** **

**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

** **

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** **

**FORM 10-Q**

** **

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** **

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

** **

**Forthe quarterly period ended March 28, 2008**

** **

**OR**

** **

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

** **

**Forthe transition period from          to         **

** **

**Commissionfile number 000-51642**

** **

**AvizaTechnology, Inc.**

(Exact Name ofRegistrant as Specified in its Charter)

 

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

 

**440Kings Village Road**

**ScottsValley, California    95066**

(Address ofPrincipal Executive Offices including Zip Code)

 

**(831)438-2100**

(Registrant’sTelephone Number, Including Area Code)

 

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

YES    x      NO    o

 

Indicate by check markwhether the registrant is a large accelerated filer, an accelerated filer, a non-acceleratedfiler, or a smaller reporting company. See definitions of “large acceleratedfiler,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2of the Exchange Act. (Check one):

 

| Large  accelerated filer o                     |   | Accelerated  filer o         |
|------------------------------------------------|--------|-----------------------------------|
|                                           |   |                              |
| Non-accelerated  filer o                       |   | Smaller  reporting company x |
| (Do not check if  a smaller reporting company) |   |                              |

 

Indicate by check markwhether the registrant is a shell company (as defined in Rule 12b-2 of theExchange Act).

YES    o      NO   x

 

As of May 8, 2008,the registrant had 21,856,473 shares of its common stock, par value $0.0001 pershare, outstanding.

 

 

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**AvizaTechnology, Inc.**

** **

**Tableof Contents**

 
| ** **                                                                                          | ** **                                                                                                                                   | **Page   No.** |
|-----------------------------------------------------------------------------------------------------|----------------------------------------------------------------------------------------------------------------------------------------------|---------------------|
| **PART I.  FINANCIAL INFORMATION**                                                             |                                                                                                                                         |                |
| Item 1. Financial Statements (unaudited):                                                           |                                                                                                                                         |                |
|                                                                                                | Condensed Consolidated Balance Sheets — at March 28,  2008 and September 28, 2007                                             |                | 1 |
|                                                                                                | Condensed Consolidated Statements of Operations — for  the Three and Six Months Ended March 28, 2008 and March 30,  2007 |                | 2 |
|                                                                                                | Condensed Consolidated Statements of Cash Flows — for  the Six Months Ended March 28, 2008 and March 30, 2007            |                | 3 |
|                                                                                                | Notes to Condensed Consolidated Financial Statements                                                                                         |                | 4 |
| Item 2. Management’s Discussion and Analysis of  Financial Condition and Results of Operations |                                                                                                                                         | 14                  |
| Item 3. Quantitative and Qualitative Disclosures About  Market Risk                                 |                                                                                                                                         | 23                  |
| Item 4. Controls and Procedures                                                                     |                                                                                                                                         | 23                  |
| ** **                                                                                          | ** **                                                                                                                                   | ** **          |
| **PART II.  OTHER INFORMATION**                                                                |                                                                                                                                         |                |
| Item  1. Legal Proceedings                                                                          |                                                                                                                                         | 23                  |
| Item  1A. Risk Factors                                                                              |                                                                                                                                         | 24                  |
| Item 2. Unregistered Sales of Equity Securities and  Use of Proceeds                                |                                                                                                                                         | 24                  |
| Item 3. Defaults Upon Senior Securities                                                             |                                                                                                                                         | 24                  |
| Item 4. Submission of Matters to a Vote of Security  Holders                                        |                                                                                                                                         | 24                  |
| Item  5. Other Information                                                                          |                                                                                                                                         | 24                  |
| Item 6.  Exhibits                                                                                   |                                                                                                                                         | 24                  |

 

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**ITEM 1.FINANCIAL STATEMENTS**

** **

**AVIZATECHNOLOGY, INC. AND SUBSIDIARIES**

**CONDENSED CONSOLIDATED BALANCE SHEETS**

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

** **
| ** **                                                                                                                                                                                      | ** ** | **March 28,** | ** ** | **September 28,** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------|------------|------------------------|------------|
| ** **                                                                                                                                                                                      | ** ** | **2008**           | ** ** | **2007 (1)**      | ** ** |
| ** **                                                                                                                                                                                      | ** ** | **(Unaudited)**    | ** ** | ** **             | ** ** |
| **ASSETS**                                                                                                                                                                                      | ** ** | ** **         | ** ** | ** **             | ** ** |
| CURRENT ASSETS:                                                                                                                                                                                 |       |               |       |                   |       |
| Cash and cash  equivalents                                                                                                                                                                      |       | $                  | 15,222     |                   | $          | 23,087 |   |
| Accounts  receivable - net                                                                                                                                                                      |       | 28,318             |       | 37,202                 |       |
| Inventory                                                                                                                                                                                       |       | 48,248             |       | 45,529                 |       |
| Prepaid expenses  and other current assets                                                                                                                                                      |       | 6,115              |       | 5,317                  |       |
| Total current  assets                                                                                                                                                                           |       | 97,903             |       | 111,135                |       |
|                                                                                                                                                                                            |       |               |       |                   |       |
| PROPERTY, PLANT  AND EQUIPMENT—net                                                                                                                                                         |       | 26,356             |       | 31,781                 |       |
| INTANGIBLE  ASSETS—net                                                                                                                                                                     |       | 1,844              |       | 3,333                  |       |
| OTHER ASSETS                                                                                                                                                                                    |       | 1,597              |       | 1,831                  |       |
| TOTAL                                                                                                                                                                                           |       | $                  | 127,700    |                   | $          | 148,080 |   |
|                                                                                                                                                                                            |       |               |       |                   |       |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY**                                                                                                                                                  |       |               |       |                   |       |
|                                                                                                                                                                                            |       |               |       |                   |       |
| CURRENT  LIABILITIES:                                                                                                                                                                           |       |               |       |                   |       |
| Short term borrowings  and current portion of notes payable                                                                                                                                     |       | $                  | 28,046     |                   | $          | 15,043 |   |
| Accounts payable                                                                                                                                                                                |       | 25,021             |       | 22,536                 |       |
| Warranty  liability                                                                                                                                                                             |       | 8,575              |       | 11,222                 |       |
| Accrued  liabilities                                                                                                                                                                            |       | 17,301             |       | 13,391                 |       |
| Total current  liabilities                                                                                                                                                                      |       | 78,943             |       | 62,192                 |       |
| NOTES  PAYABLE—Long term                                                                                                                                                                   |       | 13,004             |       | 14,490                 |       |
| OTHER  LIABILITIES - Long term                                                                                                                                                                  |       | 175                |       | —                 |       |
| Total  liabilities                                                                                                                                                                              |       | 92,122             |       | 76,682                 |       |
|                                                                                                                                                                                            |       |               |       |                   |       |
| COMMITMENTS AND  CONTINGENCIES                                                                                                                                                                  |       |               |       |                   |       |
|                                                                                                                                                                                            |       |               |       |                   |       |
| STOCKHOLDERS’  EQUITY:                                                                                                                                                                     |       |               |       |                   |       |
| Preferred stock,  $0.0001 par value - 5,000,000 shares authorized; none outstanding                                                                                                             |       | —             |       | —                 |       |
| Common stock,  $0.0001 par value—100,000,000 shares authorized; 21,856,473 and 20,846,549  shares issued and outstanding at March 28, 2008 and September 28,  2007, respectively |       | 2                  |       | 2                      |       |
| Additional  paid-in capital                                                                                                                                                                     |       | 121,234            |       | 118,400                |       |
| Accumulated  deficit                                                                                                                                                                            |       | (88,580            | )          | (49,974                | )          |
| Accumulated  other comprehensive income                                                                                                                                                         |       | 2,922              |       | 2,970                  |       |
| Total  stockholders’ equity                                                                                                                                                                |       | 35,578             |       | 71,398                 |       |
| TOTAL                                                                                                                                                                                           |       | $                  | 127,700    |                   | $          | 148,080 |   |

 

Theaccompanying notes are an integral part of these condensed consolidated financialstatements.

 

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(1)          Amounts were derivedfrom our audited consolidated financial statements for the year ended September 28,2007 included in our Annual Report on Form 10-K.

 

1

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**AVIZATECHNOLOGY, INC. AND SUBSIDIARIES**

**CONDENSED CONSOLIDATED STATEMENTS OFOPERATIONS**

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

**(unaudited)**

** **
| ** **                                 | ** ** | **Quarter Ended** | ** ** | **Six Months Ended** | ** ** |
|--------------------------------------------|------------|------------------------|------------|--------------------------------|------------|
| ** **                                 | ** ** | **March 28,**     | ** ** | **March 30,**             | ** ** | **March 28,** | ** ** | **March 30,** | ** ** |
| ** **                                 | ** ** | **2008**               | ** ** | **2007**                       | ** ** | **2008** | ** ** | **2007** | ** ** |
| ** **                                 | ** ** | ** **             | ** ** | ** **                     | ** ** | ** ** | ** ** | ** ** | ** ** |
| NET SALES                                  |       | $                      | 30,174     |                           | $          | 61,638 |   | $ | 64,188 |   | $ | 123,829 |   |
|                                       |       |                   |       |                           |       |   |   |   |   |
| COST OF GOODS  SOLD:                       |       |                   |       |                           |       |   |   |   |   |
| Cost of goods  sold                        |       | 21,035                 |       | 42,714                         |       | 45,318 |   | 86,057 |   |
| Cost of good  sold - restructuring charges |       | 13,029                 |       | —                         |       | 13,029 |   | — |   |
| Total cost of  goods sold                  |       | 34,064                 |       | 42,714                         |       | 58,347 |   | 86,057 |   |
|                                       |       |                   |       |                           |       |   |   |   |   |
| GROSS PROFIT  (LOSS)                       |       | (3,890                 | )          | 18,924                         |       | 5,841 |   | 37,772 |   |
|                                       |       |                   |       |                           |       |   |   |   |   |
| OPERATING  EXPENSES:                       |       |                   |       |                           |       |   |   |   |   |
| Research and  development                  |       | 7,981                  |       | 8,011                          |       | 16,020 |   | 15,714 |   |
| Selling, general  and administrative       |       | 9,509                  |       | 8,221                          |       | 19,083 |   | 16,628 |   |
| Restructuring  and other charges           |       | 7,792                  |       | —                         |       | 7,792 |   | — |   |
| Total operating  expenses                  |       | 25,282                 |       | 16,232                         |       | 42,895 |   | 32,342 |   |
| INCOME (LOSS)  FROM OPERATIONS             |       | (29,172                | )          | 2,692                          |       | (37,054 | ) | 5,430 |   |
|                                       |       |                   |       |                           |       |   |   |   |   |
| OTHER INCOME (EXPENSE):                    |       |                   |       |                           |       |   |   |   |   |
| Interest income                            |       | 32                     |       | 110                            |       | 84 |   | 137 |   |
| Interest expense                           |       | (536                   | )          | (1,063                         | )          | (948 | ) | (2,315 | ) |
| Other income -  net                        |       | 14                     |       | 11                             |       | 34 |   | 24 |   |
|                                       |       |                   |       |                           |       |   |   |   |   |
| Total other  expense - net                 |       | (490                   | )          | (942                           | )          | (830 | ) | (2,154 | ) |
|                                       |       |                   |       |                           |       |   |   |   |   |
| INCOME (LOSS) BEFORE  INCOME TAXES         |       | (29,662                | )          | 1,750                          |       | (37,884 | ) | 3,276 |   |
| PROVISION FOR  INCOME TAXES                |       | 424                    |       | 395                            |       | 722 |   | 796 |   |
|                                       |       |                   |       |                           |       |   |   |   |   |
| NET INCOME  (LOSS)                         |       | $                      | (30,086    | )                              | $          | 1,355 |   | $ | (38,606 | ) | $ | 2,480 |   |
|                                       |       |                   |       |                           |       |   |   |   |   |
| Net income  (loss) per share:              |       |                   |       |                           |       |   |   |   |   |
| Basic                                      |       | $                      | (1.38      | )                              | $          | 0.08 |   | $ | (1.80 | ) | $ | 0.15 |   |
| Diluted                                    |       | $                      | (1.38      | )                              | $          | 0.07 |   | $ | (1.80 | ) | $ | 0.14 |   |
| Weighted average  common shares:           |       |                   |       |                           |       |   |   |   |   |
| Basic                                      |       | 21,856,473             |       | 17,538,955                     |       | 21,458,241 |   | 16,844,853 |   |
| Diluted                                    |       | 21,856,473             |       | 18,374,237                     |       | 21,458,241 |   | 17,637,631 |   |

