Annual Report

ITEM 1.    Business

Company Overview

        We design, manufacture, sell and support advanced semiconductor capital equipment and process technologies for the global semiconductor industry and related markets. Our systems are used in a variety of segments of the semiconductor market, including advanced silicon processing for memory devices, advanced 3-D packaging and power integrated circuits, or ICs, for communications. We focus our efforts on designing systems that enable device manufacturers to meet today's challenging technological and manufacturing requirements. We offer both front-end-of-line and back-end-of-line systems and process technologies used for the aforementioned markets addressing critical thin film formation technologies, including atomic layer deposition, or ALD, physical vapor deposition, or PVD, chemical vapor deposition, or CVD, plasma etch, or Etch, 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 believe that these systems are installed at many of the world's semiconductor manufacturers, including a majority of the top 25 semiconductor manufacturers around the world. We sell our systems globally primarily through a direct sales force and in some instances through local independent sales representatives. Our global sales and support organization is focused on developing and nurturing long-term customer relationships. Our largest customers by net sales for our fiscal year ended September 28, 2007 were

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Inotera Memories, Inc., Nan Ya Technology Corp., Infineon Technologies AG (including Qimonda AG, formerly the DRAM division of Infineon Technologies AG), Semiconductor Manufacturing International Corporation and United Microelectronics Corporation.

Industry Overview

        Modern electronic devices are the fundamental building blocks used in all electronic systems, playing an important role in the proliferation of computing, communications and consumer electronics products. The market for semiconductor and related devices has expanded rapidly over recent decades as device manufacturers have produced ICs and other devices with increased functionality and increasingly smaller sizes at lower costs. VLSI Research Incorporated, or VLSI, reports that worldwide semiconductor sales are expected to reach $261.2 billion in 2007 and expects sales to reach $377.7 billion in 2012. Growth in the IC industry has been driven both by the development of new electronic products as well as an increase in the silicon content of applications for the automotive, consumer, communication and computing industries. As these electronic products have become more sophisticated, memory ICs in particular have experienced rapid growth as the need to support increased memory capacity in these products has increased. Memory ICs are available in many different types, including dynamic random access memory, or DRAM, and flash memory, to serve a variety of different memory requirements. According to VLSI, both DRAM and flash memory sales are projected to grow at a compound annual growth rate of more than 8.7% from 2007 through 2012.

        The design and manufacture of semiconductor devices involve a complex and capital-intensive multi-step process. This process involves different types of capital equipment used to manufacture, assemble and test these devices. For example, to build an IC, transistors are first created on a wafer, such as silicon, by performing a series of deposition, patterning and selective removal of unwanted layers. Interwoven within these steps are multiple thermal treatments to stabilize or activate various layers. These early fabrication process steps are typically called front-end-of-line processing. Following front-end-of-line processing, the transistors are microscopically wired together through the formation of interconnected metal layers and insulating dielectric materials, known as back-end-of-line processing. Each process step, which may be performed multiple times, is subject to a tightly controlled series of chemical, thermal and lithographic processes in order to yield a fully functional IC.

Industry Challenges

        Semiconductor designers and manufacturers are under increasing pressure to bring high-quality and increasingly complex devices to market faster and at lower cost. They must also continue to improve device performance while controlling or minimizing capital expenditures. This becomes more critical as cost-effective scaling presents significant challenges. As a result, device companies are beginning to rely heavily on non-scaling techniques such as new film materials and new device structures to deliver improved device performance. Capital equipment plays an important role in enabling device designers and manufacturers to lower their overall costs, get products to market quickly and improve the products' quality and reliability. As a direct result of the increasing pressure placed on designers and manufacturers to keep pace with Moore's Law, which predicts that for minimum component cost, the number of transistors on an IC doubles every 24 months, capital equipment suppliers are facing new challenges in meeting their needs.

        The key challenges that capital equipment manufacturers like Aviza must address include:

         New Materials —In order to keep pace with the International Technology Roadmap for Semiconductors, the semiconductor industry is faced with the need to develop and adopt an unprecedented number of new materials, as the physical properties of conventional materials are reaching limitations in their ability to provide improved performance. New materials such as high

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dielectric constant materials, or high-k dielectrics, and metal electrodes are required to increase device performance.

         Integrated Through Silicon Via, or TSV, Technologies vs. Advanced Packaging —The rapid adoption of advanced packaging techniques, which are commonly referred to as wafer level packaging, package-on-package, package-in-package or 3-D packaging, is fueled by the drive for continuous improvement in device performance and functionality in wireless, personal and consumer electronics such as mobile phones, MP3 players and radio frequency identification tags. In addition to the increasing demand for improved performance, IC designers and manufacturers have to deliver improved performance in a smaller overall package and with lower cost. The inherent physical constraints of traditional wire-bonding interconnect schemes create a practical limit on the ability to improve performance while simultaneously reducing size.

