Table of Contents






UNITED
STATES
 SECURITIES
AND EXCHANGE COMMISSION
 Washington,
D.C. 20549
  
 
 FORM
10-Q
  
 
 ý QUARTERLY REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
  For
the quarterly period ended December 26, 2008
  OR
  o TRANSITION REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
  For
the transition period from
                to
  Commission
file number 000-51642
  Aviza
Technology, Inc.
 (Exact
Name of Registrant as Specified in its Charter)
  Delaware
              
              20-1979646(State
      or Other Jurisdiction of Incorporation or Organization)
              
              (I.R.S.
      Employer Identification Number)
 
 440
Kings Village Road
 Scotts
Valley, California    95066
 (Address
of Principal Executive Offices including Zip Code)
  (831)
438-2100
 (Registrant’s
Telephone Number, Including Area Code)
  Indicate
by check mark whether the registrant: (1) has filed all reports required to be
filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
 YES
    ý     
NO    o
  Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company.  See the definitions of “large accelerated filer,” “accelerated
filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. 
(Check one):
  Large
      accelerated filer o
                  Accelerated
      filer oNon-accelerated
      filer o
                  Smaller
      reporting company ý(Do
      not check if a smaller reporting
      company)
 
 Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
 YES
   o     
NO    ý
  As of
February 3, 2009, the registrant had 21,856,473 shares of its common stock, par
value $0.0001 per share, outstanding.
  Table of Contents
 Aviza Technology, Inc.
  Table
of Contents
  Page
                No.PART I. FINANCIAL INFORMATIONItem 1. Financial Statements (unaudited):Condensed Consolidated Balance Sheets
              
              1Condensed Consolidated Statements of
      Operations
              
              2Condensed Consolidated Statements of Cash
      Flows
              
              3Notes to Condensed Consolidated Financial
      Statements
              
              4Item 2. Management’s Discussion and Analysis of Financial
      Condition and Results of Operations
              
              13Item 3. Quantitative and Qualitative Disclosures About Market
      Risk
              
              21Item 4. Controls and Procedures
              
              21PART II. OTHER INFORMATIONItem 1. Legal Proceedings
              
              21Item 1A. Risk Factors
              
              22Item 2. Unregistered Sales of Equity Securities and Use of
      Proceeds
              
              22Item 3. Defaults Upon Senior Securities
              
              22Item 4. Submission of Matters to a Vote of Security
      Holders
              
              22Item 5. Other Information
              
              22Item 6. Exhibits
              
              23
 
 
 Table of Contents
 ITEM1. FINANCIAL STATEMENTS
 
 AVIZA
TECHNOLOGY, INC. AND SUBSIDIARIES
 CONDENSED
CONSOLIDATED BALANCE SHEETS
 (in
thousands, except par amounts and number of shares)
 (unaudited)
  December
      26,
                            
                            
                            September
      26,2008
                            
                            
                            2008 (1)ASSETSCURRENT
      ASSETS:Cash
      and cash equivalents
                            
                            $
                            6,698
                            
                            
                            $
                            14,896Restricted
      cash
                            
                            
                            1,040
                            
                            
                            
                            -Accounts
      receivable - net
                            
                            
                            26,221
                            
                            
                            
                            31,580Inventory
                            
                            
                            28,029
                            
                            
                            
                            37,662Prepaid
      expenses and other current assets
                            
                            
                            4,445
                            
                            
                            
                            4,028Total
      current assets
                            
                            
                            66,433
                            
                            
                            
                            88,166PROPERTY,
      PLANT AND EQUIPMENT - net
                            
                            
                            21,841
                            
                            
                            
                            24,443INTANGIBLE
      ASSETS - net
                            
                            
                            31
                            
                            
                            
                            62OTHER
      LONG-TERM ASSETS
                            
                            
                            1,060
                            
                            
                            
                            1,118TOTAL
      ASSETS
                            
                            $
                            89,365
                            
                            
                            $
                            113,789LIABILITIES
      AND STOCKHOLDERS’ EQUITYCURRENT
      LIABILITIES:Short-term
      borrowings and current portion of notes payable
                            
                            $
                            25,050
                            
                            
                            $
                            31,073Accounts
      payable
                            
                            
                            14,860
                            
                            
                            
                            22,127Warranty
      liability
                            
                            
                            4,552
                            
                            
                            
                            6,143Accrued
      liabilities
                            
                            
                            13,163
                            
                            
                            
                            18,073Total
      current liabilities
                            
                            
                            57,625
                            
                            
                            
                            77,416NOTES
      PAYABLE—Long-term
                            
                            
                            11,222
                            
                            
                            
                            11,654OTHER
      LIABILITIES - Long-term
                            
                            
                            175
                            
                            
                            
                            175Total
      liabilities
                            
                            
                            69,022
                            
                            
                            
                            89,245STOCKHOLDERS’
      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
      shares issued and outstanding at December 26, 2008and
      September 26, 2008, respectively
                            
                            
                            2
                            
                            
                            
                            2Additional
      paid-in capital
                            
                            
                            122,605
                            
                            
                            
                            122,128Accumulated
      deficit
                            
                            
                            (96,056
                            )
                            
                            
                            (97,338
                            )Accumulated
      other comprehensive loss
                            
                            
                            (6,208
                            )
                            
                            
                            (248
                            )Total
      stockholders’ equity
                            
                            
                            20,343
                            
                            
                            
                            24,544TOTAL
      LIABILITIES AND STOCKHOLDERS' EQUITY
                            
                            $
                            89,365
                            
                            
                            $
                            113,789
  The
      accompanying notes are an integral part of these condensed consolidated
      financial statements.
  (1) Amounts were derived from our audited
consolidated financial statements for the year ended September 26, 2008included in our
Annual Report on Form 10-K
  1
 Table of Contents
 AVIZATECHNOLOGY,
INC. AND SUBSIDIARIES
 CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS
 (in
thousands, except share and per share amounts)
 (unaudited)
 
   Quarter
      EndedDecember
      26,
                            
                            
                            December
      28,2008
                            
                            
                            2007NET
      SALES
                            
                            $
                            25,231
                            
                            
                            $
                            34,014COST
      OF GOODS SOLD:Cost
      of goods sold
                            
                            
                            14,749
                            
                            
                            
                            24,283Cost
      of good sold - restructuring charges
                            
                            
                            134
                            
                            
                            
                            -Total
      cost of goods sold
                            
                            
                            14,883
                            
                            
                            
                            24,283GROSS
      PROFIT
                            
                            
                            10,348
                            
                            
                            
                            9,731OPERATING
      EXPENSES:Research
      and development
                            
                            
                            4,665
                            
                            
                            
                            8,039Selling,
      general and administrative
                            
                            
                            5,932
                            
                            
                            
                            9,826Restructuring
      charges
                            
                            
                            1,214
                            
                            
                            
                            -Total
      operating expenses
                            
                            
                            11,811
                            
                            
                            
                            17,865LOSS
      FROM OPERATIONS
                            
                            
                            (1,463
                            )
                            
                            
                            (8,134
                            )OTHER
      INCOME (EXPENSE):Interest
      income
                            
                            
                            15
                            
                            
                            
                            52Interest
      expense
                            
                            
                            (667
                            )
                            
                            
                            (412
                            )Other
      income (expense) - net
                            
                            
                            3,561
                            
                            
                            
                            272Total
      other income (expense) - net
                            
                            
                            2,909
                            
                            
                            
                            (88
                            )INCOME
      (LOSS) BEFORE INCOME TAXES
                            
                            
                            1,446
                            
                            
                            
                            (8,222
                            )PROVISION
      FOR INCOME TAXES
                            
                            
                            164
                            
                            
                            
                            298NET
      INCOME (LOSS)
                            
                            $
                            1,282
                            
                            
                            $
                            (8,520
                            )Net
      income (loss) per share:Basic
                            
                            $
                            0.06
                            
                            
                            $
                            (0.40
                            )Diluted
                            
                            $
                            0.06
                            
                            
                            $
                            (0.40
                            )Weighted
      average common shares:Basic
                            
                            
                            21,856,473
                            
                            
                            
                            21,060,009Diluted
                            
                            
                            22,047,064
                            
                            
                            
                            21,060,009
  The
      accompanying notes are an integral part of these condensed consolidated
      financial statements.
 2
 Table of Contents
 AVIZATECHNOLOGY, INC. AND SUBSIDIARIES
 CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
 (in
thousands)
 (unaudited)
  Quarter
      EndedDecember
      26,
                                        
                                        
                                        December
      28,2008
                                        
                                        
                                        2007CASH
      FLOWS FROM OPERATING ACTIVITIES:Net
      income (loss)
                                        
                                        $
                                        1,282
                                        
                                        
                                        $
                                        (8,520
                                        )Adjustments
      to reconcile net income (loss) to net cash provided by (used in) operating
      activities:Depreciation
                                        
                                        
                                        1,009
                                        
                                        
                                        
                                        1,430Amortization
                                        
                                        
                                        56
                                        
                                        
                                        
                                        133Non-cash
      restructuring
                                        
                                        
                                        1,153
                                        
                                        
                                        
                                        -Fair
      value of common stock issued for prototype materials
                                        
                                        
                                        -
                                        
                                        
                                        
                                        125Stock-based
      compensation
                                        
                                        
                                        422
                                        
                                        
                                        
                                        528Gain
      on disposal of equipment
                                        
                                        
                                        (10
                                        )
                                        
                                        
                                        (303
                                        )Provision
      for allowance for doubtful accounts
                                        
                                        
                                        263
                                        
                                        
                                        
                                        115Changes
      in assets and liabilities:Accounts
      receivable - net
                                        
                                        
                                        690
                                        
                                        
                                        
                                        2,317Inventory
                                        
                                        
                                        6,375
                                        
                                        
                                        
