- Quarterly Report (10-Q)

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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

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 o

	Non-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.

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Aviza Technology, Inc.

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		Page No.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited):
	Condensed Consolidated Balance Sheets	1
	Condensed Consolidated Statements of Operations	2
	Condensed Consolidated Statements of Cash Flows	3
	Notes to Condensed Consolidated Financial Statements	4
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		13
Item 3. Quantitative and Qualitative Disclosures About Market Risk		21
Item 4. Controls and Procedures		21

PART II. OTHER INFORMATION
Item 1. Legal Proceedings		21
Item 1A. Risk Factors		22
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		22
Item 3. Defaults Upon Senior Securities		22
Item 4. Submission of Matters to a Vote of Security Holders		22
Item 5. Other Information		22
Item 6. Exhibits		23

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ITEM 1. 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)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents	$	6,698		$	14,896
Restricted cash		1,040			-
Accounts receivable - net		26,221			31,580
Inventory		28,029			37,662
Prepaid expenses and other current assets		4,445			4,028
Total current assets		66,433			88,166

PROPERTY, PLANT AND EQUIPMENT - net		21,841			24,443
INTANGIBLE ASSETS - net		31			62
OTHER LONG-TERM ASSETS		1,060			1,118
TOTAL ASSETS	$	89,365		$	113,789

LIABILITIES AND STOCKHOLDERS’ EQUITY

CURRENT LIABILITIES:
Short-term borrowings and current portion of notes payable	$	25,050		$	31,073
Accounts payable		14,860			22,127
Warranty liability		4,552			6,143
Accrued liabilities		13,163			18,073
Total current liabilities		57,625			77,416
NOTES PAYABLE—Long-term		11,222			11,654
OTHER LIABILITIES - Long-term		175			175
Total liabilities		69,022			89,245

STOCKHOLDERS’ EQUITY:
Preferred stock, $0.0001 par value - 5,000,000 shares authorized; none outstanding		-			-
Common stock, $0.0001 par value—100,000,000 shares authorized;
21,856,473 shares issued and outstanding at December 26, 2008
and September 26, 2008, respectively		2			2
Additional paid-in capital		122,605			122,128
Accumulated deficit		(96,056	)		(97,338	)
Accumulated other comprehensive loss		(6,208	)		(248	)
Total stockholders’ equity		20,343			24,544
TOTAL 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 2 6 , 20 08 included in our Annual Report on Form 10-K

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AVIZA TECHNOLOGY, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except share and per share amounts)

(unaudited)

	Quarter Ended
	December 26,			December 28,
	2008			2007


NET SALES	$	25,231		$	34,014

COST OF GOODS SOLD:
Cost of goods sold		14,749			24,283
Cost of good sold - restructuring charges		134			-
Total cost of goods sold		14,883			24,283

GROSS PROFIT		10,348			9,731

OPERATING EXPENSES:
Research and development		4,665			8,039
Selling, general and administrative		5,932			9,826
Restructuring charges		1,214			-
Total operating expenses		11,811			17,865
LOSS FROM OPERATIONS		(1,463	)		(8,134	)

OTHER INCOME (EXPENSE):
Interest income		15			52
Interest expense		(667	)		(412	)
Other income (expense) - net		3,561			272

Total other income (expense) - net		2,909			(88	)

INCOME (LOSS) BEFORE INCOME TAXES		1,446			(8,222	)
PROVISION FOR INCOME TAXES		164			298

NET 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			21,060,009
Diluted		22,047,064			21,060,009


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

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AVIZA TECHNOLOGY, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)

	Quarter Ended
	December 26,			December 28,
	2008			2007
CASH 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			1,430
Amortization		56			133
Non-cash restructuring		1,153			-
Fair value of common stock issued for prototype materials		-			125
Stock-based compensation		422			528
Gain on disposal of equipment		(10	)		(303	)
Provision for allowance for doubtful accounts		263			115
Changes in assets and liabilities:
Accounts receivable - net		690			2,317
Inventory		6,375			(5,360	)
Prepaid expenses and other current assets, and other long-term assets		63			(163	)
Accounts payable		(4,785	)		399
Warranty 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			324
Net cash used in investing activities		(1,274	)		(1,188	)

CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds (payments) on credit lines		(6,380	)		10,275
Proceeds from the issuance of common stock		-			9
Payments 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	)		9,564
Effect of exchange rates on foreign cash balances		(93	)		181
NET DECREASE IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH		(7,158	)		(2,894	)
CASH, CASH EQUIVALENTS AND RESTRICTED CASH:
Beginning of period		14,896			23,087
End of period	$	7,738		$	20,193
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest	$	617		$	354
Income taxes paid	$	264		$	235
Noncash investing and financing activities:
Notes payable issued for services to be rendered	$	698		$	784
Fair value of common stock warrants issued for services to be rendered	$	55		$	-
Fair value of common stock issued in the acquisition
of technology license	$	-		$	1,715
Property and equipment purchases included in accounts payable at end of period	$	9		$	6

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

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AVIZA TECHNOLOGY, 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.