        The semiconductor industry continues to strive to meet the demands for improved performance in a smaller overall package at lower cost. Traditionally, this demand has been fueled by the industry's desire to keep pace with Moore's Law coupled with stacking dies one on top of the other and using traditional wire bonding techniques to accomplish the die-to-die and die-to-substrate connect. However, there are physical and performance (primarily resistance capacitance constant) limitations to being able to stack dies and still meet the input/output, or I/O, requirements with wire bonding techniques.

        To achieve higher I/O and lower cost performance, the industry is investing in alternative means of stacking dies and creating interconnect approaches that minimize or eliminate traditional wire bonding techniques, one of which is the use of TSV interconnect structures. According to TechSearch International, Inc., there are over 40 companies with TSV activities. This advancement of TSV activities is a means of keeping pace with Moore's Law. Research and development and pilot line programs are common in the integrated device manufacturing, foundry and packaging manufacturers. We believe that Aviza is one of a few semiconductor capital equipment suppliers that has all of the requisite technologies in our product portfolio to create TSVs.

         Lower Cost of Ownership —In order to improve their cost structure, device manufacturers demand processing platforms with lower total cost of ownership, which takes into account not only the initial purchase price but also throughput, yield, reliability, flexibility and other operating costs.

         Time-to-Market —Today's devices are characterized by rapid technological improvements and shorter product life cycles. These product life cycles are more accelerated for devices used in consumer electronics products such as mobile phones and digital cameras, given the constant innovation in the consumer electronics industry, which poses additional challenges for semiconductor manufacturers and capital equipment suppliers.

         Shrinking Device Features —As the semiconductor industry moves to 90-nanometer feature sizes and below, the device manufacturing process becomes significantly more complex, requiring more stringent manufacturing specifications and lower margins of error.

Our Solutions

        We deliver a broad range of semiconductor capital equipment and process technologies to serve the needs of a wide range of device manufacturers. In addition to providing the high product performance expected by our customers, we believe maintaining the quality standards of our organization and our worldwide service and support are important to meeting these needs. We believe our customers choose our products because of the following factors:

         Advanced Film Development and Process Technology —Our continued development of process technologies, such as our ALD systems, enables semiconductor manufacturers to use new materials necessary to manufacture and package next-generation devices. Our systems have been developed with

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proprietary technologies, such as our Across-Flow and Direct Liquid Injection technology, which enable the use of advanced materials.

         Low Cost of Ownership —Our systems are designed to improve the yield, throughput and utilization of semiconductor manufacturing facilities. Our systems offer integrated process technology, extendibility and optimized process flow to help IC makers achieve their overall cost-of-ownership and functionality objectives.

         Worldwide Customer Service and Support —Our goal is to provide our customers with global technical service, in-depth process engineering support and rapid delivery of our systems and parts. We provide customer support through our global service organization 24 hours per day, seven days per week. In addition, we have multiple parts depots around the world to support our installed base of systems.

         Focus on Customer Relationships and Strategic Alliance —We believe that our regular dialogue with our customers and our visibility of their technology roadmaps allow us to serve their needs effectively. We also work to develop strategic alliances with equipment and materials suppliers to the semiconductor industry to produce next-generation films and processes to keep pace with the International Technology Roadmap for Semiconductors.

Our Strategy

        Our objective is to be a leading provider of advanced capital equipment and process technologies to semiconductor manufacturers in our served markets. To achieve this objective, our strategy is comprised of the following elements:

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Provide our customers with a broad range of systems, such as our ALD, PVD, CVD, Etch and thermal processing systems, to address multiple film formation requirements;



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Expand our customer base in the Power, Micro-Electro-Mechanical systems and 3D interconnect markets with Etch, CVD and PVD systems;



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Further penetrate our existing customer base by seeking opportunities to sell our customers systems from our expanding portfolio of systems that they are not already purchasing from us;



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Expand our customer base in the DRAM, flash and logic markets with our ALD systems;



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Capitalize on our field service infrastructure in order to continue to understand our customers' current and future needs, while delivering a positive customer experience throughout the product life cycle; and



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Continue to drive cost-reduction initiatives, including the improvement of our global supply chain and reduction in materials costs.

Systems, Markets and Applications

Deposition

        Deposition involves the application of thin films in advanced device manufacturing. Chemical reactions form deposited films between gaseous reactants at an elevated temperature in the vicinity and on the surface of a wafer. Deposited films can be either crystalline or non-crystalline and can be either insulators or metals. Variations of deposition processes include ALD, PVD, CVD, plasma-enhanced chemical vapor deposition, or PECVD, atmospheric pressure chemical vapor deposition, or APCVD, and low pressure chemical vapor deposition, or LPCVD.

         Atomic Layer Deposition —The reduction in the size of devices continues to keep pace with Moore's Law, driving stringent requirements for the thickness control and repeatability of deposited films used in the manufacturing of devices. With decreasing geometries and increasing aspect ratios, we believe

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that ALD will replace some of the incumbent deposition techniques due to ALD's ability to achieve uniform thickness, which is commonly referred to as conformal step coverage, across the horizontal and vertical planes of the device structure. This method allows the deposition of a wide variety of dielectric and conductive films one atomic layer at a time for various sub-90 nanometer (nm) memory and logic applications.