                                        (5,360
                                        )Prepaid
      expenses and other current assets, and other long-term
    assets
                                        
                                        
                                        63
                                        
                                        
                                        
                                        (163
                                        )Accounts
      payable
                                        
                                        
                                        (4,785
                                        )
                                        
                                        
                                        399Warranty
      liability
                                        
                                        
                                        (1,100
                                        )
                                        
                                        
                                        (1,384
                                        )Accrued
      liabilities
                                        
                                        
                                        (4,069
                                        )
                                        
                                        
                                        (768
                                        )Net
      cash  provided by (used in) operating activities
                                        
                                        
                                        1,349
                                        
                                        
                                        
                                        (11,451
                                        )CASH
      FLOWS FROM INVESTING ACTIVITIES:Purchases
      of property, plant and equipment
                                        
                                        
                                        (1,388
                                        )
                                        
                                        
                                        (1,464
                                        )Purchase
      of technology license
                                        
                                        
                                        -
                                        
                                        
                                        
                                        (48
                                        )Proceeds
      from sale of equipment
                                        
                                        
                                        114
                                        
                                        
                                        
                                        324Net
      cash used in investing activities
                                        
                                        
                                        (1,274
                                        )
                                        
                                        
                                        (1,188
                                        )CASH
      FLOWS FROM FINANCING ACTIVITIES:Net
      proceeds (payments) on credit lines
                                        
                                        
                                        (6,380
                                        )
                                        
                                        
                                        10,275Proceeds
      from the issuance of common stock
                                        
                                        
                                        -
                                        
                                        
                                        
                                        9Payments
      on mortgage loan
                                        
                                        
                                        (110
                                        )
                                        
                                        
                                        (83
                                        )Payments
      on other borrowings
                                        
                                        
                                        (225
                                        )
                                        
                                        
                                        (256
                                        )Payments
      on equipment loan
                                        
                                        
                                        (340
                                        )
                                        
                                        
                                        (311
                                        )Payments
      on capital lease obligations
                                        
                                        
                                        (85
                                        )
                                        
                                        
                                        (70
                                        )Net
      cash  (used in) provided by  operating
      activities
                                        
                                        
                                        (7,140
                                        )
                                        
                                        
                                        9,564Effect
      of exchange rates on foreign cash balances
                                        
                                        
                                        (93
                                        )
                                        
                                        
                                        181NET
      DECREASE IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH
                                        
                                        
                                        (7,158
                                        )
                                        
                                        
                                        (2,894
                                        )CASH,
      CASH EQUIVALENTS AND RESTRICTED CASH:Beginning
      of period
                                        
                                        
                                        14,896
                                        
                                        
                                        
                                        23,087End
      of period
                                        
                                        $
                                        7,738
                                        
                                        
                                        $
                                        20,193SUPPLEMENTAL
      DISCLOSURE OF CASH FLOW INFORMATION:Cash
      paid for interest
                                        
                                        $
                                        617
                                        
                                        
                                        $
                                        354Income
      taxes paid
                                        
                                        $
                                        264
                                        
                                        
                                        $
                                        235Noncash
      investing and financing activities:Notes
      payable issued for services to be rendered
                                        
                                        $
                                        698
                                        
                                        
                                        $
                                        784Fair
      value of common stock  warrants issued  for services
      to be rendered
                                        
                                        $
                                        55
                                        
                                        
                                        $
                                        -Fair
      value of common stock issued in the acquisitionof
      technology license
                                        
                                        $
                                        -
                                        
                                        
                                        $
                                        1,715Property
      and equipment purchases included in accounts payable at end of
      period
                                        
                                        $
                                        9
                                        
                                        
                                        $
                                        6
  The
      accompanying notes are an integral part of these condensed consolidated
      financial
statements
   3
 Table of Contents
 AVIZATECHNOLOGY, INC. AND SUBSIDIARIES
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 December
26, 2008
 (Unaudited)
  1. 
Basis of Presentation
  The
accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with United States (U.S.) generally accepted accounting
principles for interim financial information and applicable regulations of the
U.S. Securities and Exchange Commission.  Certain information and
footnote disclosures normally included in financial statements prepared in
accordance with accounting principles generally accepted in the United States
have been condensed or omitted pursuant to such rules and regulations. In the
opinion of management, all adjustments (consisting only of normal recurring
adjustments) considered necessary for a fair statement of financial position and
results of operations have been included.  Our operating results for
the quarter ended December 26, 2008 are not necessarily indicative of the
results that may be expected for future quarters and the fiscal year ending
September 25, 2009.  The accompanying unaudited condensed consolidated
financial statements should be read in conjunction with our audited consolidated
financial statements for the year ended September 26, 2008, which are included
in our Annual Report on Form 10-K.
  The
preparation of the accompanying unaudited condensed consolidated financial
statements requires the use of estimates that affect the reported amounts of
assets, liabilities, revenues, expenses and contingencies.  These estimates
include, but are not limited to, estimates related to revenue recognition,
allowance for doubtful accounts, inventory valuation, tangible and intangible
long-term asset valuation, warranty and other obligations, contingent
liabilities and litigation.  Estimates are updated on an ongoing basis and
are evaluated based on historical experience and current circumstances. 
Changes in facts and circumstances in the future may give rise to changes in
these estimates which may cause actual results to differ from current
estimates.
  Certain
accounts in the December 28, 2007 condensed consolidated financial statements
have been reclassified for comparative purposes to conform to the presentation
in the current-year financial statements.  Specifically, gains and
losses on the remeasurement of receivables and payables in foreign currency,
which were previously recorded in selling, general and administrative expenses,
have been reclassified to other income (expense)-net.  Gains on the
remeasurement of foreign currency were $3.6 million and $0.3 million in the
quarters ended December 26, 2008 and December 28, 2007,
respectively.
  Aviza
Technology, Inc.’s (the “Company” or “Aviza”) current fiscal year will end on
September 25, 2009 and includes 52 weeks. We close our fiscal quarters on
the last Friday of December, March, June and September.
  We
operate in the semiconductor industry which, has been experiencing and is
expected to continue to experience severe instability.  The National
Bureau of Economic Research officially declared that the United States entered
into a recession in December 2007 and has remained there since.  The
length of the recession and whether the situation worsens even further is yet to
be determined.  The U.S. government has taken unprecedented actions
attempting to prevent worsening economic conditions, including the passage of
the Economic Stabilization Act of 2008.  The results of many of these
actions have not been fully realized to date.  Given these events and
circumstances, banks and investors have become increasingly cautious regarding
financing decisions given the uncertainty around what the future holds for
themselves, the counterparty of the transaction and the overall
economy.  These circumstances have resulted in the U.S. economy
entering a period of significant uncertainty.   Should the
economic situation worsen, we could be adversely affected.
  The
accompanying condensed consolidated financial statements have been prepared
assuming that we will continue as a going concern.  As reflected in
the accompanying condensed consolidated financial statements, we have an
accumulated deficit of $96.1 million at December 26, 2008 and a net loss from
operations of $1.5 million for the quarter ended December 26,
2008.  Under its current terms, our line of credit, which had a
balance of $22.1 million at December 26, 2008, matures in October
2009.  Based on current cash flow projections, we would not be able to
repay our line of credit when it matures, which raises substantial doubt as to
our ability to continue as a going concern beyond the maturity date of our line
of credit.
 
 We have
taken certain measures in order to continue as a going concern including
implementing a restructuring plan to reduce costs, renegotiate the terms of our
line of credit and recently entered into an agreement with Needham &
Company, LLC to assist in evaluating current financial and strategic options
available.   We may also choose to raise additional capital from
the sale of debt or equity securities or from other sources in order to support
operations and debt obligations.   However, we may not be able to
obtain any additional capital on acceptable terms, if at all.  The
unaudited condensed consolidated financial statements do not reflect any
adjustments that might result from the outcome of this uncertainty.
  4
 Table of Contents
 The
condensed consolidated financial statements include the accounts of the Company
and its subsidiaries. All significant intercompany accounts and transactions
have been eliminated in consolidation.
  2. 
Balance Sheet Details
  December
      26,
                            
                            
                            September
      26,2008
                            
                            
                            2008(in
      thousands)Inventory:Raw
      materials
                            
                            $
                            18,848
                            
                            
                            $
                            22,803Work-in-process
                            
                            
                            8,267
                            
                            
                            
                            12,648Finished
      goods and evaluation systems
                            
                            
                            914
                            
                            
                            
                            2,211Total
                            
                            $
                            28,029
                            
                            
                            $
                            37,662Prepaid
      expenses and other current assets:Deferred
      installation costs
                            
                            
                            458
                            
                            
                            $
                            394Insurance
                            
                            
                            765
                            
                            
                            
                            100Taxes
                            
                            
                            1,207
                            
                            
                            
                            1,092Other
                            
                            
                            2,015
                            
                            
                            
                            2,442Total
                            
                            $
                            4,445
                            
                            
                            $
                            4,028Property,
      plant and equipment - net:Land
                            
                            
                            1,839
                            
                            
                            $
                            1,839Buildings
      and improvements
                            
                            
                            11,981
                            
                            
                            
                            12,133Machinery
      and equipment
                            
                            
                            18,047
                            
                            
                            
                            18,553Office
      furnishings, fixtures and equipment
                            
                            
                            5,849
                            
                            
                            
                            6,388Construction-in-process
                            
                            
                            1,355
                            
                            
                            
                            1,518Total
                            
                            
                            39,071
                            
                            
                            
                            40,431Accumulated
      depreciation
                            
                            
                            (17,230
                            )
                            
                            
                            (15,988
                            )Property,
      plant and equipment - net
                            
                            $
                            21,841
                            
                            
                            $
                            24,443Accrued
      liabilities:Accrued
      payroll and payroll taxes
                            