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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		$	22,803
Work-in-process		8,267			12,648
Finished goods and evaluation systems		914			2,211
Total	$	28,029		$	37,662

Prepaid expenses and other current assets:
Deferred installation costs		458		$	394
Insurance		765			100
Taxes		1,207			1,092
Other		2,015			2,442
Total	$	4,445		$	4,028

Property, plant and equipment - net:
Land		1,839		$	1,839
Buildings and improvements		11,981			12,133
Machinery and equipment		18,047			18,553
Office furnishings, fixtures and equipment		5,849			6,388
Construction-in-process		1,355			1,518
Total		39,071			40,431
Accumulated depreciation		(17,230	)		(15,988	)
Property, plant and equipment - net	$	21,841		$	24,443

Accrued liabilities:
Accrued payroll and payroll taxes	$	2,816		$	3,796
Accrued accounting and legal fees		3,846			4,743
Deferred revenue		1,157			2,955
Accrued restructuring charges		972			1,561
Other taxes payable		2,324			2,590
Other		2,048			2,428
Total	$	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.

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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 Ended
	December 26,	December 28,
	2008	2007
Expected life (years)	3.0	4.8
Risk-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 Average
	Number of			Exercise Price		Remaining Contractual		Aggregate Intrinsic
	Shares Issuable			Per Share		Term (Years)		Value

Outstanding at September 26, 2008		4,984,066		$	3.86		5.32	$	-
Granted		482,000			0.14
Exercised		-			-
Forfeited		(342,056	)		2.78
Outstanding at December 26, 2008		5,124,010			3.58		5.11		-

Options vested and expected to vest at
at 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.

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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 Ended
	December 26,		December 28,
	2008		2007
	(in thousands)
Cost of goods sold	$	44	$	51
Research and development		94		122
Selling, general and administrative		284		355
Pre-tax stock-based compensation expense		422		528
Income 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 Vested
			Weighted		Weighted				Weighted
Range of			Average		Average		Number		Average
Exercise	Number		Remaining		Exercise		of Shares		Exercise
Prices	of Shares		Contractual		Price		Vested and		Price
Per 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):

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	December 26,			September 26,
	2008			2008

Bank loan (revolving line of credit)	$	22,113		$	28,493
Equipment note payable		1,944			2,284
Mortgage note payable		11,182			11,292
Other notes payable		750			277
Capital lease obligations		283			381
Total		36,272			42,727
Less: 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 Ended
	December 26,			December 28,
	2008			2007

Beginning warranty accrual	$	6,143		$	11,222
Additional accruals for new shipments		434			625
Warranty costs incurred		(1,615	)		(2,042	)
Expiration and change in liability for pre-existing warranties
during 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.

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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 on
				Non-cancellable			Impairment of
	Reduction in			Purchase			Machinery and
	Work Force			Commitments			Equipment (1)			Other			Total
Balance at September 26, 2008	$	330		$	965		$	200		$	66		$	1,561

Additions:
Restructuring costs - cost of sales		134			-			-			-			134
Restructuring costs - operating expenses		61			-			1,153			-			1,214
		525			965			1,353			66			2,909
Non-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.

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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 $298,000 for 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 .

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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):

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	Quarter Ended
	December 26,		December 28,
	2008		2007

Numerator:
Net income (loss)	$	1,282	$	(8,520	)

Denominator:
Basic weighted average shares outstanding		21,856,473		21,060,009
Effect of potentially dilutive securities:
Common stock warrants		190,591		-
Dilutive weighted average shares outstanding		22,047,064		21,060,009

Net 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 Ended
	December 26,		December 28,
	2008		2007
Weighted average effect of potential common stock:

Options that would have been included in the computation
of dilutive shares outstanding had the Company reported
net income		-		1,343,011

Options and warrants that were excluded from the computation of dilutive
shares outstanding because the total assumed proceeds
exceeded the average market value of the Company's common
stock during the period		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.

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

Cautionary Statement Regarding Forward-Looking Statements

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

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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.

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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 Ended
	December 26,		December 28,
	2008		2007

Net sales		100%		100%
Cost of goods sold
Cost 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 Ended
	December 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.

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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 StratIon™ 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 Ended
	December 26,		December 28,
	2008		2007
	(dollars in thousands)
Gross profit	$	10,348	$	9,731
Gross 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 plus system;

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;

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The shipment and acceptance of our first StratIon™ 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 Ended
	December 26,		December 28,
	2008		2007
	(dollars in thousands)
Research and development	$	4,665	$	8,039
Percent 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.

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	Quarter Ended
	December 26,		December 28,
	2008		2007
	(dollars in thousands)
Selling, general and administrative	$	5,932	$	9,826
Percent 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 Ended
	December 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 Ended
	December 26,		December 28,
	2008		2007
	(dollars in thousands)
Interest expense	$	667	$	412
Percent 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.

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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 Ended
	December 26,		December 28,
	2008		2007
	(dollars in thousands)
Other income (expense) - net	$	3,561	$	272
Percent 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.

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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.

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.

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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.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

As a "smaller reporting company," we are not required to provide the information required by this Item.

ITEM 4. 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.

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

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ITEM 1A. RISK FACTORS

As a "smaller reporting company," we are not required to provide the information required by this Item.

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

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.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

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

None.

ITEM 5. OTHER INFORMATION

None.

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ITEM 6. EXHIBITS

Exhibit Number	Description

10.1	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.

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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’CONNOR

	Patrick C. O’Connor Executive Vice President and Chief Financial Officer (Principal Financial and Accounting Officer)

Table of Contents

EXHIBIT INDEX

Exhibit Number	Description

10.1	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.

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