        Both conventional PVD and CVD systems have limitations with respect to creating films with less thickness at the bottom of trench structures as compared to flat structures. ALD overcomes these limitations by depositing a single atomic layer at a time which covers the entire surface of the wafer independent of the surface features with the intent of achieving nearly 100% conformal step coverage in the most challenging DRAM structures with aspect ratios greater than 60 to 1.

        The uniformity requirements for sub-100nm technologies pose a serious challenge to current deposition techniques. For example, the uniformity requirements for a 1nm film are plus or minus one-half of an angstrom, which is a unit of measure equal to one ten-billionth of a meter, across a 300mm wafer. We believe that ALD has the process capability to achieve this level of precise control with the repeatability required for high-volume manufacturing.

        We believe that ALD is also best suited to deposit high-k materials, which can meet the lower electrical leakage uniformity, conformal step coverage and material purity requirements for nanotechnology. The deposition temperatures for ALD are hundreds of degrees lower than conventional CVD processes. We offer both single wafer and batch ALD systems to cover a wide range of applications, film thickness and productivity requirements.

        Our ALD systems include:

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Celsior f xP™: Our Celsior f xP ALD system is a single-wafer, multi-chamber cluster solution configurable to both 200mm and 300mm wafer sizes and is designed to meet current process and productivity requirements with capabilities beyond the 90nm node. Our Celsior f xP system is designed to offer precise atomic-level thickness control, low process temperature and highly conformal coatings with film quality for a wide range of films, including aluminum oxide, hafnium oxide, titanium oxide, hafnium silicate, titanium nitride, tantalum nitride and zirconium oxide.



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Verano™ 5500 : Our Verano ALD system is a batch wafer processing solution for 300mm wafers and is designed to meet current nano-scale processing and high productivity requirements with capabilities beyond the 90nm node. A relatively low cost of ownership is achievable by processing up to 100 wafers at one time without compromising uniformity and conformal step coverage requirements.

Verano is capable of rapid temperature ramping, isothermal temperature profiling, Across-Flow precursor injection, boat rotation and advanced temperature control, which improves throughput and process uniformity with reduced cycle times. The longer chemical delivery times on the batch system is intended to allow full saturation of a wafer with high aspect ratio structures, thereby achieving nearly 100% conformal step coverage.

         Physical Vapor Deposition —PVD is a process used to apply conducting, liner and barrier metal layers on an IC. One of the primary PVD methods is sputtering, a process in which an electric discharge creates ions of an inert gas, such as argon, which are then accelerated in a vacuum at a target typically composed of pure metal or a metal compound, such as aluminum, tantalum or copper. The target atoms are sputtered away and deposited on the wafer to form a thin film. Thin conductive films, when patterned by lithography and etching, are used to wire an IC.

        Our Sigma f xP™ system is used to sputter uniform layers of pure metals or metal alloys and metal compounds such as oxides or nitrides. Sigma f xP couples unique process modules on a cluster tool

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architecture and is designed to achieve lower cost of ownership. Sigma f xP is designed to be one of the cleanest PVD systems on the market, which is a key technology requirement for sputtering high quality films on the wafer. The process chambers are designed around a simple base configuration that can be modified via application-specific kits to address a wide range of device needs. In particular, the process modules are scalable to create advanced capability PVD chambers for depositing high quality barrier and liner layers for advanced metallization structures. These consist of the "long throw" Hi-Fill and "ionized metal" Advanced Hi-Fill PVD chambers for improved barrier and liner deposition into high aspect ratio structures. Where conformal step coverage over high aspect ratio features is critical, a metal organic CVD module is available to provide low temperature, largely conformal titanium nitride films. Pre-heat and sputter etch chambers are also available.

        Our Sigma f xP system supports both interconnect applications on the front side of the wafer and solder metal applications on the back side of the wafer for the growing power device market. Our Sigma f xP system also addresses aluminum nitride deposition for bulk acoustic wave, or BAW, devices for next-generation communication products. BAW devices require uniform deposition of piezoelectric films, and we have developed significant intellectual property in this area.

         Chemical Vapor Deposition —CVD is a process that can be used to apply thin films of dielectric and, to a lesser extent, conductive materials. During the CVD process, gases that contain atoms of the material to be deposited chemically react to form a thin film of solid material on the wafer. Typical uses for dielectric deposition by CVD include:

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shallow trench isolation, or STI, to isolate one transistor from another;



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the pre-metal dielectric, or PMD, the insulating layer between the active components and the first interconnect metal layer;



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the inter-metal dielectric, or IMD, the insulating layer between the different metal layers; and



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the final passivation layer that seals the completed device from atmospheric moisture.

        Our Delta f xP system can be configured with up to six process modules to address different applications and markets, offering enhanced throughput, uptime and productivity. Process modules are based upon a standard design that allows migration between platforms as capacity demand increases. Key applications for the Delta f xP include STI, PMD and IMD.