 

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

 

2

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**AVIZATECHNOLOGY, INC. AND SUBSIDIARIES**

**CONDENSED CONSOLIDATED STATEMENTS OFCASH FLOWS**

**(inthousands)**

**(unaudited)**

 
| ** **                                                                               | ** ** | **Six Months Ended** | ** ** |
|------------------------------------------------------------------------------------------|------------|--------------------------------|------------|
| ** **                                                                               | ** ** | **March 28,**             | ** ** | **March 30,** | ** ** |
| ** **                                                                               | ** ** | **2008**                       | ** ** | **2007** | ** ** |
| CASH FLOWS FROM  OPERATING ACTIVITIES:                                                   |       |                           |       |   |   |
| Net income  (loss)                                                                       |       | $                              | (38,606    | ) | $ | 2,480 |   |
| Adjustments to  reconcile net income (loss) to net cash used in operating activities:    |       |                           |       |   |   |
| Depreciation                                                                             |       | 2,819                          |       | 1,887 |   |
| Amortization                                                                             |       | 311                            |       | 767 |   |
| Non-cash  restructuring and other charges                                                |       | 17,676                         |       | — |   |
| Fair value of  common stock issued for prototype materials                               |       | 125                            |       | — |   |
| Stock-based  compensation                                                                |       | 995                            |       | 914 |   |
| Gain on disposal  of equipment                                                           |       | (297                           | )          | — |   |
| Provision for  allowance for doubtful accounts                                           |       | 117                            |       | (52 | ) |
| Reduction in  acquired intangible assets due to the use of acquired net operating losses |       | —                         |       | 330 |   |
| Changes in  assets and liabilities:                                                      |       |                           |       |   |   |
| Accounts  receivable                                                                     |       | 8,830                          |       | (15,616 | ) |
| Inventory                                                                                |       | (13,162                        | )          | (1,158 | ) |
| Prepaid expenses  and other assets                                                       |       | 158                            |       | (15 | ) |
| Accounts payable                                                                         |       | 2,781                          |       | (3,137 | ) |
| Warranty  liability                                                                      |       | (2,605                         | )          | 2,013 |   |
| Accrued  liabilities                                                                     |       | 3,961                          |       | 1,473 |   |
| Net cash used in  operating activities                                                   |       | (16,897                        | )          | (10,114 | ) |
|                                                                                     |       |                           |       |   |   |
| CASH FLOWS FROM  INVESTING ACTIVITIES:                                                   |       |                           |       |   |   |
| Purchases of  property, plant and equipment                                              |       | (2,113                         | )          | (4,210 | ) |
| Purchase of  technology license                                                          |       | (48                            | )          | — |   |
| Proceeds from  sale of equipment                                                         |       | 324                            |       | — |   |
| Proceeds from  sale of the net assets of ET Equipments Ltd.                              |       | 600                            |       | — |   |
| Net cash used in  investing activities                                                   |       | (1,237                         | )          | (4,210 | ) |
|                                                                                     |       |                           |       |   |   |
| CASH FLOWS FROM  FINANCING ACTIVITIES:                                                   |       |                           |       |   |   |
| Net proceeds  from credit lines                                                          |       | 12,325                         |       | 2,119 |   |
| Proceeds from  the issuance of common stock                                              |       | 9                              |       | 24,042 |   |
| Payments on  mortgage loan                                                               |       | (187                           | )          | (140 | ) |
| Payments on  other borrowings                                                            |       | (665                           | )          | (582 | ) |
| Payments on  equipment loan                                                              |       | (634                           | )          | — |   |
| Payments on  capital lease obligations                                                   |       | (154                           | )          | (131 | ) |
| Net cash  provided by financing activities                                               |       | 10,694                         |       | 25,308 |   |
| Effect of  exchange rates on foreign cash balances                                       |       | (425                           | )          | (183 | ) |
| NET (DECREASE)  INCREASE IN CASH AND CASH EQUIVALENTS                                    |       | (7,865                         | )          | 10,801 |   |
| CASH AND CASH  EQUIVALENTS:                                                              |       |                           |       |   |   |
| Beginning of  period                                                                     |       | 23,087                         |       | 10,722 |   |
| End of period                                                                            |       | $                              | 15,222     |   | $ | 21,523 |   |
| SUPPLEMENTAL  DISCLOSURE OF CASH FLOW INFORMATION:                                       |       |                           |       |   |   |
| Cash paid for  interest                                                                  |       | $                              | 867        |   | $ | 1,770 |   |
| Income taxes  paid                                                                       |       | $                              | 269        |   | $ | 276 |   |
| NONCASH  INVESTING AND FINANCING ACTIVITIES:                                             |       |                           |       |   |   |
| Fair value of  common stock issued in the acquisition of technology license              |       | $                              | 1,715      |   | $ | — |   |
| Property and  equipment purchases included in accounts payable at end of period          |       | $                              | 290        |   | $ | 393 |   |
| Equipment  acquired under capital lease                                                  |       | $                              | 50         |   | $ | 715 |   |

 

The accompanying notes are an integral part of these condensedconsolidated financial statements

 

3

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**AVIZA TECHNOLOGY, INC. AND SUBSIDIARIESNOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTSMarch 28, 2008*(Unaudited)***

*** ***

**1.  Basis of Presentation**

** **

The accompanying unaudited condensedconsolidated financial statements have been prepared in accordance with UnitedStates (U.S.) generally accepted accounting principles for interim financialinformation and applicable regulations of the U.S. Securities and ExchangeCommission.  Certain information andfootnote disclosures normally included in financial statements prepared inaccordance with accounting principles generally accepted in the United Stateshave been condensed or omitted pursuant to such rules and regulations. Inthe opinion of management, all adjustments (consisting only of normal recurringadjustments) considered necessary for a fair statement of financial positionand results of operations have been included. Our operating results for the quarter and six months ended March 28,2008 are not necessarily indicative of the results that may be expected forfuture quarters and the fiscal year ending September 26, 2008.  Theaccompanying unaudited condensed consolidated financial statements should beread in conjunction with our audited consolidated financial statements for theyear ended September 28, 2007, which are included in our Annual Report on Form 10-K,and the risk factors contained therein.

 

The preparation of the accompanying unauditedcondensed consolidated financial statements requires the use of estimates thataffect the reported amounts of assets, liabilities, revenues, expenses andcontingencies.  These estimates include, but are not limited to, estimatesrelated to revenue recognition, allowance for doubtful accounts, inventoryvaluation, tangible and intangible long-term asset valuation, warranty andother obligations, contingent liabilities and litigation.  Estimates areupdated on an ongoing basis and are evaluated based on historical experienceand current circumstances.  Changes in facts and circumstances in thefuture may give rise to changes in these estimates which may cause actualresults to differ from current estimates.

 

Aviza Technology Inc.’s (the “Company” or “Aviza”)current fiscal year will end on September 26, 2008 and includes52 weeks. We close our fiscal quarters on the last Friday of December,March, June and September.

 

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

 

4

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**2.  Balance Sheet Details**

 
| ** **                                      | ** ** | **March 28,**      | ** ** | **September 28,** | ** ** |
|-------------------------------------------------|------------|-------------------------|------------|------------------------|------------|
| ** **                                      | ** ** | **2008**                | ** ** | **2007**               | ** ** |
| ** **                                      | ** ** | **(in thousands)** | ** ** |
|                                            |       |                    |       |                   |       |
| **Inventory:**                                  |       |                    |       |                   |       |
| Raw materials                                   |       | $                       | 27,525     |                   | $          | 28,667 |   |
| Work-in-process                                 |       | 16,908                  |       | 13,692                 |       |
| Finished goods  and evaluation systems          |       | 3,815                   |       | 3,170                  |       |
| Total                                           |       | $                       | 48,248     |                   | $          | 45,529 |   |
|                                            |       |                    |       |                   |       |
| **Prepaid  expenses and other current assets:** |       |                    |       |                   |       |
| Insurance                                       |       | $                       | 735        |                   | $          | 96 |   |
| Deferred  installation costs                    |       | 274                     |       | 385                    |       |
| Taxes                                           |       | 2,691                   |       | 2,621                  |       |
| Other                                           |       | 2,415                   |       | 2,215                  |       |
| Total                                           |       | $                       | 6,115      |                   | $          | 5,317 |   |
|                                            |       |                    |       |                   |       |
| **Property,  plant and equipment - net:**       |       |                    |       |                   |       |
| Land                                            |       | $                       | 1,839      |                   | $          | 1,839 |   |
| Buildings and  improvements                     |       | 12,211                  |       | 12,198                 |       |
| Machinery and  equipment                        |       | 17,660                  |       | 18,659                 |       |
| Office  furnishings, fixtures and equipment     |       | 6,608                   |       | 6,564                  |       |
| Construction in  process                        |       | 1,855                   |       | 3,820                  |       |
| Total                                           |       | 40,173                  |       | 43,080                 |       |
| Accumulated  depreciation                       |       | (13,817                 | )          | (11,299                | )          |
| Property, plant  and equipment - net            |       | $                       | 26,356     |                   | $          | 31,781 |   |
|                                            |       |                    |       |                   |       |
| **Accrued  liabilities:**                       |       |                    |       |                   |       |
| Accrued payroll  and payroll taxes              |       | $                       | 4,937      |                   | $          | 5,660 |   |
| Accrued  accounting and legal fees              |       | 3,843                   |       | 1,643                  |       |
| Deferred revenue                                |       | 836                     |       | 1,076                  |       |
| Accrued  restructuring charges                  |       | 2,407                   |       | —                 |       |
| Other taxes  payable                            |       | 3,741                   |       | 3,557                  |       |
| Other                                           |       | 1,537                   |       | 1,455                  |       |
| Total                                           |       | $                       | 17,301     |                   | $          | 13,391 |   |

 

**3.  Stock-Based Compensation**

** **

Effective October 1, 2005, we adoptedthe provisions of Statement of Financial Accounting Standards, or SFAS, No. 123(R),*Share-Based Payment*, or SFAS 123(R).  SFAS 123(R) establishesstandards for the accounting for transactions in which an entity exchanges itsequity instruments for goods or services.  It also addresses transactionsin which an entity incurs liabilities in exchange for goods or services thatare based on the fair value of the entity’s equity instruments or that may besettled by the issuance of those equity instruments.  Accordingly,stock-based compensation cost is measured at grant date, based on the fairvalue of the award, and is recognized as expense over the employee’s requisiteservice period.  The measurement of stock-based compensation cost is basedon several criteria including, but not limited to, the valuation model used andassociated input factors such as expected term of the award, stock pricevolatility, dividend rate, risk-free interest rate and award cancellation rate. The input factors used in the valuation model are based on subjective futureexpectations combined with management judgment.  If there is a differencebetween the assumptions used in determining stock-based compensation costs andthe actual factors, which become known over time, we may change future inputfactors used in determining stock-based compensation costs.  These changesmay materially impact our results of operations in the periods over which suchcosts are expensed.

