**UNITED
        STATES**
 **SECURITIES
        AND EXCHANGE COMMISSION**
 **Washington,
        D.C. 20549**
 
  ________________
  **FORM
        10-Q**
  ________________
  
 **(Mark
        One)**
 
 **[X]   
         QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)**
 **OF
        THE SECURITIES EXCHANGE ACT OF 1934**
 
 **For
        the quarterly period ended December 31, 2006**
 
 **or**
 
 **[ 
        ]    TRANSITION REPORT PURSUANT TO SECTION 13 OR
        15(d)**
 **OF
        THE SECURITIES EXCHANGE ACT OF 1934**
 
 **Commission
        File Number: 0-26824**
 
 **TEGAL
        CORPORATION**
 ***(Exact
        Name of Registrant as Specified in Its Charter)***
 
 **Delaware**
              **68-0370244*****(State
                  or other jurisdiction of***
              ***(I.R.S.
                  Employer Identification No.)******incorporation
                  or organization)***
 
 **2201
        South McDowell Blvd.**
 **Petaluma,
        California 94954**
 *(Address
        of Principal Executive Offices)*
 
 **Telephone
        Number (707) 763-5600**
 *(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 reports) and (2) has been subject to such filing requirements for
        the
        past 90 days. Yes [X] No [   ]
 
 Indicate
        by check mark whether the registrant is a large accelerated filer, an
        accelerated filer, or a non-accelerated filer. (See definition of “accelerated
        filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.) (Check
        One):
 Large
                  accelerated filer [ ]
              Accelerated
                  filer [ ]
              Non-accelerated
                  filer [X]
 Indicated
        by check mark whether the registrant is a shell company (as defined in Rule
        12b-2 of the Exchange Act)
 Yes
        [ ]
        No [X]
 
 
 As
        of
        February 13, 2007 there were
        7,106,867 shares
        of
        our common stock outstanding. The
        number of shares outstanding reflects a 1-for-12 reverse stock split effected
        by
        the Registrant on July 25, 2006.
 
 
 
  -
            1 -
  **TEGAL
        CORPORATION AND SUBSIDIARIES**
 
 **INDEX**
 
 **Page****PART
                  I. FINANCIAL INFORMATION**ITEM
                  1.
              CONDENSED
                  CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)Condensed
                  Consolidated Balance Sheets as of December 31, 2006 and March 31,
                  2006
              3Condensed
                  Consolidated Statements of Operations for the three and nine months
                  ended
                  December 31, 2006 and December 31, 2005
              4Condensed
                  Consolidated Statements of Cash Flows for the nine months ended
                  December
                  31, 2006 and December 31, 2005
              5Notes
                  to Condensed Consolidated Financial Statements
              6ITEM
                  2.
              MANAGEMENT’S
                  DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTSOF
                  OPERATIONS
              14ITEM
                  3.
              QUANTITATIVE
                  AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
              21ITEM
                  4.
              CONTROLS
                  AND PROCEDURES
              21**PART
                  II. OTHER INFORMATION**ITEM
                  1.
              LEGAL
                  PROCEEDINGS
              22ITEM
                  1A.
              RISK
                  FACTORS
              22ITEM
                  6.
              EXHIBITS
              27SIGNATURES
              27
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  -
            2 -
  **PART
        I — FINANCIAL INFORMATION**
 
 **Item
        1.** ***Condensed
        Consolidated Financial Statements***
 
 **TEGAL
        CORPORATION AND SUBSIDIARIES**
 **CONDENSED
        CONSOLIDATED BALANCE SHEETS**
 **(Unaudited)**
 **(In
        thousands, except share data)**
 
 
 
 
 
 **December
                  31,**
              
              **March
                  31,****2006**
              
              **2006****ASSETS**Current
                  assets:Cash
                  and cash equivalents
              
              $
              29,502
              
              $
              13,787Accounts
                  receivable, net of allowances for sales returns and doubtful accounts
                  of
                  $464 and $205 at December 31, 2006, and March 31, 2006,
                  respectively
              
              
              2,265
              
              
              5,265Inventories,
                  net
              
              
              5,886
              
              
              7,700Prepaid
                  expenses and other current assets
              
              
              1,211
              
              
              1,270Total
                  current assets
              
              
              38,864
              
              
              28,022Property
                  and equipment, net
              
              
              1,033
              
              
              1,849Intangible
                  assets, net
              
              
              1,238
              
              
              1,474Other
                  assets
              
              
              -146
              
              
              146Total
                  assets
              
              $
              41,281
              
              $
              31,491**LIABILITIES
                  AND STOCKHOLDERS’ EQUITY**Current
                  liabilities:Notes
                  payable and bank lines of credit
              
              $
              37
              
              $
              27Accounts
                  payable
              
              
              2,271
              
              
              2,458Accrued
                  product warranty
              
              
              852
              
              
              506Deferred
                  revenue
              
              
              794
              
              
              477Litigation
                  suspense
              
              
              19,500
              
              
              —Accrued
                  expenses and other current liabilities
              
              
              1,909
              
              
              1,975Total
                  current liabilities
              
              
              25,363
              
              
              5,443Long-term
                  portion of capital lease obligations
              
              
              —
              
              
              2Other
                  long term obligations
              
              
              —
              
              
              6Total
                  long term liabilities
              
              
              —
              
              
              8Total
                  liabilities
              
              
              --
                  25,363
              
              
              -
                  5,451Stockholders’
                  equity:Preferred
                  stock; $ 0.01 par value;
                  5,000,000shares authorized; none issued and outstanding
              
              
              —
              
              
              —Common
                  stock; $ 0.01 par value;200,000,000shares authorized;
                  7,106,867 and 7,021,088shares issued and outstanding at December 31, 2006 and March 31,
                  2006,
                  respectively
              
              
              71
              
              
              70Restricted
                  share units
              
              
              281
              
              
              1,034Additional
                  paid-in capital
              
              
              121,787
              
              
              119,558Accumulated
                  other comprehensive income
              
              
              142
              
              
              532Accumulated
                  deficit
              
              
              (106,363
              )
              
              (95,154
              )Total
                  stockholders’ equity
              
              
              15,918
              
              
              26,040Total
                  liabilities and stockholders’ equity
              
              $
              41,281
              
              $
              31,491
 
 See
        accompanying notes.
 
  -
            3 -
  
 
 
 **TEGAL
        CORPORATION AND SUBSIDIARIES**
 **CONDENSED
        CONSOLIDATED STATEMENTS OF OPERATIONS**
 **(Unaudited)**
 **(In
        thousands, except per share data)**
 
 
 **Three
                  Months**
                **December
                  31,**
              
              **Nine
                  Months**
                **December
                  31,********2006**
              
              ******2005**
              
              ******2006**
              
              ******2005**Revenue
              
              $
              4,377
              
              $
              6,246
              
              $
              16,066
              
              $
              15,704Cost
                  of revenue
              
              
              5,703
              
              
              4,565
              
              
              12,494
              
              
              10,905Gross
                  profit (loss)
              
              
              (1,326
              )
              
              1,681
              
              
              3,572
              
              
              4,799Operating
                  expenses:Research
                  and development
              
              
              1,077
              
              
              1,039
              
              
              3,139
              
              
              3,426Sales
                  and marketing
              
              
              949
              
              
              694
              
              
              2,957
              
              
              2,095General
                  and administrative
              
              
              3,063
              
              
              1,128
              
              
              8,850
              
              
              5,766Total
                  operating expenses
              
              
              5,089
              
              
              2,861
              
              
              14,946
              
              
              11,287Operating
                  loss
              
              
              (6,415
              )
              
              (1,180
              )
              
              (11,374
              )
              
              (6,488
              )Other
                  income (expense), net
              
              
              290
              
              
              (724
              )
              
              166
              
              
              (604
              )Net
                  loss
              
              $
              (6,125
              )
              $
              (1,904
              )
              $
              (11,208
              )
              $
              (7,092
              )Net
                  loss per share, basic and diluted
              
              $
              (0.86
              )
              $
              (0.27
              )
              $
              (1.59
              )
              $
              (1.35
              )Shares
                  used in per share computation:Basic
              
              
              7,082
              
              
              6,995
              
              
              7,044
              
              
              5,261Diluted
              
              
              7,082
              
              
              6,995
              
              
              7,044
              
              
              5,261
 
 Note:
        Shares used in per share computation for basic and diluted reflect a 1-for-12
        reverse stock split effected
        by the Company on July 25, 2006
 
 See
        accompanying notes.
  -
            4 -
  **TEGAL
        CORPORATION AND SUBSIDIARIES**
 **CONDENSED
        CONSOLIDATED STATEMENTS OF CASH FLOWS**
 **(Unaudited)**
 **(In
        thousands)**
 
 **Nine****Months Ended**
                **December
                  31,****2006**
              
              **2005**Cash
                  flows from operating activities:Net
                  loss
              
              $
              (11,208
              )
              $
              (7,092
              )Adjustments
                  to reconcile net loss to cash used in operating
                  activities:Depreciation
                  and amortization
              
              
              639
              
              
              950Stock
                  compensation expense
              
              
              1,269
              
              
              —Fair
                  value of warrants issued for services rendered
              
              
              61
              
              
              1,837Stock
                  distribution
              
              
              148
              
              
              —Provision
                  for doubtful accounts and sales return allowances
              
              
              259
              
              
              (323
              )Loss
                  on disposal of property and equipment
              
              
              657
              
              
              128Excess
                  and obsolete inventory provision
              
              
              (2,572
              )
              
              —Non-cash
                  valuation of marked to market investor warrants
              
              
              —
              
              
              436Changes
                  in operating assets and liabilities:Accounts
                  receivables
              
              
              2,619
              
              
              (3,506
              )Inventories
              
              
              4,193
              
              
              (1,384
              )Prepaid
                  expenses and other assets
              
              
              56
              
              
              (1,834
              )Accounts
                  payable
              
              
              (193
              )
              
              (145
              )Accrued
                  expenses and other liabilities
              
              
              (82
              )
              
              (269
              )Accrued
                  product warranty
              
              
              340
              
              
              159Litigation
                  suspense
              
              
              19,500
              
              
              —Deferred
                  revenue
              
              
              317
              
              
              706Net
                  cash provided by operating activities
              
              
              16,003
              
              
              (10,337
              )Cash
                  flows used in investing activities:Purchases
                  of property and equipment
              
              
              (244
              )
              
              (211
              )Net
                  cash used in investing activities:
              
              
              (244
              )
              
              (211
              )Cash
                  flows provided by financing activities:Net
                  proceeds from issuance of common stock
              
              
              —
              
              
              18,627Borrowings
                  under lines of credit
              
              
              12
              
              
              53Repayment
                  of borrowings under lines of credit
              
              
              —
              
              
              (181
              )Payments
                  on capital lease financing
              
              
              (2
              )
              
              (9
              )Net
                  cash provided by financing activities
              
              
              10
              
              
              18,490Effect
                  of exchange rates on cash and cash equivalents
              
              
              (54
              )
              
              76Net
                  increase in cash and cash equivalents
              
              
              15,715
              
              
              8,018Cash
                  and cash equivalents at beginning of period
              
              
              13,787
              
              
              7,093Cash
                  and cash equivalents at end of period
              
              $
              29,502
              
              $
              15,111
 
 See
        accompanying notes.
  -
            5 -
  **TEGAL
        CORPORATION AND SUBSIDIARIES**
 
 **NOTES
        TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 **(Unaudited)**
 **(All
        amounts in thousands, except share data)**
 
 **1.
        Basis of Presentation:**
 
 In
        the
        opinion of management of Tegal Corporation, a Delaware corporation (the
“Company”), the unaudited condensed consolidated interim financial statements
        have been prepared on the same basis as the March 31, 2006 audited consolidated
        financial statements and include all adjustments, consisting only of normal
        recurring adjustments, necessary to fairly state the information set forth
        herein. The statements have been prepared in accordance with the regulations
        of
        the Securities and Exchange Commission (the “SEC”), but omit certain information
        and footnote disclosures necessary to present the statements in accordance
        with
        generally accepted accounting principles. These interim financial statements
        should be read in conjunction with the consolidated financial statements
        and
        footnotes included in the Company’s Annual Report on Form 10-K for the fiscal
        year ended March 31, 2006. The results of operations for the three and nine
        months ended December 31, 2006 are not necessarily indicative of results
        to be
        expected for the entire year.
 
 The
        consolidated financial statements contemplate the realization of assets and
        the
        satisfaction of liabilities in the normal course of business. The Company
        incurred net (loss) of $(11,208) and
        $(7,092) for the nine months ended December 31, 2006 and 2005, respectively.
        The
        Company generated (used) cash flows from operations of $16,003 and $(10,337)
        for
        the period ended December 31, 2006 and 2005, respectively. During the fiscal
        2006 the Company raised a net of $18,384 through a private investment placement
        of equity. Management believes that these proceeds, combined with projected
        sales, consolidation of certain operations and continued cost containment
        will
        be adequate to fund operations through fiscal 2008. However, projected sales
        may
        not materialize and unforeseen costs may be incurred **.** If
        the
        projected sales do not materialize, the Company’s ability to achieve its
        intended business objectives may be adversely affected. The condensed
        consolidated financial statements do not include any adjustments relating
        to the
        recoverability and classification of recorded assets or the amount or
        classification of liabilities or any other adjustments that might be necessary
        should the Company be unable to continue as a going concern.
 