        Silicon dioxide, when deposited by conventional techniques, displays small gaps inside the structure, which prevents effective film planarization. Our planar processes (previously referred to as Flowfill and low-k Flowfill processes), which are performed on the Delta f xP, are CVD technologies that were developed to form high-quality silicon dioxide layers that possess the properties both to fill gaps and produce a high degree of planarization. Planar processes reduce the need for chemical mechanical planarization processing with a corresponding reduction in cost of ownership, or in some cases completely remove the chemical mechanical planarization steps.

         Plasma-Enhanced Chemical Vapor Deposition —PECVD is a form of deposition that utilizes plasma to enhance the chemical reaction rates of precursors, or the chemical ingredients that react with other ingredients to produce a thin film. PECVD processing allows deposition at lower temperatures, which is often required for the proper application of certain films. This deposition technique was developed to allow for low temperature processing of silicon nitride films for passivation and insulation of devices.

        Our Delta i2L cluster system is capable of processing wafers up to 200mm in size and produces high-quality dielectric films for use in compound semiconductor, silicon analog and mixed-signal devices. A low temperature deposition process offers high-quality silicon nitride films for use as on-chip capacitor dielectrics. The dense nitride films have a low hydrogen content and exhibit improved electrical performance when used in capacitors on an IC, allowing device manufacturers to use thinner

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capacitor dielectrics, while maintaining reliability. In addition to the capacitor dielectric process, the system also comes equipped with a suite of standard nitride and oxide process recipes.

         Atmospheric Pressure Chemical Vapor Deposition —APCVD is the process by which chemicals are applied to the wafer in an atmospherically controlled environment. Our APCVD systems employ our proprietary approach designed to allow high deposition rates with a simpler reactor design yielding higher operational reliability and high wafer throughput.

        Our APCVD systems include:

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1500 APCVD —Our 1500 APCVD system processes 200mm wafers addressing design-rule fabrication capability of 0.15 micron. It offers relatively low cost of ownership with a process designed to result in improved reliability, performance and serviceability through enhanced film uniformity, reduced consumables, improved system availability and ultra-low film metal levels. Our 1500 APCVD system provides both doped and un-doped deposition of tetraethylorthosilicate-, or TEOS-, based silicon dioxide and can be utilized in a broad range of dielectric film applications for both logic and memory manufacturing requirements.



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1000 APCVD —Our 1000 APCVD system offers either hybrid or TEOS-reactant processes and is designed for high productivity on 200mm wafer processing lines. It provides both doped and un-doped deposition of TEOS-based silicon dioxide and can be used in a broad range of dielectric film applications for a variety of semiconductor applications.



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999R APCVD and TEOS999 APCVD —Our 999R APCVD and TEOS999 APCVD systems are for production lines employing between 100mm and 150mm wafers and are capable of simultaneously processing two wafers in parallel. Both systems offer doped and un-doped silicon dioxide processing capabilities.

Etch

        Etch is a process that preferentially removes material from the wafer surface by chemically converting exposed portions of the surface into a gaseous by-product that is pumped away from the process chamber. Almost all deposition processes create a film covering the entire wafer surface. While many layers of different material are required to build up a device, the materials are only needed in selected parts of the wafer during the IC manufacture process. For example, to create the current carrying "wires" of an IC, the entire wafer surface is covered with sputtered aluminum alloys and its associated barrier layers. These conductive layers are then coated with light-sensitive films, which are commonly referred to as photoresist, and are exposed to the wiring pattern during the photolithography process. Plasma etching is then used to remove the exposed conductive layer, thus replicating the wiring pattern. The metal remains in place under the photoresist, which is then stripped off. The finished metal lines at that point in the device manufacture process are referred to as the interconnects.

        Our Etch systems include:

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Omega fxP ™—The Omega f xP offers up to six process modules plus in-line stations to allow for the alignment and the cooling down of the wafer. The cluster module also has two vacuum cassette stations and multiple chambers, which provide high throughput for the high volume user or the option to "mix and match" different plasma sources for advanced sequential etching processes.



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Omega i2L —The Omega i2L features our plasma source technologies in a single-chamber format that combines high performance etching with small footprint and low initial capital cost for low-rate production fabrication facilities. These attributes make the Omega i2L particularly well suited for cost-sensitive manufacturing of ICs and compound semiconductors.

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        Both the Omega f xP and the Omega i2L support our three main plasma sources: our M0RI™ etch technology, Plasma Enhanced Reactive Ion Etch, or PERIE, and Inductively Coupled Plasma, or ICP. Additional modules may also be added to the main transport modules that provide secondary functions such as a post-etch corrosion removal processes. In our etch systems suite, M0RI offers the highest plasma density that provides process solutions for the most advanced polysilicon, oxide and low-k etch requirements. The low plasma density ICP is used extensively for high-density aluminum and polysilicon etching as well as for a broad range of processing on the front and back sides of compound semiconductors. The PERIE offers medium plasma density for silicon and dielectric etching where the feature sizes are less challenging. We have also developed a variant of our M0RI etch process chamber specifically for very high aspect ratio silicon etching and micro machining. This deep silicon, or DSi, chamber offers benefits to production users in system-in-package, wafer level packaging and conventional micro electro mechanical systems applications. DSi techniques are used in a myriad of applications such as the manufacture of discrete components in system-in-package and accelerometers for car air bags. We also offer a gas phase etch module, which removes sacrificial layers to create microscopic moveable structures.

