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, 2008
 
 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, a non-accelerated filer or a smaller reporting
company.  See definitions of “large accelerated filer”, “accelerated
filer” and “smaller reporting company” in Rule 12b-2 of the Exchange
Act.
 
 Large
Accelerated
Filer   [  ]                                                                                                                 Accelerated
Filer  [  ]
 
 Non-Accelerated
Filer  [  ] (Do not check if a smaller reporting
company)                   Smaller
reporting company  [X]
 
 
 Indicate
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 12, 2009
therewere 8,412,676 of the
Registrant’s common stock outstanding.The number of shares
outstanding reflects a 1 to 12 reverse stock split effected by the Registrant on
July 25, 2006.
 
 
 
  
  TEGAL
CORPORATION AND SUBSIDIARIES
 
 INDEX
 
 PagePART
      I. FINANCIAL INFORMATIONItem
      1.
              Condensed
      Consolidated Financial Statements (Unaudited)Condensed
      Consolidated Balance Sheets as of December 31, 2008 and March 31,
      2008
              3Condensed
      Consolidated Statements of Operations for the three months and nine months
      ended December 31, 2008 and December 31, 2007
              4Condensed
      Consolidated Statements of Cash Flows for the nine months ended December
      31, 2008 and December 31, 2007
              5Notes
      to Condensed Consolidated Financial Statements
              6Item
      2.
              Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
              11Item
      3.
              Quantitative
      and Qualitative Disclosures About Market Risk
              14PART
      II. OTHER INFORMATIONItem
      1A.
              Risk
      Factors
              15Item
      6.
              Exhibits
              17Signatures
              
              18
 
  - 2
-
  PART
I — FINANCIAL INFORMATION
 
 Item
1. Condensed Consolidated
Financial Statements
 
 TEGAL
CORPORATION AND SUBSIDIARIES
 CONDENSED
CONSOLIDATED BALANCE SHEETS
 (Unaudited)
 (In
thousands, except per share data)
 
 
 December 31,
              
              
              March 31,2008
              
              
              2008ASSETSCurrent
      assets:Cash
      and cash equivalents
              
              $
              12,721
              
              
              $
              19,271Accounts
      receivable, net of allowances for sales returns and doubtful accounts of
      $204 and $191 at December 31, 2008 and March 31, 2008,
      respectively
              
              
              6,233
              
              
              
              6,758Inventories,
      net
              
              
              14,061
              
              
              
              11,056Prepaid
      expenses and other current assets
              
              
              579
              
              
              
              788Total
      current assets
              
              
              33,594
              
              
              
              37,873Property
      and equipment, net
              
              
              1,171
              
              
              
              1,213Intangible
      assets, net
              
              
              3,670
              
              
              
              903Other
      assets
              
              
              72
              
              
              
              90Total
      assets
              
              $
              38,507
              
              
              $
              40,079LIABILITIES
      AND STOCKHOLDERS’ EQUITYCurrent
      liabilities:Capital
      lease payable
              
              $
              1
              
              
              $
              14Accounts
      payable
              
              
              1,825
              
              
              
              1,469Accrued
      product warranty
              
              
              837
              
              
              
              1,770Deferred
      revenue
              
              
              254
              
              
              
              252Accrued
      expenses and other current liabilities
              
              
              2,545
              
              
              
              3,644Total
      current liabilities
              
              
              5,462
              
              
              
              7,149Commitments
      and contingencies (Note 8)Stockholders’
      equity:Preferred
      stock; $0.01 par value; 5,000,000 shares authorized; none issued and
      outstanding
              
              
              -
              
              
              
              -Common
      stock; $0.01 par value; 50,000,000 shares authorized; 8,412,676 and 7,242,736  shares
      issued and outstanding at December 31, 2008 and March
      31, 2008, respectively
              
              
              84
              
              
              
              72Additional
      paid-in capital
              
              
              128,275
              
              
              
              123,567Accumulated
      other comprehensive loss
              
              
              (396
              )
              
              
              (446
              )Accumulated
      deficit
              
              
              (94,918
              )
              
              
              (90,263
              )Total
      stockholders’ equity
              
              
              33,045
              
              
              
              32,930Total
      liabilities and stockholders’ equity
              
              $
              38,507
              
              
              $
              40,079
 
 
 See
accompanying notes to condensed consolidated financial statements.
 
 
  - 3
-
  
 TEGAL
CORPORATION AND SUBSIDIARIES
 CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS
 (Unaudited)
 (In
thousands, except per share data)
 
 
 
 
 Three
      Months Ended
              
              
              Nine
      Months EndedDecember 31,
              
              
              December 31,2008
              
              
              2007
              
              
              2008
              
              
              2007Revenue
              
              $
              4,476
              
              
              $
              10,145
              
              
              $
              11,215
              
              
              $
              25,543Cost
      of revenue
              
              
              3,113
              
              
              
              5,725
              
              
              
              6,504
              
              
              
              15,262Gross
      profit
              
              
              1,363
              
              
              
              4,420
              
              
              
              4,711
              
              
              
              10,281Operating
      expenses:Research
      and development expenses
              
              
              1,142
              
              
              
              810
              
              
              
              3,423
              
              
              
              2,645Sales
      and marketing expenses
              
              
              756
              
              
              
              923
              
              
              
              2,438
              
              
              
              3,208General
      and administrative expenses
              
              
              880
              
              
              
              938
              
              
              
              3,681
              
              
              
              3,589Total
      operating expenses
              
              
              2,778
              
              
              
              2,671
              
              
              
              9,542
              
              
              
              9,442Operating
      (loss) income
              
              
              (1,415
              )
              
              
              1,749
              
              
              
              (4,831
              )
              
              
              839Other
      income (expense), net
              
              
              50
              
              
              
              1,085
              
              
              
              176
              
              
              
              2,049(Loss)
      income before income tax expense (benefit)
              
              
              (1,365
              )
              
              
              2,834
              
              
              
              (4,655
              )
              
              
              2,888Tax
      Expense
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -Net
      (loss) income
              
              $
              (1,365
              )
              
              $
              2,834
              
              
              $
              (4,655
              )
              
              $
              2,888Net
      (loss) income per share:Basic
              
              $
              (0.19
              )
              
              $
              0.40
              
              
              $
              (0.61
              )
              
              $
              0.41Diluted
              
              $
              (0.19
              )
              
              $
              0.39
              
              
              $
              (0.61
              )
              
              $
              0.40Weighted
      average shares used in per share computation:Basic
              
              
              7,368
              
              
              
              7,148
              
              
              
              7,569
              
              
              
              7,120Diluted
              
              
              7,368
              
              
              
              7,281
              
              
              
              7,569
              
              
              
              7,241
 
 
 
 See
accompanying notes to condensed consolidated financial
statements.
  - 4
-
  TEGAL
CORPORATION AND SUBSIDIARIES
 CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
 (Unaudited)
 (In
thousands
 
 
 
 Nine
      Months EndedDecember 31,2008
              
              
              2007Cash
      flows from operating activities:Net
      (Loss) Income
              
              $
              (4,655
              )
              
              $
              2,888Adjustments
      to reconcile net loss to net cash used in operating
      activities:Depreciation
      and amortization
              
              
              688
              
              
              
              566Stock
      compensation expense
              
              
              701
              
              
              
              757Stock
      issued under stock purchase plan
              
              
              19
              
              
              
              22Provision
      for doubtful accounts and sales returns allowances
              
              
              13
              
              
              
              (255
              )Loss
      on disposal of property and equipment
              
              
              16
              
              
              
              144Fair
      value of warrants and options issued for services rendered
              
              
              --
              
              
              
              33Changes
      in operating assets and liabilities:Accounts
      receivables
              
              
              533
              
              
              
              (3,297
              )Inventories,
      net
              
              
              (1,123
              )
              
              
              (5,490
              )Prepaid
      expenses and other assets
              
              
              231
              
              
              
              77Accounts
      payable
              
              
              365
              
              
              
              (60
              )Accrued
      expenses and other current liabilities
              
              
              (1,114
              )
              
              
              (144
              )Accrued
      product warranty
              
              
              (997
              )
              
              
              896Litigation
      suspense
              
              
              --
              
              
              
              (995
              )Deferred
      revenue
              
              
              2
              
              
              
              38Net
      cash used in operating activities
              
              
              (5,321
              )
              
              
              (4,820
              )Cash
      flows used in investing activities:Purchases
      of property and equipment
              
              
              (330
              )
              
              
              (378
              )Net
      cash used in AMMS asset acquisition
              
              
              (1,000
              )
              
              
              --Net
      cash used in investing activities:
              
              
              (1,330
              )
              
              
              (378
              )Cash
      flows used in financing activities:Payments
      on capital lease financing
              
              
              (12
              )
              
              
              (10
              )Net
      cash used in financing activities
              
              
              (12
              )
              
              
              (10
              )Effect
      of exchange rates on cash and cash equivalents
              
              
              113
              
              
              
              (772
              )Net
      decrease in cash and cash equivalents
              
              
              (6,550
              )
              
              
              (5,980
              )Cash
      and cash equivalents at beginning of period
              
              
              19,271
              
              
              
              25,776Cash
      and cash equivalents at end of period
              
              $
              12,721
              
              
              $
              19,796Supplemental
      disclosure of non-cash investing activities:Shares
      issued in AMMS asset acquisition
              
              $
              4,000
              
              
              $
              -
 
 See
accompanying notes to condensed consolidated financial statements.
 