 

5

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The fair value of each option is estimated atthe date of grant using the Black-Scholes option valuation model.  Weestimate the expected stock price volatility and expected life of our optionsbased on historical data and representative peer group data.  We usehistorical data to estimate forfeiture rates. The risk-free interest rate for periods within the contractual life ofthe option is based on the U.S. Treasury yield with similar expected life.

 

Under our stock option plans, we may grant optionsto purchase up to a maximum of 6,644,000 shares of common stock, includingoutstanding options to employees, directors and consultants at a price not lessthan the fair market value on the date of the grant. These options generally vestover three to five years and generally expire seven to ten years from the dateof the grant.

 

We recognized stock-based compensationexpense of $467,000 and $995,000 during the quarter and six months ended March 28,2008, respectively, and $477,000 and $914,000 during the quarter and six monthsended March 30, 2007, respectively.  Due to uncertainty surroundingthe realization of the income tax benefit related to stock based compensationexpense, there is no related income tax benefit recognized in the consolidatedstatements of operations for the quarters and six months ended March 28,2008 and March 30, 2007, respectively, as a full valuation allowance hasbeen provided against the deferred tax asset.

 

The fair value of our stock options grantedin the quarter and six months ended March 28, 2008 and March 30,2007, respectively, was estimated at the date of grant using the followingweighted average assumptions:

 
| ** **               | ** ** | **Quarter Ended** | ** ** | **Six Months Ended** | ** ** |
|--------------------------|------------|------------------------|------------|--------------------------------|------------|
| ** **               | ** ** | **March 28,**     | ** ** | **March 30,**             | ** ** | **March 28,** | ** ** | **March 30,** | ** ** |
| ** **               | ** ** | **2008**               | ** ** | **2007**                       | ** ** | **2008** | ** ** | **2007** | ** ** |
| Expected life  (years)   |       | 3.5                    |       | 4.1                            |       | 4.5 |   | 4.4 |   |
| Risk-free  interest rate |       | 2.3                    | %          | 4.8                            | %          | 3.2 | % | 4.7 | % |
| Stock price  volatility  |       | 53.3                   | %          | 59.9                           | %          | 53.5 | % | 61.8 | % |
| Dividend yield           |       | 0.0                    | %          | 0.0                            | %          | 0.0 | % | 0.0 | % |

 

The following table summarizes our stock optionactivity under the stock plans during the quarter and six months ended March 28,2008:

 
| ** **                                                     | ** ** | ** **         | ** ** | ** **                | ** ** | **Weighted Average**      | ** ** | ** **                   | ** ** |
|----------------------------------------------------------------|------------|--------------------|------------|---------------------------|------------|--------------------------------|------------|------------------------------|------------|
| ** **                                                     | ** ** | **Number of** | ** ** | **Weighted Average** | ** ** | **Remaining Contractual** | ** ** | **Aggregate Intrinsic** | ** ** |
| ** **                                                     | ** ** | **Shares**         | ** ** | **Exercise Price**   | ** ** | **Term (Years)**          | ** ** | **Value**                    | ** ** |
|                                                           |       |               |       |                      |       |                           |       |                         |       |
| Outstanding at  September 28, 2007                        |       | 4,202,499          |       | $                         | 5.01       |                           | 6.51       |                         | $          | 3,496,801 |   |
| Granted                                                        |       | 410,000            |       | 1.78                      |       |                           |       |                         |       |
| Exercised                                                      |       | (9,924             | )          | 0.95                      |       |                           |       |                         |       |
| Forfeited                                                      |       | (35,932            | )          | 12.78                     |       |                           |       |                         |       |
| Outstanding at  December 28, 2007                         |       | 4,566,643          |       | 4.66                      |       | 6.27                           |       | 1,266,487                    |       |
| Granted                                                        |       | 100,000            |       | 1.10                      |       |                           |       |                         |       |
| Exercised                                                      |       | —             |       | —                    |       |                           |       |                         |       |
| Forfeited                                                      |       | (78,540            | )          | 9.55                      |       |                           |       |                         |       |
| Outstanding at  March 28, 2008                            |       | 4,588,103          |       | 4.50                      |       | 6.01                           |       | —                       |       |
|                                                           |       |               |       |                      |       |                           |       |                         |       |
| Options vested  and expected to vest at at March 28, 2008 |       | 4,076,106          |       | 4.51                      |       | 6.00                           |       | —                       |       |
|                                                           |       |               |       |                      |       |                           |       |                         |       |
| Options vested  at March 28, 2008                         |       | 2,750,407          |       | 4.70                      |       | 5.90                           |       | —                       |       |
|                                                                |            |                    |            |                           |            |                                |            |                              |            |  |  |

 

The aggregate intrinsic value representstotal pre-tax intrinsic value based on the closing stock price of $0.50, $1.81and $3.45 per share at March 28, 2008, December 28, 2007 and September 28,2007, respectively.

 

6

----

 

As of March 28, 2008, there was $3.4million of unrecognized compensation cost related to unvested stock optionsgranted and outstanding, net of estimated forfeitures.  The cost isexpected to be recognized over a weighted average period of approximately 2.9years.

 

The following table details total stock-basedcompensation expense for the quarters and six months ended March 28, 2008and March 30, 2007, respectively:

 
| ** **                                | ** ** | **Quarter Ended**  | ** ** | **Six Months Ended** | ** ** |
|-------------------------------------------|------------|-------------------------|------------|--------------------------------|------------|
| ** **                                | ** ** | **March 28,**      | ** ** | **March 30,**             | ** ** | **March 28,** | ** ** | **March 30,** | ** ** |
| ** **                                | ** ** | **2008**                | ** ** | **2007**                       | ** ** | **2008** | ** ** | **2007** | ** ** |
| ** **                                | ** ** | **(in thousands)** | ** ** |
| Cost of goods  sold                       |       | $                       | 50         |                           | $          | 52 |   | $ | 102 |   | $ | 101 |   |
| Research and  development                 |       | 119                     |       | 109                            |       | 240 |   | 223 |   |
| Selling, general  and administrative      |       | 298                     |       | 316                            |       | 653 |   | 590 |   |
|                                      |       |                    |       |                           |       |   |   |   |   |
| Pre-tax  stock-based compensation expense |       | 467                     |       | 477                            |       | 995 |   | 914 |   |
| Income tax  benefits                      |       | —                  |       | —                         |       | — |   | — |   |
| Stock-based  compensation expense         |       | $                       | 467        |                           | $          | 477 |   | $ | 995 |   | $ | 914 |   |

 

The options outstanding and vested at March 28,2008 were in the following exercise price ranges:

 
| ** **        | ** ** | **Options Outstanding** | ** ** | **Options Vested** | ** ** |
|-------------------|------------|------------------------------|------------|-------------------------|------------|
| ** **        | ** ** | ** **                   | ** ** | **Weighted**            | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **        | ** ** | ** **                   | ** ** | **Average**             | ** ** | **Weighted** | ** ** | ** ** | ** ** | **Weighted** | ** ** |
| **Range of** | ** ** | ** **                   | ** ** | **Remaining**           | ** ** | **Average** | ** ** | **Number** | ** ** | **Average** | ** ** |
| **Exercise**      | ** ** | **Number**                   | ** ** | **Contractual**         | ** ** | **Exercise** | ** ** | **Vested and** | ** ** | **Exercise** | ** ** |
| **Prices**        | ** ** | **Outstanding**              | ** ** | **Life (Years)**   | ** ** | **Price** | ** ** | **Exercisable** | ** ** | **Price** | ** ** |
| ** **        | ** ** | ** **                   | ** ** | ** **              | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| $0.83 - $0.83     |       | 1,099,071                    |       | 5.85                    |       | $ | 0.83 |   | 1,097,231 |   | $ | 0.83 |   |
| $0.84 - $4.98     |       | 1,074,797                    |       | 6.17                    |       | 2.37 |   | 359,629 |   | 2.42 |   |
| $4.99 - $5.59     |       | 900,521                      |       | 4.88                    |       | 5.00 |   | 379,001 |   | 5.01 |   |
| $5.60 - $87.07    |       | 1,513,714                    |       | 6.68                    |       | 8.39 |   | 914,546 |   | 10.11 |   |
| $0.83 - $87.07    |       | 4,588,103                    |       | 6.01                    |       | 4.50 |   | 2,750,407 |   | 4.70 |   |
|                   |            |                              |            |                         |            |  |  |  |  |  |  |  |  |

 

The weighted average fair value of options onthe grant date, as determined under SFAS 123(R), granted during the quarter andsix months ended March 28, 2008 was $0.44 and $0.78 per share,respectively, and $3.07 and $2.89 per share for the quarter and six monthsended March 30, 2007, respectively.

 

The total intrinsic value of optionsexercised during the quarter and six months ended March 28, 2008 was $0and $14,000, respectively, and $290,000 for the quarter and six months ended March 30,2007. The total cash received from employees as a result of employee stockoptions exercises during the quarter and six months ended March 28, 2008was $0 and $9,000, respectively.  For thequarter and six months ended March 30, 2007, the total cash received fromemployees as a result of stock option exercise was $161,000.

 

7

----

 

**4. Intangible Assets**

** **

 Duringthe quarter ended December 28, 2007, we acquired prototype materials and alicense to certain technology in exchange for 1,000,000 shares of our commonstock and potential future royalty payments based on net revenue generated fromfuture sales of products developed utilizing the technology. A summary of thetotal consideration given at closing is as follows (in thousands):

 
| Issuance of  common stock (1,000,000 shares at $1.83 per share) |   | $  | 1,830  |   |
|-----------------------------------------------------------------|--------|----|--------|--------|
| Direct  acquisition costs                                       |   | 58 |   |
| Total  consideration                                            |   | $  | 1,888  |   |

 

The price per share used for valuationpurposes was the closing price per common share per the NASDAQ Global Market onDecember 7, 2007, the date the shares were transferred.  Direct acquisition costs represent legal costsand use tax liability accrued on the transaction.

 

The total consideration issued in thetransaction was allocated based on the estimated fair values of the assetsacquired as of the closing date.  Theallocation is as follows (in thousands):

 
| License              |   | $   | 1,763  |   |
|----------------------|--------|-----|--------|--------|
| Prototype  materials |   | 125 |   |
| Total  consideration |   | $   | 1,888  |   |

 

The prototype materials were expensed asresearch and development costs during the quarter ended December 28,2007.  The cost of the license will beamortized over a 10-year useful life commencing January 2008.

 

Intangible assets are recorded at cost, netof accumulated amortization, and are amortized over their estimated usefullives using the straight-line method.  At March 28, 2008 and September 28, 2007 our intangible assetsconsisted of licenses which we have acquired.

 

We evaluate intangible assets for indicatorsof possible impairment when events or changes in circumstances indicate thecarrying amount of the asset may not be recoverable.   During the quarter ended March 28, 2008,we successfully completed testing of new technology which provides a moreefficient and cost-effective solution than certain technology we had previouslylicensed.  As a result, the value of thepreviously licensed technology has become impaired and will be phased outduring the next four quarters.  As aresult, the previously licensed technology was written down to its fair valueat March 28, 2008 based upon an analysis of future cash flows related tothe technology.  This resulted in animpairment charge to operations of approximately $3.0 million which is includedin restructuring and other charges during the quarter ended March 28,2008.  The estimated useful life of thepreviously licensed technology was reduced to one year based on ouranalysis.  The net book value of thislicense at March 28, 2008 was $125,000, which reflects the write-down.