                            $
                            2,816
                            
                            
                            $
                            3,796Accrued
      accounting and legal fees
                            
                            
                            3,846
                            
                            
                            
                            4,743Deferred
      revenue
                            
                            
                            1,157
                            
                            
                            
                            2,955Accrued
      restructuring charges
                            
                            
                            972
                            
                            
                            
                            1,561Other
      taxes payable
                            
                            
                            2,324
                            
                            
                            
                            2,590Other
                            
                            
                            2,048
                            
                            
                            
                            2,428Total
                            
                            $
                            13,163
                            
                            
                            $
                            18,073
   3. 
Stock-Based Compensation
  We
adopted the provisions of Statement of Financial Accounting Standards, or
SFAS,  No. 123(R), Share-Based Payment, or SFAS
123(R).  SFAS 123(R) requires stock-based compensation cost to be
measured at grant date, based on the fair value of the award, and be recognized
as expense over the employee’s requisite service period.  The measurement
of stock-based compensation cost is based on several criteria including, but not
limited to, the valuation model used and associated input factors such as
expected term of the award, stock price volatility, dividend rate, risk-free
interest rate and award cancellation rate.  The input factors used in the
valuation model are based on subjective future expectations combined with
management judgment.  If there is a difference between the assumptions used
in determining stock-based compensation costs and the actual factors, which
become known over time, we may change future input factors used in determining
stock-based compensation costs.  These changes may materially impact our
results of operations in the periods over which such costs are
expensed.
  5
 Table of Contents
 The fair
value of each option is estimated at the date of grant using the Black-Scholes
option pricing model.  We estimate the expected stock price volatility and
expected life of our options based on historical data and representative peer
group data.  We use historical data to estimate forfeiture
rates.  The risk-free interest rate for periods within the contractual
life of the option is based on the U.S. Treasury yield with similar expected
life.
  Under our
stock option plans, we may grant options to purchase up to a maximum of
7,729,448 shares of common stock, including outstanding options to
employees, directors and consultants at a price not less than the fair market
value on the date of the grant. These options generally vest over two to five
years and generally expire seven to ten years from the date of
the grant.
  We
recognized stock-based compensation expense of $422,000 and $528,000 during the
quarters ended December 26, 2008 and December 28, 2007, respectively.  Due
to uncertainty surrounding the realization of the income tax benefit related to
stock based compensation expense, there is no related income tax benefit
recognized in the consolidated statements of operations for the quarters ended
December 26, 2008 and December 28, 2007, respectively, as a full valuation
allowance has been provided against the deferred tax asset.
  The fair
value of our stock options granted during the quarters ended December 26, 2008
and December 28, 2007 was estimated at the date of grant using the following
weighted average assumptions:
   Quarter
      EndedDecember
      26,
                                  
                                  December
      28,2008
                                  
                                  2007Expected
      life (years)
                                  
                                  3.0
                                  
                                  4.8Risk-free
      interest rate
                                  
                                  1.9%
                                  
                                  3.4%Stock
      price volatility
                                  
                                  76.4%
                                  
                                  53.5%Dividend
      yield
                                  
                                  0.0%
                                  
                                  0.0%
 The following table summarizes our
stock option activity under the stock plans during the quarter ended December
26, 2008:
  Weighted
      Average
                                      
                                      
                                      Weighted
      AverageNumber
      of
                                      
                                      
                                      Exercise
      Price
                                      
                                      
                                      Remaining
      Contractual
                                      
                                      
                                      Aggregate
      IntrinsicShares
      Issuable
                                      
                                      
                                      Per
      Share
                                      
                                      
                                      Term
      (Years)
                                      
                                      
                                      ValueOutstanding
      at September 26, 2008
                                      
                                      
                                      4,984,066
                                      
                                      
                                      $
                                      3.86
                                      
                                      
                                      
                                      5.32
                                      
                                      
                                      $
                                      -Granted
                                      
                                      
                                      482,000
                                      
                                      
                                      
                                      0.14Exercised
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -Forfeited
                                      
                                      
                                      (342,056
                                      )
                                      
                                      
                                      2.78Outstanding
      at December 26, 2008
                                      
                                      
                                      5,124,010
                                      
                                      
                                      
                                      3.58
                                      
                                      
                                      
                                      5.11
                                      
                                      
                                      
                                      -Options
      vested and expected to vest atat
      December 26, 2008
                                      
                                      
                                      4,913,005
                                      
                                      
                                      
                                      3.63
                                      
                                      
                                      
                                      5.11
                                      
                                      
                                      
                                      -Options
      vested at December 26, 2008
                                      
                                      
                                      3,178,283
                                      
                                      
                                      
                                      4.31
                                      
                                      
                                      
                                      5.14
                                      
                                      
                                      
                                      -
   The
aggregate intrinsic value represents total pre-tax intrinsic value based on the
closing stock price of $0.08 and $0.47 per share at December 26, 2008 and
September 26, 2008, respectively.
  6
 Table of Contents
 As of December 26, 2008, there was $2.4
million of unrecognized compensation cost related to unvested stock options
granted and outstanding, net of estimated forfeitures.  The cost is
expected to be recognized over a weighted average period of approximately 2.0
years.
  The
following table details total stock-based compensation expense for the quarters
ended December 26, 2008 and December 28, 2007:
  Quarter
      EndedDecember
      26,
                                            
                                            
                                            December
      28,2008
                                            
                                            
                                            2007(in
      thousands)Cost
      of goods sold
                                            
                                            $
                                            44
                                            
                                            
                                            $
                                            51Research
      and development
                                            
                                            
                                            94
                                            
                                            
                                            
                                            122Selling,
      general and administrative
                                            
                                            
                                            284
                                            
                                            
                                            
                                            355Pre-tax
      stock-based compensation expense
                                            
                                            
                                            422
                                            
                                            
                                            
                                            528Income
      tax benefits
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -Stock-based
      compensation expense
                                            
                                            $
                                            422
                                            
                                            
                                            $
                                            528
   The
options outstanding and vested at December 26, 2008 were in the following
exercise price ranges:
  Options
      Outstanding
                                                                                    
                                                                                    
                                                                                    Options
      VestedWeighted
                                                                                    
                                                                                    
                                                                                    Weighted
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    WeightedRange
      of
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    
                                                                                    Average
                                                                                    
                                                                                    
                                                                                    Average
                                                                                    
                                                                                    
                                                                                    Number
                                                                                    
                                                                                    
                                                                                    AverageExercise
                                                                                    
                                                                                    
                                                                                    Number
                                                                                    
                                                                                    
                                                                                    Remaining
                                                                                    
                                                                                    
                                                                                    Exercise
                                                                                    
                                                                                    
                                                                                    of
      Shares
                                                                                    
                                                                                    
                                                                                    ExercisePrices
                                                                                    
                                                                                    
                                                                                    of
      Shares
                                                                                    
                                                                                    
                                                                                    Contractual
                                                                                    
                                                                                    
                                                                                    Price
                                                                                    
                                                                                    
                                                                                    Vested
      and
                                                                                    
                                                                                    
                                                                                    PricePer
      Share
                                                                                    
                                                                                    
                                                                                    Outstanding
                                                                                    
                                                                                    
                                                                                    Life
      (Years)
                                                                                    
                                                                                    
                                                                                    Per
      Share
                                                                                    
                                                                                    
                                                                                    Exercisable
                                                                                    
                                                                                    
                                                                                    Per
      Share$0.14
      - $0.54
                                                                                    
                                                                                    
                                                                                    
                                                                                    1,212,414
                                                                                    
                                                                                    
                                                                                    
                                                                                    4.54
                                                                                    
                                                                                    
                                                                                    $
                                                                                    0.37
                                                                                    
                                                                                    
                                                                                    
                                                                                    260,145
                                                                                    
                                                                                    
                                                                                    $
                                                                                    0.46$0.55
      - $0.83
                                                                                    
                                                                                    
                                                                                    
                                                                                    1,005,390
                                                                                    
                                                                                    
                                                                                    
                                                                                    5.03
                                                                                    
                                                                                    
                                                                                    
                                                                                    0.83
                                                                                    
                                                                                    
                                                                                    
                                                                                    1,005,390
                                                                                    
                                                                                    
                                                                                    
                                                                                    0.83$0.84
      - $4.58
                                                                                    
                                                                                    
                                                                                    
                                                                                    770,590
                                                                                    
                                                                                    
                                                                                    
                                                                                    5.32
                                                                                    
                                                                                    
                                                                                    
                                                                                    2.15
                                                                                    
                                                                                    
                                                                                    
                                                                                    435,812
                                                                                    
                                                                                    
                                                                                    
                                                                                    2.06$4.59
      - $5.60
                                                                                    
                                                                                    
                                                                                    
                                                                                    1,534,839
                                                                                    
                                                                                    
                                                                                    
                                                                                    5.66
                                                                                    
                                                                                    
                                                                                    
                                                                                    5.31
                                                                                    
                                                                                    
                                                                                    
                                                                                    1,048,595
                                                                                    
                                                                                    
                                                                                    
                                                                                    5.35$5.61
      - $87.07
                                                                                    
                                                                                    
                                                                                    
                                                                                    600,777
                                                                                    
                                                                                    
                                                                                    
                                                                                    4.74
                                                                                    
                                                                                    
                                                                                    
                                                                                    12.09
                                                                                    
                                                                                    
                                                                                    
                                                                                    428,341
                                                                                    
                                                                                    
                                                                                    
                                                                                    14.56$0.14
      - $87.07
                                                                                    
                                                                                    
                                                                                    
                                                                                    5,124,010
                                                                                    
                                                                                    
                                                                                    
                                                                                    5.11
                                                                                    
                                                                                    
                                                                                    
                                                                                    3.58
                                                                                    
                                                                                    
                                                                                    
                                                                                    3,178,283
                                                                                    
                                                                                    
                                                                                    