 
  - 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, the unaudited condensed consolidated interim financial
statements have been prepared on the same basis as the March 31, 2008 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 (“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 audited
consolidated financial statements and footnotes included in the Company’s Annual
Report on Form 10-K for the fiscal year ended March 31, 2008.  The
results of operations for the three and nine months ended December 31, 2008 are
not necessarily indicative of results to be expected for the entire
year.
 
 Our
consolidated financial statements contemplate the realization of assets and the
satisfaction of liabilities in the normal course of business. We had net (loss)
income of ($4,655) and $2,888 for the nine
month periods ended December 31, 2008 and 2007, respectively. We used cash flows
from operations of ($5,321) and ($4,820) for the periods ended December 31, 2008
and 2007, respectively.  In fiscal 2009, we financed our operations
from existing cash on hand.  In fiscal 2008, we financed our
operations from existing cash on hand and from the release of $14,705 from
litigation suspense related to the settlement of the AMS
litigation.  We believe that these proceeds, combined with continued
cost containment, will be adequate to fund operations through the next twelve
months.  However, projected sales may not materialize and unforeseen
costs may be incurred.If the projected
sales do not materialize, we will need to reduce expenses further and raise
additional 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
common stock, and debt covenants could impose restrictions on our operations.
The sale of equity or debt could result in additional dilution to current
stockholders, and such financing may not be available to us on acceptable terms,
if at all.
 
 Concentration
of Credit Risk
 
 Financial
instruments that potentially subject the Company to significant concentrations
of credit risk consist primarily of cash investments and accounts receivable.
Substantially all of the Company’s liquid investments are invested in money
market funds. The Company’s accounts receivable are derived primarily from sales
to customers located in the United States, 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. As of December
31, 2008, one customer accounted for approximately 36% of the accounts
receivable balance.  As of December 31, 2007 two customers accounted
for approximately 81% of the accounts receivable balance.
 
 During
the quarter ended December 31, 2008, sales to suppliers of substrates and
services in the integrated circuit and MEMS sensor markets and manufacturers of
high brightness LEDs accounted for 67% of our total revenue.  During
the quarter ended December 31, 2007 ST Microelectronics and Analog Devices, Inc
accounted for 82% of total revenues.  During the nine months ended
December 31, 2008, a leading supplier in the integrated circuit and MEMS sensor
market, SVTC Tech. LLC and Diodes Fab Tech Inc, accounted for 47% of our total
revenue.  During the nine months ended December 31, 2007 ST
Microelectronics accounted for 71% of total revenues.
 
 Intangible Assets
 
 Year
to date acquisition–related intangibles include patents and trademarks that are
amortized on a straight-line basis over periods ranging from 5 years to 15
years.  The Company performs an ongoing review of its identified
intangible assets to determine if facts and circumstances exist that indicate
the useful life is shorter than originally estimated or the carrying amount may
not be recoverable.  If such facts and circumstances exist, the
Company assesses the recoverability of identified intangible assets by comparing
the projected undiscounted net cash flow associated with the related asset or
group of assets over their remaining lives against their respective carrying
amounts.  Impairment, if any, is based on the excess of the carrying
amount over the fair value of those assets.
  Stock-Based
Compensation
 
 The
Company has adopted several stock plans that provide for the issuance of 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 and restricted stock units (“RSUs”).  Stock options and RSUs
generally vest ratably over a four-year period on the anniversary date of the
grant, and stock options expire ten years after the grant date.  On
occasion RSUs may vest on the achievement of specific performance
targets.  The Company also has an employee stock purchase plan (an
“ESPP”) that allows qualified employees to purchase Company shares at 85% of the
lower of the common stock’s market value on specified dates.  The
stock-based compensation for our ESPP was determined using the Black-Scholes
option pricing model and the provisions of Statement of Financial Accounting
Standards (“SFAS”) No. 123 (revised 2004), “Share Based Payment”,(“SFAS
123R”).
 
 Effective
April 1, 2006, the Company adopted the fair value recognition provisions of SFAS
123R using the modified prospective transition method.
 
 Total
stock-based compensation expense related to stock options and RSUs for the nine
months ended December 31, 2008 and 2007 was $701 and $757,
respectively.  Total stock-based compensation expense related to stock
options and RSUs for the three months ended December 31, 2008 and 2007 was $202
and $66, respectively.  The total compensation expense related to
non-vested stock options and RSUs not yet recognized is $2,005.
 
 The
Company used the following valuation assumptions to estimate the fair value of
options granted for the periods ended December 31, 2008 and 2007
respectively:
 
 STOCK
      OPTIONS:
              
              2008
              
              
              2007Expected
      life (years)
              
              
              6.0
              
              
              
              4.0Volatility
              
              
              68.3
              %
              
              
              96.0
              %Risk-free
      interest rate
              
              
              2.49
              %
              
              
              4.7
              %Dividend
      yield
              
              
              0
              %
              
              
              0
              %
 
 ESPP
awards were valued using the Black-Scholes model with expected volatility
calculated using a six-month historical volatility.
 
 ESPP:
              
              2008
              
              
              2007Expected
      life (years)
              
              
              0.5
              
              
              
              0.5Volatility
              
              
              117
              %
              
              
              58.0
              %Risk-free
      interest rate
              
              
              0.94
              %
              
              
              4.7
              %Dividend
      yield
              
              
              0
              %
              
              
              0
              %
 
 
 During
the three months ended December 31, 2008, there were 378,847 stock option awards
granted.
 
 - 6
-
 Stock
Options & Warrants
 A summary
of stock option and warrant activity during the quarter ended December 31, 2008
is as follows:
 
 Weighted
      AverageWeighted
      Average
              
              Remaining
      Contractual
              AggregateShares
              
              
              Exercise
      Price
              
              Term
      (in Years)
              Intrinsic
      ValueBeginning
      outstanding
              
              
              2,266,912
              
              
              $
              10.55GrantedPrice
      = market value
              
              
              378,847
              
              
              
              2.33Total
              
              
              378,847
              
              
              
              2.33Exercised
              
              
              --
              
              
              
              0.00CancelledForfeited
              
              
              (16,693
              )
              
              
              4.36Expired
              
              
              (13,712
              )
              
              
              19.04Total
              
              
              (30,405
              )
              
              
              10.98Ending
      outstanding
              
              
              2,615,354
              
              
              $
              9.32
              
              4.66
              $-Ending
      vested and expected to vest
              
              
              2,540,451
              
              
              $
              9.50
              
              4.52
              $-Ending
      exercisable
              
              
              1,896,225
              
              
              $
              11.61
              
              2.90
              $-
 
 
 The
aggregate intrinsic value of stock options and warrants outstanding at December
31, 2008 is calculated as the difference, to the extent greater than zero,
between the exercise price of the underlying options and the market price of our
common stock as of December 31, 2008.
   The
following table summarizes information with respect to stock options and
warrants outstanding as of December 31, 2008:
 Weighted
      AverageRange
      of
              
              
              Number
      Outstanding
              
              
              Weighted
              
              
              
              
              