 

Accumulated amortization and impairment onour intangible assets at March 28, 2008 and December 28, 2007 was$3,919,000 and $858,000, respectively.

 

Amortization expense relating to allintangible assets was $144,000 and $244,000 for the quarter and six monthsended March 28, 2008, respectively, and $125,000 and $253,000 for thequarter and six months ended March 30, 2007, respectively.  Based on the intangible assets recorded at March 28,2008, and assuming no subsequent additions to or impairment of the underlyingassets, the remaining amortization expense is expected to be as follows(in thousands):

 
| September 26,  2008 (remaining 6 months) |   | $   | 151    |   |
|-----------------------------------------------|--------|-----|--------|--------|
| September 25,  2009                      |   | 239 |   |
| September 24,  2010                      |   | 176 |   |
| September 30,  2011                      |   | 176 |   |
| September 28,  2012                      |   | 176 |   |
| Thereafter                                    |   | 926 |   |
| Total                                         |   | $   | 1,844  |   |

 

8

----

** **

**5.  BorrowingFacilities**

** **

Borrowings consist of the following (inthousands):

 
| ** **                                       | ** ** | **March 28,** | ** ** | **September 28,** | ** ** |
|--------------------------------------------------|------------|--------------------|------------|------------------------|------------|
| ** **                                       | ** ** | **2008**           | ** ** | **2007**               | ** ** |
|                                             |       |               |       |                   |       |
| Bank loan  (revolving line of credit)            |       | $                  | 25,261     |                   | $          | 12,937 |   |
| Equipment note  payable                          |       | 2,969              |       | 3,603                  |       |
| Mortgage note  payable                           |       | 11,598             |       | 11,785                 |       |
| Other notes  payable                             |       | 692                |       | 572                    |       |
| Capital lease  obligations                       |       | 530                |       | 636                    |       |
| Total                                            |       | 41,050             |       | 29,533                 |       |
| Less: short-term  borrowings and current portion |       | 28,046             |       | 15,043                 |       |
| Long-term  portion                               |       | $                  | 13,004     |                   | $          | 14,490 |   |

** **

**6.  Warranty and Guarantees**

** **

***Warranty***—Weaccrue for the estimated cost of the warranty on our systems, which includesthe cost of the labor and parts necessary to repair systems during the warrantyperiod. The amounts recorded in the warranty accrual are estimated based onactual historical costs incurred and on estimated probable future expensesrelated to current sales. The warranty accrual is adjusted over the warrantyperiod based on actual cost incurred. Systems typically have warranty periodsranging from one to three years. The components of the warranty accrual are asfollows:

 
| ** **                                                      | ** ** | **Quarter Ended**  | ** ** | **Six Months Ended** | ** ** |
|-----------------------------------------------------------------|------------|-------------------------|------------|--------------------------------|------------|
| ** **                                                      | ** ** | **March 28,**      | ** ** | **March 30,**             | ** ** | **March 28,** | ** ** | **March 30,** | ** ** |
| ** **                                                      | ** ** | **2008**                | ** ** | **2007**                       | ** ** | **2008** | ** ** | **2007** | ** ** |
| ** **                                                      | ** ** | **(in thousands)** | ** ** |
| Beginning  warranty accrual                                     |       | $                       | 9,805      |                           | $          | 12,099 |   | $ | 11,222 |   | $ | 10,816 |   |
| Additional  accruals for new shipments                          |       | 543                     |       | 2,723                          |       | 1,168 |   | 5,763 |   |
| Warranty costs  incurred                                        |       | (1,955                  | )          | (1,915                         | )          | (3,997 | ) | (3,754 | ) |
| Expiration and  change in liability for pre-existing warranties |       |                    |       |                           |       |   |   |   |   |
| during the  period                                              |       | 182                     |       | (4                             | )          | 182 |   | 78 |   |
| Ending warranty  accrual                                        |       | $                       | 8,575      |                           | $          | 12,903 |   | $ | 8,575 |   | $ | 12,903 |   |

 

***Guarantees***—In addition to productwarranties, we, from time to time, in the normal course of business, indemnifycertain customers against third-party claims that our products, when used fortheir intended purposes, infringe the intellectual property rights of suchthird party or other claims made against certain parties. It is not possible todetermine the maximum potential amount of liability under these indemnificationobligations due to the limited history of prior indemnification claims and theunique facts and circumstances that are likely to be involved in eachparticular claim. Historically, we have never made payments under theseobligations and no liabilities have been recorded for these obligations on thebalance sheet at March 28, 2008 and September 28, 2007, respectively.

 

**7.  Income Taxes**

** **

As part of the process of preparing our financial statements, we arerequired to estimate our income tax provision (benefit) in each of the jurisdictionsin which we operate. This process requires us to estimate our current incometax provision (benefit) and assess temporary differences resulting fromdiffering treatment of items for tax and accounting purposes. These differencesresult in deferred tax assets and liabilities, which are included in ourbalance sheet**.**

 

9

----

 

We recorded a valuation allowance to reduce our deferred tax assets tothe amount that is more likely than not to be realized. While we haveconsidered future taxable income and any ongoing prudent and feasible taxplanning strategies in assessing the need for the valuation allowance, if wewere to determine that we would be able to realize our deferred tax assets inthe future in excess of our net recorded amount, an adjustment to the deferredtax asset would increase income in the period such determination was made.Likewise, if we****were to determinethat we would not be able to realize all or part of a net deferred tax asset inthe future, an adjustment to the deferred tax asset would be charged to incomein the period such determination was made.  We have recorded a 100%valuation allowance against our domestic and United Kingdom net deferred taxasset due to the uncertainty regarding future taxable income.

 

Income tax expenseprimarily relates to our foreign operations as we continue to incur losses fromdomestic operations. We recorded income tax expense of $424,000 and $722,000during the quarter and six months ended March 28, 2008, respectively, and$395,000 and $796,000****for thequarter and six months ended March 30, 2007, respectively.

 

We adopted theprovisions of Financial Standards Accounting Board Interpretation No. 48, “*Accounting for Uncertainty in Income Taxes*”(“FIN 48”), an interpretation of FASB Statement No. 109 (“SFAS 109”) on September 29,2007. As a result of the implementation of FIN 48, we recognized no materialadjustment in the liability for unrecognized income tax benefits. At theadoption date of September 29, 2007, we had approximately$3.5 million of unrecognized tax benefits, $2.1 million of which wouldaffect our effective tax rate if recognized, and $1.4 million would be offsetby valuation allowance. At March 28, 2008, we had $3.6 million ofunrecognized tax benefits.

 

In addition, werecognized interest and penalties related to uncertain tax positions in incometax expense. At the adoption date of September 29, 2007, we hadapproximately $124,000 of accrued interest and penalties for uncertain taxpositions primarily from our foreign operations. We do not anticipate thattotal unrecognized tax benefits will significantly change due****to the settlement of audits and the expiration of thestatue of limitations prior to March 27, 2009.

 

At September 28,2007, we had approximately $56.6 million and $8.3 million of federaland California net operating loss carryforwards, respectively. We and oursubsidiaries have had multiple ownership changes, as defined by Section 382of the Internal Revenue Code (IRC), due to significant stock transactions inprevious years that will limit the future realization of our net operating losscarryforwards. Section 382 will result in the forfeiture of approximately$24.6 million of net operating loss carryforwards for federal income taxpurposes. The net operating loss carryforwards begin to expire in 2014 forfederal and 2013 for California purposes.

 

As of September 28,2007, we had federal and California research and development tax creditcarryforwards of approximately $1.7 million and $1.6 million,respectively.  Due to Section 382ownership changes under IRC Section 383, $1.1 million of the federalresearch tax credit carryforwards will be subject to forfeiture.  Federal research and development tax creditcarryforwards will expire beginning in fiscal 2011.  California research and development taxcredits will carry forward indefinitely.

 

**8.  Restructuring and OtherCharges**

** **

***RestructuringCharges -*****During thequarter ended March 28, 2008, we announced our plans for a significant globalrestructuring based on an analysis of our product strategy, served markets andinternal operations.  In order tostreamline our operations and align product offerings with the current marketconditions, we have and will continue to downsize programs, products andspending related to trench capacitor technology for DRAM and will decrease ouroverall dependence on the DRAM market. The restructuring of our global workforce, products and businessoperations is designed to reduce our overall cost structure, as well as improveoperational execution and financial performance.  We will refocus on our core strengths in theALD, Etch and PVD technologies, while moving away from the development of largebatch thermal systems.  We will continueto service and support our current global installed base.

 

As part of ourrestructuring plans, we executed a global reduction in workforce, divestedourselves of a non-core operation and wrote down assets related to non-coreproducts which included inventory revaluation, cancellation of purchasecommitments and the write-down of impaired machinery and equipment.  Volume manufacturing will no longer beperformed at our Scotts Valley headquarters.  Of the restructuring charges, approximately $2.4 million will requirefuture cash payments.  We estimate thesepayments will be made throughout fiscal 2009.

 

10

----

 

During the quarterended March 28, 2008, we sold the net assets of our machine shop, ETEquipments Ltd., located in Wales, UK, for $600,000 as part of ourrestructuring plan to refocus on our core strengths.  The net book value of the net assets sold,cost of completing the transaction and loss on the sale of the net assets of ETEquipments Ltd. were as follows (in thousands):

 
| Assets:                                               |   |   |   |   |   |
|-------------------------------------------------------|--------|--------|--------|--------|--------|
| Inventory                                             |   | $      | 1,143  |   |   |   |
| Equipment                                             |   | 148    |   |   |   |
|                                                  |   |   |   | $      | 1,291  |   |
| Liabilities:                                          |   |   |   |   |   |
| Accounts payable                                      |   | (19    | )      |   |   |
| Accrued  liabilities                                  |   | (233   | )      |   |   |
|                                                  |   |   |   | (252   | )      |
| Net assets sold                                       |   |   |   | 1,039  |   |
| Transaction  costs                                    |   |   |   | 104    |   |
|                                                  |   |   |   | 1,143  |   |
| Less: purchase  price                                 |   |   |   | (600   | )      |
| Net loss on sale  of net assets of ET Equipments Ltd. |   |   |   | $      | 543    |   |
|                                                       |        |        |        |        |        |  |  |

 

Transaction costsrelate primarily to legal fees incurred.

 

***OtherCharges -*** During the quarter ended March 28,2008, we impaired an intangible asset related to a license we had acquired (seeNote 4).  Completion of successfultesting of a new technology, which provides a more efficient and cost-effectivesolution, lead to the impairment of the license, resulting in a charge ofapproximately $3.0 million to operations during the quarter ended March 28,2008.