                                                                                    4.31
   The
weighted average fair value of options on the grant date, as determined under
SFAS 123(R), granted during the quarters ended December 26, 2008 and December
28, 2007 was $0.07 and $0.87 per share, respectively.
  The total
intrinsic value of options exercised during the quarter ended December 28, 2007
was $14,000. The total cash received from employees as a result of employee
stock option exercises during the quarter ended December 28, 2007 was
$9,000.  There were no stock options exercised during the quarter
ended December 26, 2008.
  4.  Borrowing
Facilities
  Borrowings
consist of the following (in thousands):
   
 7
 Table of Contents
  December
      26,
                          
                          
                          September
      26,2008
                          
                          
                          2008Bank
      loan (revolving line of credit)
                          
                          $
                          22,113
                          
                          
                          $
                          28,493Equipment
      note payable
                          
                          
                          1,944
                          
                          
                          
                          2,284Mortgage
      note payable
                          
                          
                          11,182
                          
                          
                          
                          11,292Other
      notes payable
                          
                          
                          750
                          
                          
                          
                          277Capital
      lease obligations
                          
                          
                          283
                          
                          
                          
                          381Total
                          
                          
                          36,272
                          
                          
                          
                          42,727Less:
      short-term borrowings and current portion
                          
                          
                          (25,050
                          )
                          
                          
                          (31,073
                          )Long-term
      portion
                          
                          $
                          11,222
                          
                          
                          $
                          11,654
 On
September 30, 2008, our credit facility was amended to reduce the maximum
available for borrowing under the revolving line of credit, equipment loan and
commercial real estate loan to approximately $42.6 million, increase the
interest rate on outstanding borrowings to LIBOR plus 4% and amended certain
financial and operating covenants.
  On
October 1, 2008, our credit facility was amended to extend the maturity date of
the revolving portion of the credit facility from April 13, 2009 to October 13,
2009, provided we achieved certain operating results during the quarter ended
December 26, 2008.  If we were unable to achieve the required results,
the maturity date for the revolving portion of the credit facility would be
April 13, 2009.  We achieved the required operating results during the
quarter ended December 26, 2008, and as such, the maturity date on the revolving
portion of our credit facility is October 13, 2009.
 
 5. 
Warranty and Guarantees
  Warranty—We
accrue for the estimated cost of the warranty on our systems, which includes the
cost of the labor and parts necessary to repair systems during the warranty
period. The amounts recorded in the warranty accrual are estimated based on
actual historical costs incurred and on estimated probable future expenses
related to current sales. The warranty accrual is adjusted over the warranty
period based on actual costs incurred. Systems typically have warranty periods
ranging from one to three years. The components of the warranty accrual are as
follows (in thousands):
  Quarter
      EndedDecember
      26,
                                              
                                              
                                              December
      28,2008
                                              
                                              
                                              2007Beginning
      warranty accrual
                                              
                                              $
                                              6,143
                                              
                                              
                                              $
                                              11,222Additional
      accruals for new shipments
                                              
                                              
                                              434
                                              
                                              
                                              
                                              625Warranty
      costs incurred
                                              
                                              
                                              (1,615
                                              )
                                              
                                              
                                              (2,042
                                              )Expiration
      and change in liability for pre-existing warrantiesduring
      the period
                                              
                                              
                                              (410
                                              )
                                              
                                              
                                              -Ending
      warranty accrual
                                              
                                              $
                                              4,552
                                              
                                              
                                              $
                                              9,805
   Guarantees—In
addition to product warranties, we, from time to time, in the normal course of
business, indemnify certain customers against third-party claims that our
products, when used for their intended purposes, infringe the intellectual
property rights of such third party or other claims made against certain
parties. It is not possible to determine the maximum potential amount of
liability under these indemnification obligations due to the limited history of
prior indemnification claims and the unique facts and circumstances that are
likely to be involved in each particular claim. Historically, we have never made
payments under these obligations and no liabilities have been recorded for these
obligations on the balance sheet at December 26, 2008 and September 26, 2008,
respectively.
  
 8
 Table of Contents
 6. 
Restructuring and Other Charges
 
 During
fiscal 2008, we began implementation of a significant global restructuring based
on an analysis of our product strategy, served markets and internal
operations.  In order to streamline our operations and align product
offerings with the current market conditions, we have and will continue to
downsize programs, products and spending related to trench capacitor technology
for DRAM and will decrease our overall dependence on the DRAM
market.  The restructuring of our global workforce, products and
business operations was designed to reduce our overall cost structure, as well
as improve operational execution and financial performance.  We have
refocused on our core strengths in the ALD, Etch and PVD technologies, while
moving away from the development of large batch thermal systems.  We
intend to continue to service and support our current global installed
base.
 
 As part
of our restructuring plans, we executed a global reduction in workforce,
divested ourselves of a non-core operation and wrote down assets related to
non-core products, which included inventory revaluation, cancellation of
purchase commitments and the write-down of impaired machinery and
equipment.  Volume manufacturing is no longer being performed at our
Scotts Valley headquarters.  In addition, continued research and
development of products related to certain licensed technology was discontinued
and the license was determined to have been fully impaired.  During
the quarter ended December 26, 2008, we incurred additional restructuring
charges of approximately $1.1 million related to the impairment of certain
demonstration lab equipment that will not be relocated as part of the transfer
of research and development activity from Scotts Valley to Newport,
Wales.  The remaining restructuring charges for the quarter relate to
termination benefits for 45 employees whose positions became redundant as part
of our ongoing restructuring plan.Liabilities for
estimated payments related to the restructuring plan were recorded and included
in accrued liabilities.  At December 26, 2008 and September 26, 2008,
approximately $1.0 million and $1.6 million in accrued liabilities remained
unpaid, respectively.  Activity related to these liabilities and
additional restructuring costs incurred during the quarter ended December 26,
2008 is summarized as follows:
  Loss
      onNon-cancellable
                                      
                                      
                                      Impairment
      ofReduction
      in
                                      
                                      
                                      Purchase
                                      
                                      
                                      Machinery
      andWork
      Force
                                      
                                      
                                      Commitments
                                      
                                      
                                      Equipment
      (1)
                                      
                                      
                                      Other
                                      
                                      
                                      TotalBalance
      at September 26, 2008
                                      
                                      $
                                      330
                                      
                                      
                                      $
                                      965
                                      
                                      
                                      $
                                      200
                                      
                                      
                                      $
                                      66
                                      
                                      
                                      $
                                      1,561Additions:Restructuring
      costs - cost of sales
                                      
                                      
                                      134
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      134Restructuring
      costs - operating expenses
                                      
                                      
                                      61
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      1,153
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      1,214525
                                      
                                      
                                      
                                      965
                                      
                                      
                                      
                                      1,353
                                      
                                      
                                      
                                      66
                                      
                                      
                                      
                                      2,909Non-cash
      adjustments
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      (1,153
                                      )
                                      
                                      
                                      -
                                      
                                      
                                      
                                      (1,153
                                      )Cash
      payments
                                      
                                      
                                      (270
                                      )
                                      
                                      
                                      (502
                                      )
                                      
                                      
                                      -
                                      
                                      
                                      
                                      (12
                                      )
                                      
                                      
                                      (784
                                      )Balance
      at December 26, 2008
                                      
                                      $
                                      255
                                      
                                      
                                      $
                                      463
                                      
                                      
                                      $
                                      200
                                      
                                      
                                      $
                                      54
                                      
                                      
                                      $
                                      972
 
 (1)
Includes $0.2 million of disposal costs accrued as of December 26,
2008
  7.  Income
Taxes
  As part
of the process of preparing our financial statements, we are required to
estimate our income tax provision (benefit) in each of the jurisdictions in
which we operate. This process requires us to estimate our current income tax
provision (benefit) and assess temporary differences resulting from differing
treatment of items for tax and accounting purposes. These differences result in
deferred tax assets and liabilities, which are included in our balance
sheet.
 
 We
recorded a valuation allowance to reduce our deferred tax assets to the amount
that is more likely than not to be realized. While we have considered future
taxable income and any ongoing prudent and feasible tax planning strategies in
assessing the need for the valuation allowance, if we were to determine that we
would be able to realize our deferred tax assets in the future in excess of our
net recorded amount, an adjustment to the deferred tax asset would increase
income in the period such determination was made. Likewise, if we were to
determine that we would not be able to realize all or part of a net deferred tax
asset in the future, an adjustment to the deferred tax asset would be charged to
income in the period such determination was made.  We have recorded a 100%
valuation allowance against our domestic and United Kingdom net deferred tax
assets due to the uncertainty regarding future taxable income.
 
 9
 Table of Contents
 Income
tax expense primarily relates to our foreign operations as we continue to incur
losses from domestic operations.  We recorded income tax expense of
$164,000 and $298,000for the three months
ended December 26, 2008 and December 28, 2007, respectively.
 
 We
adopted the provisions of Financial Standards Accounting Board Interpretation
No. 48, “Accounting for
Uncertainty in Income Taxes,” or FIN 48, an interpretation of FASB
Statement No. 109, or SFAS 109, at the beginning of fiscal year
2008.  At December 26, 2008 and September 26, 2008, we had $3.2
million and $2.9 million of unrecognized tax benefits, respectively. The
amount of unrecognized tax benefits that would affect our effective tax rate if
recognized are $1.8 million as of December 26, 2008.  In addition, we
recognized interest and penalties related to uncertain tax positions in income
tax expense.  At December 26, 2008 and September 26, 2008, we had
approximately $0.2 million and $0.1 million, respectively, of accrued interest
and penalties for uncertain tax positions, primarily from our foreign
operations. We do not anticipate that total unrecognized tax benefits will
significantly change due to the settlement of audits and the expiration of
statute of limitations prior to December 25, 2009.
 