 On
        July
        21, 2006, Tegal Corporation filed with the Secretary of State of the State
        of
        Delaware a Certificate of Amendment to the Company’s Certificate of
        Incorporation to affect a 1-for-12 reverse stock split of the Company’s common
        stock. The condensed consolidated financial statements for current and prior
        periods have been adjusted to reflect the change in number of shares.
 
 **Concentration
        of Credit Risk**
 
 Financial
        instruments that potentially subject the Company to significant concentrations
        of credit risk consist primarily of temporary cash investments and accounts
        receivable. Substantially all of the Company’s temporary investments are
        invested in money market funds. The Company’s accounts receivable are derived
        primarily from sales to customers located in the U.S., Europe and Asia. The
        Company performs ongoing credit evaluations of its customers and generally
        requires no collateral. The Company maintains reserves for potential credit
        losses. Write-offs during the periods presented have been insignificant.
 
 During
        the three months ended December 31, 2006, one customer accounted for 65%
        of
        total revenue. During the three months ended December 31, 2005, one customer
        accounted for 70% of total revenue. During the nine months ended December
        31,
        2006, one customer accounted for 41% of total revenue. During the nine months
        ended December 31, 2005, one customer accounted for 55% of total revenue.
 
 As
        of
        December 31, 2006, one customer accounted for 35% of outstanding accounts
        receivable balance. As of December 31, 2005, two customers accounted for
        76% of
        outstanding accounts receivable balance.
 
  **Adoption
        of SFAS 123R**
 
 The
        Company has adopted several stock plans that provide equity instruments to
        the
        Company’s employees and non-employee directors. The Company’s plans include
        incentive and non-statutory stock options and restricted stock awards. Stock
        options generally vest ratably over a four-year period on the anniversary
        date
        of the grant, and expire ten years after the grant date. Restricted stock
        awards
        generally vest on the achievement of specific performance targets. The Company
        also has employee stock purchase plans that allow qualified employees to
        purchase Company shares at 85% of the fair market value on specified
        dates.
  -
            6 -
  Prior
        to
        April 1, 2006 the Company accounted for these stock-based employee compensation
        plans under the measurement and recognition provisions of Accounting Principles
        Board Opinion No. 25, “Accounting for Stock Issued to Employees” or APB 25, and
        related Interpretations, as permitted by SFAS No. 123, “Accounting for Stock
        Based Compensation,” or SFAS 123. With the exception of grants of restricted
        stock awards, the Company generally recorded no stock-based compensation
        expense
        during periods prior to April 1, 2006 as all stock-based grants had exercise
        prices equal to the fair market value of the Company’s common stock on the date
        of grant. The Company also recorded no compensation expense in connection
        with
        the Company’s employee stock purchase plans as they qualified as
        non-compensatory plans following the guidance provided by APB 25. [In accordance
        with SFAS 123 and SFAS 148 “Accounting for Stock-Based Compensation-Transition
        and Disclosure,” appearing later in this Note, the Company disclosed its net
        loss and net loss per share for the three and nine months ended December
        31,
        2005 as if the Company had applied the fair value-based method in measuring
        compensation expense for its stock-based compensation plans.]
 
 Effective
        April 1, 2006, the Company adopted the fair value recognition provisions
        of SFAS
        No. 123R “Accounting for Stock Based Compensation,” using the modified
        prospective transition method. Under that transition method, the Company
        recognized compensation expense of $806 and $1,269 for the three and nine
        months
        ended December 31, 2006 , which included: (a) compensation expense for all
        share-based payments granted prior to but not yet vested as of April 1, 2006,
        based on the grant date fair value estimated in accordance with the original
        provisions of SFAS 123, and (b) compensation expense for all share-based
        payments granted or modified on or after April 1, 2006, based on the grant
        date
        fair value estimated in accordance with the provisions of SFAS 123R.
        Compensation expense is recognized only for those awards that are expected
        to
        vest, whereas prior to the adoption of SFAS 123R, the Company recognized
        forfeitures as they occurred. In addition, the Company elected the straight-line
        attribution method as our accounting policy for recognizing stock-based
        compensation expense for all awards that are granted on or after April 1,
        2006.
        Results in prior periods have not been restated.
 
 The
        total
        compensation expense related to non-vested awards not yet recognized is $4,215.
        The weighted average period for which it is expected to be recognized is
        3.29
        years.
 
 Had
        the
        Company adopted SFAS No 123R during the fiscal year ended March 31, 2006,
        compensation expense of approximately $1,770 would have been recognized in
        the
        consolidated statements of operations for the year ended March 31, 2006.
  The
        following assumptions are included in the estimated grant date fair value
        calculations for the Company’s stock option and RSU awards and Employee
        Qualified Stock Purchase Plan (“ESPP”):
 
 **As
                  of**
                **December
                  31, 2006**
              **As
                  of**
                **December
                  31, 2005**Expected
                  life (years):Stock
                  options
              4.0
              4.0ESPP
              0.5
              0.5Volatility:Stock
                  options and RSU’s
              96%
              84%ESPP
              96%
              84%Risk-free
                  interest rate
              4.7%
              3.9%Dividend
                  yield
              0%
              0%
 
 
 During
        the nine months ended December 31, 2006, there were 269 stock option grants
        and
        479 RSU grants.
 
 -
            7 -
 
 The
        following table illustrates on a post reverse stock split basis, the effect
        on
        net (loss) and net (loss) per share if the Company had applied the fair value
        recognition provisions of SFAS No. 123R to stock-based compensation during
        the
        three and nine months ending December 31, 2006. (in thousands, except per
        share
        data):
 
 
 **Three
                  Months**
                **December
                  31,**
              
              **Nine
                  Months**
                **December
                  31,****2005**
              
              **2005**Net
                  loss as reported
              
              $
              (1,904
              )
              $
              (7,092
              )Add:
                  Stock-based employee compensation expense included in
                Reported
                  net income
              
              
              —
              
              
              —Deduct:
                  Total stock-based employee compensation expense
                Determined
                  under fair value method for all awards
              
              
              (367
              )
              
              (1,447
              )Pro
                  forma net loss
              
              $
              (2,271
              )
              $
              (8,539
              )Basic
                  net loss per share:As
                  reported
              
              $
              (0.27
              )
              $
              (1.35
              )Pro
                  forma
              
              $
              (0.73
              )
              $
              (1.62
              )
 
 The
        disclosure provisions of SFAS No. 123R and SFAS No. 148 require judgments
        by
        management as to the estimated lives of the outstanding options. Management
        has
        based the estimated life of the options on historical option exercise patterns.
        If the estimated life of the options increases, the valuation of the options
        will increase as well.
 
 **2.
        Inventories:**
 
 Inventories
        are stated at the lower of cost or market, reduced by provisions for excess
        and
        obsolescence. Cost is computed using standard cost, which approximates actual
        cost on a first-in, first-out basis and includes material, direct labor and
        manufacturing overhead costs.
 
 The
        estimate of the effect of excess and obsolescence on the carrying values
        of our
        inventories is based upon projected future demand and market conditions.
        A
        provision has been established for related inventories in excess of production
        demand. Should actual production demand differ from estimates, additional
        inventory write-downs may be required. The status of this reserve is reviewed
        on
        an on-going basis, any excess and obsolete provision is released only if
        and
        when the related inventory is sold or scrapped. During the nine months ending
        December 31, 2006 the Company reduced the reserve by $3,024, sold or scrapped
        previously reserved inventory of $2,685 and adjusted the reserve balance
        for a
        change in manufacturing overhead related to improved plant efficiencies by
        $339.
        The reserve balance at December 31, 2006 was $ 4,112. At March 31, 2006,
        the
        reserve was at $7,136.
 
 
 Inventories
        as of December 31, 2006 and March 31, 2006 consisted of:
 
 **December
                  31,**
                **2006**
              
              **March
                  31,**
                **2006**Raw
                  materials
              
              $
              1,376
              
              $
              1,692Work
                  in progress
              
              
              3,198
              
              
              4,173Finished
                  goods and spares
              
              
              1,312
              
              
              1,835$
              5,886
              
              $
              7,700
 
 The
        Company periodically analyzes any systems that are in finished goods inventory
        to determine if they are suitable for current customer requirements. At the
        present time, the Company’s policy is that, if after approximately 18 months,
        the Company determines that a sale will not take place within the next 12
        months
        and the system would be useable for customer demonstrations or training,
        it is
        transferred to fixed assets. Otherwise, it is expensed.
 
 **3.
        Product Warranty:**
 
 The
        Company provides warranty on all system sales based on the estimated cost
        of
        product warranties at the time revenue is recognized. The warranty obligation
        is
        affected by product failure rates, material usage rates, and the efficiency
        by
        which the product failure is corrected. Should actual product failure rates,
        material usage rates and labor efficiencies differ from estimates, revisions
        to
        the estimated warranty liability may be required.
 
  -
            8 -
  Warranty
        activity for the three and nine months ended December 31, 2006 and 2005
        was:
 
 **Warranty
                  Activity for the Three Months Ended****December
                  31,**
              
              **Warranty
                  Activity for the Nine Months Ended**
                **December
                  31,****2006**
              
              **2006**
              
              **2006**
              
              **2005**Balance
                  at the beginning of the period
              
              $
              800
              
              $
              315
              
              $
              723
              
              $
              252Additional
                  warranty accruals for warranties issued during the period
              
              
              208
              
              
              234
              
              
              707
              
              
              445Settlements
                  made during the period
              
              
              (156
              )
              
              (124
              )
              
              (578
              )
              
              (272
              )Balance
                  at the end of the period
              
              $
              852
              
              $
              425
              
              $
              852
              
              $
              425
 
 
 Certain
        of the Company's sales contracts include provisions under which customers
        would
        be indemnified by the Company in the event of, among other things, a third-party
        claim against the customer for intellectual property rights infringement
        related
        to the Company's products. There are no limitations on the maximum potential
        future payments under these guarantees. The Company has accrued no amounts
        in
        relation to these provisions as no such claims have been made and the Company
        believes it has valid, enforceable rights to the intellectual property embedded
        in its products.
 
 **4.
        Net Loss per Common Share:**
 
 Basic
        net
        loss per common share is computed using the weighted-average number of shares
        of
        common stock outstanding.
 The
        following table represents the calculation of basic and diluted net loss
        per
        common share (in thousands, except per share data):
 
 **Three
                  Months ended December 31,****2006**
              
              **Three
                  Months ended December 31,****2005**
              
              **Nine
                  Months ended December 31,****2006**
              
              **Nine
                  Months ended December 31,****2005**Net
                  loss applicable to common stockholders
              
              $
              (6,125
              )
              $
              (1,904
              )
              $
              (11,208
              )
              $
              (7,092
              )Basic
                  and diluted:Weighted-average
                  common shares outstanding (adjusted to reflect 1-for-12 reverse
                  stock
                  split)
              
              
              7,082
              
              
              6,995
              
              
              7,044
              
              
              5,261Weighted-average
                  common shares used in computing basic and diluted net loss per
                  common
                  share
              
              
              7,082
              
              
              6,995
              
              
              7,044
              
              
              5,261Basic
                  and diluted net loss per common share
              
              $
              (0.86
              )
              $
              (0.27
              )
              $
              (1.59
              )
              $
              (1.35
              )
 
 Outstanding
        options, warrants and restricted stock units of 2,967,302 and
        2,500,404 shares
        of common stock at a weighted-average exercise price of $11.40 and $15.24
        per
        share on December 31, 2006 and 2005 respectively, were not included in the
        computation of diluted net loss per common share for the periods presented
        as a
        result of their anti-dilutive effect. Such securities could potentially dilute
        earnings per share in future periods.
 
 **5.
        Stock-Based Transactions:**
 
 ***Issuance
        of Warrants to Consultants***
 
 The
        Company is party to a contract with certain consultants pursuant to which
        the
        Company will issue warrants and restricted stock units on a monthly and
        quarterly basis in lieu of cash payments through January 2008, depending
        upon
        the continuation of the contract and the achievement of certain performance
        goals. The maximum number of shares of common stock exercisable pursuant
        to any
        warrants granted under these agreements is
        53,333 shares.
        During the three months ended December 31, 2006, and December 31, 2005, warrants
        to purchase 2,500 and 7,083 shares of common stock, respectively, were granted
        and valued at $13 and $42, respectively. During the nine months ended December
        31, 2006 and December 31, 2005, warrants to purchase 13,332 and 21,250 shares
        were granted and valued at $60 and $179, respectively. These values were
        calculated using the Black-Scholes model with an exercise price at the market
        value on the day of the grant. The value of the warrants was estimated
        with the following assumptions; Five year life with an interest rate of
        4.51% and volatility of 115%. None of the warrants have been exercised as
        of
        December 31, 2006.
 
 
  -
            9 -
  ***Issuance
        of Options and Restricted Stock Units to Consultants***
 
 During
        the three months ended December 31, 2006, the Company entered into an agreement
        with certain consultants pursuant to which the Company will issue options
        and
        restricted stock units (“RSUs”) on a quarterly basis in lieu of cash payments
        through November 2008, depending upon the continuation of the contract and
        the
        achievement of certain performance goals. The maximum number of options to
        be
        issued is 20,000. The maximum number of RSUs to be issued is 10,000. During
        the
        three and nine months ended December 31, 2006, and December 31, 2005, no
        options
        or RSUs were issued under this agreement.
 