** **

**Theimpact of these restructuring and other charges on the operating results forthe quarter and six months ended March 28, 2008, and the remainingliability as of March 28, 2008, is summarized as follows (in thousands):**

 
| ** **                                            | ** ** | ** **            | ** ** | **Loss on**              | ** ** | ** **      | ** ** | **Sale of Net**        | ** ** | **Impairment of** | ** ** | ** **             | ** ** | ** ** | ** ** |
|-------------------------------------------------------|------------|-----------------------|------------|-------------------------------|------------|-----------------|------------|----------------------------------|------------|------------------------|------------|------------------------|------------|------------|------------|
| ** **                                            | ** ** | **Reduction in** | ** ** | **Non-cancellable**           | ** ** | **Inventory**   | ** ** | **Assets of**               | ** ** | **Machinery and** | ** ** | **Impairment of** | ** ** | ** ** | ** ** |
| ** **                                            | ** ** | **Workforce**         | ** ** | **Purchase Commitments** | ** ** | **Revaluation** | ** ** | **ET Equipments Ltd.** | ** ** | **Equipment (1)** | ** ** | **Intangible**         | ** ** | **Total**  | ** ** |
|                                                  |       |                  |       |                          |       |            |       |                             |       |                   |       |                   |       |       |       |
| Restructuring  Costs - cost of goods sold             |       | $                     | 380        |                          | $          | 2,178           |       | $                                | 10,471     |                   | $          | —                 |       | $          | —     |   | $ | — |   | $ | 13,029 |   |
| Restructuring  and other charges - operating expenses |       | 387                   |       | —                        |       | —          |       | 543                              |       | 3,854                  |       | 3,008                  |       | 7,792      |       |
| Total  restructuring and other charges                |       | 767                   |       | 2,178                         |       | 10,471          |       | 543                              |       | 3,854                  |       | 3,008                  |       | 20,821     |       |
| Non-cash  adjustments                                 |       | —                |       | —                        |       | (10,471         | )          | (543                             | )          | (3,654                 | )          | (3,008                 | )          | (17,676    | )          |
| Cash payments                                         |       | (589                  | )          | (149                          | )          | —          |       | —                           |       | —                 |       | —                 |       | (738       | )          |
| Accrued  restructuring charges at March 28, 2008 |       | $                     | 178        |                          | $          | 2,029           |       | $                                | —     |                   | $          | —                 |       | $          | 200        |   | $ | — |   | $ | 2,407 |   |

 

----

(1)  Includes $200,000 of disposal costs accrued as of March 28,2008

 

**9.  Commitments andContingencies**

** **

On April 11, 2006, IPS, Ltd. filed a lawsuitagainst us in the United States District Court for the Central District ofCalifornia. The complaint alleges that we improperly used IPS’s confidentialinformation to develop our Celsior single-wafer processing type atomic layerdeposition technology. The complaint is for unspecified monetary damages,injunctive relief and an order rescinding the settlement and distributoragreements that we and IPS entered into in May 2004 in settlement of aprior lawsuit that IPS filed against ASML U.S., Inc. and us in March 2004relating to assets that we acquired from ASML in October 2003. In May 2007,we successfully moved the dispute to arbitration. Discovery commenced in June 2007.The arbitration hearing is currently scheduled for October 2008. We intendto contest the lawsuit vigorously. We do not believe that the outcome ofthis lawsuit will have a material impact on our business, financial conditionor results of operations.

 

11

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Prior to our merger transaction with TrikonTechnologies, Inc., Trikon was a party to an employment lawsuit in France.On March 10, 2004, Dr. Jihad Kiwan departed Trikon as Director andChief Executive Officer. On March 29, 2004 and April 2, 2004, Trikonreceived letters from a United Kingdom law firm and from a French law firm,respectively, on behalf of Dr. Kiwan, detailing certain monetary claimsfor severance amounts due to Dr. Kiwan with respect to his employment withTrikon. On April 28, 2004, Dr. Kiwan filed a lawsuit in France and onJune 10, 2004, filed similar proceedings in the United Kingdom. Dr. Kiwanhas subsequently withdrawn the proceedings in the United Kingdom.  On January 7, 2008, the FrenchCommercial Court in Grenoble rejected certain of Dr. Kiwan’s claims butordered us to pay monetary awards with respect to certain other of Dr. Kiwan’sclaims. We intend to appeal the decision and do not believe that the outcome ofthe dispute will have a material impact on our business, financial condition orresults of operations.  We have accruedour estimate of the costs to settle the claims at March 28, 2008.

 

On December 1, 2006, we filed anarbitration demand against ASML U.S., Inc., and related entities,asserting claims of fraud, negligent misrepresentation, fraud in the inducementand breach of the covenant of good faith and fair dealing arising out of ourpurchase of ASML’s Thermal Division in October 2003.  Following discovery and an unsuccessfulmotion for summary judgment filed by ASML, the matter was arbitrated in December 2007and January 2008.  The arbitratorissued a preliminary judgment in favor of ASML. Based on a provision in the governing contract providing that the partyprevailing in the arbitration may recover its attorneys’ fees and costs fromthe opposing party, the arbitrator has ordered briefings by both parties withregard to any fee request by ASML.  On April 17,2008, ASML submitted a petition seeking approximately $2.5 million in attorneys’fees and costs incurred in connection with this matter.  We intend to oppose this request and plan tofile an opposition brief on May 9, 2008. We have accrued our estimate of the cost to settle the claims at March 28,2008.

 

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

 

Failure of WJ, ARCADIS, or AIS to fulfilltheir obligations may subject the Company to substantial fines, and the Companycould be forced to suspend production, alter manufacturing processes or ceasebusiness operations, any of which could have a material negative effect on theCompany’s business, financial condition or results of operations.

 

Management believes that the likelihood of thefailure of WJ, ARCADIS or AIS is remote and that any remaining or uninsuredenvironmental liabilities will not have a material impact on the Company’sbusiness, financial condition or results of operations.

 

**10.  Major Customers**

** **

During the quarter ended March 28, 2008,two customers accounted for 12% and 10% of total net sales, respectively, andduring the six months ended March 28, 2008, a different customer accountedfor 13% of total net sales.  During thequarter and six months ended March 30, 2007, one customer accounted for43% and 42% of total net sales, respectively.

 

12

----

 

**11.  Comprehensive Income (Loss)**

** **

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

 
| ** **                         | ** ** | **Quarter Ended** | ** ** | **Six Months** | ** ** |
|------------------------------------|------------|------------------------|------------|---------------------|------------|
| ** **                         | ** ** | **March 28,**     | ** ** | **March 30,**  | ** ** | **March 28,** | ** ** | **March 30,** | ** ** |
| ** **                         | ** ** | **2008**               | ** ** | **2007**            | ** ** | **2008** | ** ** | **2007** | ** ** |
| Net income  (loss)                 |       | $                      | (30,086    | )                   | $          | 1,355 |   | $ | (38,606 | ) | $ | 2,480 |   |
| Currency translation  adjustment   |       | 396                    |       | 203                 |       | (48 | ) | 1,209 |   |
|                               |       |                   |       |                |       |   |   |   |   |
| Total  comprehensive (loss) income |       | $                      | (29,690    | )                   | $          | 1,558 |   | $ | (38,654 | ) | $ | 3,689 |   |

 

**12.  Net Income (Loss) Per Share**

** **

Basic income (loss) per share has beencomputed based upon the weighted average number of common shares outstandingfor the periods presented.  Dilutedincome (loss) per share is calculated as though all potentially dilutive shareswere outstanding during the period, based upon the application of the treasurystock method.  The following details thecalculation of the net income (loss) per share for the periods presented (inthousands, except share and per share data):

 
| ** **                                    | ** ** | **Quarter Ended** | ** ** | **Six Months Ended** | ** ** |
|-----------------------------------------------|------------|------------------------|------------|--------------------------------|------------|
| ** **                                    | ** ** | **March 28,**     | ** ** | **March 30,**             | ** ** | **March 28,** | ** ** | **March 30,** | ** ** |
| ** **                                    | ** ** | **2008**               | ** ** | **2007**                       | ** ** | **2008** | ** ** | **2007** | ** ** |
|                                          |       |                   |       |                           |       |   |   |   |   |
| Numerator:                                    |       |                   |       |                           |       |   |   |   |   |
| Net income  (loss)                            |       | $                      | (30,086    | )                              | $          | 1,355 |   | $ | (38,606 | ) | $ | 2,480 |   |
|                                          |       |                   |       |                           |       |   |   |   |   |
| Denominator:                                  |       |                   |       |                           |       |   |   |   |   |
| Basic weighted  average shares outstanding    |       | 21,856,473             |       | 17,538,955                     |       | 21,458,241 |   | 16,844,853 |   |
| Effect of  potentially dilutive securities:   |       |                   |       |                           |       |   |   |   |   |
| Stock options                                 |       | —                 |       | 835,282                        |       | — |   | 792,778 |   |
|                                          |       |                   |       |                           |       |   |   |   |   |
| Dilutive  weighted average shares outstanding |       | 21,856,473             |       | 18,374,237                     |       | 21,458,241 |   | 17,637,631 |   |
|                                          |       |                   |       |                           |       |   |   |   |   |
| Net income  (loss) per share - basic          |       | $                      | (1.38      | )                              | $          | 0.08 |   | $ | (1.80 | ) | $ | 0.15 |   |
|                                          |       |                   |       |                           |       |   |   |   |   |
| Net income  (loss) per share - diluted        |       | $                      | (1.38      | )                              | $          | 0.07 |   | $ | (1.80 | ) | $ | 0.14 |   |

 

13

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For the six months ended March 28, 2008and March 30, 2007, we had securities outstanding that could potentiallydilute basic earnings per share in the future, but were excluded from thecomputation of diluted net income (loss) per share in the periods presented astheir effect would have been anti-dilutive. The weighted average shares of common stock issuable upon conversion orexercise of such outstanding securities consist of the following:

 
| ** **                                                                                                                                                                                                  | ** ** | **Quarter Ended** | ** ** | **Six Months Ended** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------|------------|--------------------------------|------------|
| ** **                                                                                                                                                                                                  | ** ** | **March 28,**     | ** ** | **March 30,**             | ** ** | **March 28,** | ** ** | **March 30,** | ** ** |
| ** **                                                                                                                                                                                                  | ** ** | **2008**               | ** ** | **2007**                       | ** ** | **2008** | ** ** | **2007** | ** ** |
| Weighted average  effect of potential common stock:                                                                                                                                                         |       |                   |       |                           |       |   |   |   |   |
|                                                                                                                                                                                                        |       |                   |       |                           |       |   |   |   |   |
| Options that  would have been included in the computation of dilutive shares outstanding  had the Company reported net income from continuing operations                                                    |       | 1,099,071              |       | —                         |       | 1,366,540 |   | — |   |
|                                                                                                                                                                                                        |       |                   |       |                           |       |   |   |   |   |
| Options that  were excluded from the computation of dilutive shares outstanding because the  total assumed proceeds exceeded the average market value of the Company’s  common stock during the period |       | 3,492,669              |       | 2,364,976                      |       | 3,076,214 |   | 2,390,999 |   |
|                                                                                                                                                                                                        |       |                   |       |                           |       |   |   |   |   |
| Shares resulting  from conversion of common stock warrants                                                                                                                                                  |       | 290,000                |       | 406,725                        |       | 305,392 |   | 406,725 |   |

 

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

** **

**Cautionary Statement RegardingForward-Looking Statements**

** **

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

* *

*For a discussion of the factors that couldcause actual results to differ materially from the forward-looking statements,see the “Liquidity and Capital Resources” section under “Management’sDiscussion and Analysis of Financial Condition and Results of Operations” inthis item of this report and the other risks and uncertainties that are setforth elsewhere in this report or detailed in our other Securities and ExchangeCommission reports and filings. We assume no obligation to update theseforward-looking statements.*

 

14

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** **

**Overview**

** **

We design, manufacture, sell and supportadvanced semiconductor capital equipment and process technologies for theglobal semiconductor industry and related markets. We offer bothfront-end-of-line and back-end-of-line systems and process technologies used ina variety of segments of the semiconductor market using critical thin filmformation technologies, including ALD, PVD, CVD, Etch and thermal processingsystems.