 At
September 26, 2008, we had approximately $85.7 million federal, $18.7 million
state, and $76.1 million foreign net operating loss, or NOL, carryforwards, to
reduce future taxable income.   We also have research and
development tax credit carryforwards of approximately $2.0 million and $1.7
million for federal and state income tax purposes, respectively. The federal NOL
and credit carryforwards expire beginning in 2011 through
2028.   The state NOL carryforwards expire beginning 2015 and the
state credit carryforwards have no expiration date.   A
substantial portion of the foreign NOLs are from our United Kingdom operation,
which can be offset against future profits arising from the same business
indefinitely.
 
 Our
ability to use our federal and state NOL carryforwards and federal and state
credit carryforwards to reduce future taxable income and future taxes,
respectively, are subject to restrictions attributable to equity transactions
that have resulted in a change of ownership as defined by the Internal Revenue
Code Section 382. Utilization of these carryforwards is severely restricted and
is likely to result in significant amounts of these carryforwards expiring prior
to benefiting Aviza.
 
 8. 
Commitments and Contingencies
  On April
11, 2006, IPS, Ltd. filed a lawsuit against us in the United States District
Court for the Central District of California. The complaint alleges that we
improperly used IPS's confidential information to develop our Celsior
single-wafer processing type atomic layer deposition technology. The complaint
is for unspecified monetary damages, injunctive relief and an order rescinding
the settlement and distributor agreements that we and IPS entered into in May
2004 in settlement of a prior lawsuit that IPS filed against ASML U.S., Inc. and
us in March 2004 relating to assets that we acquired from ASML in October 2003.
In May 2007, we successfully moved the dispute to arbitration. Discovery
commenced in June 2007. The parties have reached a settlement agreement in
principle and we do not expect the final agreement to have a material impact on
our business, financial condition or results of operations.
 
 Prior to
our merger transaction with Trikon Technologies, Inc., Trikon was a party to an
employment lawsuit in France. On March 10, 2004, Dr. Jihad Kiwan departed Trikon
as Director and Chief Executive Officer. On March 29, 2004 and April 2, 2004,
Trikon received letters from a United Kingdom law firm and from a French law
firm, respectively, on behalf of Dr. Kiwan, detailing certain monetary claims
for severance amounts due to Dr. Kiwan with respect to his employment with
Trikon. On April 28, 2004, Dr. Kiwan filed a lawsuit in France and on June 10,
2004, filed similar proceedings in the United Kingdom. Dr. Kiwan has
subsequently withdrawn the proceedings in the United Kingdom.  On
January 7, 2008, the French Commercial Court in Grenoble rejected certain of Dr.
Kiwan's claims but ordered us to pay monetary awards with respect to certain
other of Dr. Kiwan's claims.  On January 6, 2009, the Tribunal de
Grande Instance de Grenoble, which is the court of first instance having
jurisdiction to deal with applications for a stay of enforcement of judgments,
ordered us to pay the amount that was previously awarded by the French
Commercial Court within six months  from January 6,
2009.   As of December 26, 2008, we have accrued estimated
settlement costs related to this matter.  We have filed an appeal to
the Regional Court of Appeals in Grenoble and the arguments are scheduled to be
heard on or about April 23, 2009.  We do not believe that the outcome
of the dispute will have a material impact on our business, financial condition
or results of operations.
  10
 Table of Contents
 Our
Scotts Valley location is a federally listed Superfund site. Chlorinated solvent
and other contamination was identified at the site in the early 1980's, and by
the late 1980's Watkins Johnson Corporation ("WJ") (a previous owner of the
property and now called Triquint Semiconductor, Inc.) had installed a
groundwater extraction and treatment system. In 1991, WJ entered into a consent
decree with the United States Environmental Protection Agency providing for
remediation of the site. In July 1999, WJ signed a remediation agreement
with an environmental consulting firm, ARCADIS Geraghty and Miller ("ARCADIS").
Pursuant to this remediation agreement, WJ paid approximately $3 million in
exchange for which ARCADIS agreed to perform the work necessary to assure
satisfactory completion of WJ's obligation under the consent decree. The
agreement also includes a cost overrun guaranty from ARCADIS up to a total
project cost of $15 million. In addition, the agreement included
procurement of a ten-year, claims-made insurance policy to cover overruns of up
to $10 million from American International Specialty ("AIS"), along with a
ten-year, claims made $10 million policy to cover unknown pollution
conditions at the site.
  Failure
of WJ, ARCADIS, or AIS to fulfill their obligations may subject the Company to
substantial fines, and the Company could be forced to suspend production, alter
manufacturing processes or cease business operations, any of which could have a
material negative effect on the Company's sales, income and business
operations.
  Management
believes that the likelihood of the failure of WJ, ARCADIS or AIS is remote and
that any remaining or uninsured environmental liabilities will not have a
material effect on the Company's results of operations or financial
position.
  9. 
Common Stock Warrants
  During
November 2008, we engaged Needham and Company, LLC to assist us in evaluating
current financial and strategic options available through partnering, financing
and business development activities.  As part of the agreement,
Needham and Company received a warrant to purchase 500,000 shares of our common
stock.  The warrant has an exercise price of $0.01 per share and
expires two years from the date of issuance.  The fair value of the
warrant was estimated using the Black-Scholes option pricing model using
estimated stock price volatility of  76.35% based on historical data
and representative peer group data, the warrant term of 2 years and the
risk-free interest rate of 1.0% based on the U.S. Treasury yield for instruments
with similar terms.  The fair value of the warrant is approximately
$55,000 and is included as part of the prepaid expense and other current assets
at December 26, 2008 and is being amortized over the 11-month term of the
agreement with Needham and Company.
  10. 
Major Customers
  During
the quarter ended December 26, 2008, four customers accounted for 15%, 14%, 11%
and 10% of total net sales, respectively. During the quarter ended December 28,
2007, three customers accounted for 17%, 12% and 12% of total net sales,
respectively.
  11. 
Net Income (Loss) Per Share
  Basic net
income (loss) per share has been computed based upon the weighted average number
of common shares outstanding for the periods presented.  Diluted net
income (loss) per share is calculated as though all potentially dilutive shares
were outstanding during the period, based upon the application of the treasury
stock method.  The following details the calculation of the net income
(loss) per share for the periods presented (in thousands, except share and per
share data):
  11
 Table of Contents
   Quarter
      EndedDecember
      26,
                      
                      
                      December
      28,2008
                      
                      
                      2007Numerator:Net
      income (loss)
                      
                      $
                      1,282
                      
                      
                      $
                      (8,520
                      )Denominator:Basic
      weighted average shares outstanding
                      
                      
                      21,856,473
                      
                      
                      
                      21,060,009Effect
      of potentially dilutive securities:Common
      stock warrants
                      
                      
                      190,591
                      
                      
                      
                      -Dilutive
      weighted average shares outstanding
                      
                      
                      22,047,064
                      
                      
                      
                      21,060,009Net
      income (loss) per share - basic
                      
                      $
                      0.06
                      
                      
                      $
                      (0.40
                      )Net
      income (loss) per share - diluted
                      
                      $
                      0.06
                      
                      
                      $
                      (0.40
                      )
  For the
quarters ended December 26, 2008 and December 28, 2007, we had securities
outstanding that could potentially dilute basic earnings per share in the
future, but were excluded from the computation of diluted net income (loss) per
share in the periods presented as their effect would have been
anti-dilutive.  The weighted average shares of common stock issuable
upon conversion or exercise of such outstanding securities consist of the
following:
  Quarter
      EndedDecember
      26,
                            
                            
                            December
      28,2008
                            
                            
                            2007Weighted
      average effect of potential common stock:Options
      that would have been included in the computationof
      dilutive shares outstanding had the Company reportednet
      income
                            
                            
                            -
                            
                            
                            
                            1,343,011Options
      and warrants that were excluded from the computation of
      dilutiveshares
      outstanding because the total assumed proceedsexceeded
      the average market value of the Company's commonstock
      during the period
                            
                            
                            5,380,812
                            
                            
                            
                            3,271,541
  12.  Subsequent
Event
  On
January 21, 2009, we entered into an agreement with Tokyo Electron Limited
(“TEL”).  Under the agreement, we will assign certain patents that are
owned by us to TEL.  As consideration for this assignment, TEL will
pay us $1.5 million within 30 days after receipt of the
assignments.  In addition, TEL also agreed to acquire from us a
Flowfill test chamber, as well as technical assistance regarding the chamber and
the Flowfill technology. In consideration for this agreement, we will receive
$0.3 million for the Flowfill chamber and $0.1 million for the technical
assistance.  The technical assistance should be completed within nine
months after the agreement date.
  