 
 **6.
        Notes Payable and Bank Lines of Credit:**
 
 As
        of
        December 31, 2006, the Company’s Japanese subsidiary had $32 outstanding under
        its lines of credit which is collateralized by Japanese customer promissory
        notes held by such subsidiary in advance of payment on customers’ accounts
        receivable. The credit line has a total borrowing capacity of 150 million
        yen
        (approximately $1,261 at exchange rates prevailing on December 31, 2006),
        which
        are secured by Japanese customer promissory notes held by such subsidiary
        in
        advance of payment on customers’ accounts receivable. The Japanese bank line
        bears interest at Japanese prime (1.625% as of December 31, 2006) plus 0.875%.
 
 Notes
        payable as of December 31, 2006 consisted of capital lease obligations on
        fixed
        assets totaling $5.
 
 **7.
        Legal Proceedings**
 
 Sputtered
        Films Inc. v. Advanced Modular Sputtering , et al., filed in Santa Barbara
        County Superior Court.
 
  On
        December 22, 2003, Sputtered Films, Inc. ("SFI"), a wholly owned subsidiary
        of
        the Company, filed an action against two former employees, Sergey Mishin
        and
        Rose Stuart-Curran, and a company they formed after leaving their employment
        with SFI named Advanced Modular Sputtering, Inc. ("AMS"). Sergey Mishin and
        Rose
        Stuart-Curran had each signed confidentiality and non-disclosure agreements
        regarding information obtained while employed by SFI. The action contains
        causes
        of action for specific performance, breach of contract, breach of the covenant
        of good faith and fair dealing, misappropriation of trade secrets, unfair
        competition, unfair business practices, interference with prospective economic
        advantage, conversion, unjust enrichment, and declaratory relief. These claims
        arise out of information SFI received evidencing that AMS possessed and used
        SFI's confidential, proprietary and trade secret drawings, specifications
        and
        technology to manufacture the sputtering tool marketed by AMS.
   During
        2004 and 2005, this litigation was largely stalled while AMS and Agilent
        Technologies, Inc. contested SFI's right to conduct discovery. This dispute
        was
        resolved in late 2005 when the California Court of Appeal affirmed SFI's
        trade
        secrets identification as statutorily sufficient. On November 18, 2005, SFI
        requested leave to add Agilent Technologies, Inc. ("Agilent") as a defendant
        based on evidence that Agilent and AMS co-developed the machines which SFI
        contends were built using SFI proprietary information. The Court granted
        SFI's
        request and Agilent was served as a Doe defendant on December 12, 2005. In
        early
        December, SFI learned that Agilent transferred its Semiconductor Products
        Group
        to a number of Avago entities effective December 1, 2005, and accordingly
        SFI
        sought and received court approval to add Avago Technologies U.S., Inc. and
        Avago Technologies Wireless (U.S.A.) Manufacturing, Inc (collectively the
        "Avago
        Entities") as defendant in this action. On April 25, 2006, the Avago Entities
        filed a Cross-Complaint against SFI and Tegal Corporation alleging causes
        of
        action for breach of contract, trade secret misappropriation, unfair
        competition, conversion, unjust enrichment and declaratory relief. The
        Cross-Complaint alleges on information and belief that SFI misused information
        obtained from Hewlett-Packard in connection with Hewlett-Packard's request
        to
        purchase SFI machines or to upgrade SFI machines Hewlett-Packard already
        owned.
   On
        November 13, 2006, following commencement of the trial, all the parties in
        the
        litigation agreed on terms of a settlement, which was filed with the court.
        The
        settlement terms provide for a payment to the Company of approximately $13
        million, net of fees and certain expenses associated with the litigation.
        The
        settlement also calls for the transfer of assets related to PVD technology
        from
        AMS to SFI and the dissolution of AMS as of March 1, 2007. The Avago
        Cross-Complaint was also dismissed as part of the settlement. A final
‘confidential settlement and release of claims’ was executed among the parties
        effective December 21, 2006.
  **8.
        Geographical Information**
 
 The
        Company operates in one segment for the manufacture, marketing and servicing
        of
        integrated circuit fabrication equipment. In accordance with SFAS No. 131
        “Disclosures about Segments of an Enterprise and Related Information,” (“SFAS
        131”), the Company’s chief operating decision-maker has been identified as the
        President and Chief Executive Officer who reviews operating results to make
        decisions about allocating resources and assessing performance for the entire
        company.
  -
            10 -
  All
        material operating units qualify for aggregation under SFAS 131 due to their
        identical customer base and similarities in: economic characteristics; nature
        of
        products and services; and procurement, manufacturing and distribution
        processes. Since the Company operates in one segment and in one group of
        similar
        products and services, all financial segment and product line information
        required by SFAS 131 can be found in the condensed consolidated financial
        statements.
 
 For
        geographical reporting, revenues are attributed to the geographic location
        in
        which the customers’ facilities are located. Long-lived assets consist primarily
        of property, plant and equipment, and are attributed to the geographic location
        in which they are located. Net sales and long-lived assets by geographic
        region
        were as follows:
 
 **Revenue
                  for the**
                **Three
                  Months Ended**
                **December
                  31,**
              
              **Revenue
                  for the**
                **Nine
                  Months Ended******
                ******December 31,********2006**
              
              ******2005**
              
              ******2006**
              
              ******2005**Sales
                  to customers located in:United
                  States
              
              $
              2,037
              
              $
              2,047
              
              $
              5,799
              
              $
              3,790Asia,
                  excluding Japan
              
              
              1,311
              
              
              2,431
              
              
              5,923
              
              
              2,770Japan
              
              
              377
              
              
              768
              
              
              2,053
              
              
              1,846Europe
              
              
              652
              
              
              1,000
              
              
              2,291
              
              
              7,298Total
                  revenue
              
              $
              4,377
              
              $
              6,246
              
              $
              _16,066
              
              $
              15,704
 
 **Long
                  - Lived**
                **Assets
                  as of December 31,****2006**
              
              **2005**Long-lived
                  assets at period-end:United
                  States
              
              $
              2,333
              
              $
              5,217Europe
              
              
              10
              
              
              17Japan
              
              
              7
              
              
              8Asia,
                  excluding Japan
              
              
              —
              
              
              4Total
                  long-lived assets
              
              $
              2,350
              
              $
              5,246
 
 **9.
        Stock Options & Warrants**
 A
        summary
        of stock option and warrant activity during the quarter ended December 31,
        2006
        is as follows:
 
 **Weighted****Weighted**
              
              **Average****Average**
              
              **Remaining**
              
              **Aggregate****Exercise**
              
              **Contractual**
              
              **Intrinsic****Shares**
              
              **Price**
              
              **Term
                  (in yrs.)**
              
              **Value**Beginning
                  outstanding
              
              
              1,969,562
              
              $
              13.37Granted****Price
                  < market value
              
              
              —
              
              $
              0.00****Price
                  = market value
              
              
              382,899
              
              $
              4.60****Price
                  > market value
              
              
              —
              
              $
              0.00****Total
              
              
              382,899
              
              $
              4.60Exercised
              
              
              —
              
              $
              0.00CancelledForfeited
              
              
              (31,072
              )
              $
              5.15Expired
              
              
              (109,453
              )
              $
              24.79Total
              
              
              (140,525
              )
              $
              20.45Ending
                  outstanding
              
              
              2,211,936
              
              $
              11.40
              
              
              5.26
              
              $
              653,667Ending
                  vested & expected to vest
              
              
              2,177,283
              
              $
              11.51
              
              
              5.26
              
              $
              602,136Ending
                  exercisable
              
              
              1,856,850
              
              $
              12.63
              
              
              4.50
              
              $
              155,137
 
  -
            11 -
  The
        aggregate intrinsic value of options and warrants outstanding at December
        31,
        2006 is calculated as the difference between the exercise price of the
        underlying options and the market price of our common stock as of December
        31,
        2006.
 
 The
        following table summarizes information with respect to stock options and
        warrants outstanding as of December 31, 2006:
 
 
 **Weighted****Number**
              
              **Average**
              
              
              
              **Number**
              **Weighted****Outstanding**
              
              **Remaining**
              
              
              
              **Exercisable**
              **Average****Range
                  of**
                **Exercise
                  Prices**
              
              **As
                  of**
                **December
                  31, 2006**
              
              **Contractual**
                **Term**
                **(in
                  years)**
              
              **Weighted
                  Average**
                **Exercise
                  Price**
              
              **As
                  of**
                **December
                  31, 2006**
              **Exercise
                  Price**
                **As
                  of December 31, 2006**$
                  4.20
              $ 4.20
              
              16,344
              
              1.69
              
              $  4.20
              
              16,344
              $   
                  4.204.60
              4.60
              
              359,326
              
              9.70
              
              4.60
              
              54,673
              4.604.68
              8.28
              
              284,355
              
              6.09
              
              6.74
              
              238,730
              6.7612.00
              12.00
              
              1,284,990
              
              3.68
              
              12.00
              
              1,284,990
              12.0012.36
              46.50
              
              223,316
              
              6.94
              
              15.70
              
              218,508
              15.7549.32
              82.56
              
              34,863
              
              2.13
              
              51.95
              
              34,863
              51.9592.26
              92.26
              
              416
              
              3.19
              
              92.26
              
              416
              92.2692.52
              92.52
              
              4,165
              
              3.13
              
              92.52
              
              4,165
              92.5299.00
              99.00
              
              2,498
              
              3.24
              
              99.00
              
              2,498
              99.00105.00
              105.00
              
              1,663
              
              1.98
              
              105.00
              
              1,663
              105.00$4.20
              $105.00
              
              2,211,936
              
              5.26
              
              $11.40
              
              1,856,850
              $12.63
 
   **Restricted
        Stock Units**
 
 
 The
        following table summarizes the Company’s restricted stock award activity for the
        period ended December 31, 2006:
 
 **Number**
                **of**
                **Shares**
              
              **Weighted
                  Avg.**
                **Grant
                  Date**
                **Fair
                  Value**Balance(YTD),
                  September 30, 2006
              
              
              45,833
              
              $
              9.68Granted
              
              
              478,771
              
              
              —Vested
              
              
              —
              
              
              —Forfeited
              
              
              5,905
              
              
              —Released
              
              
              (33,333
              )
              $
              9.96Balance,
                  December 31, 2006
              
              
              485,366
              
              $
              4.73
 
 
 **Unvested
        restricted stock at December 31, 2006**
 
 As
        of
        December 31, 2006 there was $3,037 of total unrecognized compensation cost
        related to restricted stock which is expected to be recognized in the next
        2 to
        4 years.
 
 
 
 
 
 
 
  -
            12 -
  **10.
        Comprehensive Income (Loss):**
 
 
 The
        components of comprehensive loss for the three and nine months ended December
        31, 2006 and 2005 are as follows:
 
 **Three
                  Months****Ended**
                **December
                  31,**
              
              **Nine
                  Months****Ended**
                **December
                  31,****2006**
              
              **2005**
              
              **2006**
              
              **2005**Net
                  (loss)
              
              $
              (6,125
              )
              $
              (1,904
              )
              $
              (11,208
              )
              $
              (7,092
              )Foreign
                  currency translation adjustment
              
              
              2
              
              
              228
              
              
              390
              
              
              621Total
                  comprehensive (loss)
              
              $
              (6,123
              )
              $
              (1,676
              )
              $
              (10,818
              )
              $
              (6,471
              )
  
  **11.
        Recent Accounting Pronouncements**
  In
        February 2006, the Financial Accounting Standards Board (“FASB”) issued
        Statement of Financial Accounting Standards (“SFAS”) No. 155 *“Accounting
        for Certain Hybrid Financial Instruments”* (“SFAS
        155”), an amendment of FASB Statements No. 133 and 140. SFAS 155 will be
        effective for the Company beginning in the fourth quarter of fiscal 2007.
        SFAS
        155 permits interests in hybrid financial instruments that contain an embedded
        derivative that would otherwise require bifurcation, to be accounted for
        as a
        single financial instrument at fair value, with changes in fair value recognized
        in earnings. This election is permitted on an instrument-by-instrument basis
        for
        all hybrid financial instruments held, obtained, or issued as of the adoption
        date. The Company is assessing the impact of the adoption of SFAS
        155.
 
 In
        June
        2006, the FASB ratified the consensus reached on Emerging Issues Task Force
        (“EITF”) Issue No. 06-3, *“How
        Taxes Collected from Customers and Remitted to Governmental Authorities Should
        Be Presented in the Income Statement (That Is, Gross Versus Net
        Presentation)”* .
        The
        scope of EITF Issue No. 06-3 includes any transaction-based tax assessed
        by a
        governmental authority that is imposed concurrent with or subsequent to a
        revenue-producing transaction between a seller and a customer. The scope
        does
        not include taxes that are based on gross receipts or total revenues imposed
        during the inventory procurement process. Gross versus net income statement
        classification of that tax is an accounting policy decision and a voluntary
        change would be considered a change in accounting policy requiring the
        application of SFAS No. 154, *“Accounting
        Changes and Error Corrections.* ”
The
        following disclosures will be required for taxes within the scope of this
        issue
        that are significant in amount: (1) the accounting policy elected for these
        taxes and (2) the amounts of the taxes reflected gross (as revenue) in the
        income statement on an interim and annual basis for all periods presented.
        The
        EITF Issue No. 06-3 ratified consensus is effective for interim and annual
        periods beginning after December 15, 2006. The Company does not expect the
        adoption of EITF Issue No. 06-3 to have a material impact on the Company’s
        Condensed Consolidated Financial Statements.
 