              Number
      Exercisable
              
              
              Exercise
      PriceExercise Prices
              
              
              As
      of
              
              
              Average
      Remaining
              
              
              Weighted
      Average
              
              
              As
      of
              
              
              As
      ofDecember
      31, 2008
              
              
              Term
      (in years)
              
              
              Exercise
      Price
              
              
              December
      31, 2008
              
              
              December
      31, 2008$
              2.20
              
              
              $
              2.20
              
              
              
              20,000
              
              
              
              9.87
              
              
              $
              2.20
              
              
              
              --
              
              
              $
              --2.34
              
              
              
              2.34
              
              
              
              358,847
              
              
              
              9.85
              
              
              
              2.34
              
              
              
              --
              
              
              
              --3.44
              
              
              
              4.20
              
              
              
              286,339
              
              
              
              9.12
              
              
              
              4.07
              
              
              
              57,213
              
              
              
              4.134.60
              
              
              
              4.68
              
              
              
              266,593
              
              
              
              7.72
              
              
              
              4.60
              
              
              
              171,479
              
              
              
              4.615.26
              
              
              
              8.28
              
              
              
              277,064
              
              
              
              4.72
              
              
              
              6.65
              
              
              
              262,272
              
              
              
              6.6812.00
              
              
              
              12.00
              
              
              
              1,284,990
              
              
              
              1.68
              
              
              
              12.00
              
              
              
              1,284,990
              
              
              
              12.0012.36
              
              
              
              92.26
              
              
              
              114,442
              
              
              
              2.66
              
              
              
              27.60
              
              
              
              113,192
              
              
              
              27.7392.52
              
              
              
              92.52
              
              
              
              4,165
              
              
              
              1.13
              
              
              
              92.52
              
              
              
              4,165
              
              
              
              92.5299.00
              
              
              
              99.00
              
              
              
              2,498
              
              
              
              1.24
              
              
              
              99.00
              
              
              
              2,498
              
              
              
              99.00105.00
              
              
              
              105.00
              
              
              
              416
              
              
              
              3.73
              
              
              
              105.00
              
              
              
              416
              
              
              
              105.00$
              2.20
              
              
              $
              105.00
              
              
              
              2,615,354
              
              
              
              4.66
              
              
              $
              9.32
              
              
              
              1,896,225
              
              
              $
              11.61
 
 
 
 As of
December 31, 2008, there was $1,497 of total unrecognized compensation cost
related to outstanding options and warrants which is expected to be recognized
over a period of 3.24 years.
 
 Restricted
Stock Units
 
 The
following table summarizes the Company’s RSU activity for the
three months ended December 31, 2008:
 
 Number
                of
                Shares
              
              
              Weighted
      Average
                Grant
      Date
                Fair ValueBalance,
      September 30,2008
              
              
              282,675
              
              
              $
              3.22Awarded
              
              
              -
              
              
              $
              -Released
              
              
              (173,494
              )
              
              $
              1.67Forfeited
              
              
              (7,411
              )
              
              $
              4.60Balance
      December 31,2008
              
              
              101,770
              
              
              $
              1.10
 
 Unvested
restricted stock at December 31, 2008
 
 As of
December 31, 2008 there was $508 of total unrecognized compensation cost related
to unvested RSUs which is expected to be recognized over a period of 1.87
years.
 
 - 7
-
 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, 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 conditions. 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.  Any excess and
obsolete provision is released only if and when the related inventory is sold or
scrapped.  During the nine months ended December 31, 2008 and
December 31, 2007, the Company sold or scrapped previously reserved inventory of
$154and $148,respectively.The inventory provisionbalanceatDecember 31,
2008andDecember
31,2007was$3,541and$3,760, respectively.
 
 Inventories
for the periods presented consisted of:
 
 
 December
      31,
              
              
              March
      31,2008
              
              
              2008Raw
      materials
              
              $
              6,139
              
              
              $
              4,674Work
      in progress
              
              
              4,482
              
              
              
              4,663Finished
      goods and spares
              
              
              3,440
              
              
              
              1,719$
              14,061
              
              
              $
              11,056
 
 
 
 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.
 
 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.  Warranty
activity for the three and nine months ended December 31, 2008 and 2007 is
as follows:
 
 
 Warranty
      Activity for the
              
              
              Warranty
      Activity for theThree
      Months Ended
              
              
              Nine
      Months EndedDecember 31,
              
              
              December 31,2008
              
              
              2007
              
              
              2008
              
              
              2007Balance
      at the beginning of the period
              
              $
              947
              
              
              $
              1,435
              
              
              $
              1,770
              
              
              $
              1,101Additional
      warranty accruals for warranties
      issued during the period
              
              
              273
              
              
              
              719
              
              
              
              455
              
              
              
              2,000Warranty
      expense during the period
              
              
              (383
              )
              
              
              (201
              )
              
              
              (1,388
              )
              
              
              (1,148
              )Balance
      at the end of the period
              
              $
              837
              
              
              $
              1,953
              
              
              $
              837
              
              
              $
              1,953
 
 
 
 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) Income Per Common Share (EPS):
 
 Basic EPS
is computed by dividing net (loss) income available to common stockholders
(numerator) by the weighted average number of common shares outstanding
(denominator) for the period. For periods of net income, diluted EPS gives
effect to all dilutive potential common shares outstanding during the period.
The computation of diluted EPS uses the average market price of the common stock
during the period.
 
 The
following table represents the calculation of basic and diluted net loss per
common share (in thousands, except per share data):
 
 
 Three
      Months Ended
              
              
              Nine
      Months EndedDecember
      31,
              
              
              December
      31,2008
              
              
              2007
              
              
              2008
              
              
              2007Net
      (loss) income applicable to common stockholders
              
              $
              (1,365
              )
              
              $
              2,834
              
              
              $
              (4,655
              )
              
              $
              2,888Basic
      and diluted:Weighted-average
      common shares outstanding
              
              
              7,368
              
              
              
              7,148
              
              
              
              7,569
              
              
              
              7,120Plus
      diluted - common stock equivalents
              
              
              --
              
              
              
              133
              
              
              
              --
              
              
              
              121Weighted-average
      common shares used in diluted net (loss) income per common
      share
              
              
              7,368
              
              
              
              7,281
              
              
              
              7,569
              
              
              
              7,241Basic
      net (loss) income per common share
              
              $
              (0.19
              )
              
              $
              0.40
              
              
              $
              (0.61
              )
              
              $
              0.41Diluted
      net (loss) income per common share
              
              $
              (0.19
              )
              
              $
              0.39
              
              
              $
              (0.61
              )
              
              $
              0.40
 
 
 Outstanding
options, warrants and RSUs of 2,717,124 and 2,587,953 shares of common stock at
a weighted-average exercise price per share of $9.01 and $9.74 on December 31,
2008 and 2007 respectively, were not included in the computation of diluted net
(loss) income 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.
 
 - 8
-
 5.      Stock-Based
Transactions:
 
 Issuance
of Warrants to Consultants
 
 The
Company issued no warrants to any party for the nine months ended December 31,
2008.  During the nine months ended December 31, 2007 the Company
issued 7,500 warrants valued at $33 using the Black-Scholes model with an
exercise price at the market value on the day of the grant and an average
interest rate of 4.51%, a volatility rate of 115% and a 5 year
life.  These warrants remain outstanding.
 
 6.      Financial
Instruments:
 
 We
adopted the provisions of Statement of Financial Accounting Standards
No. 157, Fair Value
Measurements,(“SFAS 157”) on April 1, 2008.  SFAS No. 157
defines fair value as the price that would be received to sell an asset or paid
to transfer a liability (“exit price”) in an orderly transaction between market
participants at the measurement date.
 
 In
determining fair value, we use various approaches, including market, income
and/or cost approaches, and each of these approaches requires certain inputs.
SFAS No. 157 establishes a hierarchy for inputs used in measuring fair
value that maximizes the use of observable inputs and minimizes the use of
unobservable inputs by requiring that observable inputs be used when available.
Observable inputs are inputs that market participants would use in pricing the
asset or liability developed based on market data obtained from sources
independent of us. Unobservable inputs are inputs that reflect our assumptions
as compared to the assumptions market participants would use in pricing the
asset or liability developed based on the best information available in the
circumstances. The hierarchy is broken down into three levels based on the
reliability of inputs as follows:
 
 Level 1:
Quoted market prices in active markets for identical assets or
liabilities.
 