 12
 Table of Contents
  ITEM2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
  Cautionary
Statement Regarding Forward-Looking Statements
  The
statements in this report include forward-looking statements. These
forward-looking statements are based on our management’s current expectations
and beliefs and involve numerous risks and uncertainties that could cause actual
results to differ materially from expectations. You should not rely upon these
forward-looking statements as predictions of future events because we cannot
assure you that the events or circumstances reflected in these statements will
be achieved or will occur. You can identify forward-looking statements by the
use of forward-looking terminology, including the words “believes,” “expects,”
“may,” “will,” “should,” “seeks,” “intends,” “plans,” “estimates” or
“anticipates” or the negative of these words and phrases or other variations of
these words and phrases or comparable terminology. These forward-looking
statements relate to, among other things: our sales, results of operations and
anticipated cash flows; capital expenditures; depreciation and amortization
expenses; research and development expenses; sales, general and administrative
expenses; the development and timing of the introduction of new products and
technologies; our ability to maintain and develop relationships with our
existing and potential future customers and our ability to maintain the level of
investment in research and development and capacity that is required to remain
competitive.  Many factors could cause our actual results to differ
materially from those projected in these forward-looking statements, including,
but not limited to: variability of our revenues and financial performance; risks
associated with product development and technological changes; the acceptance of
our products in the marketplace by existing and potential future customers;
disruption of operations or increases in expenses due to our involvement in
litigation or caused by civil or political unrest or other catastrophic events;
general economic conditions and conditions in the semiconductor industry in
particular; the continued employment of our key personnel and risks associated
with competition.
  For
a discussion of the factors that could cause actual results to differ materially
from the forward-looking statements, see the “Liquidity and Capital Resources”
section under “Management’s Discussion and Analysis of Financial Condition
and Results of Operations” in this item of this report and the other risks and
uncertainties that are set forth elsewhere in this report or detailed in our
other Securities and Exchange Commission reports and filings. We assume no
obligation to update these forward-looking statements.
  Overview
  We
design, manufacture, sell and support advanced semiconductor capital equipment
and process technologies for the global semiconductor industry and related
markets.  We offer both front-end-of-line and back-end-of-line systems
and process technologies used in a variety of segments of the semiconductor
market using critical thin film formation technologies, including ALD, PVD,
Etch, CVD and thermal processing systems.
  Our
customer base is geographically diverse and includes both integrated device
manufacturers and foundry-based manufacturers.  We have a broad
installed base, with approximately 2,500 systems in active operation, for which
we are providing ongoing parts and services worldwide.  We sell our
systems globally primarily through a direct sales force and in some instances
through local independent sales representatives.  Our largest
customers may vary from year to year depending upon, among other things, the
customer’s annual budget for capital expenditures, plans for new fabrication
facilities and expansions and new system introductions by us.  We
expect to continue to receive a substantial portion of our net sales from a
small number of customers for the foreseeable future.
  Our
common stock is publicly traded on the Nasdaq Global Market under the symbol
"AVZA."
  We are
often required to develop systems in advance of our customers' demand for those
systems, and we undertake significant system development efforts in advance of
any of our customers expressly indicating demand for our systems. Our system
development efforts typically span six months to two years.
  During
the fiscal year ended September 26, 2008, we announced plans for a global
restructuring based upon an analysis of our product strategy, served markets and
internal operations.  The restructuring allows us to refocus our
attention on our core strengths in the ALD, Etch and PVD market
segments.  We have and will continue to downsize programs, products
and spending related to trench capacitor technology for 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 as well as improve operational execution and financial
performance.  We intend to continue to support our current global
installed base and maintain the ability to manufacture additional systems as may
be required by customers.  During the fiscal year ended September 26,
2008, we recorded approximately $19.9 million in costs associated with the
restructuring.  During the quarter ended December 26, 2008, we
recorded an additional $1.3 million in restructuring charges. Restructuring
charges to date were primarily attributable to a global reduction in force of
approximately 25% of employees and contractors and the write-down of assets
relating to non-core products or processes, which included inventory
revaluation, cancellation of purchase commitments, the write-down of equipment
and the impairment of an intangible asset.  We expect that annual
savings as a result of our restructuring related to lower employee costs and
lower depreciation expenses will be approximately $15.5 million.
  13
 Table of Contents
 On March 28, 2008, we
received notification from Nasdaq informing us that the bid price of our common
stock closed below the minimum $1.00 per share requirement for continued
inclusion under the Market Place Rule
4450(a)(5).We submitted an appeal to a Nasdaq
Listing Qualification Panel and a hearing date for our appeal was set for
November 20, 2008. However, on October 16, 2008, Nasdaq announced that, due to
extraordinary market conditions, it would implement a temporary suspension of
bid price and market value of publicly held shares requirements until January
19, 2009. On December 19, 2008, Nasdaq extended this suspension to April 20,
2009. Because of the suspension of the bid price requirement, our appeal hearing
date was cancelled. The delisting of our common stock has been stayed pending
our appeal hearing and the decision of the Nasdaq Listing Qualification Panel.
We expect to coordinate with Nasdaq after April 20, 2009 to schedule a new
appeal hearing date.
  Critical
Accounting Policies
  There are
no material changes to the critical accounting policies described in the section
entitled “Critical Accounting Polices” under Item 7 in our Annual Report on Form
10-K for the fiscal year ended September 26, 2008.
  14
 Table of Contents
 Results
of Operations
  The
information in the table below presents our statements of operations data as a
percentage of net sales for the quarters ended December 26, 2008 and December
28, 2007.
  Quarter
      EndedDecember
      26,
                              
                              
                              December
      28,2008
                              
                              
                              2007Net
      sales
                              
                              
                              100%
                              
                              
                              
                              100%Cost
      of goods soldCost
      of goods sold
                              
                              
                              58%
                              
                              
                              
                              71%Cost
      of goods sold - restructuring charges
                              
                              
                              1%
                              
                              
                              
                              0%Total
      cost of sales
                              
                              
                              59%
                              
                              
                              
                              71%Gross
      margin
                              
                              
                              41%
                              
                              
                              
                              29%Operating
      expenses:Research
      and development
                              
                              
                              18%
                              
                              
                              
                              24%Selling,
      general and administrative
                              
                              
                              24%
                              
                              
                              
                              28%Restructuring  charges
      - operating expenses
                              
                              
                              5%
                              
                              
                              
                              0%Total
      operating expenses
                              
                              
                              47%
                              
                              
                              
                              52%Loss
      from operations
                              
                              
                              (6)%
                              
                              
                              
                              (23)%Other
      income (expense):Interest
      income
                              
                              
                              0%
                              
                              
                              
                              0%Interest
      expense
                              
                              
                              (2)%
                              
                              
                              
                              (1)%Other
      income - net
                              
                              
                              14%
                              
                              
                              
                              0%Total
      other income (expense) - net
                              
                              
                              12%
                              
                              
                              
                              (1)%Income
      (loss) before income taxes
                              
                              
                              6%
                              
                              
                              
                              (24)%Provision
      for income taxes
                              
                              
                              1%
                              
                              
                              
                              1%Net
      income (loss)
                              
                              
                              5%
                              
                              
                              
                              (25)%
  
 Net
Sales
   Quarter
      EndedDecember
      26,
                                
                                
                                December
      28,2008
                                
                                
                                2007(in
      thousands)Net
      sales
                                
                                $
                                25,231
                                
                                
                                $
                                34,014
  Net sales
for the quarter ended December 26, 2008 decreased by $8.8 million, or 26%, from
the quarter ended December 28, 2007.  The decrease was due primarily
to the following:
  ·
              An
      approximate $3.5 million decrease in net sales of our deposition and
      thermal processing systems.  Sales recognized on shipment
      decreased by $1.7 million as unit shipments decreased by 71% during the
      quarter ended December 26, 2008 as compared to the quarter ended December
      28, 2007.  The shortfall created by lower unit shipments was
      partially offset by a greater percentage of shipments of ALD systems,
      which have a higher average selling price.  Net sales recognized
      on customer acceptance decreased by $1.8 million due to fewer systems in
      the field under installation during the quarter ended December 26,
      2008.  The overall decrease is the result of changes within our
      DRAM customers relating primarily to trench capacitor
      technology.
  15
 Table of Contents
 ·
              An
      approximate $3.2 million decrease in net sales of our Etch, PVD and CVD
      systems which reflect a 21% decrease in module shipments due to lower
      demand and order delays.
  ·
              Service
      and spare part sales decreased by approximately $3.8 million due primarily
      to lower spare parts sales.  This is primarily due to lower
      equipment utilization at our customer facilities;
  and
  ·
              During
      the quarter ended December 26, 2008, we shipped and received customer
      acceptance of our StratIonTM fxp, our first 300mm
      ready Ion Beam Deposition system.  Revenue of $1.7 million was
      recognized based on a discounted price in relation to a three-year joint
      development program.  The program entails the development of
      next generation magnetic tunnel junction based devices for applications
      including Magnetic Random Access Memory and hard disk drive heads on RF
      components.  The system will also be used for the deposition of
      metal gates for advanced Complementary Metal Oxide Semiconductor (CMOS)
      processes.  Acceptance of this system, and the related revenue
      recognized, partially offset the lower sales in other product
      lines.
  During
the quarter ended December 26, 2008, Panasonic Corporation, Triquint
Semiconductor Inc., Robert Bosch GmBH and ST Microelectronics accounted for 15%,
14%, 11% and 10% of net sales, respectively.
  During
the quarter ended December 28, 2007, Qimonda A.G., Win Semiconductor Corporation
and ST Microelectronics accounted for 17%, 12% and 12% of net sales,
respectively.
 