 In
        June
        2006, the FASB issued FASB Interpretation No. 48 *“Accounting
        For Uncertainty in Income Taxes.”* An
        interpretation of FASB Statement No. 109 (“FIN 48”). FIN 48 clarifies the
        accounting for uncertainty in income taxes recognized in an enterprise’s
        financial statements in accordance with FASB Statement No.109 *“Accounting
        for Income Taxes.”* It
        prescribes a recognition threshold and measurement attribute for the financial
        statement recognition and measurement of a tax position taken or expected
        to be
        taken in a tax return. FIN 48 also provides guidance on derecognition,
        classification, interest and penalties, accounting in interim periods,
        disclosure, and transition. FIN 48 is effective for fiscal years beginning
        after
        December 15, 2006. The Company is currently evaluating the impact of FIN
        48 to
        its financial position and results of operations.
 
 In
        September 2006, the FASB issued SFAS No. 157, *“Fair
        Value Measurements”* (“SFAS
        157”). SFAS 157 defines fair value, establishes a framework for measuring fair
        value in accordance with generally accepted accounting principles, and expands
        disclosures about fair value measurements. SFAS 157 does not require any
        new
        fair value measurements; rather, it applies under other accounting
        pronouncements that require or permit fair value measurements. The provisions
        of
        SFAS 157 are to be applied prospectively as of the beginning of the fiscal
        year
        in which it is initially applied, with any transition adjustment recognized
        as a
        cumulative-effect adjustment to the opening balance of retained earnings.
        The
        provisions of SFAS 157 are effective for fiscal years beginning after November
        15, 2007; therefore, the Company anticipates adopting SFAS 157 as of April
        1,
        2008. The Company is assessing the impact of the adoption of SFAS 157.
  -
            13 -
  In
        September 2006, the SEC issued Staff Accounting Bulletin No. 108 (“SAB 108”), *“Considering
        the Effects of Prior Year Misstatements when Quantifying Misstatements in
        Current Year Financial Statements.”* SAB 108
        is effective for fiscal years ending on or after November 15, 2006 and addresses
        how financial statement errors should be considered from a materiality
        perspective and corrected. The literature provides interpretive guidance
        on how
        the effects of the carryover or reversal of prior year misstatements should
        be
        considered in quantifying a current year misstatement. Historically, there
        have
        been two approaches commonly used to quantify such errors: (i) the “rollover”
approach, which quantifies the error as the amount by which the current year
        income statement is misstated, and (ii) the “iron curtain” approach, which
        quantifies the error as the cumulative amount by which the current year balance
        sheet is misstated. The SEC Staff believes that companies should quantify
        errors
        using both approaches and evaluate whether either of these approaches results
        in
        quantifying a misstatement that, when all relevant quantitative and qualitative
        factors are considered, is material. The Company is currently evaluating
        the
        impact, if any, of adopting the provisions of SAB 108 on our consolidated
        financial position, results of operations and liquidity.
  In
        November 2006, the FASB ratified EITF Issue No. 06-6, *Application
        of EITF Issue No. 05-7, ‘Accounting for Modifications to Conversion Options
        Embedded in Debt Instruments and Related Issues* ’
(“EITF
        06-6”). EITF 06-6 addresses the modification of a convertible debt instrument
        that changes the fair value of an embedded conversion option and the subsequent
        recognition of interest expense for the associated debt instrument when the
        modification does not result in a debt extinguishment pursuant to EITF 96-19.
        We
        do not expect the adoption of EITF 06-6 to have a material impact on our
        consolidated financial position, results of operations or cash
        flows.
   In
        November 2006, the FASB ratified EITF Issue No. 06-7, *Issuer’s
        Accounting for a Previously Bifurcated Conversion Option in a Convertible
        Debt
        Instrument When the Conversion Option No Longer Meets the Bifurcation Criteria
        in FASB Statement No. 133, Accounting for Derivative Instruments and Hedging
        Activities* (“EITF
        06-7”). At the time of issuance, an embedded conversion option in a convertible
        debt instrument may be required to be bifurcated from the debt instrument
        and
        accounted for separately by the issuer as a derivative under FAS 133, based
        on
        the application of EITF 00-19. Subsequent to the issuance of the convertible
        debt, facts may change and cause the embedded conversion option to no longer
        meet the conditions for separate accounting as a derivative instrument, such
        as
        when the bifurcated instrument meets the conditions of Issue 00-19 to be
        classified in stockholders’ equity. Under EITF 06-7, when an embedded conversion
        option previously accounted for as a derivative under FAS 133 no longer meets
        the bifurcation criteria under that standard, an issuer shall disclose a
        description of the principal changes causing the embedded conversion option
        to
        no longer require bifurcation under FAS 133 and the amount of the liability
        for
        the conversion option reclassified to stockholders’ equity. EITF 06-7 should be
        applied to all previously bifurcated conversion options in convertible debt
        instruments that no longer meet the bifurcation criteria in FAS 133 in interim
        or annual periods beginning after December 15, 2006, regardless of whether
        the
        debt instrument was entered into prior or subsequent to the effective date
        of
        EITF 06-7. Earlier application of EITF 06-7 is permitted in periods for which
        financial statements have not yet been issued. We do not expect the adoption
        of
        EITF 06-7 to have a material impact on our consolidated financial position,
        results of operations or cash flows.
   In
        December 2006, the FASB issued FSP EITF 00-19-2, *Accounting
        for Registration Payment Arrangements* (“FSP
        00-19-2”) which addresses accounting for registration payment arrangements. FSP
        00-19-2 specifies that the contingent obligation to make future payments
        or
        otherwise transfer consideration under a registration payment arrangement,
        whether issued as a separate agreement or included as a provision of a financial
        instrument or other agreement, should be separately recognized and measured
        in
        accordance with FASB Statement No. 5, *Accounting
        for Contingencies.* FSP
        00-19-2 further clarifies that a financial instrument subject to a registration
        payment arrangement should be accounted for in accordance with other applicable
        generally accepted accounting principles without regard to the contingent
        obligation to transfer consideration pursuant to the registration
        payment.
  **Item
        2.** ***Management’s
        Discussion and Analysis of Financial Condition and Results of
        Operations***
 
 **Special
        Note Regarding Forward Looking Statements**
  Information
        herein contains forward-looking statements, which can be identified by the
        use
        of forward-looking terminology such as “may,” “will,” “expect,” “anticipate,”
“estimate,” or “continue” or the negative thereof or other variations thereon or
        comparable terminology or which constitute projected financial information.
        The
        forward-looking statements relate to the near-term semiconductor capital
        equipment industry outlook, demand for our products, our quarterly revenue
        and
        earnings prospects for the near-term future and other matters contained herein.
        Such statements are based on current expectations and beliefs and involve
        a
        number of uncertainties and risks that could cause the actual results to
        differ
        materially from those projected. Such uncertainties and risks include, but
        are
        not limited to, cyclicality of the semiconductor industry, impediments to
        customer acceptance of our products, fluctuations in quarterly operating
        results, competitive pricing pressures, the introduction of competitor products
        having technological and/or pricing advantages, product volume and mix and
        other
        risks detailed from time to time in our SEC reports, including in the section
        entitled “Risk Factors” elsewhere in this report. For further information, refer
        to the business description and risk factors described below. All
        forward-looking statements are expressly qualified in their entirety by the
        cautionary statements in this paragraph.
   -
            14 -
   Tegal
        designs, manufactures, markets and services plasma etch and deposition systems
        that enable the production of integrated circuits (“ICs”), memory and related
        microelectronics devices used in personal computers, wireless voice and data
        telecommunications, contact-less transaction devices, radio frequency
        identification devices (“RFIDs”), smart cards, data storage and micro-level
        actuators. Etching and deposition constitute two of the principal IC and
        related
        device production process steps and each must be performed numerous times
        in the
        production of such devices. Dollar amounts presented in this Item 2 are in
        thousands unless otherwise indicated.
  
 **Semiconductor
        Industry Background**
 
 Over
        the
        past twenty years, the semiconductor industry has experienced significant
        growth. This growth has resulted from the increasing demand for ICs from
        traditional IC markets, such as personal computers, telecommunications, consumer
        electronics, automotive electronics and office equipment, as well as developing
        markets, such as wireless communications, multimedia and portable and network
        computing. As a result of this increased demand, semiconductor device
        manufacturers have periodically expended significant amounts of capital to
        build
        new semiconductor fabrication facilities (“fabs”) and to expand existing fabs.
        More recently, growth has slowed, and there are signs that the industry is
        beginning to mature. While unit demand for semiconductor devices continue
        to
        rise, the average selling prices of chips continue to decline. There is growing
        pressure on semiconductor device manufacturers to reduce manufacturing costs
        while increasing the value of their products. The semiconductor industry
        has
        also been historically cyclical, with periods of rapid expansion followed
        by
        periods of over-capacity.
 
 Growth
        in
        the semiconductor industry has been driven, in large part, by advances in
        semiconductor performance at a decreasing cost per function. Advanced
        semiconductor processing technologies increasingly allow semiconductor
        manufacturers to produce ICs with smaller features, thereby increasing
        processing speed and expanding device functionality and memory capacity.
        As ICs
        have become more complex, however, both the number and price of state of
        the art
        process tools required to manufacture ICs have increased significantly. As
        a
        result, the cost of semiconductor manufacturing equipment has become an
        increasingly large part of the total cost of producing advanced ICs.
 
 To
        create
        an IC, semiconductor wafers are subjected to a large number of complex process
        steps. The three primary steps in manufacturing ICs are (1) deposition, in
        which
        a layer of insulating or conducting material is deposited on the wafer surface,
        (2) photolithography, in which the circuit pattern is projected onto a light
        sensitive material (the photoresist), and (3) etch, in which the unmasked
        parts
        of the deposited material on the wafer are selectively removed to form the
        IC
        circuit pattern.
 
 Each
        step
        of the manufacturing process for ICs requires specialized manufacturing
        equipment. Today, plasma-based systems are used for the great majority of
        both
        deposition and etching processes. During physical vapor deposition (also
        known
        as “PVD”), the semiconductor wafer is exposed to a plasma environment that forms
        continuous thin films of electrically insulating or electrically conductive
        layers on the semiconductor wafer. During a plasma etch process (also known
        as
“dry etch”), a semiconductor wafer is exposed to a plasma composed of a reactive
        gas, such as chlorine, which etches away selected portions of the layer
        underlying the patterned photoresist layer.
 
 **Business
        Strategy**
 
 Our
        business objective is to utilize the unique technologies that we have developed
        internally or acquired externally in order to increase our market share in
        process equipment for both semiconductor manufacturing and nanotechnology
        device
        fabrication. The following are key elements of our strategy:
 
 *Maintain
        our Technology Leadership Position in New Materials Etch* -- We
        have become a leading provider of etch process solutions for a set of new
        materials central to the production of an array of advanced semiconductor
        and
        nanotechnology devices in emerging markets. Incorporation of these new materials
        is essential to achieving the higher device densities, lower power consumption
        and novel functions exhibited by the newest generation of cell phones, computer
        memories, fiber optic switches and remote sensors. Currently, we are the
        leading
        supplier of etch solutions to makers of advanced “non-volatile” ferro-electric
        (“FeRAM”), magnetic (“MRAM”) devices, and virtually all other types of
        non-volatile memories. FeRAM is just now entering commercial production with
        chips for the newest generation of cell phones, PDA’s, smart cards and RFIDs,
        used for applications such as railway passes and ink jet cartridge tracking.
        Our
        new materials expertise also includes the etching of so-called “compound-semi”
materials, such as GaAs, GaN and InP, widely used in telecom device production.
        In addition, we are known for our capability to etch certain noble metals,
        such
        as gold and platinum, as well as certain proprietary compound metals. This
        capability is increasingly important in advanced memory development and in
        the
        production of Micro-Electrical Mechanical Systems (“MEMS”), a type of
        commercially produced nanotechnology device, especially useful to the automotive
        industry.
  -
            15 -
  *Strengthen
        our Position in Deposition Process Equipment for Advanced Packaging Applications
        --* Since
        2002, we have completed two acquisitions of deposition products incorporating
        the same unique “sputter-up” technology. This technology is directed principally
        at so-called “back-end” semiconductor manufacturing processes, including
        backside metallization and underbump metal processes, for both 200-mm and
        300-mm
        wafer sizes. These processes are important to advanced, wafer-level packaging
        schemes, which are increasingly being used for high-pin-count logic and memory
        devices. In connection with the recent addition of the AMS product to our
        portfolio, we have strengthened our position in the deposition of certain
        films
        incorporated into MEMS devices.
 