 Level 2:
Observable market based inputs or unobservable inputs that are corroborated by
market data.
 
 Level 3:
Unobservable inputs that are not corroborated by market data.
 
 Level 1
primarily consists of financial instruments whose value is based on quoted
market prices in active markets for identical assets or liabilities we have the
ability to access.  This category also includes financial instruments
that are valued using alternative approaches but for which the Company typically
receives independent external valuation information including U.S. Treasuries,
other U.S. Government and agency securities and certain cash instruments such as
money market funds and certificates of deposit.
 
 Level 2
includes financial instruments that are valued based on quoted prices of similar
investments in active markets or similar or identical investments in markets
that are not active or model based valuations for which all significant inputs
and value drivers are observable directly or indirectly.  Financial
instruments in this category include sovereign debt, certain corporate equities,
corporate debt, certain U.S. agency and non-agency mortgage-backed securities
and non-exchange-traded derivatives such as interest rate swaps.
 
 Level
3 is comprised of financial instruments whose fair value is based on inputs that
are unobservable and significant to the overall fair value
measurement.
 
 Fair
value is a market-based measure considered from the perspective of a market
participant who holds the asset or owes the liability rather than an
entity-specific measure. Therefore, even when market assumptions are not readily
available, our own assumptions are set to reflect those that market participants
would use in pricing the asset or liability at the measurement
date.
 
 Financial
instruments owned and financial instruments sold, but not yet purchased,
including contractual commitments arising pursuant to futures, forward and
option contracts, interest rate swaps and other derivative contracts, are
recorded on a trade-date basis at fair value.Fair value is
generally based on quoted market prices. If quoted market prices are not
available, fair value is determined based on other relevant factors, including
dealer price quotations, price activity for equivalent instruments and valuation
pricing models. Valuation pricing models consider time value, yield curve and
volatility factors, prepayment speeds, default rates, loss severity, current
market and contractual prices for the underlying financial instruments, as well
as other measurements.
 
 On
September 24, 2008, the Company entered into a foreign exchange contract to sell
Euros, which was used to hedge a sales transaction in which costs are
denominated in U.S. dollars and the related revenues are generated in
Euros.   The contract was valued using Level 1 inputs as defined
by SFAS No. 157.  As of December 31, 2008 the Company concluded the
foreign exchange contract for a net gain of $8.
 
 7.      AMMS
Asset Acquisition
 
 On
September 16, 2008, the Company acquired certain assets from Alcatel Micro
Machining Systems (“AMMS”) and Alcatel Lucent (“Alcatel”, and together with
AMMS, the “Sellers”), pursuant to an Asset Purchase Agreement dated September 2,
2008 between the Company and the Sellers.   In connection with
the Acquisition, the Company also entered into an Intellectual Property
Agreement dated September 16, 2008 between the Company, Alcatel and an affiliate
of Alcatel.  The Asset Purchase Agreement and the Intellectual
Property Agreement were acquired for an aggregate consideration of $5,000,000
comprised of $1,000,000 in cash and $4,000,000 in shares of the Company’s common
stock. The 1,044,386 shares of common stock issued to the Seller was calculated
by obtaining  the quotient of (a) $4,000,000 divided by (b) the
average of the closing sales prices of the Company’s common stock as reported on
the Nasdaq Capital Market on the five (5) consecutive trading days immediately
preceding the closing date.
  In
connection with this acquisition, the Company obtained limited rights to use the
AMMS trademark pursuant to a trademark license agreement and agreed to purchase
certain equipment from an affiliate of the Sellers pursuant to a preferred
supplier agreement.
 
 The purchase price was allocated as
follows:
 
 Assets
      acquired:Trademarks
              
              $
              428Patents
              
              
              2,648Total
      Intangible Assets
              
              
              3,076Fixed
      Assets
              
              
              24Inventory
              
              
              1,900Total
      Tangible Assets
              
              
              1,924Total
      Acquired Assets
              
              $
              5,000
 
 - 9
-
 
 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.
 
 For
geographical reporting, revenues are attributed to the geographic location in
which the customers’ facilities are located.  Long-lived assets
consist 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
              
              
              Revenue
      for theThree
      Months Ended
              
              
              Nine
      Months EndedDecember 31,
              
              
              December 31,2008
              
              
              2007
              
              
              2008
              
              
              2007Sales
      to customers located in:United
      States
              
              $
              2,789
              
              
              $
              3,315
              
              
              $
              7,663
              
              
              $
              4,431Asia
              
              
              245
              
              
              
              6,003
              
              
              
              962
              
              
              
              9,397Germany
              
              
              576
              
              
              
              733
              
              
              
              751
              
              
              
              2,116Europe,
      excluding Germany
              
              
              866
              
              
              
              94
              
              
              
              1,839
              
              
              
              9,599Total
      sales
              
              $
              4,476
              
              
              $
              10,145
              
              
              $
              11,215
              
              
              $
              25,543
 
 
 
 
 
 Long-lived
                Assets
      as of:December 31,
                2008
              
              
              March 31,
                2008Long-lived
      assets at period-end:United
      States
              
              $
              1,160
              
              
              $
              1,195Europe
              
              
              11
              
              
              
              18Total
      long-lived assets
              
              $
              1,171
              
              
              $
              1,213
 
 
 9.      Recent
Accounting Pronouncements
 
 In
September 2006, the Financial Accounting Standards Board, (“FASB”) issued
Statement of Financial Standards 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.  The Company began complying with SFAS 157 as of
April 1, 2008 as follows:   Before September 26, 2008, the
Company held no derivatives, commodity instruments or other financial
instruments for trading purposes.  The only assets and liabilities
valued using a fair value methodology were related to stock based
compensation.  The Company has been using this valuation method since
April 1, 2006 when it adopted the fair value recognition provisions of SFAS
123R.  On September 26, 2008, the Company became a party to a foreign
exchange contract to sell Euros.   See Note 6 Financial
Instruments.
 
 In
February 2007, FASB issued SFAS No. 159, “The Fair Value Option for Financial
Assets and Liabilities” (“SFAS 159”). SFAS 159 provides entities with the
option to report selected financial assets and liabilities at fair value.
Business entities adopting SFAS 159 will report unrealized gains and losses in
earnings at each subsequent reporting date on items for which fair value option
has been elected. SFAS 159 establishes presentation and disclosure requirements
designed to facilitate comparisons between entities that choose different
measurement attributes for similar types of assets and liabilities. SFAS 159
requires additional information that will help investors and other financial
statement users to understand the effect of an entity’s choice to use fair value
on its earnings.  SFAS 159 is effective for fiscal years beginning
after November 15, 2007, with earlier adoption permitted. The Company adopted
SFAS 159 on April 1, 2008 and chose not to elect the fair value option
for its financial assets and liabilities that had not previously been carried at
fair value.
 
 In
December 2007, FASB issued SFAS No. 141 (revised 2007), “Business Combinations”,
(“SFAS 141R”) which replaces SFAS No 141.  SFAS 141R retains the
purchase method of accounting for acquisitions, but requires a number of
changes, including changes in the way assets and liabilities are recognized in
the purchase accounting. It also changes the recognition of assets acquired and
liabilities assumed arising from contingencies, requires the capitalization of
in-process research and development at fair value, and requires the expensing of
acquisition-related costs as incurred. SFAS No. 141R is effective for the
Company beginning April 1, 2009 and will apply prospectively to business
combinations completed on or after that date.   The Company is
currently evaluating the potential impact, if any, of the adoption of SFAS 162
on its consolidated financial statements.
  In
December 2007, FASB issued SFAS No. 160, “Noncontrolling Interests in
Consolidated Financial Statement, - an amendment of ARB No. 51”, (“SFAS
160”) which changes the accounting and reporting for minority
interests.  Minority interests will be recharacterized as
noncontrolling interests and will be reported as a component of equity separate
from the parent’s equity, and purchases or sales of equity interests that do not
result in a change in control will be accounted for as equity transactions. In
addition, net income attributable to the noncontrolling interest will be
included in consolidated net income on the face of the income statement and,
upon a loss of control, the interest sold, as well as any interest retained,
will be recorded at fair value with any gain or loss recognized in earnings.
SFAS No. 160 is effective for the Company beginning April 1, 2009 and will apply
prospectively, except for the presentation and disclosure requirements, which
will apply retrospectively.  The Company does not anticipate a
material effect to the consolidated financial statements.
 