 

Our customer base is geographically diverseand includes both integrated device manufacturers and foundry-basedmanufacturers. We have a broad installed base, with approximately2,500 systems in active operation for which we are providing ongoing partsand services worldwide. We sell our systems globally primarily through a directsales force and in some instances through local independent salesrepresentatives.  Our largest customersmay vary from year to year depending upon, among other things, the customer’sannual budget for capital expenditures, plans for new fabrication facilitiesand expansions and new system introductions by us.

 

Aviza Technology, Inc. was incorporatedon December 8, 2004 to facilitate the merger transaction of oursubsidiaries, Aviza, Inc. and Trikon Technologies, Inc. Aviza, Inc.was incorporated on September 18, 2003 by affiliates of VantagePointVenture Partners, or VantagePoint, as Thermal Acquisition Corporation, aDelaware corporation, for the purpose of acquiring the business of the ThermalDivision of ASML Holding, N.V., a Netherlands corporation, which divisionof ASML is referred to in this discussion as the Predecessor. On October 10,2003, Thermal Acquisition Corporation acquired the business of the Predecessorand changed its name to Aviza Technology, Inc., which name wassubsequently changed to Aviza, Inc. in connection with the mergertransaction with Trikon.

 

On December 1, 2005, we completed themerger transaction with Trikon, and our common stock is publicly traded on theNasdaq Global Market under the symbol “AVZA.”

 

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

 

During the quarter ended March 28, 2008,we announced plans for a global restructuring based upon an analysis of ourproduct strategy, served markets and internal operations.  The restructuring allows us to refocus ourattention on our core strengths in the ALD, Etch and PVD market segments.  We have and will continue todownsize programs, products and spending related to trench capacitor technologyfor DRAM and will decrease our overall dependence on the DRAM market.  The restructuring of our global workforce,products and business operations is designed to reduce our cost structure aswell as improve operational execution and financial performance.  We will continue to support our currentglobal installed base and maintain the ability to manufacture additionalsystems as may be required by customers. During the quarter ended March 28, 2008, we recorded approximately$17.8 million in costs associated with the restructuring.  These charges were primarily attributable toa global reduction in force of approximately 15% of employees and contractorsand the write-down of assets relating to non-core products or processes whichinclude inventory revaluation, cancellation of purchase commitments and thewrite-down of equipment.  Annualized savingsas a result of our restructuring related to lower employee costs and lowerdepreciation expenses will be approximately $8.0 million.

 

On March 28, 2008, we receivednotification from Nasdaq informing us that the bid price of our common stockclosed below the minimum $1.00 per share requirement for continued inclusionunder the Market place Rule 4450 (a) (5).  We have until September 24, 2008 toregain compliance.

 

**Critical Accounting Policies**

** **

There are no material changes to the criticalaccounting policies described in the section entitled “Critical AccountingPolices” under Item 7 in our Annual Report on Form 10-K for the fiscalyear ended September 28, 2007.

 

15

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**Results of Operations**

** **

The information in the table below presentsour statements of operations data as a percentage of net sales for the quartersand six months ended March 28, 2008 and March 30, 2007.

 
| ** **                                  | ** ** | **Quarter Ended** | ** ** | **Six Months Ended** | ** ** |
|---------------------------------------------|------------|------------------------|------------|--------------------------------|------------|
| ** **                                  | ** ** | **March 28,**     | ** ** | **March 30,**             | ** ** | **March 28,** | ** ** | **March 30,** | ** ** |
| ** **                                  | ** ** | **2008**               | ** ** | **2007**                       | ** ** | **2008** | ** ** | **2007** | ** ** |
|                                        |       |                   |       |                           |       |   |   |   |   |
| Net sales                                   |       | 100                    | %          | 100                            | %          | 100 | % | 100 | % |
| Cost of goods  sold                         |       |                   |       |                           |       |   |   |   |   |
| Cost of goods  sold                         |       | 70                     | %          | 69                             | %          | 71 | % | 69 | % |
| Cost of goods  sold - restructuring charges |       | 43                     | %          | 0                              | %          | 20 | % | 0 | % |
| Total cost of  sales                        |       | 113                    | %          | 69                             | %          | 91 | % | 69 | % |
| Gross margin                                |       | (13                    | )%         | 31                             | %          | 9 | % | 31 | % |
|                                        |       |                   |       |                           |       |   |   |   |   |
| Operating  expenses:                        |       |                   |       |                           |       |   |   |   |   |
| Research and  development                   |       | 26                     | %          | 13                             | %          | 25 | % | 13 | % |
| Selling, general  and administrative        |       | 31                     | %          | 13                             | %          | 30 | % | 13 | % |
| Restructuring  and other charges            |       | 26                     | %          | 0                              | %          | 12 | % | 0 | % |
| Total operating  expenses                   |       | 83                     | %          | 26                             | %          | 67 | % | 26 | % |
| Income (loss)  from operations              |       | (96                    | )%         | 5                              | %          | (58 | )% | 5 | % |
| Other income  (expense):                    |       |                   |       |                           |       |   |   |   |   |
| Interest income                             |       | 0                      | %          | 0                              | %          | 0 | % | 0 | % |
| Interest expense                            |       | (2                     | )%         | (2                             | )%         | (1 | )% | (2 | )% |
| Other income -  net                         |       | 0                      | %          | 0                              | %          | 0 | % | 0 | % |
| Total other  expense - net                  |       | (2                     | )%         | (2                             | )%         | (1 | )% | (2 | )% |
| Income (loss)  before income taxes          |       | (98                    | )%         | 3                              | %          | (59 | )% | 3 | % |
| Provision for  income taxes                 |       | 1                      | %          | 1                              | %          | 1 | % | 1 | % |
| Net income  (loss)                          |       | (99                    | )%         | 2                              | %          | (60 | )% | 2 | % |

 

**Net Sales**

 
| ** ** | ** ** | **Quarter Ended**  | ** ** | **Six Months Ended** | ** ** |
|------------|------------|-------------------------|------------|--------------------------------|------------|
| ** ** | ** ** | **March 28,**      | ** ** | **March 30,**             | ** ** | **March 28,** | ** ** | **March 30,** | ** ** |
| ** ** | ** ** | **2008**                | ** ** | **2007**                       | ** ** | **2008** | ** ** | **2007** | ** ** |
| ** ** | ** ** | **(in thousands)** | ** ** |
| Net sales  |       | $                       | 30,174     |                           | $          | 61,638 |   | $ | 64,188 |   | $ | 123,829 |   |
|            |            |                         |            |                                |            |  |  |  |  |  |  |  |  |

 

Net sales for the quarter ended March 28,2008 decreased by $31.5 million, or 51%, from the quarter ended March 30,2007.  The decrease was due primarily tothe following:

 

·                  Approximately $34.0 million of thedecrease in net sales was related to our deposition and thermal processingsystems.  Sales recognized on shipmentdecreased by $31.2 million as unit shipments decreased by 91% during thequarter ended March 28, 2008 from the quarter ended March 30,2007.  Net sales recognized on customeracceptance decreased by $2.8 million primarily due to a $2.0 million reductionin RVP-300*plus* system acceptances, which reflectsfewer systems in the field under installation. The overall decrease is the result of changes within our DRAM customers,relating primarily to trench capacitor technology.

 

16

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·                  The decrease in our deposition andthermal processing systems net sales was partially offset by a $4.1 million(49%) increase in net sales of our PVD, Etch and CVD systems due to higher unitvolume.

 

·                  Service and spare parts sales wasapproximately $1.6 million lower during the quarter ended March 28, 2008primarily due to lower spare parts shipments.

 

Net sales for the sixmonths ended March 28, 2008 decreased by $59.6 million, or 48%, from thesix months ended March 30, 2007. The decrease was due primarily to the following:

 

·                  Net sales recognized on shipment ofour thermal processing systems (primarily RVP-300*plus*),and ALD systems decreased by $53.2 million primarily due to a decrease in unitshipment volume (84%).

 

·                  Net sales recognized on acceptance ofour thermal processing systems decreased by approximately $5.3 million due toless installation activity in the field during the six months ended March 28,2008.

 

·                  Service and spares sales wereapproximately 11% less during the six months ended March 28, 2008 due tolower equipment utilization at our customer sites.

 

During the quarter ended March 28, 2008,Matsushita Electrical Industrial Company and Triquent Semiconductor, Inc.accounted for 12% and 10% of our net sales, respectively.  During the six months ended March 28,2008, Qimonda AG accounted for 13% of our net sales.

 

During the quarter and six months ended March 30,2007, Inotera Memories Inc. accounted for 43% and 42% of our net sales,respectively.

 

**Gross Profit (Loss) and Gross Margin**

** **

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

 
| ** **           | ** ** | **Quarter Ended**               | ** ** | **Six Months Ended** | ** ** |
|----------------------|------------|--------------------------------------|------------|--------------------------------|------------|
| ** **           | ** ** | **March 28,**                   | ** ** | **March 30,**             | ** ** | **March 28,** | ** ** | **March 30,** | ** ** |
| ** **           | ** ** | **2008**                             | ** ** | **2007**                       | ** ** | **2008** | ** ** | **2007** | ** ** |
| ** **           | ** ** | **(dollars in thousands)** | ** ** |
| Gross profit  (loss) |       | $                                    | (3,890     | )                              | $          | 18,924 |   | $ | 5,841 |   | $ | 37,772 |   |
| Gross margin         |       | (13                                  | )%         | 31                             | %          | 9 | % | 31 | % |
|                      |            |                                      |            |                                |            |  |  |  |  |  |  |  |  |

 

The decrease in gross margin of 44% duringthe quarter ended March 28, 2008, as compared to the quarter ended March 30,2007, was primarily the result of restructuring costs totaling $13.0 million inconnection with inventory write-downs and losses recorded for outstandingpurchase commitments due to a refocus of our product strategies, and severancepayments made as part of our reduction in force.  The inventory write-down relates to changesthat were based on our decision to downsize programs, products and spendingrelated to our underperforming thermal processing systems and our plan to focuson our core and more profitable ALD, Etch and PVD products.

 

17

----

 

Excluding the impact of restructuringcharges, gross margin for the quarter ended March 28, 2008 would have been30%, making the decrease in gross margin 1% compared to the quarter ended March 30,2007.  The decrease was due primarily tothe following:

 

·                  A 7% decrease in overall servicegross margin related to lower spare parts sales in the quarter ended March 28,2008.

 

·                  A $1.5 million increase in unabsorbedmanufacturing costs.  As the increase isspread over a much lower sales base, its impact is larger.

 

These differences were partially offset bythe following:

 

·                  Higher gross margins on shipments dueto product mix changes, with a greater proportion of ALD, PVD and Etchshipments in the quarter ended March 28, 2008 as compared to a greaterproportion of RVP-300*plus* thermalprocessing systems shipments in the quarter ended March 30, 2007.

 

·                  Gross margins on sales recognized onsystem acceptance increased by approximately 3% due to a lower proportion ofRVP-300*plus* thermal processing systemacceptance revenue in the quarter ended March 28, 2008 as compared to thequarter ended March 30, 2007.

 

The decrease in gross margin of 22% duringthe six months ended March 28, 2008 as compared to the six months ended March 30,2007 was primarily due to the restructuring charges of approximately $13.0million recorded during the six months ended March 28, 2008.