 Gross
Profit and Gross Margin
  Gross
profit is the difference between net sales and cost of goods sold.  Cost of
goods sold consists of purchased material, labor and overhead to manufacture
equipment or spare parts and the cost of service and factory and field support
to customers for warranty, installation and paid service calls.  In
addition, the cost of outsourcing the assembly or manufacturing of systems and
subsystems to third parties is included in cost of goods sold.  Gross
margin is gross profit expressed as a percentage of net sales.
  Quarter
      EndedDecember
      26,
                                
                                
                                December
      28,2008
                                
                                
                                2007(dollars
      in thousands)Gross
      profit
                                
                                $
                                10,348
                                
                                
                                $
                                9,731Gross
      margin
                                
                                
                                41%
                                
                                
                                
                                29%
 
 The
increase in gross margin of 12% during the quarter ended December 26, 2008 as
compared to the quarter ended December 28, 2007 was primarily the result of the
following:
  ·
              A
      shift in the product mix within the deposition and thermal systems product
      group to a higher percentage of ALD systems sales as compared to RVP 300
      plus system
      sales.  In addition, we sold an RVP 300 plus system which had
      previously been used as a demonstration unit and had a depreciated
      carrying cost.  As a result we realized a 75% gross margin on
      this sale which was significantly higher than the average gross margin for
      an RVP 300 plussystem;
  ·
              A
      24% increase in Etch, PVD and CVD product gross margin recognized at
      shipment due primarily to lower revenue deferrals at shipment and lower
      manufacturing costs;
  ·
              A
      7% increase in gross margin earned on system acceptance due to fewer
      deposition and thermal system
acceptances;
  16
 Table of Contents
 ·
              The
      shipment and acceptance of our first StratIonTM fxp 300mm Ion Beam
      Deposition system which had an 87% gross margin as the system shipped was
      a refurbished development system which had been previously expensed as
      part of the research and development effort to develop the product line;
      and
  ·
              A
      10% increase in spares and service gross margin due primarily to cost
      reductions associated with a 38% reduction in
  headcount.
  These
gross margin improvements were partially offset by the impact of the following
during the quarter ended December 26, 2008:
  ·
              A
      $1.4 million inventory write down primarily relating to thermal and
      deposition systems inventory; and
  ·
              Increased
      unabsorbed manufacturing costs of approximately $0.7
    million.
  Research
and Development
  Research
and development expense consists of employment costs attributable to employees,
consultants and contractors who primarily spend their time on system design,
engineering and process development; materials and supplies used in system
prototyping, including wafers, chemicals and process gases; depreciation and
amortization expense allocable to research and development activities and
facilities; direct charges for repairs to research equipment and laboratories;
costs of outside services for facilities; and process engineering support and
wafer analytical services.  We also include in research and development
expenses associated with the preparation, filing and prosecution of patents and
other intellectual property.
   Quarter
      EndedDecember
      26,
                              
                              
                              December
      28,2008
                              
                              
                              2007(dollars
      in thousands)Research
      and development
                              
                              $
                              4,665
                              
                              
                              $
                              8,039Percent
      of total net sales
                              
                              
                              18%
                              
                              
                              
                              24%
  The
decrease in research and development expenses of approximately $3.4 million, or
42%, during the quarter ended December 26, 2008 as compared to the quarter ended
December 28, 2007 was due primarily to the following:
  ·
              A
      $1.7 million reduction in salaries and benefits as a result of a 42%
      headcount reduction from staffing levels for the quarter ended December
      28, 2007 related to our
restructuring;
  ·
              Lower
      prototype materials and supply cost of $1.0 million;
  and
  ·
              Lower
      depreciation and amortization expenses of approximately $0.3 million due
      to the impairment of assets during fiscal year 2008 as part of the overall
      restructuring.
  Selling,
General and Administrative
  Selling,
general and administrative expense consists of employment costs attributable to
employees, consultants and contractors who primarily spend their time on sales,
marketing, order administration and corporate administrative services; occupancy
costs attributable to employees performing these functions; sales commissions;
promotional marketing expenses; and legal and accounting expenses.
    17
 Table of Contents
 Quarter
      EndedDecember
      26,
                          
                          
                          December
      28,2008
                          
                          
                          2007(dollars
      in thousands)Selling,
      general and administrative
                          
                          $
                          5,932
                          
                          
                          $
                          9,826Percent
      of total net sales
                          
                          
                          24%
                          
                          
                          
                          29%
  The
decrease in selling, general and administrative expense of $3.9 million, or 40%,
in the quarter ended December 26, 2008 as compared to the quarter ended December
28, 2007 was primarily due to the following:
  ·
              A $0.9 million decrease in
      salaries and benefits due to a 21% reduction in
      headcount;
  ·
              Lower legal and accounting fees
      of approximately $1.8
million;
  ·
              Reduced commission ($0.3 million)
      due to limited third-party representative involvement;
      and
  ·
              Approximately $0.7 million of
      cost reduction in travel, subsidiary infrastructure and other selling
      costs in relation to our cost reduction measures and the general downturn
      in business activity.
  For the
quarter ended December 28, 2007, approximately $0.3 million in foreign exchange
remeasurement gain has been reclassified from selling, general and
administrative expense to other income (expense)-net.
  Restructuring
Charges – Operating Expenses
 
 Quarter
      EndedDecember
      26,
                          
                          
                          December
      28,2008
                          
                          
                          2007(dollars
      in thousands)Restructuring
      charges - operating expenses
                          
                          $
                          1,214
                          
                          
                          $
                          -Percent
      of net sales
                          
                          
                          5%
                          
                          
                          
                          0%
  Restructuring
charges – operating expenses during the quarter ended December 26, 2008 included
approximately $1.1 million related to the impairment of certain demonstration
lab equipment that will not be relocated as part of the transfer of research and
development activity from Scotts Valley to Newport, Wales.  The
remaining restructuring charges relate to termination benefits for 45 employees
whose positions became redundant as part of our ongoing restructuring
plan.
  Interest
Expense
   Quarter
      EndedDecember
      26,
                          
                          
                          December
      28,2008
                          
                          
                          2007(dollars
      in thousands)Interest
      expense
                          
                          $
                          667
                          
                          
                          $
                          412Percent
      of net sales
                          
                          
                          2%
                          
                          
                          
                          1%
  Our
interest expense for the quarters ended December 26, 2008 and December 28, 2007
consisted primarily of interest incurred on our revolving line of credit,
equipment term loan and commercial real estate loan.  In addition,
amortization of debt issuance costs impacted both quarters.
  Aggregate
borrowings under our revolving line of credit, equipment term loan and
commercial real estate loan were $35.2 million and $38.2 million at December 26,
2008 and December 28, 2007, respectively.
  18
 Table of Contents
 During
the quarter ended December 26, 2008, interest expense increased by $0.2 million
from the quarter ended December 28, 2007 due to a combination of higher average
borrowings ($36.7 million as compared to $19.9 million) and lower average
interest rates (6.8% as compared to 7.2%).
  Other
Income (Expenses) – Net
  Quarter
      EndedDecember
      26,
                          
                          
                          December
      28,2008
                          
                          
                          2007(dollars
      in thousands)Other
      income (expense) - net
                          
                          $
                          3,561
                          
                          
                          $
                          272Percent
      of net sales
                          
                          
                          14%
                          
                          
                          
                          1%
   The
increase in other income (expense)-net relates to approximately $3.6 million in
currency exchange remeasurement gains due primarily to the strengthening of the
U.S. dollar against the British Pound. Other than recording this as a
remeasurement gain, we do not derive any economic gain on the strengthening of
U.S. dollar.
  For the
quarter ended December 28, 2007, approximately $0.3 million in currency exchange
remeasurement gain was reclassified from selling, general and administrative
expense to other income (expense)-net.
  Income
Taxes
  Because
we have incurred significant operating losses during prior periods, no material
federal or state income taxes have been recorded. We recorded income taxes
relating to certain profitable international subsidiaries and provided a full
valuation allowance on our net tax benefits generated in all other jurisdictions
during the respective periods.
  Liquidity
and Capital Resources
  Recent
U.S. economic conditions have been unprecedented and challenging, particularly
in the credit and financial markets.  Continued concerns about the
systemic impact of inflation, energy costs, geopolitical issues, the
availability and cost of credit, the U.S. mortgage market and a declining real
estate market have contributed to increased market volatility and diminished
expectations for the U.S. economy.  In the third calendar quarter of
2008, added concerns fueled by the failure of several large financial
institutions and government interventions in the U.S. credit markets led to
increased market uncertainty and instability in the capital and credit
markets.  These conditions, combined with volatile oil prices,
declining business and consumer confidence and increased unemployment, have
contributed to unprecedented levels of volatility.
  As a
result of these market conditions, the cost and availability of credit has been
and may continue to be adversely affected by illiquid credit markets and wider
credit spreads. Concern about the stability of the markets generally and the
strength of counterparties specifically has lead many lenders and institutional
investors to reduce, and in some cases, cease to provide funding to borrowers.
Continued turbulence in the U.S. and international markets and economies may
harm our liquidity and financial condition, and the liquidity and financial
condition of our customers. If these market conditions continue, they may limit
our ability, and the ability of our customers, to timely refinance maturing
indebtedness and access the capital markets to meet liquidity needs, which could
harm our business, financial condition and results of operations.
  At
December 26, 2008, our cash and cash equivalents were $7.7 million as compared
to $14.9 million at September 26, 2008.   Our cash balance
at December 26, 2008 includes approximately $1.0 million in restricted cash used
as collateral against a letter-of-credit. This $7.2 million decrease in cash and
cash equivalents is primarily attributable to cash used to pay down our debt
($7.1 million).
  The
condensed consolidated financial statements presented elsewhere in this document
have been prepared assuming that we will continue as a going
concern.  As reflected in the condensed consolidated financial
statements, we have an accumulated deficit of $96.1 million at December 26, 2008
and a net loss from operations of $1.5 million for the quarter ended December
26, 2008.  Under its current terms, our line of credit, which had a
balance of $22.1 million at December 26, 2008, matures in October
2009.  Based on current cash flow projections, we would not be able to
meet the repay our line of credit when it matures, which raises substantial
doubt as to our ability to continue as a going concern beyond the maturity date
of our line of credit.
 