 In March
2008, FASB issued SFAS No. 161, “Disclosures about Derivative
Instruments and Hedging Activities—an amendment of FASB Statement No.
133” (“SFAS 161”), which requires enhanced disclosures about an entity’s
derivative and hedging activities and thereby improves the transparency of
financial reporting. The statement requires disclosure about (a) why an entity
uses derivative instruments, (b) how derivative instruments and related hedged
items are accounted for under SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities" and its related interpretations, and
(c) how derivative instruments and related hedged items affect an entity's
financial position, financial performance, and cash flows.  SFAS 161
is effective for fiscal years beginning after November 15, 2008.  The
Company does not anticipate a material effect to the consolidated financial
statements.
 
 In May
2008, FASB issued SFAS No. 162 "The Hierarchy of Generally Accepted
Accounting Principles" ("SFAS 162"). SFAS 162 identifies the sources of
generally accepted accounting principles in the United States. SFAS 162 is
effective sixty days following the SEC's approval of PCAOB amendments to AU
Section 411, "The Meaning of
'Present fairly in conformity with generally accepted accounting
principles'". The Company is currently evaluating the potential impact,
if any, of the adoption of SFAS 162 on its consolidated financial
statements.
 
 In May
2008, FASB issued SFAS No. 163, “Accounting for Financial Guarantee
Insurance Contracts” (“SFAS 163”). The new standard clarifies how SFAS
60, “Accounting and Reporting
by Insurance Enterprises”, applies to financial guarantee insurance
contracts issued by insurance enterprises, including the recognition and
measurement of premium revenue and claim liabilities. It also requires expanded
disclosures about financial guarantee insurance contracts. SFAS 163 is effective
for fiscal years beginning after December 15, 2008.  The Company is
currently evaluating the impacts and disclosures of this standard, but does not
expect SFAS 163 to have a material effect on the Company’s consolidated
financial statements.
 
 In June
2007, FASB’s Emerging Issues Task Force (“EITF”) reached a consensus on EITF
Issue No. 07-3, “Accounting
for Nonrefundable Advance Payments for Goods or Services to Be Used in Future
Research and Development Activities” (“EITF Issue No. 07-3”) that would
require nonrefundable advance payments made by the Company for future research
and development activities to be capitalized and recognized as an expense as the
goods or services are received by the Company. EITF Issue No. 07-3 is effective
for fiscal years beginning after December 15, 2008.  The Company is
currently evaluating the impacts and disclosures of this standard, but does not
expect EITF Issue No. 07-3 to have a material impact on the Company’s
consolidated financial statements.
 
 In
December 2007, FASB ratified the EITF consensus on EITF Issue No. 07-1, “Accounting for Collaborative
Arrangements”  (“EITF Issue 07-01”) that discusses how parties
to a collaborative arrangement (which does not establish a legal entity within
such arrangement) should account for various activities. The consensus indicates
that costs incurred and revenues generated from transactions with third parties
(i.e., parties outside of the collaborative arrangement) should be reported by
the collaborators on the respective line items in their income statements
pursuant to EITF Issue No. 99-19, “Reporting Revenue Gross as a
Principal Versus Net as an Agent.”  Additionally, the consensus
provides that income statement characterization of payments between the
participants in a collaborative arrangement should be based upon existing
authoritative pronouncements, analogy to such pronouncements if not within their
scope, or a reasonable, rational, and consistently applied accounting policy
election. EITF Issue No. 07-1 is effective for fiscal years beginning after
December 15, 2008 and is to be applied retrospectively to all periods presented
for collaborative arrangements existing as of the date of adoption. The Company
is currently evaluating the impacts and disclosures of this standard, but does
not expect EITF Issue No. 07-1 to have a material impact on the Company’s
consolidated financial statements in the current fiscal year.
 
 In
April 2008, the FASB issued FASB Staff Position Statement of Financial
Accounting Standards 142-3, “Determination of the Useful Life of Intangible
Assets” (“FSP SFAS 142-3”). FSP SFAS 142-3 provides guidance with respect to
estimating the useful lives of recognized intangible assets acquired on or after
the effective date and requires additional disclosure related to the renewal or
extension of the terms of recognized intangible assets. FSP SFAS 142-3 is
effective for fiscal years and interim periods beginning after December 15,
2008. The Company is currently evaluating the impacts and disclosures
of  this standard, but does not expect FSP SFAS 142-3 to have a
material impact on the Company’s consolidated financial statements.
 
 - 10
-
 
 Item
2.   Management’s Discussion and Analysis
of Financial Condition and Results of Operations– (Amounts in
thousands)
 
 Special
Note Regarding Forward Looking Statements
 
 Information
contained or incorporated by reference in this report contains forward-looking
statements.  These forward-looking statements are based on current
expectations and beliefs and involve numerous risks and uncertainties that could
cause actual results to differ materially from expectations.  These
forward-looking statements should not be relied upon as predictions of future
events as we cannot assure you that the events or circumstances reflected in
these statements will be achieved or will occur.  You can identify
forward-looking statements by the use of forward-looking terminology such as
“may,” “will,” “expect,” “anticipate,” “estimate” or “continue” or the negative
thereof or other variations thereon or comparable terminology which constitutes
projected financial information.  These forward-looking statements are
subject to risks, uncertainties and assumptions about Tegal
Corporation  including, but not limited to, industry conditions,
economic conditions, acceptance of new technologies and market acceptance of
Tegal Corporation’s  products and service.  For a discussion
of the factors that could cause actual results to differ materially from the
forward-looking statements, see the “Part Item 1A—Risk Factors” and the
“Liquidity and Capital Resources” section set forth in this
section  and such other risks and uncertainties as set forth below in
this report or detailed in our other SEC reports and filings. We assume no
obligation to update forward-looking statements.
 
 Tegal
Corporation, a Delaware corporation (“Tegal” or the “Company”), 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 portable computers, cell phones, PDAs and RFID
applications; megapixel imaging chips used in digital and cell phone cameras;
power amplifiers for portable handsets and wireless networking gear; and
micro-electrical mechanical systems (“MEMS”) devices including accelerometers
for automotive airbags, microfluidic control devices for ink-jet printers; and
laboratory-on-a-chip medical test kits.  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.
 
 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 the industry is maturing
as the cost of building new wafer fabs has increased
dramatically.  Similarly, the rate of semiconductor sales growth has
slowed as the industry feels the effects of the current economic environment and
average selling prices of chips continue to decline.  The industry
faces a period of uncertainty with a steep decline in consumer confidence and
caution in the enterprise segment. 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.  Currently, the industry is experiencing a down-turn,
heightened by tighter credit markets and the negative economic
environment.  These circumstances have caused customers to delay or
reconsider expenditures on capital equipment.
 
 Historically,
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 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 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 (i.e., devices smaller than about 100
nanometers).   In the recent past, we have focused on competing
with more established competitors by being “designed-in” to the advanced device
fabrication plans of our customers.  We have done so primarily by
engaging in research and development activities on behalf of our customers that
our more established competitors were unwilling or unable to
perform.  Many of these advanced devices promise substantial returns
as consumer demand for certain functions grows and new markets are
created.  However, the timing of the emergence of such demand is
highly uncertain.  In addition, the successful integration by our
customers of all the various technical processes required to manufacture a
device at an acceptable cost is also highly uncertain.  We cannot
accurately predict the timing of the stable emergence of these
markets.  Due to the cyclical nature of our industry, we expect that
net orders will continue to fluctuate.  In the meantime, our costs for
maintaining our research and development efforts and our service and
manufacturing infrastructure have remained constant or in some cases
increased.
 
 At the
present time, we are continuing our transition of the Company’s dependence on
these highly unpredictable markets to more established equipment markets, where
our success is dependent more on our ability to apply successfully our
engineering capabilities to solving existing manufacturing
problems.  We aim to carefully manage this transition by limiting our
research and development efforts to the most promising near-term sales
opportunities, while at the same time redirecting all our available resources
toward new products aimed at established equipment markets.  Because
of our relatively small size, our ability to meet the needs of individual
customers is far more important to our success than either macroeconomic factors
or industry-wide factors such as cyclicality, although both of these factors
affect our performance as well.  As a result, our methods of
evaluating our progress will continue to be highly
customer-focused.
 