 

Excluding the impact of restructuringcharges, gross margin decreased 1% during the six months ended March 28,2008 as compared to the six months ended March 30, 2007.  The decrease related primarily to thefollowing:

 

·                  Reductions in manufacturing cost ofapproximately $3.0 million were more than offset by lower manufacturing costabsorption of $5.7 million due to a decrease in the number of systems producedduring the six months ended March 28, 2008 primarily in relation to an 84%decrease in system shipments.

 

·                  Gross margin on service-relatedactivities decreased by approximately 8% primarily due to lower spare partssales, a higher proportion of the field options sales during the six monthsended March 28, 2008 and lower service cost absorption due to the impacton installation and warranty service demand of lower shipments during the sixmonths ended March 28, 2008.

 

Partially offsetting the impact of lowermanufacturing and service absorption for the period was:

 

·                  A 10% improvement in gross marginrecognized on shipment of our RVP-300*plus* systemsprimarily due to higher average selling prices.

 

·                  A greater proportion of PVD, Etch andCVD related sales, which have higher gross margins than the thermal processingsystems.

 

**Research and Development**

** **

Research and development expense consists ofemployment costs attributable to employees, consultants and contractors whoprimarily spend their time on system design, engineering and processdevelopment; materials and supplies used in system prototyping, includingwafers, chemicals and process gases; depreciation and amortization expenseallocable to research and development activities and facilities; direct chargesfor repairs to research equipment and laboratories; costs of outside servicesfor facilities; and process engineering support and wafer analyticalservices.  We also include in research and development expenses associatedwith the preparation, filing and prosecution of patents and other intellectualproperty.

 
| ** **                | ** ** | **Quarter Ended**               | ** ** | **Six Months Ended** | ** ** |
|---------------------------|------------|--------------------------------------|------------|--------------------------------|------------|
| ** **                | ** ** | **March 28,**                   | ** ** | **March 30,**             | ** ** | **March 28,** | ** ** | **March 30,** | ** ** |
| ** **                | ** ** | **2008**                             | ** ** | **2007**                       | ** ** | **2008** | ** ** | **2007** | ** ** |
| ** **                | ** ** | **(dollars in thousands)** | ** ** |
| Research and  development |       | $                                    | 7,981      |                           | $          | 8,011 |   | $ | 16,020 |   | $ | 15,714 |   |
| Percent of net  sales     |       | 26                                   | %          | 13                             | %          | 25 | % | 13 | % |
|                           |            |                                      |            |                                |            |  |  |  |  |  |  |  |  |

 

18

----

 

Research and development costs wererelatively flat between the quarters ended March 28, 2008 and March 30,2007.  Increases in salaries and wagesand depreciation expense related to demonstration lab equipment additions wereoffset by lower net prototype supply costs.

 

The net increase in research and developmentcosts of approximately $0.3 million, or 2%, during the six months ended March 28,2008 over the six months ended March 30, 2007 was primarily due to the following:

 

·                  Increased depreciation andamortization expense of approximately $0.5 million related primarily toequipment installed in our demonstration laboratories and amortization of atechnology license acquired during December 2007.

 

·                  During the six months ended March 30,2007, we received government grants of approximately $1.4 million, whichpartially offset costs associated with a next-generation productdevelopment.  There were no similar grantoffsets during the six months ended March 28, 2008.

 

·                  Increased travel expense ofapproximately $0.2 million.

 

·                  Lower prototype material and suppliescost of $1.9 million.

 

**Selling, General and Administrative**

** **

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

 
| ** **                           | ** ** | **Quarter Ended**               | ** ** | **Six Months Ended** | ** ** |
|--------------------------------------|------------|--------------------------------------|------------|--------------------------------|------------|
| ** **                           | ** ** | **March 28,**                   | ** ** | **March 30,**             | ** ** | **March 28,** | ** ** | **March 30,** | ** ** |
| ** **                           | ** ** | **2008**                             | ** ** | **2007**                       | ** ** | **2008** | ** ** | **2007** | ** ** |
| ** **                           | ** ** | **(dollars in thousands)** | ** ** |
| Selling, general  and administrative |       | $                                    | 9,509      |                           | $          | 8,221 |   | $ | 19,083 |   | $ | 16,628 |   |
| Percent of net  sales                |       | 31                                   | %          | 13                             | %          | 30 | % | 13 | % |
|                                      |            |                                      |            |                                |            |  |  |  |  |  |  |  |  |

 

The increase in selling, general andadministrative expense of approximately $1.3 million, or 16%, in the quarterended March 28, 2008, as compared to the quarter ended March 30,2007, was primarily due to a $2.9 million increase in legal costs associatedwith pending legal matters.

 

The increase in legal costs was partiallyoffset by:

 

·                  Decreased salaries and benefits of$0.4 million due to lower headcount and lower stock-based compensation costs.

 

·                  A $0.6 million decrease inthird-party commissions and sales bonus due to an approximate 61% decrease insystem sales quarter over quarter.

 

·                  Increased currency exchange gains of$0.6 million.

 

The increase in selling, general andadministrative expense of approximately $2.5 million, or 15%, during the sixmonths ended March 28, 2008 over the six months ended March 30, 2007was primarily due to the following:

 

·                  A $4.2 million increase in legal feesrelated to pending legal matters.

 

·                  Increases in costs associated withour international infrastructure build-up of $0.4 million.

 

·                  A $0.3 million increase in outsideservice costs primarily relating to information technology requirements.

 

19

----

 

These increases were partially offset by:

 

·                  Lower salary, wages and employeebenefits of approximately $0.8 million due to lower headcount.

 

·                  Approximately $0.5 million in reducedcommission expenses related to lower system sales during the six months ended March 28,2008.

 

·                  Lower export license and fee costs ofapproximately $0.5 million due to lower export and franchise tax fees.

 

·                  A $0.6 million increase in currencytransaction gains.

* *

**Restructuring and Other Charges**

** **
| ** **                       | ** ** | **Quarter Ended**               | ** ** | **Six Months Ended** | ** ** |
|----------------------------------|------------|--------------------------------------|------------|--------------------------------|------------|
| ** **                       | ** ** | **March 28,**                   | ** ** | **March 30,**             | ** ** | **March 28,** | ** ** | **March 30,** | ** ** |
| ** **                       | ** ** | **2008**                             | ** ** | **2007**                       | ** ** | **2008** | ** ** | **2007** | ** ** |
| ** **                       | ** ** | **(dollars in thousands)** | ** ** |
| Restructuring  and Other Charges |       | $                                    | 7,792      |                           | $          | — |   | $ | 7,792 |   | $ | — |   |
| Percent of net  sales            |       | 26                                   | %          | 0                              | %          | 12 | % | 0 | % |
|                                  |            |                                      |            |                                |            |  |  |  |  |  |  |  |  |

** **

**During the quarter ended March 28,2008, we implemented restructuring plans to align operations with our corestrength products in the ALD, Etch and PVD market segments.  This entailed a downsizing of activitiesrelated to lower performing, less profitable products resulting in a globalreduction in force, the write-down of impaired machinery and equipment and thedivestiture of the net assets of ET Equipments Ltd., a machine shop located inWales, U.K.   During the quarter ended March 28,2008, we also wrote down an intangible asset related to a license of certaintechnology.  We have developed andsuccessfully tested a more efficient and cost-effective technology thusimpairing the asset.**

** **

**The breakdown of restructuringand other charges included in operating expenses for the quarter ended March 28,2008 are as follows (in thousands):**

** **
| Impairment of  machinery and equipment            |   | $     | 3,854  |   |
|---------------------------------------------------|--------|-------|--------|--------|
| Impairment of  intagible asset                    |   | 3,008 |   |
| Loss on sale of  net assets of ET Equipments Ltd. |   | 543   |   |
| Reduction in  work force                          |   | 387   |   |
|                                              |   | $     | 7,792  |   |

 

20

----

** **

**Interest Expense**

 
| ** **            | ** ** | **Quarter Ended**               | ** ** | **Six Months Ended** | ** ** |
|-----------------------|------------|--------------------------------------|------------|--------------------------------|------------|
| ** **            | ** ** | **March 28,**                   | ** ** | **March 30,**             | ** ** | **March 28,** | ** ** | **March 30,** | ** ** |
| ** **            | ** ** | **2008**                             | ** ** | **2007**                       | ** ** | **2008** | ** ** | **2007** | ** ** |
| ** **            | ** ** | **(dollars in thousands)** | ** ** |
| Interest expense      |       | $                                    | 536        |                           | $          | 1,063 |   | $ | 948 |   | $ | 2,315 |   |
| Percent of net  sales |       | 2                                    | %          | 2                              | %          | 1 | % | 2 | % |
|                       |            |                                      |            |                                |            |  |  |  |  |  |  |  |  |

 

Our interest expense for the quarters and six monthsended March 28, 2008 and March 30, 2007 consisted primarily ofinterest incurred on our revolving line of credit, equipment term loan andcommercial real estate loan.  Inaddition, amortization of debt issuance costs impacted both quarters.  During the six months ended March 30,2007, interest expense included the amortization of the fair value of warrantsissued to affiliates of VantagePoint in consideration of VantagePoint’sagreement to guarantee a portion of our prior revolving line of credit.  During April 2007, we entered into a newfinancing agreement that did not require further guarantees.  Unamortized debt issuance costs and warrantamortization related to the prior financing agreements were written off whenthe transaction for our new financing closed.

 

Aggregate borrowings under our current revolvingline of credit, equipment term loan and commercial real estate loan were $39.8million at March 28, 2008. Aggregate borrowings under the prior credit facility were $36.7 at March 30,2007.

 

During the quarter ended March 28, 2008,interest expense decreased by approximately $0.5 million from the quarter endedMarch 30, 2007, due to a combination of lower average borrowings and alower average interest rate on our current credit facility.  Interest rates on our current credit facilityaveraged 5.9% during the quarter ended March 28, 2008.  Interest rates on our facilities in placeduring the quarter ended March 30, 2007 ranged from 8.25% to 10.625%.

 

During the six months ended March 28, 2008,interest expense decreased by approximately $1.4 million from the six monthsended March 30, 2007 primarily due to lower average borrowings ($25.5million average borrowing on our current bank facility during the six monthsended March 28, 2008 as compared to $36.7 million average borrowings onour line of credit and real estate loan in place during the six months ended March 30,2007), a lower average interest rate (6.2% as compared to 8.7%) and loweramortization of debt issuance costs ($0.1 million as compared to $0.5 million).

 

**Income Taxes**

** **

Because we have incurred significant operatinglosses during prior periods, no material federal or state income taxes havebeen recorded. We recorded income taxes relating to certain profitableinternational subsidiaries and provided a full valuation allowance on our nettax benefits generated in all other jurisdictions during the respectiveperiods.

 

**Liquidity and Capital Resources**

** **

At March 28, 2008, our cash and cash equivalentswere $15.2 million as compared to $23.1 million at September 28,2007.  This $7.9 million decrease in cash and cashequivalents is primarily attributable to cash used to fund operations ($16.9million) and capital expenditures ($1.2 million) during the six months ended March 28,2008, which was partially offset by increased borrowings under our revolvingline of credit.

 

We anticipate that our existing cash balances andavailable borrowings under our credit facility will be sufficient to meet ouranticipated cash needs for at least the next 12 months.  However, we mayneed to raise additional capital from the sale of debt or equity securities orfrom other sources in order to support our operations.   We may notbe able to obtain any additional capital on acceptable terms, if at all.