Batch Thermal Processing

        Wafers are subjected to intense heat that can take a wafer from room temperature to temperatures ranging from 100°C to 1200°C. Thermal processing systems, commonly referred to as furnaces, work with either low pressure, for deposition, or atmospheric, for oxidation and diffusion, conditions. LPCVD is used to deposit either a conductive non-metal film such as doped poly-silicon or an insulator film such as silicon nitride. Wafers are loaded into thermal processing systems in batches of 50 to 150 wafers. The heating process may be used to modify the properties of deposited films, reactively grow various films such as oxide or modify the conductive properties of a silicon wafer.

        Our thermal processing systems include:

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RVP-300plus ™—Our RVP-300 plus is designed for processing 300mm wafers addressing requirements for 0.13-micron and smaller geometries. The design of the RVP-300 plus focuses on maximizing productivity and throughput. Among its features, the RVP-300 plus is capable of rapidly ramping the temperature up and down, which results in chemical deposition and temperature control across the wafer. The RVP-300 plus also utilizes a dual-cassette configuration resulting in increased throughput.



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RVP-550 ™—Our RVP-550 is a flexible batch heating system with Across-Flow technology and is designed to process loads up to 100 wafers. Our Across-Flow technology generates a virtual single-wafer environment intended to result in improved process performance. We believe that the RVP-550 is well suited for advanced technology applications in a high product mix manufacturing process typically found at an advanced foundry customer.



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RVP-200 —Our RVP-200, which is based on the AVP platform discussed below, processes both eight-inch and six-inch wafers and meets 0.18-micron technology requirements. The RVP-200 features a design that enables it to ramp up and ramp down temperatures between two to ten times faster than the AVP platform and offers faster throughput and tighter junction depth control. By utilizing the AVP platform features such as 16-cassette wafer handling and advanced temperature control, the RVP-200 is designed to offer the same advanced reliability as our AVP systems.



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AVP-200 —Our AVP-200 is a vertical furnace designed to meet the eight-inch and six-inch wafer requirements of sub-0.25 micron processing. The AVP-200 single-tube system includes advanced process control, data acquisition software, advanced automation, a proprietary process chamber design and an option for atmospheric control within the wafer handling area. Key features of the AVP system include storage capacity for sixteen 25-wafer cassettes, or a total of 400 wafers, and

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advanced temperature control for accurate wafer temperature regulation. We designed the AVP system to offer customers a low cost of ownership through high productivity and a small footprint.

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VTR —Our VTR systems process wafers from 100mm to 200mm. These systems operate under computer control, providing specialized process recipe introduction, cassette-to-cassette automation, monitoring of critical system functions and automated loading of wafers into the reaction chamber. We believe that our VTR systems generally offer comparable reliability, lower contamination and better process uniformity than horizontal reactors. Our VTR systems can be installed through the wall in a customer's clean room facility and are compatible with industry standard software interfaces.

Sales, Marketing and Customer Support

        We sell, install and service our systems for our global device manufacturing customers with the aim of providing viable manufacturing solutions for their existing technological needs, as well as establishing long-term business relationships to support their next-generation products. Our experienced sales personnel have the knowledge to address the technical benefits and economic advantages of our systems. Our sales organization is tightly integrated with our services and support organization, which we believe allows us to understand our customers' needs better and to tailor solutions to meet those needs.

        Our sales are distributed among three geographic regions that include North America, Europe and Asia Pacific. The following table illustrates the geographic distribution of our net sales for the years ended September 28, 2007 (fiscal 2007), September 29, 2006 (fiscal 2006) and September 30, 2005 (fiscal 2005):

        In North America, our systems are marketed and sold through our direct sales and service organization in Scotts Valley, California. In Europe, our systems are marketed and sold primarily through our direct sales and service operations in France, Germany, Israel and the United Kingdom, as well as Italy, where we use a local sales representative. In the Asia Pacific region, we use direct sales and service and agency arrangements. We have offices within the Asia Pacific region in China, Japan, Korea, Malaysia, Singapore and Taiwan.

        In order to demonstrate the capability of our systems, we engage customers during our research and development cycle. We have occasionally provided our newest generation systems to our customers for evaluation. The average duration of an evaluation period for systems provided to our customers is typically less than one year. As we expand our sales efforts globally, particularly with new systems and in emerging markets, we believe that ongoing and continued investment in demonstration and evaluation systems may be important to our future business.

        We believe that a comprehensive global support program is critical to providing sustained value to our customers and maintaining customer loyalty. As a result, we maintain an experienced central customer support group in addition to regional based service and support staff around the world at local centers, who are in close proximity to customers and provide comprehensive local support programs intended to ensure that our systems are operating in optimal fashion.