 In order
to achieve our business strategy, we are focused on the following key
elements:
 
 Maintaining our Technology
Leadership Position in New Materials Etch – We are 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 a leading
supplier of etch solutions to makers of various advanced “non-volatile”
memories, as well as to device makers incorporating compound metals and certain
high-K dielectric materials into their devices.  Our new materials
expertise also includes the etching of so-called “compound-semi” materials, such
as gallium arsenide, gallium nitride and indium phosphide, widely used in
telecom device production, as well as expanding use in growth markets such as
mobile terminals, digital home appliances as well as enterprise applications,
such as wireless local area networks. The advantages of compound semiconductor
devices over traditional silicon devices include higher operating speeds, lower
power consumption, reduced noise and distortion, higher operable temperature,
light emitting and detecting properties, higher light emission efficiency and
longer product life.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”). We intend to maintain our leadership position in new materials etch
through our own internal development efforts and through various joint
development programs and production efforts with leading device
manufacturers.
 
 Strengthening our Position in
Deposition Process Equipment – Since 2002, we have completed two
acquisitions of deposition products incorporating the same unique “sputter-up”
technology.  In December 2006, as a result of the settlement of our
litigation with Advanced Modular Systems (“AMS”) and others, we also acquired
the assets and know-how of a similar deposition system.  These
deposition tools enable the production of highly-oriented, thin piezoelectric
films composed of aluminum nitride.  Such films are incorporated into
high frequency filters called Bulk Acoustic Wave (“BAW”) and Film Bulk Acoustic
Resonators (“FBARs”) used in cellular telephone and wireless
communications.   In addition our PVD products are well-suited
for applications within so-called “back-end” semiconductor manufacturing
processes, including backside metallization of ultra-thin wafers and underbump
metal processes.  These processes are important to power devices, as
well as certain advanced, wafer-level packaging schemes, which are increasingly
being used for high-pin-count logic and memory devices.
 
 Introducing a New Product into
Established Equipment Market - The continued development of our Nano
Layer Deposition (“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.  In addition, there appear to be significant
applications of our NLD technology in barrier films and high-K materials
deposition.  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.
 
 Maintaining our Service Leadership
Position --   Tegal has been consistently recognized by
our customers for providing a high level of customer support, a fact that has
been noted by our top ranking for eight of the last ten 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 and Estimates
 
 Our
discussion and analysis of our financial condition and results of operations are
based upon our 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 ongoing basis, we evaluate our estimates, including those
related to revenue recognition, bad debts, sales returns allowance, inventory,
intangible and long lived assets, warranty obligations, restructure expenses,
deferred taxes and freight charged to customers. 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 are the most significant to
the presentation of our consolidated financial statements:
 
 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 consensus on Emerging Issues
Task Force Issue No. 00-21, “Accouanting for Revenue Arrangements
with Multiple Deliverables (“EITF Issue 00-21”).  We first
refer to EITF Issue 00-21 in order to determine if there is more than one unit
of accounting and then we refer to Staff Accounting Bulletin (“SAB”) 104 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 collectability 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 deferred revenue.
 
 Accounting
for Stock-Based Compensation
 
 We have
adopted several stock plans that provide for issuance of equity instruments to
our employees and non-employee directors. Our plans include incentive and
non-statutory stock options and restricted stock awards and
RSUs.  These equity awards generally vest ratably over a four-year
period on the anniversary date of the grant, and stock options expire ten years
after the grant date.  Certain restricted stock awards may vest on the
achievement of specific performance targets.  We also have an ESPP
that allows qualified employees to purchase Tegal shares at 85% of the fair
market value on specified dates.
 
 Effective
April 1, 2006, we adopted the fair value recognition provisions of Statement of
Financial Accounting Standards No. 123 (revised 2004), “Share Based Payment” (“SFAS
123R”) using the modified prospective transition method.
 
 - 11
-
 Accounts
Receivable – Allowance for Sales Returns and Doubtful Accounts
 
 The
Company maintains an allowance for doubtful accounts receivable for estimated
losses resulting from the inability of the Company’s customers to make required
payments. If the financial condition of the Company’s customers were to
deteriorate, or even a single customer was otherwise unable to make payments,
additional allowances may be required.  As of December 31, 2008 one
customer accounted for approximately 36% of the accounts receivable
balance.  As of December 31, 2007 two customers accounted for
approximately 81% of the accounts receivable balance.
 
 The
Company’s return policy is for spare parts and components only.  A
right of return does not exist for systems. Customers are allowed to return
spare parts if they are defective upon receipt. The potential returns are offset
against gross revenue on a monthly 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 conditions. 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. 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, 2008 and
March 31, 2008 was $3,541and $3,760,
respectively.  During the nine months ended December 31,
2008, and December 31, 2007, the reserve was reduced by $154and $148, respectively when
the Company sold or scrapped previously
reserved inventory.
 
 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, it 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.
 
 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 unsellable 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. No impairment charge has been recorded for the
years ended 2008 and 2007.
 
 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.  The warranty reserve is based on historical cost data
related to warranty.  Should actual product failure rates, material
usage rates and labor efficiencies differ from our estimates, revisions to the
estimated warranty liability may be required.  Actual warranty expense
is typically low in the period immediately following installation.
 
 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, 2008 and 2007:
 
 
 
 Three
      Months Ended
              
              
              Nine
      Months EndedDecember 31,
              
              
              December 31,2008
              
              
              2007
              
              
              2008
              
              
              2007Revenue
              
              
              100.0
              %
              
              
              100.0
              %
              
              
              100.0
              %
              
              
              100.0
              %Cost
      of revenue
              
              
              69.6
              %
              
              
              56.4
              %
              
              
              58.0
              %
              
              
              59.8
              %Gross
      profit
              
              
              30.4
              %
              
              
              43.6
              %
              
              
              42.0
              %
              
              
              40.2
              %Operating
      expenses:Research
      and development
              
              
              25.5
              %
              
              
              8.0
              %
              
              
              30.5
              %
              
              
              10.4
              %Sales
      and marketing
              
              
              16.9
              %
              
              
              9.1
              %
              
              
              21.7
              %
              
              
              12.6
              %General
      and administrative
              
              
              19.7
              %
              
              
              9.2
              %
              
              
              32.8
              %
              
              
              14.1
              %Total
      operating expenses
              
              
              62.1
              %
              
              
              26.3
              %
              
              
              85.0
              %
              
              
              37.1
              %Operating
      income (loss)
              
              
              (31.7
              %)
              
              
              17.3
              %
              
              
              (43.0
              %)
              
              
              3.1
              %Other
      income (expense), net
              
              
              1.1
              %
              
              
              10.7
              %
              
              
              1.6
              %
              
              
              7.9
              %Income
      (loss) before income tax expense (benefit)
              
              
              (30.6
              %)
              
              
              28.0
              %
              
              
              (41.4
              %)
              
              
              11.0
              %Net
      income (loss)
              
              
              (30.6
              %)
              
              
              28.0
              %
              
              
              (41.4
              %)
              
              
              11.0
              %
 
 
 
 - 12
-
 The
following table sets forth certain financial items for the three and nine months
ended December 31, 2008 and 2007:
 
 
 Three
      Months Ended
              
              
              Nine
      Months EndedDecember 31,
              
              
              December 31,2008
              
              
              2007
              
              
              2008
              
              
              2007Revenue
              
              $
              4,476
              
              
              $
              10,145
              
              
              $
              11,215
              
              
              $
              25,543Cost
      of revenue
              
              
              3,113
              
              
              
              5,725
              
              
              
              6,504
              
              
              
              15,262Gross
      profit
              
              
              1,363
              
              
              
              4,420
              
              
              
              4,711
              
              
              
              10,281Operating
      expenses:Research
      and development expenses
              
              
              1,142
              
              
              
              810
              
              
              
              3,423
              
              
              
              2,645Sales
      and marketing expenses
              
              
              756
              
              
              
              923
              
              
              
              2,438
              
              
              
              3,208General
      and administrative expenses
              
              
              880
              
              
              
              938
              
              
              
              3,681
              
              
              
              3,589Total
      operating expenses
              
              
              2,778
              
              
              
              2,671
              
              
              