 *Introduce
        a New Product into Established Equipment Market --* The
        continued development of our recently acquired NLD technology represents
        our
        belief that we have a compelling solution to a critical process need in
        present-day and future semiconductor device fabrication. As device geometries
        continue to shrink, conventional chemical vapor deposition (“CVD”) process
        equipment is increasingly incapable of depositing thin conformal films in
        high-aspect ratio trenches and vias. Atomic Level Deposition (“ALD”) is one
        technology for satisfying this deposition requirement. However, ALD has several
        shortcomings, including low throughput and limitations on film type and quality,
        which we believe our NLD technology overcomes.
 
 *Maintain
        our Service Leadership Position* -- We
        have been consistently recognized by our customers for providing a high level
        of
        customer support, a fact that has been noted by our top rankings for several
        consecutive years in the annual survey conducted by VLSI Research, Inc. We
        expect to maintain and build on this reputation as we seek new customers in both
        emerging and established markets.
 
 **Critical
        Accounting Policies**
 
 Our
        discussion and analysis of the financial condition and results of operations
        are
        based upon our condensed consolidated financial statements, which have been
        prepared in accordance with accounting principles generally accepted in the
        United States of America. The preparation of these financial statements requires
        us to make estimates and judgments that affect the reported amounts of assets,
        liabilities, revenues and expenses, and related disclosure of contingent
        assets
        and liabilities. On an on-going basis, we evaluate our estimates, including
        those related to inventory, warranty obligations, purchase order commitments,
        bad debts, income taxes, intangible assets, restructuring and contingencies
        and
        litigation. We base our estimates on historical experience and on various
        other
        assumptions that we believe to be reasonable under the circumstances, the
        results of which form the basis for making judgments about the carrying values
        of assets and liabilities that are not readily apparent from other sources.
        Actual results may differ from these estimates under different assumptions
        or
        conditions.
 
 We
        believe the following critical accounting policies affect our more significant
        judgments and estimates used in the preparation of our condensed consolidated
        financial statements:
 
 **Accounting
        for Stock-Based Compensation**
 
 Prior
        to
        April 1, 2006, we accounted for stock-based employee compensation plans under
        the measurement and recognition provisions of Accounting Principles Board
        Opinion No.25, “Accounting for Stock Issued to Employees,” or APB25, and related
        Interpretations, as permitted by SFAS No.123, “Accounting for Stock-Based
        Compensation” (“SFAS 123”). With the exception of certain warrants granted and
        grants of restricted stock awards, we generally, recorded no stock-based
        compensation expenses during periods prior to April 1, 2006 as all stock-based
        grants had exercise prices equal to the fair market value of our common stock
        on
        the date of grant. We also recorded no compensation expense in connection
        with
        our employee stock purchase plan as it qualified as a non-compensatory plan
        following the guidance provided by APB25. In accordance with SFAS123 and
        SFAS
        148, “Accounting for Stock-Based Compensation - Transition and Disclosure”, we
        disclosed our net loss per share as if we had applied the fair value based
        method in measuring compensation expense for our stock-based compensation
        programs. Under SFAS 123, we elected to calculate our compensation expense
        by
        applying the Black-Scholes valuation method,
 
 Effective
        April 1, 2006, we adopted the fair value recognition provisions of SFAS No.123R
        “Accounting for Stock-Based Compensation,” (“SFAS 123R”) using the modified
        prospective transition method. Under that method, compensation expense that
        we
        recognized for the three months ended December 31, 2006 included: (a)
        compensation expense for all share-based payment granted prior to but not
        yet
        vested as of April 1, 2006, based on the grant date fair value estimated
        in
        accordance with the original provisions of SFAS 123, and (b) compensation
        expense for all share-based payments granted on or modified after April 1,
        2006,
        based on the grant date fair value estimated in accordance with the provisions
        of SFAS123R. Compensation expense is recognized only for those awards that
        are
        expected to vest, whereas prior to the adoption of SFAS123R, we recognized
        forfeitures as they occurred. In addition, we elected the straight-line
        attribution method as our accounting policy for recognizing stock-based
        compensation expense for all awards granted.
 
 -
            16 -
  We
        estimate the fair value of options granted using the Black Scholes option
        valuation and the assumptions shown in Note 1 to our condensed consolidated
        financial statements. All options are amortized over the requisite service
        periods of the awards, which are generally the vesting periods.
 
 **Revenue
        Recognition**
 
 Each
        sale
        of our equipment is evaluated on an individual basis in regard to revenue
        recognition. We have integrated in our evaluation the related interpretative
        guidance included in Topic 13 of the codification of staff accounting bulletins,
        and recognize the role of the FASB’s Emerging Issues Task Force (“EITF”)
        consensus on Issue 00-21. We first refer to EITF 00-21 in order to determine
        if
        there is more than one unit of accounting and then we refer to SAB104 for
        revenue recognition topics for the unit of accounting. We recognize revenue
        when
        persuasive evidence of an arrangement exists, the seller’s price is fixed or
        determinable and collectibility is reasonably assured.
 
 For
        products produced according to our published specifications, where no
        installation is required or installation is deemed perfunctory and no
        substantive customer acceptance provisions exist, revenue is recognized when
        title passes to the customer, generally upon shipment. Installation is not
        deemed to be essential to the functionality of the equipment since installation
        does not involve significant changes to the features or capabilities of the
        equipment or building complex interfaces and connections. In addition, the
        equipment could be installed by the customer or other vendors and generally
        the
        cost of installation approximates only 1% of the sales value of the related
        equipment.
 
 For
        products produced according to a particular customer’s specifications, revenue
        is recognized when the product has been tested and it has been demonstrated
        that
        it meets the customer’s specifications and title passes to the customer. The
        amount of revenue recorded is reduced by the amount (generally 10%), which
        is
        not payable by the customer until installation is completed and final customer
        acceptance is achieved.
 
 For
        new
        products, new applications of existing products, or for products with
        substantive customer acceptance provisions where performance cannot be fully
        assessed prior to meeting customer specifications at the customer site, 100%
        of
        revenue is recognized upon completion of installation and receipt of final
        customer acceptance. Since title to goods generally passes to the customer
        upon
        shipment and 90% of the contract amount becomes payable at that time, inventory
        is relieved and accounts receivable is recorded for the entire contract amount.
        The revenue on these transactions is deferred and recorded as deferred revenue.
        We reserve for warranty costs at the time the related revenue is
        recognized.
 
 Revenue
        related to sales of spare parts is recognized upon shipment. Revenue related
        to
        maintenance and service contracts is recognized ratably over the duration
        of the
        contracts. Unearned maintenance and service revenue is included in other
        accrued
        liabilities.
 
 **Accounts
        Receivable - Allowance for Sales Returns and Doubtful
        Accounts**
 
 We
        maintain an allowance for doubtful accounts receivable for estimated losses
        resulting from the inability of our customers to make required payments.
        If the
        financial conditions of our customers were to deteriorate, or even a single
        customer was otherwise unable to make payments, additional allowances may
        be
        required.
 
 Our
        return policy is for spare parts and components only. Customers are allowed
        to
        return spare parts if they are defective upon receipt, in accordance with
        SFAS
        48. The potential returns are offset against gross revenue on a quarterly
        basis.
        Management reviews outstanding requests for returns on a quarterly basis
        to
        determine that the reserves are adequate.
 
 **Inventories**
 
 Inventories
        are stated at the lower of cost or market, reduced by provisions for excess
        and
        obsolescence. Cost is computed using standard cost, which approximates actual
        cost on a first-in, first-out basis and includes material, labor and
        manufacturing overhead costs. We estimate the effects of excess and obsolescence
        on the carrying values of our inventories based upon estimates of future
        demand
        and market condition. We establish provisions for related inventories in
        excess
        of production demand. Should actual production demand differ from our estimates,
        additional inventory write-downs may be required, as was the case in the
        current
        quarter and  the
        fourth quarter of fiscal 2006. Any excess and obsolete provision is released
        only if and when the related inventories is sold or scrapped. The inventory
        provision balance at December 31, 2006 and March 31, 2006 was $4,112 and
        $7,136,
        respectively. The inventory provision expense for the period ended December
        31,
        2006 and March 31, 2006 was $( 3,024)
        and $(1,146), respectively.
 
 -
            17 -
  We
        periodically analyze any systems that are in finished goods inventory to
        determine if they are suitable for current customer requirements. At the
        present
        time, our policy is that if after approximately 18 months we determine that
        a
        sale will not take place within the next 12 months, and the system would
        be
        useable for customer demonstrations or training, it is transferred to fixed
        assets. Otherwise, it is expensed.
 
 The
        carrying value of systems used for demonstrations or training is determined
        by
        assessing the cost of the components that are suitable for sale. Any parts
        that
        may be rendered not saleable as a result of such use are removed from the
        system
        and are not included in finished goods inventory. The remaining saleable
        parts
        are valued at the lower of cost or market, representing the system’s net
        realizable value. The depreciation period for systems that are transferred
        to
        fixed assets is determined based on the age of the system and its remaining
        useful life (typically five to eight years).
 
 **Impairment
        of Long-Lived Assets**
 
 Long-lived
        assets are reviewed for impairment whenever events or changes in circumstances
        indicate that the carrying amount may not be recoverable. If undiscounted
        expected future cash flows are less than the carrying value of the assets,
        an
        impairment loss is recognized based on the excess of the carrying amount
        over
        the fair value of the assets.
 
 **Warranty
        Obligations**
 
 We
        provide for the estimated cost of our product warranties at the time revenue
        is
        recognized. Our warranty obligation is affected by product failure rates,
        material usage rates and the efficiency by which the product failure is
        corrected. Should actual product failure rates, material usage rates and
        labor
        efficiencies differ from our estimates, revisions to the estimated warranty
        liability may be required.
 
 **Deferred
        Taxes**
 
 We
        record
        a valuation allowance to reduce our deferred tax assets to the amount that
        is
        more likely than not to be realized. Based on the uncertainty of future taxable
        income, we have fully reserved our deferred tax assets. In the event we were
        to
        determine that we would be able to realize our deferred tax assets in the
        future, an adjustment to the deferred tax asset would increase income in
        the
        period such determination was made.
 
 
 **Results
        of Operations**
 
 The
        following table sets forth certain financial items as a percentage of revenue
        for the three and nine months ended December 31, 2006 and 2005:
 
 **Three
                  Months**
                **Ended**
                **December
                  31,**
              
              **Nine
                  Months**
                **Ended**
                **December
                  31,****2006**
              
              **2005**
              
              **2006**
              
              **2005**Revenue
              
              
              100.0
              %
              
              100.0
              %
              
              100.0
              %
              
              100.0
              %Cost
                  of revenue
              
              
              130.3
              
              
              73.1
              
              
              77.8
              
              
              69.5Gross
                  profit
              
              
              (30.3
              )
              
              26.9
              
              
              22.2
              
              
              30.5Operating
                  expenses:Research
                  and development
              
              
              24.6
              
              
              16.6
              
              
              19.5
              
              
              21.8Sales
                  and marketing
              
              
              21.7
              
              
              11.1
              
              
              18.4
              
              
              13.3General
                  and administrative
              
              
              70.0
              
              
              18.1
              
              
              55.1
              
              
              36.8Total
                  operating expenses
              
              
              116.3
              
              
              45.8
              
              
              93.0
              
              
              71.9Operating
                  loss
              
              
              (146.6
              )
              
              (18.9
              )
              
              (70.8
              )
              
              (41.4
              )Other
                  expense (income)
              
              
              6.6
              
              
              (11.6
              )
              
              1.0
              
              
              (3.8
              )Net
                  loss
              
              
              (139.9
              %)
              
              (30.5
              %)
              
              (69.8
              %)
              
              (45.2
              %)
 
 
 -
            18 -
  The
        foll owing
        table sets forth certain financial items for the three and nine months ended
        December 31, 2006.
 
