site” pursuant to the Comprehensive Environmental Response Compensation and Liability Act. The contamination on the Scotts Valley Site includes chlorinated solvents in soil and groundwater. The site is being remediated under the terms of an agreement under which an environmental consultant, ARCADIS Geraghty & Miller International, has agreed to complete the work, and an insurance policy is in place to cover certain remediation costs. If, however, ARCADIS, WJ Communications and the insurance provider fail to fulfill their obligations, we could be subject to substantial fines and be forced to suspend production, alter manufacturing processes or cease business operations, any of which could harm our business, financial condition or results of operations.

Our ability to use net operating losses to offset future taxable income is subject to limitations.

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

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

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

Business interruptions could adversely affect our business.

Our operations are vulnerable to interruption by fire, earthquake, power loss, telecommunications failure and other events beyond our control. A disaster could severely damage our ability to deliver our systems to our customers. In order to manufacture our systems, we will need to maintain and protect our manufacturing facilities and computer systems, many of which will be located in or near our headquarters in Scotts Valley, California. Scotts Valley is located near a known earthquake fault zone. Although our facilities are designed to be fault-tolerant, our systems are susceptible to damage from fire, floods, earthquakes, power loss, telecommunications failures and similar events. Although we maintain general business insurance against interruptions such as fires and floods, we cannot assure you that the amount of coverage will be adequate in any particular case.

Any acquisitions we may make could disrupt business and harm our financial condition.

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

· diversion of management’s attention from other operational matters;

· inability to complete acquisitions as anticipated or at all;

· inability to realize synergies expected to result from an acquisition;

· failure to commercialize purchased technologies;

· ineffectiveness of an acquired company’s internal controls;

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

· unknown and undisclosed commitments or liabilities;

· failure to integrate and retain key employees; and

· ineffective integration of operations.

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

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

At June 29, 2007, affiliates of VantagePoint 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% and 15.8%, respectively, of our outstanding common stock. VantagePoint and CDPQ exercise significant influence over our operations, business strategy and the outcome of votes on all matters requiring stockholder approval, including the approval of significant corporate transactions such as mergers or other business combinations. VantagePoint or CDPQ may have interests that differ from the interests of our other stockholders. This concentration of ownership may also have the effect of delaying or preventing a change of control of Aviza or discouraging others from making tender offers for shares of our common stock, which could prevent our other stockholders from receiving a premium for their shares.

The price of our common stock has been and may continue to be volatile, which may lead to losses by investors or to securities litigation.

The market price of our common stock has been and may continue to be volatile, and our stock price may decline in the future. For example, for the period from December 2, 2005, the first day that our common stock was publicly traded, through August 7, 2007, the closing price range of our common stock was $3.66 to $8.74 per share.

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

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

None.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None

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.

10.3		Second Amended and Restated 2005 Stock Plan, incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K filed by the registrant with the Commission on May 15, 2007.

10.4		Amendment No. 2 to the 2003 Equity Incentive Plan of Aviza, Inc., incorporated by reference to Exhibit 10.2 to the Current Report on Form 8-K filed by the registrant with the Commission on May 15, 2007.

10.5		Amendment No. 2 to the 2004 Equity Incentive Plan of Trikon Technologies, Inc., incorporated by reference to Exhibit 10.3 to the Current Report on Form 8-K filed by the registrant with the Commission on May 15, 2007.

10.6		Purchase Agreement and Joint and Mutual Escrow Instructions, dated as of July 9, 2007, between Aviza Technology, Inc., and Morley Bros., LLC., incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K filed by the registrant with the Commission on July 13, 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.

SIGNATURES

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

	Aviza Technology, Inc.
	(Registrant)

Dated: August 13, 2007

	By:		/s/ PATRICK C. O’CONNOR
		Patrick C. O’Connor Executive Vice President and Chief Financial Officer (Principal Financial and Accounting Officer)

EXHIBIT INDEX

Exhibit Number		Description
3.1		Amended and Restated Certificate of Incorporation of Aviza Technology, Inc., incorporated by reference to Exhibit 3.1 to the Annual Report on Form 10-K filed by the registrant with the Commission on December 29, 2005.

3.2		Amended and Restated Bylaws of Aviza Technology, Inc., incorporated by reference to Exhibit 3.2 to the Annual Report on Form 10-K filed by the registrant with the Commission on December 29, 2005.

4.1		Specimen certificate of common stock of Aviza Technology, Inc., incorporated by reference to Exhibit 4.1 to the Annual Report on Form 10-K filed by the registrant with the Commission on December 29, 2005.

10.1		Amendment No. 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.

10.3		Second Amended and Restated 2005 Stock Plan, incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K filed by the registrant with the Commission on May 15, 2007.

10.4		Amendment No. 2 to the 2003 Equity Incentive Plan of Aviza, Inc., incorporated by reference to Exhibit 10.2 to the Current Report on Form 8-K filed by the registrant with the Commission on May 15, 2007.

10.5		Amendment No. 2 to the 2004 Equity Incentive Plan of Trikon Technologies, Inc., incorporated by reference to Exhibit 10.3 to the Current Report on Form 8-K filed by the registrant with the Commission on May 15, 2007.

10.6		Purchase Agreement and Joint and Mutual Escrow Instructions, dated as of July 9, 2007, between Aviza Technology, Inc., and Morley Bros., LLC., incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K filed by the registrant with the Commission on July 13, 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.