              9,542
              
              
              
              9,442Operating
      (loss) income
              
              
              (1,415
              )
              
              
              1,749
              
              
              
              (4,831
              )
              
              
              839Other
      income (expense), net
              
              
              50
              
              
              
              1,085
              
              
              
              176
              
              
              
              2,049(Loss)
      income before income tax expense (benefit)
              
              
              (1,365
              )
              
              
              2,834
              
              
              
              (4,655
              )
              
              
              2,888Tax
      Expense
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -Net
      (loss) income
              
              $
              (1,365
              )
              
              $
              2,834
              
              
              $
              (4,655
              )
              
              $
              2,888Net
      (loss) income per share:Basic
              
              $
              (0.19
              )
              
              $
              0.40
              
              
              $
              (0.61
              )
              
              $
              0.41Diluted
              
              $
              (0.19
              )
              
              $
              0.39
              
              
              $
              (0.61
              )
              
              $
              0.40Weighted
      average shares used in per share computation:Basic
              
              
              7,368
              
              
              
              7,148
              
              
              
              7,569
              
              
              
              7,120Diluted
              
              
              7,368
              
              
              
              7,281
              
              
              
              7,569
              
              
              
              7,241
 
 
 Revenue
 
 Revenue
of $4,476 for the three months ended December 31, 2008 decreased by $5,669 from
revenue of $10,145 for the three months ended December 31,
2007.  Revenue for the three months ended December 31, 2008 was mainly
from the sale of one new DRIE (Deep Reactive Ion Etch) system, one new 900
series system, and one used DRIE system.  Revenue for the three months
ended December 31, 2007 resulted principally from the sale of two new advanced
series systems, two new 900 series systems and one new Endeavor system
..
 
 Revenue
of $11,215 for the nine months ended December 31, 2008 decreased by $14,328 from
revenue of $25,543 for the nine months ended December 31,
2007.  Revenue for the nine months ended December 31, 2008 resulted
from the sale of two new systems (one DRIE and one 900 series) and three used
systems (one Advanced Etch, one Endeavor, one DRIE).  Revenue for the
nine months ended December 31, 2007 resulted principally from the sale of six
new advanced series systems and three new 900 series systems, as well as one new
Endeavor system and one used Endeavor system.
 
 International
sales as a percentage of total revenue for the three and nine months ended
December 31, 2008 was approximately 38% and 32%
respectively.  International sales as a percentage of revenue for the
three and nine
months ended December 31, 2007 was approximately 67% and 83%,
respectively.  The decrease in international sales as a percentage of
revenue can be attributed to fewer systems sold.  The Company
typically sells more systems in international markets.  Despite this
decrease we believe that international sales will continue to represent a
significant portion of our revenue.
 
 Gross
profit
 
 Gross
profit of $1,363 for the three months ended December 31, 2008 decreased by
$3,057 from gross profit of $4,420 for the three months ended December 31, 2007,
representing a 69% decrease.  The decrease in gross profit was
attributable to fewer systems sold.  Our gross profit margin for the
three months ended December 31, 2008 was 30% compared to 44% for the same period
last year.   The principle reason for the decreased margin was
increased costs associated with the introduction and integration of the new DRIE
systems acquired from AMMS into our manufacturing structure.
 
 Gross
profit of $4,711 for the nine months ended December 31, 2008 decreased by
$5,570from the
gross profit of $10,281 for the nine months ended December 31, 2007,
representing a 54% decrease.The decrease in gross profit was
attributable to fewer systems sold.  While our gross profit declined,
our gross profit margin for the nine months ended December 31, 2008 was 42%
compared to 40% for the same period last year.  The principle reason
for the increased margin was the specific mix of sales from different
products.
 
 Future
gross profit and gross margin are highly dependent on the level and product mix
included in net revenues. This includes the mix of sales between lower and
higher margin products.  Accordingly, we are not able to predict
future gross profit levels or gross margins with certainty.
 
 Research and
Development
 
 Research and
development (R&D) 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. The spending
increase of $332 for the three months ended December 31, 2008 compared to the
three months ended December 31, 2007 resulted primarily from an increase of
R&D project material costs. The spending increase of $778 for the nine
months ended December 31, 2008 compared to the nine months ended December 31,
2007 resulted primarily from increase of legal cost for patent maintenance and
reimbursement for non-recurring engineering work  during the first
quarter of fiscal 2008.  There have not been any engineering
reimbursements in fiscal 2009.
 
 
 Sales and
Marketing
 
 Sales and marketing
expenses consist primarily of salaries, commissions, trade show promotion and
travel and living expenses associated with those functions. The decrease of $167
and $770 in sales and marketing spending for the three and nine months ended
December 31, 2008, respectively, as compared to the same periods in 2007 was
primarily due to the
decrease of sales commission for systems over the same period last year combined
with decreased spending on travel expenses and payroll
costs.
 
 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 decrease of $58 in spending for the three months
ended December 31, 2008 as compared to the three months ended December 31, 2007
was primarily due to decreases in consulting/outside service fees offset by an
increase in legal expenses.  The increase of $92 in spending for the
nine months ended December 31, 2008 as compared to the nine months ended
December 31, 2007 was primarily due to increases in legal fees related to the
purchase of the AMMS assets.
 
 Other
income, net
 
 Other income, net
consists of interest income, other income, gains and losses on foreign exchange
and gain and losses on the disposal of fixed assets.  For the three
months ended December 31, 2008 over the three months ended December 31, 2007,
other income (expense), net decreased by $1,035 primarily due to decreased
interest income and the closing of the Japanese subsidiary.  Other
income (expense), net decreased by $1,873 in the nine months ended December 31,
2008 compared to the nine months ended December 31, 2007. The decrease is
primarily related to the change in other income, resulting from recording $682
from the recognition of foreign exchange differences between current and
historical valuations of investment as a result of the dissolution of our Japan
subsidiary and a $278 gain related to the AMS settlement in the prior year
period.  In the same nine months ended December 31, 2008 , interest
income decreased by of $504 compared to the same period in the prior year due to
lower cash balances held at lower interest rates.  The change in the
value of the Euro compared to the U.S. dollar also contributed to the
decrease.
 
 - 13
-
 Contractual
Obligation
 
 The
following summarizes our contractual obligations at December 31, 2008, and the
effect such obligations are expected to have on our liquidity and cash flows in
future periods (in thousands).
 
 
 Contractual
      obligations:Total
              
              
              Less than 1 Year
              
              
              1-3 Years
              
              
              3-5 Years
              
              
              After 5 YearsNon-cancelable
      capital lease obligations
              
              $
              1
              
              
              $
              1
              
              
              $
              -
              
              
              $
              -
              
              
              $
              -Non-cancelable
      operating lease obligations
              
              
              1,012
              
              
              
              613
              
              
              
              362
              
              
              
              37
              
              
              
              -Total
      contractual cash obligations
              
              $
              1,013
              
              
              $
              614
              
              
              $
              362
              
              
              $
              37
              
              
              $
              -
 
 
 
 Certain
of our sales contracts include provisions under which customers would be
indemnified by us in the event of, among other things, a third party claim
against the customer for intellectual property rights infringement related to
our products. There are no limitations on the maximum potential future payments
under these guarantees. We have accrued no amounts in relation to these
provisions as no such claims have been made and we believe we have valid,
enforceable rights to the intellectual property embedded in its
products.
 
 Liquidity
and Capital Resources
 
 For the
nine months ended December 31, 2008, we financed our operations from existing
cash on hand..  In fiscal 2008 we financed our operations from
existing cash on hand and from the release of the net $14,705 from litigation
suspense related to the settlement of the AMS litigation.  We received
$19,500 representing the gross cash proceeds from the settlement of the
AMS  litigation.
 
 The
consolidated financial statements contemplate the realization of assets and the
satisfaction of liabilities in the normal course of business. We had net (loss)
income of ($4,655) and $2,888 for the nine months ended December 31, 2008 and
2007, respectively. We had net (loss) income of ($1,365) and $2,834 for the
three months ended December 31, 2008 and 2007, respectively. We used cash from
operations of ($5,321) and ($4,820) for the nine months ended December 31, 2008
and 2007, respectively.  We believe that the outstanding cash
balances, combined with projected sales and continued cost containment will be
adequate to fund operations through the next twelve months.  However,
projected sales may not materialize and unforeseen costs may be incurred.If the projected
sales do not materialize, we will need to reduce expenses further and raise
additional 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
common stock, and debt covenants could impose restrictions on our operations.
The sale of equity or debt could result in additional dilution to current
stockholders, and such financing may not be available to us on acceptable terms,
if at all.
 