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Customers

        Our customer base is diverse, both geographically and in terms of the types of devices that our customers produce. Customers for our systems include several of the world's top semiconductor manufacturers and foundry makers. We have a broad installed base, with approximately 2,500 systems in active operation for which we are providing ongoing parts and services worldwide.

        Our customers are primarily IC manufacturers. The IC industry is cyclical and has experienced significant fluctuations, and our sales are impacted by broad industry trends. Moreover, we have a highly concentrated customer base. For our fiscal year ended September 28, 2007, two customers, Inotera Memories Inc. and Nan Ya Technology Corp., accounted for 29% and 12% of our net sales, respectively, and approximately 67% of our net sales in fiscal 2007 were attributable to our top ten customers. For our 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 were attributable to our top ten customers. For our 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 were attributable to our top ten customers. Our largest customers may vary from year to year depending upon, among other things, our customers' annual budget for capital expenditures, plans for new fabrication facilities and expansions and new system introductions by us. We expect to continue to receive a substantial portion of our net sales from a small number of customers for the foreseeable future.

Backlog

        As of September 28, 2007, our backlog was approximately $19.9 million, as compared to approximately $66.0 million and $20.0 million as of September 29, 2006 and September 30, 2005, respectively. Our backlog consists of both system and spare part purchase orders from our customers that provide for typical delivery within 12 months. Backlog attributable to systems not yet shipped includes only systems for which we have received a purchase order and have assigned a delivery date. Orders are typically subject to cancellation or delay by the customer with no penalty. Because of possible changes in delivery schedules and cancellations of orders, our backlog at any particular point in time is not necessarily representative of actual sales for any succeeding periods, nor is backlog any assurance that we will realize profit from completing these orders.

Research, Development and Engineering

        Modern electronic devices are subject to significant and rapid changes in technologies in order to remain competitive. We and other semiconductor equipment suppliers are subject to the demands that these rapid technological changes impose in relation to new system introductions and continual improvements and enhancements to existing systems. As a result, we strive to design and continually improve low-cost systems that have high throughput, flexibility and scalability and are efficient to manufacture and easy to support. Close working relationships between our key customers and our engineering teams enable us to incorporate our customers' feedback and needs into our system development efforts. We intend to continue to make substantial investments in strategic research and development both in personnel utilization and financial terms.

        We focus our research and development activities on developing applications for our ALD, PVD, CVD, Etch and thermal systems. During recent periods, we have devoted significant resources to developing advanced thin films for dielectrics and capacitors. Our research and development expenditures during fiscal 2007, 2006 and 2005 were $31.9 million, $25.7 million and $21.1 million, respectively.

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Manufacturing, Raw Materials and Supplies

        Our principal manufacturing operations consist of assembly, systems integration and testing at our facilities in Scotts Valley, California and Newport, Wales, U.K. We focus our internal manufacturing efforts on those precision mechanical and electro-mechanical assemblies that we believe differentiate our systems from those of our competitors. We outsource the manufacture of many of our non-critical subassemblies to a number of key suppliers. We attempt to maintain close relationships with these suppliers and to develop qualified alternative suppliers in the event that we lose access to existing suppliers in an effort to reduce cost. Effective component procurement is critical to the quality, manufacturing cycle time and cost of our systems.

        In the past year, we have improved our global supply chain and reduced our material costs. These efforts have resulted in gross margin improvements. Continuous improvement in our supply chain is one of our key strategic initiatives. In addition, our single platform architecture utilizes common design elements, components and subsystems. This results in our ability to maintain lower inventory levels and obtain better prices for the higher volumes of parts that we buy.

        Certain components used in our systems are purchased from a single supplier or a limited group of suppliers. Although we believe that all single-source components are currently available in adequate numbers, we cannot assure you that shortages will not develop in the future.

Competition

        Our markets are competitive and characterized by rapidly changing technology. We believe that the primary competitive factors in our markets are:

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system performance and reliability;



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initial sales price;



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total cost of ownership;



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ability to manufacture and deliver systems on a timely basis;



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ability to meet customer specifications; and



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global customer technical service and support.

        We believe that we compete effectively with our competitors with respect to each of these factors. Our ability to remain competitive will depend to a great extent upon our ongoing performance in the areas of system development and customer support. To be successful in the future, we believe that we must respond promptly and effectively to the challenges of technological change and our competitors' innovations by continually enhancing our system offerings.

        Our principal competitors include Applied Materials, Inc., Tokyo Electron LTD, ASM International N.V., Kokusai Semiconductor Equipment Corporation and IPS, Ltd. Some of our competitors have substantially greater financial resources and more extensive engineering, manufacturing, marketing and customer support capabilities than we do. We expect our competitors to continue to improve the performance of their current products and to introduce new products or new technologies. In addition, we anticipate that competitive pressures may cause continued price-based competition.

Intellectual Property

        We rely on a combination of patents, patent applications, copyrights, trademarks, trade secrets, confidentiality provisions and licensing arrangements to establish and protect our proprietary rights. As

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of September 28, 2007, we held 125 U.S. and 190 foreign patents. Our issued patents and any subsequently issued patents arising from our pending applications will expire between 2008 and 2027.