 **Three
                  Months ended**
                **December
                  31,**
              
              **Nine
                  Months ended**
                **December
                  31,****(In
                  thousands, except per share data)****2006**
              
              **2005**
              
              **2006**
              
              **2005**Revenue
              
              $
              4,377
              
              $
              6,246
              
              $
              16,066
              
              $
              15,704Cost
                  of revenue
              
              
              5,703
              
              
              4,565
              
              
              12,494
              
              
              10,905Gross
                  profit
              
              
              (1,326
              )
              
              1,681
              
              
              3,572
              
              
              4,799Operating
                  expenses:Research
                  and development
              
              
              1,077
              
              
              1,039
              
              
              3,139
              
              
              3,426Sales
                  and marketing
              
              
              949
              
              
              694
              
              
              2,957
              
              
              2,095General
                  and administrative
              
              
              3,063
              
              
              1,128
              
              
              8,850
              
              
              5,766Total
                  operating expenses
              
              
              5,089
              
              
              2,861
              
              
              14,946
              
              
              11,287Operating
                  Profit (loss)
              
              
              (6,415
              )
              
              (1,180
              )
              
              (11,374
              )
              
              (6,488
              )Non-operating
                  income (expenses)
              
              
              290
              
              
              (724
              )
              
              166
              
              
              (604
              )Net
                  income (loss)
              
              $
              (6,125
              )
              $
              (1,904
              )
              $
              (11,208
              )
              $
              (7,092
              )Earnings
                  per share
              
              $
              (0.86
              )
              $
              (0.27
              )
              $
              (1.59
              )
              $
              (1.35
              )Number
                  of shares outstandingBasic
              
              
              7,082
              
              
              6,995
              
              
              7,044
              
              
              5,262Diluted
              
              
              7,082
              
              
              6,995
              
              
              7,044
              
              
              5,262
 
 
 ***Revenue*** **
  ** The
        changes in revenue for the three and nine months ended December 31, 2006
        were
        principally due to the product mix of systems sold during the period.
  International
        sales as a percentage of our revenue for the three
        and
        nine months ended
        December 31, 2006 were 53.5% and 63.9%, respectively. We believe that
        international sales will continue to represent a significant portion of our
        revenue.
  ***Gross
        profit (loss*** *)*
  ** Gross
        profit as a percentage to revenue for the nine months ended December 31,
        2006
        decreased to 22.2 %
        compared to 30.5% for the same period last year. During the three months
        ended
        December 31, 2006 gross
        profit as a percentage to revenue was (30.3%), a decrease from the 26.9%
        for the
        same period last year. The decrease in gross profit as a percentage to revenue
        is due to product mix as well as the write off approximately $1,700 of inventory
        for the 300-mm deposition product. The inventory write down represents
        approximately $1.7 M.
  ***Research
        and Development*** **
  ** Research
        and development expenses consist primarily of salaries, prototype material
        and
        other costs associated with our ongoing systems and process technology
        development, applications and field process support efforts. Spending has
        been
        consistent in total dollars, $1,077 for the three months ended December 31,
        2006
        and $3,139 for the nine months ended December 31, 2006. Prior year spending
        was
        $1,039 and $3,426 respectively.
  ***Sales
        and Marketing*** **
  ** Sales
        and
        marketing expenses consist primarily of salaries, commissions, trade show
        promotion and travel and living expenses associated with those functions.
        Sales
        and marketing spending for the three and nine months ended December 31, 2006
        was
        $949 and $2,957, respectively. This increase over the prior year periods
        of $694
        and $2,095 respectively represents increased efforts that are being placed
        on
        increasing world wide sales.
  -
            19 -
  ***General
        and Administrative***
  General
        and administrative expenses consist primarily of compensation for general
        management, accounting and finance, human resources, information systems
        and
        investor relations functions and for legal, consulting and accounting fees
        of
        the Company.  The $1,935 increase over the prior year’s three month period
        and the $3,084 over the prior year’s nine month period were primarily due to the
        legal fees relating directly to the litigation against AMS, Agilent, and
        Avago
        Technologies.  Other factors to the increase relate to a one time lease
        termination expense of $500 for the reduction of space in the Petaluma facility
        and the costs associated with moving portions of the operations to San
        Jose.
 
 ***Other
        income (expense), net***
  ** Other
        income (expense), net consists principally of, interest income, interest
        expense, other income, revenue, gains and losses on the disposal of fixed
        assets, and gains and losses on foreign exchange.
 
 ***Contractual
        obligation*** **
 
 The
        following summarizes our contractual obligations at December 31, 2006, and
        the
        effect such obligations are expected to have on our liquidity and cash flows
        in
        future periods.
  Contractual
                  obligations:
              
              **Total**
              
              **Less
                  than**
                **1
                  Year**
              
              **1-3
                  Years**
              
              **3-5
                  Years**
              
              **After**
                **5
                  Years****(In
                  thousands)**Non-cancelable
                  capital lease obligations
              
              $
              5
              
              $
              5
              
              $
              —
              
              $
              0
              
              $
              —Non-cancelable
                  operating lease obligations
              
              
              1,232
              
              
              641
              
              
              559
              
              
              32
              
              
              —Notes
                  payable and bank lines of credit
              
              
              32
              
              
              32
              
              
              —
              
              
              —
              
              
              —Total
                  contractual cash obligations
              
              $
              1,269
              
              $
              678
              
              $
              559
              
              $
              32
              
              $
              —
 
 Certain
        sales contracts of the Company include provisions under which customers would
        be
        indemnified by the Company in the event of, among other things, a third-party
        claim against the customer for intellectual property rights infringement
        related
        to the Company's products. There are no limitations on the maximum potential
        future payments under these indemnities. The Company has accrued no amounts
        in
        relation to these provisions as no such claims have been made and the Company
        believes it has valid, enforceable rights to the intellectual property embedded
        in its products.
 
 **Liquidity
        and Capital Resources**
 
 For
        the
        nine months ended December 31, 2006, we financed our operations through the
        use
        of outstanding cash balances, borrowings against our credit facilities in
        Japan
        and net proceeds from the 2005 PIPE.
 
 As
        of
        December 31, 2006, our Japanese subsidiary had $32 outstanding under its
        lines
        of credit which is collateralized by Japanese customer promissory notes held
        by
        such subsidiary in advance of payment on customers’ accounts receivable. The
        credit line has a total borrowing capacity of 150 million yen (approximately
        $1,261 at exchange rates prevailing on December 31, 2006), which are secured
        by
        Japanese customer promissory notes held by such subsidiary in advance of
        payment
        on customers’ accounts receivable. The Japanese bank line bears interest at
        Japanese prime (1.625% as of December 31, 2006) plus 0.875%.
 
 Notes
        payable as of December 31, 2006 consisted of capital lease obligations on
        fixed
        assets totaling $5.
 
 The
        consolidated financial statements contemplate the realization of assets and
        the
        satisfaction of liabilities in the normal course of business. We incurred
        net
        (loss) of $(6,125) and $(11,208) and $(1,904) and $(7,092) for the three
        and
        nine months ended December 31, 2006 and 2005, respectively. We generated
        used
        cash flows from operations of $16,003 and $(10,337) for the period ended
        December 31, 2006 and December 31, 2005, respectively. During the prior fiscal
        year 2006, we raised a net of $18,161 through the 2005 PIPE. Management believes
        that these proceeds, combined with projected sales, consolidation of certain
        operations and continued cost containment will be adequate to fund operations
        through fiscal 2008. However, projected sales may not materialize and unforeseen
        costs may be incurred **.** If
        the
        projected sales do not materialize, our ability to achieve our intended business
        objectives may be adversely affected. The consolidated financial statements
        do
        not include any adjustments relating to the recoverability and classification
        of
        recorded assets or the amount or classification of liabilities or any other
        adjustments that might be necessary should we be unable to continue as a
        going
        concern.
 
 -
            20 -
  **Litigation
        Suspense**
 
 As
        of
        December 31, 2006, we placed $19,500, representing the gross cash proceeds
        from
        the recent settlement of our litigation with AMS, Agilent, and Avago
        Technologies, into suspense. Subsequent to the signing of the final settlement
        agreement on December 20 and 21, 2006, a dispute arose between the Company
        and
        its litigation counsel on this matter as to the calculation of the contingency
        amount due under such counsel’s engagement letter. We are currently attempting
        to resolve this dispute through non-binding arbitration, but we cannot assure
        you that we will be successful in settling this matter in our favor or at
        all
        through this process. Since the amount cannot be determined with reasonable
        certainty until the dispute is resolved, the Company has elected to suspend
        the
        entire amount, in accordance with *FAS
        5, “Accounting for Contingencies”.*
 
 **Item
        3.** ***Quantitative
        and Qualitative Disclosures about Market Risk***
 
 Our
        cash
        equivalents are principally comprised of money market accounts. As of December
        31, 2006 ,
        we had
        cash and cash equivalents of $29,502 .
        These
        accounts are subject to interest rate risk and may fall in value if market
        interest rates increase. We attempt to limit this exposure by investing
        primarily in short-term securities having a maturity of three months or less.
        Due to the nature of our cash and cash equivalents, we have concluded that
        there
        is no material market risk exposure.
 
 We
        have
        foreign subsidiaries that operate and sell our products in various global
        markets. As a result, our cash flow and earnings are exposed to fluctuations
        in
        interest and foreign currency exchange rates. We attempt to limit these
        exposures through the use of various hedge instruments, primarily forward
        exchange contracts and currency option contracts (with maturities of less
        than
        three months) to manage our exposure associated with firm commitments and
        net
        asset and liability positions denominated in non-functional currencies. There
        have been no material changes regarding market risk since the disclosures made
        in our Form 10-K for the fiscal year ended March 31, 2006.
 
 At
        December 31, 2006, we did not have any forward exchange contracts.
 
 **Item
        4.** ***Controls
        and Procedures***
 
 We
        maintain disclosure controls and procedures that are designed to ensure that
        information required to be disclosed in our Exchange Act reports is recorded,
        processed, summarized and reported within the time periods specified in the
        SEC’s rules and forms, and that such information is accumulated and communicated
        to our management, including our Chief Executive Officer and Chief Financial
        Officer, as appropriate, to allow for timely decisions regarding required
        disclosure. In designing and evaluating our disclosure controls and procedures,
        our management recognizes that any controls and procedures, no matter how
        well
        designed and operated, can provide only reasonable assurance of achieving
        the
        desired control objectives, and our management is required to apply its judgment
        in evaluating the cost-benefit relationship of possible controls and procedures.
 
 (a)  *Evaluation
        of Disclosure Controls and Procedures.* Based
        on
        their evaluation as of a date at the end of the quarter covered by this
        quarterly report on Form 10-Q, the Company’s Chief Executive Officer and Chief
        Financial Officer have concluded that the Company’s disclosure controls and
        procedures (as defined in Rules 13a-14(c) under the Securities Exchange Act
        of
        1934) are effective at the reasonable assurance level.
  (b)  *Changes
        in Internal Controls* .
        There
        has been no change in the Company’s internal control over financial reporting
        during the fiscal quarter ended December 31, 2006 that has materially affected,
        or is reasonably likely to materially affect, the Company’s internal controls
        over financial reporting
 
 
 
 
 
 
 
 
 
 
 
 
 
  -
            21 -
  **PART
        II — OTHER INFORMATION**
 
 **Item
        1.** ***Legal
        Proceedings***
 
 Sputtered
        Films, Inc. v. Advanced Modular Sputtering, et al., filed in Santa Barbara
        County Superior Court.
 
  On
        December 22, 2003, Sputtered Films, Inc. ("SFI"), a wholly owned subsidiary
        of
        the Company, filed an action against two former employees, Sergey Mishin
        and
        Rose Stuart-Curran, and a company they formed after leaving their employment
        with SFI named Advanced Modular Sputtering, Inc. ("AMS"). Sergey Mishin and
        Rose
        Stuart-Curran had each signed confidentiality and non-disclosure agreements
        regarding information obtained while employed by SFI. The action contains
        causes
        of action for specific performance, breach of contract, breach of the covenant
        of good faith and fair dealing, misappropriation of trade secrets, unfair
        competition, unfair business practices, interference with prospective economic
        advantage, conversion, unjust enrichment, and declaratory relief. These claims
        arise out of information SFI received evidencing that AMS possessed and used
        SFI's confidential, proprietary and trade secret drawings, specifications
        and
        technology to manufacture the sputtering tool marketed by AMS.
   During
        2004 and 2005, this litigation was largely stalled while AMS and Agilent
        Technologies, Inc. contested SFI's right to conduct discovery. This dispute
        was
        resolved in late 2005 when the California Court of Appeal affirmed SFI's
        trade
        secret identification as statutorily sufficient. On November 18, 2005, SFI
        requested leave to add Agilent Technologies, Inc. ("Agilent") as a defendant
        based on evidence that Agilent and AMS co-developed the machines which SFI
        contends were built using SFI proprietary information. The Court granted
        SFI's
        request and Agilent was served as a Doe defendant on December 12, 2005. In
        early
        December, SFI learned that Agilent transferred its Semiconductor Products
        Group
        to a number of Avago entities effective December 1, 2005, and accordingly
        SFI
        sought and received court approval to add Avago Technologies U.S., Inc. and
        Avago Technologies Wireless (U.S.A.) Manufacturing, Inc (collectively the
        "Avago
        Entities") as defendant in this action. On April 25, 2006, the Avago Entities
        filed a Cross-Complaint against SFI and Tegal Corporation alleging causes
        of
        action for breach of contract, trade secret misappropriation, unfair
        competition, conversion, unjust enrichment and declaratory relief. The
        Cross-Complaint alleges on information and belief that SFI misused information
        obtained from Hewlett-Packard in connection with Hewlett-Packard's request
        to
        purchase SFI machines or to upgrade SFI machines Hewlett-Packard already
        owned.
   On
        November 13, 2006, following commencement of the trial, all the parties in
        the
        litigation agreed on terms of a settlement, which was filed with the court.
        The
        settlement terms provide for a payment to the Company of approximately $13
        million, net of fees and certain expenses associated with the litigation.
        The
        settlement also calls for the transfer of assets related to PVD technology
        from
        AMS to SFI and the dissolution of AMS as of March 1, 2007. The Avago
        Cross-Complaint was also dismissed as part of the settlement. A final
        confidential settlement and release of claims was executed among the parties
        on
        December 20 and 21, 2006. See “Litigation Suspense” in Item 2 above for more
        information regarding the Company’s receipt of settlement fees.
  