 19
 Table of Contents
 We have
taken certain measures in order to continue as a going concern including
implementing a restructuring plan to reduce costs, renegotiate the terms of our
line of credit and recently entered into an agreement with Needham &
Company, LLC to assist in evaluating current financial and strategic options
available.  We may also choose to raise additional capital from the
sale of debt or equity securities or from other sources in order to support
operations and debt obligations.   However, we may not be able to
obtain any additional capital on acceptable terms, if at all.  The
unaudited condensed consolidated financial statements presented elsewhere in
this document do not reflect any adjustments that might result from the outcome
of this uncertainty.
  Cash
Flows from Operating Activities
  Operating
activities generated $1.3 million of cash in the quarter ended December 26,
2008.  Cash was generated through net income for the quarter of
approximately $1.3 million, which was augmented by non-cash income/expense
adjustments primarily depreciation, amortization, stock based compensation, bad
debt expense and gain on the disposal of equipment aggregating approximately
$2.9 million.  Within changes in operating assets and liabilities,
changes in accounts receivables provided $0.7 million in
cash.  Changes in inventory provided $6.4 million in cash during the
quarter as purchases slowed in relation to lower shipments and a slowdown in the
market in general.  Changes in accounts payable used $4.8 million of
cash for the quarter due to lower purchasing volume in the
quarter.  Cash was used to fund reductions in our warranty liability
of $1.1 million and to fund reductions in accrued liabilities of $4.1
million.
  Cash
Flows from Investing Activities
  Cash used
in investing activities for the quarter ended December 26, 2008 was $1.3
million. Investing activities during the quarter consisted primarily of
purchasing equipment to be used in our development and demonstration
laboratories.
  Cash
Flows from Financing Activities
  Net cash
used by financing activities for the quarter ended December 26, 2008 was $7.1
million.  Payments on bank borrowings under our revolving line of credit
used $6.4 million in cash. Payments on our mortgage line of credit, short-term
borrowings and capital lease obligations constituted the remainder of the cash
used for the quarter.
  On
September 30, 2008, our credit facility was amended to reduce the maximum
available for borrowing under the revolving line of credit, equipment loan and
commercial real estate loan to approximately $42.6 million, increase the
interest rate on outstanding borrowings to LIBOR plus 4% and amended certain
financial and operating covenants.
  On
October 1, 2008, our credit facility was amended to extend the maturity date of
the revolving portion of the credit facility from April 13, 2009 to October 13,
2009, provided we achieved certain operating results during the quarter ended
December 26, 2008.  If we were unable to achieve the required results,
the maturity date for the revolving portion of the credit facility would be
April 13, 2009.  We achieved the required operating results during the
quarter ended December 26, 2008, and as such, the maturity date on the revolving
portion of our credit facility is October 13, 2009.
  Borrowings
under the revolving line of credit were $22.1 million at December 26, 2008
and were secured by accounts receivable and inventory.
  Our
equipment term loan has a three-year amortization period with monthly payments
of principal and accrued interest and is secured by a lien on our
equipment.  Outstanding borrowings under the equipment term loan were
$1.9 million at December 26, 2008. As principal is paid down under the
equipment portion of the facility, additional borrowing availability will be
created under the revolving portion of the credit facility.
  Our
commercial real estate loan is secured by a deed of trust on our Scotts Valley
facility.  Monthly payments of principal and accrued interest are
based on a 20-year amortization period for the loan
principal.  Outstanding borrowings under the commercial real estate
term loan were $11.2 million at December 26, 2008.  As principal
is paid down under the commercial real estate portion of the facility,
additional borrowing availability will be created under the revolving portion of
the credit facility.
  20
 Table of Contents
 A
subsidiary of ours has a revolving line of credit for 200,000,000 Japanese Yen
(approximately $2.2 million, at the exchange rate on December 26,
2008) under which there were no borrowings at December 26, 2008. The credit line
bears interest at 1.875% per annum.
  Off-Balance
Sheet Arrangements
  At
December 26, 2008, we had no off-balance sheet arrangements as defined in Item
303(a)(4) of Regulation S-K promulgated by the Securities and Exchange
Commission.
  Contractual
Obligations
  Other
than operating leases for certain equipment and real estate and certain vendor
commitments, we have no significant off-balance sheet transactions or
unconditional purchase obligations.  As a “smaller reporting company,” we
are not required to provide tabular disclosure of contractual
obligations.
 
 ITEM3.    QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK
  As a
"smaller reporting company," we are not required to provide the information
required by this Item.
  ITEM4.    CONTROLS AND PROCEDURES
  An
evaluation was performed under the supervision and with the participation of our
management, including our Chief Executive Officer and Chief Financial Officer,
of the effectiveness of the design and operation of our disclosure controls and
procedures as of the end of the period covered by this quarterly report. Based
on that evaluation, our management, including our Chief Executive Officer and
Chief Financial Officer, concluded that, as of December 26, 2008, our disclosure
controls and procedures were effective.  During the quarter ended
December 26, 2008, there were no changes in our internal control over financial
reporting that materially affected, or were reasonably likely to materially
affect, our internal control over financial reporting.
  PARTII.  OTHER INFORMATION
  ITEM 1. 
LEGAL PROCEEDINGS
  On April
11, 2006, IPS, Ltd. filed a lawsuit against us in the United States District
Court for the Central District of California. The complaint alleges that we
improperly used IPS's confidential information to develop our Celsior
single-wafer processing type atomic layer deposition technology. The complaint
is for unspecified monetary damages, injunctive relief and an order rescinding
the settlement and distributor agreements that we and IPS entered into in May
2004 in settlement of a prior lawsuit that IPS filed against ASML U.S., Inc. and
us in March 2004 relating to assets that we acquired from ASML in October 2003.
In May 2007, we successfully moved the dispute to arbitration. Discovery
commenced in June 2007. The parties have reached a settlement agreement in
principle and we do not expect the final agreement to have a material impact on
our business, financial condition or results of operations.
  Prior to
our merger transaction with Trikon Technologies, Inc., Trikon was a party to an
employment lawsuit in France. On March 10, 2004, Dr. Jihad Kiwan departed Trikon
as Director and Chief Executive Officer. On March 29, 2004 and April 2, 2004,
Trikon received letters from a United Kingdom law firm and from a French law
firm, respectively, on behalf of Dr. Kiwan, detailing certain monetary claims
for severance amounts due to Dr. Kiwan with respect to his employment with
Trikon. On April 28, 2004, Dr. Kiwan filed a lawsuit in France and on June 10,
2004, filed similar proceedings in the United Kingdom. Dr. Kiwan has
subsequently withdrawn the proceedings in the United Kingdom.  On
January 7, 2008, the French Commercial Court in Grenoble rejected certain of Dr.
Kiwan's claims but ordered us to pay monetary awards with respect to certain
other of Dr. Kiwan's claims.  On January 6, 2009, the Tribunal de
Grande Instance de Grenoble, which is the court of first instance having
jurisdiction to deal with applications for a stay of enforcement of judgments,
ordered us to pay the amount that was previously awarded by the French
Commercial Court within six months from January 6,
2009.    As of December 26, 2008, we have accrued estimated
settlement costs related to this matter.  We have filed an appeal to
the Regional Court of Appeals in Grenoble and the arguments are scheduled to be
heard on or about April 23, 2009.  We do not believe that the outcome
of the dispute will have a material impact on our business, financial condition
or results of operations.
  21
 Table of Contents
 ITEM1A.  RISK FACTORS
  As a
"smaller reporting company," we are not required to provide the information
required by this Item.
  ITEM2.  UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF
PROCEEDS
  During
November 2008, we engaged Needham and Company, LLC to assist us in evaluating
current financial and strategic options available through partnering, financing
and business development activities.  As part of the agreement, we
issued to Needham and Company a warrant to purchase 500,000 shares of our common
stock, dated November 20, 2008.  The warrant has an exercise price of
$0.01 per share and expires two years from the date of issuance.
  Our
issuance of the securities in the transaction described above was exempt from
registration under the Securities Act in reliance on Section 4(2) of the
Securities Act and Regulation D promulgated thereunder. The recipient of the
securities in the transaction represented its intention to acquire the
securities for investment only and not with a view to or for sale in connection
with any distribution thereof, and appropriate legends were affixed to the
warrant certificate and other instruments issued in such transaction. The sale
of these securities was made without general solicitation or
advertising.
  ITEM3.  DEFAULTS UPON SENIOR SECURITIES
  None.
  ITEM4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS
  None.
  ITEM5. OTHER INFORMATION
  None.
  
 22
 Table of Contents
  ITEM6. EXHIBITS
  Exhibit
                            Number
                          Description10.1
                          First
      Amendment to Loan and Security Agreement, by and among Aviza Technology,
      Inc., Aviza, Inc., United Commercial Bank, East West Bank and Chinatrust
      Bank (U.S.A.), entered into as of September 30, 2008, incorporated by
      reference to Exhibit 10.1 to the Current Report on Form 8-K filed by the
      registrant with the Commission on October 3, 2008.10.2
                          Second
      Amendment to Loan and Security Agreement, by and among Aviza Technology,
      Inc., Aviza, Inc., United Commercial Bank, East West Bank and Chinatrust
      Bank (U.S.A.), entered into as of October 1, 2008, incorporated by
      reference to Exhibit 10.2 to the Current Report on Form 8-K filed by the
      registrant with the Commission on October 3, 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.
   
 23
 Table of Contents
 SIGNATURES
  Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
  Aviza Technology, Inc.

                            (Registrant)Dated:
      February 5, 2009
                        By:
                        /s/ PATRICK C.
      O’CONNORPatrick
      C. O’Connor
                          Executive
      Vice President and Chief FinancialOfficer
                          (Principal
      Financial and Accounting Officer)
   
 24
 Table of Contents
 EXHIBIT
INDEX
  Exhibit
                          Number
                        Description10.1
                        First
      Amendment to Loan and Security Agreement, by and among Aviza Technology,
      Inc., Aviza, Inc., United Commercial Bank, East West Bank and Chinatrust
      Bank (U.S.A.), entered into as of September 30, 2008, incorporated by
      reference to Exhibit 10.1 to the Current Report on Form 8-K filed by the
      registrant with the Commission on October 3, 2008.10.2
                        Second
      Amendment to Loan and Security Agreement, by and among Aviza Technology,
      Inc., Aviza, Inc., United Commercial Bank, East West Bank and Chinatrust
      Bank (U.S.A.), entered into as of October 1, 2008, incorporated by
      reference to Exhibit 10.2 to the Current Report on Form 8-K filed by the
      registrant with the Commission on October 3, 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.
 
  25