 

21

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***Cash Flows from OperatingActivities***

*** ***

Operating activities used approximately $16.9million of cash in the six months ended March 28, 2008.  Cash was used to fund operating losses ofapproximately $38.6 million during the six months ended March 28,2008.  Non-cash operating costs totaling$21.7 million, consisting primarily of depreciation and amortization,restructuring and other charges and stock-based compensation, were included inthe operating loss for the period.  Cashprovided by a decrease of approximately $8.8 million in accounts receivableprimarily due to collections of retentions due on shipments, an increase inaccounts payable of approximately $2.8 million used to finance inventorypurchases and a $4.0 million increase in accrued liabilities primarily relatedto increased legal costs and restructuring charges was offset by cash used tofund increases in inventory of approximately $13.2 million primarily related toincreased PVD, Etch and CVD business opportunities and a decrease ofapproximately $2.6 million in warranty liabilities primarily due to lowersystem shipments during the six months ended March 28, 2008.

 

***Cash Flows from InvestingActivities***

*** ***

Cash used in investing activities for the six monthsended March 28, 2008 was $1.2 million. Cash used in investing activitiesduring the quarter primarily consisted of purchasing equipment to be used inour development and demonstration laboratories ($2.1 million), which waspartially offset by proceeds received from the sale of equipment and the saleof the net assets of ET Equipments Ltd. ($0.6 million), our machine shoplocated in Wales, U.K.

 

***Cash Flows from FinancingActivities***

*** ***

Net cash generated by financing activities for thesix months ended March 28, 2008 was $10.7 million.  Incremental bankborrowings under our revolving line of credit generated $12.3 million in cash.Payments on our mortgage line of credit, short-term borrowings and capitallease obligations were the primary offsets to these borrowings.

 

During April 2007, we entered into a creditfacility with a syndicate of banks to refinance our existing line of credit andmortgage line of credit. Our credit facility includes a two-year revolving lineof credit, an equipment term loan and a four-year commercial real estate termloan. We may borrow up to $55.0 million under our credit facility.Borrowings under the credit facility bear interest at the London Inter BankOffering Rate, or LIBOR, plus 2.18% (5.30% at March 28, 2008).  The terms of the credit agreement prohibitsus from paying cash dividends on our common stock. The credit agreementcontains certain financial and operating covenants.

 

Maximum borrowings available under the revolvingline of credit are $44.0 million and are secured by our accountsreceivable and inventory. Outstanding borrowings under the revolving line ofcredit were $25.3 million at March 28, 2008.

 

Maximum borrowings under the equipment term loan are$4.0 million and are secured by a lien on our equipment. Our equipmentterm loan has a three-year amortization period with monthly payments ofprincipal and accrued interest. Outstanding borrowings under the equipment termloan were $3.0 million at March 28, 2008. As principal is paid downunder the equipment portion of the facility, additional borrowing availabilitywill be created under the revolving portion of the credit facility.

 

Maximum borrowings under the commercial real estateterm loan are $13.0 million or 70% of the appraised value of the realestate, whichever is lower, and are secured by a deed of trust on our ScottsValley facility.  Monthly payments ofprincipal and accrued interest will be based on a 20-year amortization periodof the loan principal.  Outstanding borrowingsunder the commercial real estate term loan were $11.6 million at March 28,2008.  As principal is paid down underthe commercial real estate portion of the facility, additional borrowingavailability will be created under the revolving portion of the creditfacility.

 

A subsidiary of ours has a revolving line of creditfor 200,000,000 Japanese Yen (approximately $2.0 million, at the exchangerate on March 28, 2008) under which there were no borrowings at March 28,2008. The credit line bears interest at 1.875% per annum.

 

22

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**Off-Balance Sheet Arrangements**

** **

At March 28, 2008, we had no off-balance sheetarrangements as defined in Item 303(a)(4) of Regulation S-Kpromulgated by the Securities and Exchange Commission.

 

**Contractual Obligations**

** **

Other than operating leases for certain equipmentand real estate and certain vendor commitments, we have no significantoff-balance sheet transactions or unconditional purchase obligations.  Asa “smaller reporting company,” we are not required to provide tabulardisclosure of contractual obligations.

 

**ITEM 3.   QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**

** **

As a “smaller reporting company,” we are notrequired to provide the information required by this Item.

 

**ITEM 4.    CONTROLSAND PROCEDURES**

** **

An evaluation was performed under the supervisionand with the participation of our management, including our chief executiveofficer and chief financial officer, of the effectiveness of the design andoperation of our disclosure controls and procedures as of the end of the periodcovered by this quarterly report. Based on that evaluation, our management,including our chief executive officer and chief financial officer, concludedthat, as of March 28, 2008, our disclosure controls and procedures wereeffective.  During the six months ended March 28,2008, there were no changes in our internal control over financial reportingthat materially affected, or were reasonably likely to materially affect, ourinternal control over financial reporting.

 

**PART II.  OTHER INFORMATION**

** **

**ITEM 1.  LEGAL PROCEEDINGS**

** **

On April 11,2006, IPS, Ltd. filed a lawsuit against us in the United States District Courtfor the Central District of California. The complaint alleges that we improperlyused IPS’s confidential information to develop our Celsior single-waferprocessing type atomic layer deposition technology. The complaint is forunspecified monetary damages, injunctive relief and an order rescinding thesettlement and distributor agreements that we and IPS entered into in May 2004in 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, we successfully moved the dispute to arbitration. Discoverycommenced in June 2007. The arbitration hearing is currently scheduled forOctober 2008. We intend to contest the lawsuit vigorously. We do notbelieve that the outcome of this lawsuit will have a material impact on ourbusiness, financial condition or results of operations.

 

Priorto our merger transaction with Trikon Technologies, Inc., Trikon was aparty to an employment lawsuit in France. On March 10, 2004, Dr. JihadKiwan departed Trikon as Director and Chief Executive Officer.  On March 29, 2004 and April 2,2004, Trikon received letters from a United Kingdom law firm and from a Frenchlaw firm, respectively, on behalf of Dr. Kiwan, detailing certain monetaryclaims for severance amounts due to Dr. Kiwan with respect to his employmentwith Trikon. On April 28, 2004, Dr. Kiwan filed a lawsuit in Franceand on June 10, 2004, filed similar proceedings in the United Kingdom. Dr. Kiwanhas subsequently withdrawn the proceedings in the United Kingdom. On January 7,2008, the French Commercial Court in Grenoble rejected certain of Dr. Kiwan’sclaims but ordered us to pay monetary awards with respect to certain other of Dr. Kiwan’sclaims. We have appealed the decision and do not believe that the outcome ofthe dispute will have a material impact on our business, financial condition orresults of operations.  We have accrued our estimate of the costto settle the claims at March 28, 2008.

 

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On December 1, 2006, we filed an arbitrationdemand against ASML U.S., Inc., and related entities, asserting claims offraud, negligent misrepresentation, fraud in the inducement and breach of thecovenant of good faith and fair dealing arising out of our purchase of ASML’sThermal Division in October 2003. Following discovery and an unsuccessful motion for summary judgmentfiled by ASML, the matter was arbitrated in December 2007 and January 2008.  The arbitrator issued a preliminary judgmentin favor of ASML.  Based on a provisionin the governing contract providing that the party prevailing in thearbitration may recover its attorneys’ fees and costs from the opposing party,the arbitrator has ordered briefing by both parties with regard to any feerequest by ASML.  On April 17, 2008,ASML submitted a petition seeking approximately $2.5 million in attorneys’ feesand costs incurred in connection with this matter.  We intend to oppose this request and plan tofile an opposition brief on May 9, 2008.  We haveaccrued our estimate of the cost to settle the claims at March 28, 2008.

 

**ITEM 1A.  RISK FACTORS**

** **

As a “smaller reporting company,” we are notrequired to provide the information required by this Item.

 

**ITEM 2.  UNREGISTERED SALES OFEQUITY SECURITIES AND USE OF PROCEEDS**

** **

None.

 

**ITEM 3.  DEFAULTS UPON SENIORSECURITIES**

** **

None.

 

**ITEM 4.  SUBMISSION OF MATTERSTO A VOTE OF SECURITY HOLDERS**

** **

None

 

**ITEM 5. OTHER INFORMATION**

** **

None.

 

**ITEM 6.EXHIBITS**

 
| **Exhibit   Number** | ** ** | **Description**                                                                                                                                                                                                                                                                                                                        |
|---------------------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                      |       |                                                                                                                                                                                                                                                                                                                                   |
| 10.1                      |       | Purchase Agreement and  Joint and Mutual Escrow Instructions, dated as of March 6, 2008, between  Aviza Technology, Inc. and Fowler Property Acquisitions, LLC,  incorporated by reference to Exhibit 10.1 to the Current Report on  Form 8-K filed by the registrant with the Commission on March 12,  2008. |
|                      |       |                                                                                                                                                                                                                                                                                                                                   |
| 31.1                      |       | Certification  of the Chief Executive Officer pursuant to Section 302 of the  Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                         |
|                      |       |                                                                                                                                                                                                                                                                                                                                   |
| 31.2                      |       | Certification  of the Chief Financial Officer pursuant to Section 302 of the  Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                         |
|                      |       |                                                                                                                                                                                                                                                                                                                                   |
| 32.1                      |       | Certification  of the Chief Executive Officer pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                         |
|                      |       |                                                                                                                                                                                                                                                                                                                                   |
| 32.2                      |       | Certification of the Chief Financial Officer pursuant  to Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                          |
|                      |       |                                                                                                                                                                                                                                                                                                                                   |

** **

**24**

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** **

**SIGNATURES**

** **

Pursuant to the requirements of the SecuritiesExchange Act of 1934, the registrant has duly caused this report to be signedon its behalf by the undersigned thereunto duly authorized.

 
|                    | Aviza  Technology, Inc.                                                                                                         |                              |
|-------------------------|--------------------------------------------------------------------------------------------------------------------------------------|-----------------------------------|
| * *                | *(Registrant)*                                                                                                                       | * *                          |
| * *                | * *                                                                                                                             | * *                          |
| * *                | * *                                                                                                                             | * *                          |
| Dated: May 9, 2008 |                                                                                                                                 |
|                    | By:                                                                                                                                  | **/s/  PATRICK C. O’CONNOR** |
|                    |                                                                                                                                 |
| ** **              | **Patrick  C. O’Connor***Executive Vice President and Chief Financial   Officer   (Principal Financial and Accounting Officer)* |
|                         |                                                                                                                                      |                                   |  |

 

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**EXHIBITINDEX**

 
| **Exhibit   Number** | ** ** | **Description**                                                                                                                                                                                                                                                                                                                        |
|---------------------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                      |       |                                                                                                                                                                                                                                                                                                                                   |
| 10.1                      |       | Purchase Agreement and  Joint and Mutual Escrow Instructions, dated as of March 6, 2008, between  Aviza Technology, Inc. and Fowler Property Acquisitions, LLC,  incorporated by reference to Exhibit 10.1 to the Current Report on  Form 8-K filed by the registrant with the Commission on March 12,  2008. |
|                      |       |                                                                                                                                                                                                                                                                                                                                   |
| 31.1                      |       | Certification  of the Chief Executive Officer pursuant to Section 302 of the  Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                         |
|                      |       |                                                                                                                                                                                                                                                                                                                                   |
| 31.2                      |       | Certification  of the Chief Financial Officer pursuant to Section 302 of the  Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                         |
|                      |       |                                                                                                                                                                                                                                                                                                                                   |
| 32.1                      |       | Certification  of the Chief Executive Officer pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                         |
|                      |       |                                                                                                                                                                                                                                                                                                                                   |
| 32.2                      |       | Certification of the Chief Financial Officer pursuant  to Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                          |

 

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