        We also rely on technical know-how and other unpatented proprietary information relating to the development and manufacturing of our systems. We seek to protect our trade secrets and proprietary information, in part, by requiring our employees to enter into agreements obligating them to maintain confidentiality and to assign to us the rights to inventions that they make while in our employment. We also enter into non-disclosure agreements with our consultants and suppliers to protect confidential information delivered to them.

        There has been significant litigation in the semiconductor equipment industry involving patents and other intellectual property rights. Infringement claims may be asserted against us in the future and, if such claims are made, we may not be able to defend against such claims successfully or, if necessary, obtain licenses on reasonable terms. 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 lawsuit, 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:

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lose or forfeit proprietary rights;



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



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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;



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pay damages and attorneys' fees in some circumstances; or



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redesign those systems that use the challenged intellectual property.

        In addition, in the normal course of business, we periodically receive and make inquiries regarding possible patent infringement. In dealing with such inquiries, it may become necessary or useful for us to obtain or grant licenses or other rights. We cannot assure you that such licenses or rights will be available to us on commercially reasonable terms or at all. If we are not able to resolve a claim, negotiate a settlement or obtain necessary licenses on commercially reasonable terms or successfully prosecute or defend our position, it could harm our business, financial condition and results of operations.

Employees

        As of September 28, 2007, we had 670 employees, of which 255 were located in Europe, 135 were located in Asia and 280 were located in North America. Of our total employees, 135 were principally dedicated to research and development, 145 were dedicated to sales and general and administrative, 208 were dedicated to customer service, applications and services and support and 182 were dedicated to manufacturing.

        We consider our relationship with our employees to be good. None of our employees are represented by a labor union or covered by a collective bargaining agreement, and we have never experienced a work stoppage, slowdown or strike.

Facilities

        We maintain our headquarters in Scotts Valley, California, where we own a 213,000-square foot facility. We also operate a leased 103,000-square foot manufacturing and engineering facility in Newport, Wales, U.K. We believe that our facilities in the U.S. and U.K. provide sufficient manufacturing capacity for the foreseeable future.

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        In addition, we lease a number of smaller properties and field offices located in France, Germany, Scotland, China, Japan, Korea, Malaysia, Singapore and Taiwan.

Environmental Matters

        We operate semiconductor applications laboratories and manufacturing facilities in Scotts Valley, California and Newport, South Wales, U.K. and are subject to federal, state and local regulations governing the use of hazardous materials.

        Our Scotts Valley property is a federally listed Superfund site. Chlorinated solvent and other contamination was identified at the site in the early 1980s, and by the late 1980s, Watkins Johnson Corporation, or Watkins Johnson (now WJ Communications, Inc.), a predecessor to the Thermal Division of ASML Holdings, N.V., our Predecessor, had installed a groundwater extraction and treatment system. In 1991, Watkins Johnson entered into a consent decree with the United States Environmental Protection Agency providing for remediation of the site. In July 1999, Watkins Johnson signed a remediation agreement with an environmental consulting firm, ARCADIS Geraghty and Miller, or ARCADIS. Pursuant to this remediation agreement, Watkins Johnson paid approximately $3.0 million in exchange for which ARCADIS agreed to perform the work necessary to assure satisfactory completion of Watkins Johnson's obligation under the consent decree. The agreement also includes a cost overrun guaranty from ARCADIS up to a total project cost of $15.0 million. In addition, the agreement included procurement of a 10-year, claims-made insurance policy to cover overruns of up to $10.0 million from American International Specialty, or AIS, along with a 10-year, claims-made $10.0 million policy to cover unknown pollution conditions at the site.

        Failure of Watkins Johnson, ARCADIS or AIS to fulfill their obligations may subject us to substantial fines, and we could 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. We believe that the likelihood of the failure of Watkins Johnson, ARCADIS or AIS to fulfill their respective obligations is remote and that any remaining or uninsured environmental liabilities will not have a material effect on our business, financial condition or results of operations.

Available Information

        We make available free of charge, through our website, www.aviza.com , our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and all amendments to those reports as soon as reasonably practicable after such material is electronically filed with the SEC. Our publicly filed information is also available on the SEC's website, http://www.sec.gov . The information on our website is not incorporated herein by reference.

ITEM 1A.    Risk Factors

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 our fiscal year ended September 28, 2007. The semiconductor industry has historically been cyclical due to sudden changes in manufacturing capacity and is currently experiencing lower demand for ICs. Based on information from DRAMeXchange, a global leading provider of market intelligence, DRAM spot prices have declined approximately 85% from January 2, 2007 to November 29, 2007 and Gartner Inc., a market research firm, has lowered its forecast for capital spending for 2008. Changes in manufacturing capacity affect the timing and amounts of our customers' capital equipment purchases and investments in technology, and affect our orders, net sales, gross margins and results of operations.

