Quarterly Report

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 (changed to AVZAQ on June 19, 2009).”  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.

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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.

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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.

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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:

The following table summarizes our stock option activity under the stock plans during the quarter and nine months ended June 29, 2007:

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.

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

The options outstanding and exercisable at June 29, 2007 were in the following exercise price ranges:

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.

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