 **Item
        1A.** ***Risk
        Factors***  ****
 
  *We
        wish to caution you that there are risks and uncertainties that could affect
        our
        business. These risks and uncertainties include, but are not limited to,
        the
        risks described below and elsewhere in this report, particularly in
“Forward-Looking Statements.” The following is not intended to be a complete
        discussion of all potential risks or uncertainties, as it is not possible
        to
        predict or identify all risk factors. The risk factors set forth below are
        also
        set forth in Part 1, Item 1A of our Annual Report on Form 10-K for the fiscal
        year ended March 31, 2006.  Except for the deletion of the risk factor
        entitled "If we fail to meet the continued listing requirements of the NASDAQ
        Stock Market, our stock could be delisted," there have been no material changes
        made.*
  
 **We
        have incurred operating losses and may not be profitable in the future; our
        plans to maintain and increase liquidity may not be successful.**
 
 We
        incurred net losses of $8.9 million, $15.4 million and $12.6 million for
        the
        years ended March 31, 2006, 2005 and 2004, respectively, and generated negative
        cash flows from operations of $11.7 million, $7.5 million and $3.2 million
        in
        these respective years. If the projected sales do not materialize, we will
        need
        to reduce expenses further and raise capital through the issuance of debt
        or
        equity securities. If additional funds are raised through the issuance of
        preferred stock or debt, these securities could have rights, privileges or
        preferences senior to those of our common stock, and debt covenants could
        impose
        restrictions on our operations. Moreover, such financing may not be available
        to
        us on acceptable terms, if at all. Failure to raise additional funds may
        adversely affect our ability to achieve our intended business objectives.
  -
            22 -
  **The
        exercise of outstanding warrants, options and other rights to obtain additional
        shares will dilute the value of our shares of common stock and could cause
        the
        price of our shares of common stock to decline.**
 
 As
        of
        December 31, 2006, there were
        7,106,867 sh ares
        of
        our common stock issued and outstanding.
 
 As
        of
        December 31, 2006, there were warrants, stock options and restricted stock
        awards outstanding for approximately 2,697,302 shares
        of
        our common stock and there were
        1,868,223 shares of
        common stock reserved for issuance under our equity incentive and stock purchase
        plans.
 
 The
        exercise of these warrants and options and the issuance of the common stock
        pursuant to our equity incentive plans will result in dilution in the value
        of
        the shares of our outstanding common stock and the voting power represented
        thereby. In addition, the exercise price of the warrants may be lowered under
        the price adjustment provisions in the event of a “dilutive issuance,” that is,
        if we issue common stock at any time prior to their maturity at a per share
        price below such conversion or exercise price, either directly or in connection
        with the issuance of securities that are convertible into, or exercisable
        for,
        shares of our common stock. A reduction in the exercise price may result
        in the
        issuance of a significant number of additional shares upon the exercise of
        the
        warrants.
 
 The
        warrants do not establish a “floor” that would limit reductions in such
        conversion price or exercise price. The downward adjustment of the exercise
        price of these warrants could result in further dilution in the value of
        the
        shares of our outstanding common stock and the voting power represented
        thereby.
 
 No
        prediction can be made as to the effect, if any, that future sales of shares
        of
        our common stock, or the availability of shares for future sale, will have
        on
        the market price of our common stock prevailing from time to time. Sales
        of
        substantial amounts of shares of our common stock in the public market, or
        the
        perception that such sales could occur, may adversely affect the market price
        of
        our common stock and may make it more difficult for us to sell our equity
        securities in the future at a time and price which we deem appropriate.
 
 To
        the
        extent our stockholders and the other holders of our warrants and options
        exercise such securities and then sell the shares of our common stock they
        receive upon exercise, our stock price may decrease due to the additional
        amount
        of shares available in the market. The subsequent sales of these shares could
        encourage short sales by our security holders and others, which could place
        further downward pressure on our stock price. Moreover, holders of these
        warrants and options may hedge their positions in our common stock by shorting
        our common stock, which could further adversely affect our stock
        price.
 
 
 **The
        semiconductor industry is cyclical and may experience periodic downturns
        that
        may negatively affect customer demand for our products and result in losses
        such
        as those experienced in the past.**
 
 Our
        business depends upon the capital expenditures of semiconductor manufacturers,
        which in turn depend on the current and anticipated market demand for integrated
        circuits. The semiconductor industry is highly cyclical and historically
        has
        experienced periodic downturns, which often have had a detrimental effect
        on the
        semiconductor industry’s demand for semiconductor capital equipment, including
        etch and deposition systems manufactured by us. Despite a moderate recovery
        in
        the industry, we have continued to implement a cost containment program and
        have
        completed a corporate-wide restructuring to preserve our cash. However, the
        need
        for continued investment in research and development, possible capital equipment
        requirements and extensive ongoing customer service and support requirements
        worldwide will continue to limit our ability to reduce expenses in response
        to
        any future downturns. As a result, we may continue to experience operating
        losses such as those we have experienced in the past, which could materially
        adversely affect us.
 
 **Our
        competitors have greater financial resources and greater name recognition
        than
        we do and therefore may compete more successfully in the semiconductor capital
        equipment industry than we can.**
 
 We
        believe that to be competitive, we will require significant financial resources
        in order to offer a broad range of systems, to maintain customer service
        and
        support centers worldwide and to invest in research and development. Many
        of our
        existing and potential competitors, including, among others, Applied Materials,
        Inc., Lam Research Corporation, Novellus and Tokyo Electron Limited, have
        substantially greater financial resources, more extensive engineering,
        manufacturing, marketing and customer service and support capabilities, larger
        installed bases of current generation etch, deposition and other production
        equipment and broader process equipment offerings, as well as greater name
        recognition than we do. We cannot assure you that we will be able to compete
        successfully against these companies in the United States or
        worldwide.
  -
            23 -
  Our
        potential customers may not adopt our
        products because of their significant cost or because our potential customers
        are already using a competitor’s tool.
  A
        substantial investment is required to install and integrate capital equipment
        into a semiconductor production line. Additionally, we believe that once
        a
        device manufacturer has selected a particular vendor’s capital equipment, that
        manufacturer generally relies upon that vendor’s equipment for that specific
        production line application and, to the extent possible, subsequent generations
        of that vendor’s systems. Accordingly, it may be extremely difficult to achieve
        significant sales to a particular customer once that customer has selected
        another vendor’s capital equipment unless there are compelling reasons to do so,
        such as significant performance or cost advantages. Any failure to gain access
        and achieve sales to new customers will adversely affect the successful
        commercial adoption of our products and could have a detrimental effect on
        us.
 
 
 **We
        depend on sales of our advanced products to customers that may not fully
        adopt
        our product for production use.**
 
 We
        have
        designed our advanced etch and deposition products for customer applications
        in
        emerging new films, polysilicon and metal which we believe to be the leading
        edge of critical applications for the production of advanced semiconductor
        and
        other microelectronic devices. Revenues from the sale of our advanced etch
        and
        deposition systems accounted for 69%, 30% and 40% of total revenues in fiscal
        2006, 2005 and 2004, respectively. Our advanced systems are currently being
        used
        primarily for research and development activities or low volume production.
        For
        our advanced systems to achieve full market adoption, our customers must
        utilize
        these systems for volume production. We cannot assure you that the market
        for
        devices incorporating emerging films, polysilicon or metal will develop as
        quickly or to the degree we expect. If our advanced systems do not achieve
        significant sales or volume production due to a lack of customer adoption,
        our
        business, financial condition, results of operations and cash flows will
        be
        materially adversely affected.
 
 **Our
        customers are concentrated and therefore the loss of a significant customer
        may
        harm our business.**
 
 The
        composition of our top five customers has changed from year to year, but
        net
        system sales to our top five customers in each of fiscal 2006, 2005, and
        2004
        accounted for 68.9%, 80.0% and 84.8%, respectively, of our total net system
        sales. ST Microelectronics accounted for 54.3% of our total revenue in fiscal
        2006. Fujitsu, Western Digital, and RF Micro Devices accounted for 38.2%,
        12.8%
        and 10.1% respectively, of our net system sales in fiscal year 2005. Intel,
        Fuji
        Film, and Matsushita accounted for 31.4%, 22.9% and 12.6% respectively, of
        our
        net system sales in 2004. ST Microelectronics accounted for 47% of total
        revenue
        in the quarter ended September 30, 2006. Other than these customers, no single
        customer represented more than 10% of our total revenue in fiscal 2006, 2005,
        and 2004. Although the composition of the group comprising our largest customers
        may vary from year to year, the loss of a significant customer or any reduction
        in orders by any significant customer, including reductions due to market,
        economic or competitive conditions in the semiconductor and related device
        manufacturing industry, may have a material adverse effect on us.
 
 
 **Our
        quarterly operating results may continue to fluctuate.**
 
 Our
        revenue and operating results have fluctuated and are likely to continue
        to
        fluctuate significantly from quarter to quarter, and we cannot assure you
        that
        we will achieve profitability in the future.
 
 Our
        900
        series etch systems typically sell for prices ranging between $250,000 and
        $600,000, while prices of our 6500 series critical etch systems and our Endeavor
        deposition systems typically range between $1,500,000 and
        $3,000,000. To the extent we are successful in selling our 6500 and Endeavor
        series systems, the sale of a small number of these systems will probably
        account for a substantial portion of revenue in future quarters, and a
        transaction for a single system could have a substantial impact on revenue
        and
        gross margin for a given quarter.
 
 -
            24 -
 Other
                factors that could affect our quarterly operating results include:
  ·
                    our
                        timing of new systems and technology announcements and releases
                        and
                        ability to transition between product
                        versions; 
 ·
                    seasonal
                        fluctuations in sales; 
 ·
                    changes
                        in the mix of our revenues represented by our various products
                        and
                        customers; 
 ·
                    adverse
                        changes in the level of economic activity in the United States
                        or other
                        major economies in which we do business; ·
                    foreign
                        currency exchange rate fluctuations; 
 ·
                    expenses
                        related to, and the financial impact of, possible acquisitions
                        of other
                        businesses; and 
 ·
                    changes
                        in the timing of product orders due to unexpected delays
                        in the
                        introduction of our customers’ products, due to lifecycles of our
                        customers’ products ending earlier than expected or due to market
                        acceptance of our customers’ products. 
 
 
 
 **Some
                of our sales cycles are lengthy, exposing us to the risks of inventory
                obsolescence and fluctuations in operating results.**
 
 Sales
                of
                our systems depend, in significant part, upon the decision of a prospective
                customer to add new manufacturing capacity or to expand existing
                manufacturing
                capacity, both of which typically involve a significant capital commitment.
                We
                often experience delays in finalizing system sales following initial
                system
                qualification while the customer evaluates and receives approvals
                for the
                purchase of our systems and completes a new or expanded facility.
                Due to these
                and other factors, our systems typically have a lengthy sales cycle
                (often 12 to
                18 months in the case of critical etch and deposition systems) during
                which we
                may expend substantial funds and management effort. Lengthy sales
                cycles subject
                us to a number of significant risks, including inventory obsolescence
                and
                fluctuations in operating results over which we have little or no
                control.
 
 **Because
                technology changes rapidly, we may not be able to introduce our products
                in a
                timely manner.**
 
 The
                semiconductor manufacturing industry is subject to rapid technological
                change
                and new system introductions and enhancements. We believe that our
                future
                success depends on our ability to continue to enhance our existing
                systems and
                their process capabilities, and to develop and manufacture in a timely
                manner
                new systems with improved process capabilities. We may incur substantial
                unanticipated costs to ensure product functionality and reliability
                early in our
                products’ life cycles. We cannot assure you that we will be successful in the
                introduction and volume manufacture of new systems or that we will
                be able to
                develop and introduce, in a timely manner, new systems or enhancements
                to our
                existing systems and processes which satisfy customer needs or achieve
                market
                adoption.
 
 **Our
                financial performance may adversely affect the morale and performance
                of our
                personnel and our ability to hire new personnel.**
 
 Our
                common stock has declined in value below the exercise price of many
                options
                granted to employees pursuant to our stock option plans. Thus, the
                intended
                benefits of the stock options granted to our employees, the creation
                of
                performance and retention incentives, may not be realized. As a result,
                we may
                lose employees whom we would prefer to retain. As a result of these
                factors, our
                remaining personnel may seek employment with larger, more established
                companies
                or companies perceived as having less volatile stock prices.
 
 **We
                may not be able to protect our intellectual property or obtain licenses
                for
                third parties’ intellectual property and therefore we may be exposed to
                liability for infringement or the risk that our operations may be
                adversely
                affected.**
 
 Although
                we attempt to protect our intellectual property rights through patents,
                copyrights, trade secrets and other measures, we may not be able
                to protect our
                technology adequately and competitors may be able to develop similar
                technology
                independently. Additionally, patent applications that we may file
                may not be
                issued and foreign intellectual property laws may not protect our
                intellectual
                property rights. There is also a risk that patents licensed by or
                issued to us
                will be challenged, invalidated or circumvented and that the rights
                granted
                there under will not provide competitive advantages to us. Furthermore,
                others
                may independently develop similar systems, duplicate our systems
                or design
                around the patents licensed by or issued to us.
 