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        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 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 our fiscal year ended September 28, 2007, approximately 41% of our net sales were attributable to two customers and approximately 67% of our net sales were attributable to our top 10 customers. Inotera Memories, Inc. and Nan Ya Technology Corp. accounted for 29% and 12% of our net sales in fiscal 2007, respectively. 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. 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 cancelling 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.

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

        We had net income of $0.4 million for the fiscal year ended September 28, 2007 (fiscal 2007). However, we incurred net losses of $14.7 million and $16.0 million for the fiscal years ended September 29, 2006 (fiscal 2006) and September 30, 2005 (fiscal 2005), respectively. As a result, we may need to continue increasing our sales and reducing our costs in order to maintain 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 achieve and sustain profitability, we may be forced to implement expense reduction measures, including selling assets, consolidating operations, reducing our workforce or delaying, cancelling 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;

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•

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.

        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 used IPS's confidential information to develop our Celsior single-wafer atomic layer deposition technology. The complaint is for unspecified monetary damages, injunctive relief and an order rescinding the settlement and distributor agreements that we and IPS entered into in May 2004 in settlement of a prior lawsuit that IPS filed against ASML U.S., Inc. and us in March 2004 relating to assets that we acquired from ASML in October 2003. In May 2007, Aviza successfully moved the dispute to arbitration. Discovery commenced in June 2007. The arbitration hearing is currently scheduled for May 2008. In September 2007, IPS moved for a preliminary injunction in the U.S. District Court in Los Angeles. We opposed the motion and the Court subsequently took the matter off calendar and has yet to issue any ruling. We intend to contest the lawsuit vigorously.

        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, 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.

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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 September 28, 2007, we had total debt of approximately $29.5 million, of which approximately $15.0 million was short-term. 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, 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 September 28, 2007, we had cash and cash equivalents of approximately $23.1 million and short-term debt of approximately $15.0 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

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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

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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 installed bases 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. We cannot assure you that we will be able to do so, or that customers will adopt the redesigned systems.

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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.

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

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particularly dependent on the contributions of the principal members of our management, operations and engineering staff, including Jerauld Cutini, our President and Chief Executive Officer, Patrick O'Connor, our Executive Vice President, Chief Financial Officer and Secretary, 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.

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 fiscal 2007 net sales from sales in foreign countries, including certain countries in Asia Pacific 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 and China are not signatories to the Patent Cooperation Treaty, which is designed to specify rules and methods for defending intellectual property internationally. In Taiwan and China, the publication of a patent prior to its filing would invalidate the ability of a company to obtain a patent. Similarly, in contrast to the United States where the contents of patent applications remain confidential during the patent prosecution process, the contents of a patent application in Taiwan and China are published upon filing which provides competitors an advanced view of the contents of patent applications prior to the establishment of patent rights. There is a risk that our means of protecting our proprietary rights may not be adequate in these 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.

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We will be required to spend significant time, money and other resources to determine that 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.

        As currently in effect, 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 and may contain an opinion by our independent registered public accounting firm as to the effectiveness of our internal control over financial reporting if we qualify as an "accelerated filer," as defined under the Securities Exchange Act, for our fiscal year ending in September 2008. Beginning with our Annual Report on Form 10-K for our fiscal year ending in September 2009, we will be required to include both our management's assessment and an opinion by our independent registered public accounting firm as to the effectiveness of our internal control over financial reporting.

        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 on Form 10-K that we file with the SEC. 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 may not have to provide its attestation on our management's report or its opinion as to the effectiveness of our internal control over financial reporting until December 2009.

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, 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

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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 could 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 have already outsourced 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.

        We expect that our requirements will 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 Pacific. We have penetrated this market with some of our systems. If we are unable to continue to penetrate this market our business could be harmed.

        The percentage of worldwide semiconductor production that is based in Asia Pacific is growing more rapidly than in other regions. Although we derived approximately 61%, 64% and 65% of our net sales for fiscal 2007, 2006 and 2005, 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.

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, Wales operations are based in the United Kingdom and most of the operating expenses attributable to those operations are incurred in British pounds sterling. As a result, a significant portion of our costs are subject to currency fluctuations. Accordingly, if the British pound sterling 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.

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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, Wales, U.K., and sales and service offices in many other countries. In addition, approximately 61% of our net sales for fiscal 2007 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:

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longer sales cycles;



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multiple, conflicting and changing governmental laws and regulations;



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protectionist laws and business practices that favor local companies;



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price and currency exchange rates and controls;



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difficulties in collecting accounts receivable;



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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



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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

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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-ownership 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 NOLs are subject to limitations arising from previous ownership changes and were 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 the use of our NOLs. 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:

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diversion of management's attention from other operational matters;



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inability to complete acquisitions as anticipated or at all;



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inability to realize synergies expected to result from an acquisition;



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failure to commercialize purchased technologies;



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ineffectiveness of an acquired company's internal controls;



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

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•

unknown and undisclosed commitments or liabilities;



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failure to integrate and retain key employees; and



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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.

        As of September 28, 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, owned approximately 36% and 16%, 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 September 28, 2007, the closing price range of our common stock was $2.95 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 1B.    Unresolved Staff Comments

        Not applicable.

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