 -
                    25 -
  Litigation
                could result in substantial cost and diversion of effort by us, which
                by itself
                could have a detrimental effect on our financial condition, operating
                results
                and cash flows. Further, adverse determinations in such litigation
                could result
                in our loss of proprietary rights, subject us to significant liabilities
                to
                third parties, and require us to seek licenses from third parties
                or prevent us
                from manufacturing or selling our systems. In addition, licenses
                under third
                parties’ intellectual property rights may not be available on reasonable terms,
                if at all.
 **We
                are exposed to additional risks associated with international sales
                and
                operations.**
 
 International
                sales accounted for 76%, 70% and 67% of total revenue for fiscal
                2006, 2005 and
                2004, respectively. International sales are subject to certain risks,
                including
                the imposition of government controls, fluctuations in the U.S. dollar
                (which
                could increase the sales price in local currencies of our systems
                in foreign
                markets), changes in export license and other regulatory requirements,
                tariffs
                and other market barriers, political and economic instability, potential
                hostilities, restrictions on the export or import of technology,
                difficulties in
                accounts receivable collection, difficulties in managing representatives,
                difficulties in staffing and managing international operations and
                potentially
                adverse tax consequences. We cannot assure you that any of these
                factors will
                not have a detrimental effect on our operations, financial results
                and cash
                flows.
 
 We
                generally attempt to offset a portion of our U.S. dollar denominated
                balance
                sheet exposures subject to foreign exchange rate re-measurement by
                purchasing
                forward currency contracts for future delivery. We cannot assure
                you that our
                future results of operations and cash flows will not be adversely
                affected by
                foreign currency fluctuations. In addition, the laws of certain countries
                in
                which our products are sold may not provide our products and intellectual
                property rights with the same degree of protection as the laws of
                the United
                States.
 
 **Evolving
                regulation of corporate governance and public disclosure may result
                in
                additional expenses and continuing uncertainty.**
  Changing
                laws, regulations and standard relating to corporate governance and
                public
                disclosure, including the Sarbanes-Oxley Act of 2002, new SEC regulations
                and
                Nasdaq Market rules are creating uncertainty for public companies.
                We
                continually evaluate and monitor developments with respect to new
                and proposed
                rules and cannot predict or estimate the amount of the additional
                costs we may
                incur or the timing of such costs. These new or changed laws, regulations
                and
                standards are subject to varying interpretations, in many cases due
                to their
                lack of specificity, and as a result, their application in practice
                may evolve
                over time as new guidance is provided by regulatory and governing
                bodies. This
                could result in continuing uncertainty regarding compliance matters
                and higher
                costs necessitated by ongoing revisions to disclosure and governance
                practices.
                We are committed to maintaining high standards of corporate governance
                and
                public disclosure. As a result, we have invested resources to comply
                with
                evolving laws, regulations and standards, and this investment may
                result in
                increased general and administrative expenses and a diversion of
                management time
                and attention from revenue-generating activities to compliance activities.
                If
                our efforts to comply with new or changed laws, regulations and standards
                differ
                from the activities intended by regulatory or governing bodies due
                to
                ambiguities related to practice, regulatory authorities may initiate
                legal
                proceedings against us and we may be harmed.
 
 **Our
                stock price is volatile and could result in a material decline in
                the value of
                your investment in Tegal.**
 
 We
                believe that factors such as announcements of developments related
                to our
                business, fluctuations in our operating results, sales of our common
                stock into
                the marketplace, failure to meet or changes in analysts’ expectations, general
                conditions in the semiconductor industry or the worldwide economy,
                announcements
                of technological innovations or new products or enhancements by us
                or our
                competitors, developments in patents or other intellectual property
                rights,
                developments in our relationships with our customers and suppliers,
                natural
                disasters and outbreaks of hostilities could cause the price of our
                common stock
                to fluctuate substantially. In addition, in recent years the stock
                market in
                general, and the market for shares of small capitalization stocks
                in particular,
                have experienced extreme price fluctuations, which have often been
                unrelated to
                the operating performance of affected companies. We cannot assure
                you that the
                market price of our common stock will not experience significant
                fluctuations in
                the future, including fluctuations that are unrelated to our
                performance.
 
 -
                    26 -
  **Potential
                disruption of our supply of materials required to build our systems
                could have a
                negative effect on our operations and damage our customer
                relationships.**
 
 Materials
                delays have not been significant in recent years. Nevertheless, we
                procure
                certain components and sub-assemblies included in our systems from
                a limited
                group of suppliers, and occasionally from a single source supplier.
                For example,
                we depend on MECS Corporation, a robotic equipment supplier, as the
                sole source
                for the robotic arm used in all of our 6500 series systems. We currently
                have no
                existing supply contract with MECS Corporation, and we currently
                purchase all
                robotic assemblies from MECS Corporation on a purchase order basis.
                Disruption
                or termination of certain of these sources, including our robotic
                sub-assembly
                source, could have an adverse effect on our operations and damage
                our
                relationship with our customers.
 
 **Any
                failure by us to comply with environmental regulations imposed on
                us could
                subject us to future liabilities.**
 
 We
                are
                subject to a variety of governmental regulations related to the use,
                storage,
                handling, discharge or disposal of toxic, volatile or otherwise hazardous
                chemicals used in our manufacturing process. We believe that we are
                currently in
                compliance in all material respects with these regulations and that
                we have
                obtained all necessary environmental permits generally relating to
                the discharge
                of hazardous wastes to conduct our business. Nevertheless, our failure
                to comply
                with present or future regulations could result in additional or
                corrective
                operating costs, suspension of production, and alteration of our
                manufacturing
                processes or cessation of our operations.
 
 
 
 **Item
                6.** ***Exhibits***
 
 (a)  *Exhibits*
 
 31.1
                      Certifications
                          of the Chief Executive Officer pursuant to Section 302
                          of the
                          Sarbanes-Oxley Act of 2002.31.2
                      Certifications
                          of the Chief Financial Officer pursuant to Section 302
                          of the
                          Sarbanes-Oxley Act of 2002.32
                      Certifications
                          of the Chief Executive Officer and Chief Financial Officer
                          pursuant to
                          Section 906 of the Sarbanes-Oxley Act of
                          2002.
 
 
 **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.
 
 TEGAL
                          CORPORATION
                        (Registrant)/s/
                          CHRISTINE HERGENROTHER
                        Christine
                          Hergenrother
                        *Chief
                          Financial Officer*Dated:
                          February 14, 2007
   
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  -
                    27 -
  **EXHIBIT
                31.1**
 
 
 **CERTIFICATION
                OF THE CHIEF EXECUTIVE OFFICER**
 **PURSUANT
                TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002**
 
 I,
                Thomas
                R. Mika, certify that:
 
 1.  I
                have
                reviewed this quarterly report on Form 10-Q of Tegal Corporation;
 
 2.  Based
                on
                my knowledge, this report does not contain any untrue statement of
                a material
                fact or omit to state a material fact necessary to make the statements
                made, in
                light of the circumstances under which such statements were made,
                not misleading
                with respect to the period covered by this report;
 
 3.  Based
                on
                my knowledge, the financial statements, and other financial information
                included
                in this report, fairly present in all material respects the financial
                condition,
                results of operations and cash flows of the registrant as of, and
                for, the
                periods presented in this report;
 
 4.  The
                registrant’s other certifying officer and I are responsible for establishing
                and
                maintaining disclosure controls and procedures (as defined in Exchange
                Act Rules
                13a-15(e) and 15d-14(e)) for the registrant and we have:
 
 (a)  designed
                such disclosure controls and procedures, or caused such disclosure
                controls and
                procedures to be designed under our supervision, to ensure that material
                information relating to the registrant, including its consolidated
                subsidiaries,
                is made known to us by others within those entities, particularly
                during the
                period in which this report is being prepared;
 
 (b)  evaluated
                the effectiveness of the registrant’s disclosure controls and procedures and
                presented in this report our conclusions about the effectiveness
                of the
                disclosure controls and procedures, as of the end of the period covered
                by this
                report based on such evaluation;
 
 (c)
                disclosed in this report any change in the registrant’s internal control over
                financial reporting that occurred during the registrant’s most recent fiscal
                quarter (the registrant’s fourth fiscal quarter in the case of an annual report)
                that has materially affected, or is reasonably likely to materially
                affect, the
                registrant’s internal control over financial reporting; and
 
 5.  The
                registrant’s other certifying officer(s) and I have disclosed, based on our
                most
                recent evaluation of internal control over financial reporting, to
                the
                registrant’s auditors and the audit committee of the registrant’s board of
                directors (or persons performing the equivalent function):
 
 (a)  all
                significant deficiencies and material weaknesses in the design or
                operation of
                internal control over financial reporting which are reasonably likely
                to
                adversely affect the registrant’s ability to record, process, summarize and
                report financial information; and
 (b)  any
                fraud, whether or not material, that involves management or other
                employees who
                have a significant role in the registrant’s internal controls over financial
                reporting.
 
 
 Date:
                February 14, 2007    /s/   Thomas
                R. Mika
 Chief
                Executive Officer and President
  -
                    28 -
  **EXHIBIT
                31.2**
 
 
 **CERTIFICATION
                OF THE CHIEF FINANCIAL OFFICER**
 **PURSUANT
                TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002**
 
 I,
                Christine Hergenrother, certify that:
 
 1.  I
                have
                reviewed this quarterly report on Form 10-Q of Tegal Corporation;
 
 2.  Based
                on
                my knowledge, this report does not contain any untrue statement of
                a material
                fact or omit to state a material fact necessary to make the statements
                made, in
                light of the circumstances under which such statements were made,
                not misleading
                with respect to the period covered by this report;
 
 3.  Based
                on
                my knowledge, the financial statements, and other financial information
                included
                in this report, fairly present in all material respects the financial
                condition,
                results of operations and cash flows of the registrant as of, and
                for, the
                periods presented in this report;
 
 4.  The
                registrant’s other certifying officer and I are responsible for establishing
                and
                maintaining disclosure controls and procedures (as defined in Exchange
                Act Rules
                13a-15(e) and 15d-14(e)) for the registrant and we have:
 
 (a)  designed
                such disclosure controls and procedures, or caused such disclosure
                controls and
                procedures to be designed under our supervision, to ensure that material
                information relating to the registrant, including its consolidated
                subsidiaries,
                is made known to us by others within those entities, particularly
                during the
                period in which this report is being prepared;
 
 (b)  evaluated
                the effectiveness of the registrant’s disclosure controls and procedures and
                presented in this report our conclusions about the effectiveness
                of the
                disclosure controls and procedures, as of the end of the period covered
                by this
                report based on such evaluation;
 
 (c)
                disclosed in this report any change in the registrant’s internal control over
                financial reporting that occurred during the registrant’s most recent fiscal
                quarter (the registrant’s fourth fiscal quarter in the case of an annual report)
                that has materially affected, or is reasonably likely to materially
                affect, the
                registrant’s internal control over financial reporting; and
 
 5.  The
                registrant’s other certifying officer(s) and I have disclosed, based on our
                most
                recent evaluation of internal control over financial reporting, to
                the
                registrant’s auditors and the audit committee of the registrant’s board of
                directors (or persons performing the equivalent function):
 
 (a)  all
                significant deficiencies and material weaknesses in the design or
                operation of
                internal control over financial reporting which are reasonably likely
                to
                adversely affect the registrant’s ability to record, process, summarize and
                report financial information; and
 
 (b)  any
                fraud, whether or not material, that involves management or other
                employees who
                have a significant role in the registrant’s internal controls over financial
                reporting.
 
 Date:
                February 14, 2007    /s/
                Christine Hergenrother
 Chief
                Financial Officer
 
 
 
 
 
 
 
 
 
 
  -
                    29 -
  
 **EXHIBIT
                32**
 
 **CERTIFICATION
                PURSUANT TO**
 **SECTION
                906 OF THE SARBANES-OXLEY ACT OF 2002**
 **(18
                U.S.C. SECTION 1350)**
  In
                connection with the Quarterly Report of Tegal Corporation, a Delaware
                corporation (the “Company”), on Form 10-Q for the quarter ended December 31,
                2006 as filed with the Securities and Exchange Commission (the “Report”), I,
                Thomas R. Mika, President and Chief Executive Officer of the Company,
                certify,
                pursuant to § 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. § 1350), that to
                my knowledge:
  (1)
                The
                Report fully complies with the requirements of section 13(a) or 15(d)
                of the
                Securities Exchange Act of 1934, as amended; and
  (2)
                The
                information contained in the Report fairly presents, in all material
                respects,
                the financial condition and result of operations of the Company.
  
 /s/   Thomas
                R. Mika
 Chief
                Executive Officer and President
 February
                14, 2007
 
 
 
 **CERTIFICATION
                PURSUANT TO**
 **SECTION
                906 OF THE SARBANES-OXLEY ACT OF 2002**
 **(18
                U.S.C. SECTION 1350)**
  In
                connection with the Quarterly Report of Tegal Corporation, a Delaware
                corporation (the “Company”), on Form 10-Q for the quarter ended December 31,
                2006 as filed with the Securities and Exchange Commission (the “Report”), I,
                Christine Hergenrother, Chief Financial Officer of the Company, certify,
                pursuant to § 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. § 1350), that to
                my knowledge:
  (1)
                The
                Report fully complies with the requirements of section 13(a) or 15(d)
                of the
                Securities Exchange Act of 1934, as amended; and
  (2)
                The
                information contained in the Report fairly presents, in all material
                respects,
                the financial condition and result of operations of the Company.
 
 
 /s/   Christine
                Hergenrother
 Chief
                Financial Officer
 February
                14, 2007