 Item
3.  Quantitative and
Qualitative Disclosures About Market Risk
 
 Our cash
equivalents are principally comprised of money market accounts.  As of
December 31,
2008, we had cash and cash equivalents of $12,721.  Our
exposure to foreign currency fluctuations is primarily related to inventories
held in Europe, which are denominated in the Euro. Changes in the exchange rate
between the Euro and the U.S. dollar could adversely affect our operating
results. Exposure to foreign currency exchange rate risk may increase over time
as our business evolves and our products continue to be sold into international
markets. We concluded a forward foreign exchange contract to manage possible
short-term exposures to changing foreign exchange rates on December 30,
2008.   For the quarter ended December 31, 2008, fluctuations of
the U.S. dollar in relation to the Euro were immaterial to our financial
statements.  These fluctuations primarily affect cost of goods sold as
it relates to varying levels of inventory held in Europe and denominated in the
Euro.
 
 Interest
Rate Risk
 
 We are
only marginally exposed to interest rate risk through interest earned on money
market accounts. Interest rates that may affect these items in the future will
depend on market conditions and may differ from the rates we have experienced in
the past. We do not hold or issue derivatives, commodity instruments or other
financial instruments for trading purposes.
 
 
 Item
4.   Controls
and Procedures
 
 Evaluation of disclosure controls
and procedures.
  As of the period covered
by this quarterly report, management performed, with the participation of our
Chief Executive Officer and Chief Financial Officer, an evaluation of the
effectiveness of our disclosure controls and procedures as defined in Rule
13a-15(e) and 15d-15(e) of the Exchange Act.  Our disclosure controls
and procedures are designed to ensure that information required to be disclosed
in the report we file or submit under the Exchange Act is recorded, processed,
summarized, and reported within the time periods specified in the rules and
forms of the Securities and Exchange Commission, and that such information is
accumulated and communicated to our management, including our Chief Executive
Officer and Chief Financial Officer, as appropriate to allow timely decisions
regarding required disclosures.   Based on the evaluation, our
Chief Executive Officer and Chief Financial Officer concluded that as of
December 31, 2008, such disclosure controls and procedures were
effective.
 
 Changes
in Internal Control Over Financial Reporting
 
 There were no changes in
our internal control over financial reporting during the quarter ended December
31, 2008 that materially affected, or are reasonably likely to materially
affect, our internal control over financial reporting.
  Disclosure
Controls and Internal Controls for Financial Reporting
  Disclosure controls are
procedures that are designed with the objective of ensuring that information
required to be disclosed in our reports filed under the Exchange Act such as
this Quarterly Report on Form 10-Q, is recorded, processed, summarized and
reported within the time periods specified in the SEC’s rules and forms.
Disclosure controls are also designed with the objective of ensuring that such
information is accumulated and communicated to our management, including the
Chief Executive Officer and Chief Financial Officer, as appropriate to allow
timely decisions regarding required disclosure. Internal controls for financial
reporting are procedures which are designed with the objective of providing
reasonable assurance that our transactions are properly authorized, our assets
are safeguarded against unauthorized or improper use and our transactions are
properly recorded and reported, all to permit the preparation of our financial
statements in conformity with U.S. GAAP.
  - 14
-
  
 PART
II — OTHER INFORMATION
 
 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.
 
 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 had
net income (loss) of $18,104, ($13,213) and ($8,880) for the years ended March
31, 2008, 2007 and 2006, respectively.  We generated (used) cash flows
from operations of ($5,057), $12,772, and ($11,576) in these respective
years.  For the three and nine months ended December 31, 2008, we had
a net loss of ($1,365) and ($4,655), respectively. We believe that our
outstanding balances, combined with continued cost containment will be adequate
to fund operations through fiscal year 2009. Our business is dependent upon the
sales of our capital equipment, and projected sales may not materialize and
unforeseen costs may be incurred.  If the projected sales do not
materialize, we will need to reduce expenses further and/or raise additional
capital which may include capital raises 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 any needed funds
would materially adversely affect us.
 
 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 ICs. The
semiconductor industry is highly cyclical and historically has experienced
periodic downturns, including the downturn we are currently experiencing, 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. In response to the current prolonged industry slowdown, we
have initiated a substantial cost containment program and 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
the current and 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.
 
 We
are exposed to risks associated with the ongoing financial crisis and weakening
global economy.
 
 The
recent severe tightening of the credit markets, turmoil in the financial markets
and weakening global economy are contributing to slowdowns in the industries in
which we operate, which slowdowns are expected to worsen if these economic
conditions are prolonged or deteriorate further.  The markets for ICs
depend largely on consumer spending.  Economic uncertainty exacerbates
negative trends in consumer spending and may cause our customers to push out,
cancel or refrain from placing equipment or service orders, which may reduce our
revenue.  Difficulties in obtaining capital and deteriorating market
conditions may also lead to the inability of some customers to obtain affordable
financing, resulting in lower Tegal sales.  These conditions may also
similarly affect key suppliers, which could affect their ability to deliver
parts and result in delays for our products.  Further, these
conditions and the uncertainty about future economic conditions make it
challenging for us to forecast operating results, make business decisions and
identify the risks that may affect our business, financial condition and results
of operations.  If we are not able to timely and appropriately adapt
to changes resulting from the difficult economic environment, our business,
financial condition or results of operations may be materially and 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 changes from year to year, but net system
sales to our top five customers in fiscal 2008 and 2007 accounted for 87.2% and
77.8% respectively, of our total net system sales.  ST
Microelectronics accounted for 57.8% of our total revenue in fiscal
2008.  ST Microelectronics and International Rectifier accounted for
43.1% and 13.4%, respectively, of our total revenue in fiscal
2007.  During the nine months ended December 31, 2008,  suppliers
and or manufacturers in the integrated circuit, MEMS sensor and high brightness
LED markets,  SVTC Tech, LLC and Diodes Fab Tech, Inc. accounted for 18%,
17% and 12% respectively, of our total revenue.  During the nine
months ended December 31, 2007, ST Microelectronics accounted for 71% of total
revenues.  Other than these customers, no single customer represented
more than 10% of our total revenue in fiscal 2008 or the three or nine months
ended December 31, 2008.   Although the composition of the group
comprising our largest customers may vary from year to year, and quarter to
quarter, 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, would have a material adverse effect on 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 Aviza Technology, Inc., OC
Oerlikon Corporation AG, Ulvac Japan, Ltd., Canon Anelva Technix Corporation,
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.
 
 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 material adverse 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. Revenue from the sale of our advanced etch and
deposition systems accounted for 61% and 57% of total revenue in fiscal 2008 and
2007, 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 full customer adoption,
we will be materially adversely affected.
 
 We
face risks associated with acquisitions, divestitures and other
transactions.
 
 We face risks associated
with acquisitions, divestitures and other transactions.   We have
made, and may in the future make, acquisitions of or significant investments in
businesses with complementary products, services and/or technologies.
Acquisitions, including the recently completed acquisition of DRIE (Deep
Reactive Ion Etch) and PECVD (Plasma-Enhanced Chemical Vapor Deposition)
products and related intellectual property from AMMS, involve numerous risks,
including, but not limited to:
  ·
              Difficulties
      in integrating the operations, technologies, products and personnel of
      acquired companies;
 
 ·
              Lack
      of synergies or the inability to realize expected synergies and cost
      savings;
 
 ·
              Revenue
      and expense levels of acquired entities differing from those anticipated
      at the time of the acquisitions;
 
 ·
              Difficulties
      in managing geographically dispersed
operations;
 
 ·
              The
      potential loss of key employees, customers and strategic partners of
      acquired companies;
 
 ·
              Claims
      by terminated employees, shareholders of acquired companies or other third
      parties related to the transaction;
 
 ·
              The
      issuance of dilutive securities, assumption or incurrence of additional
      debt obligations or expenses, or use of substantial portions of our
      cash;
 
 ·
              Diversion
      of management’s attention from normal daily operations of the business;
      and
 
 ·
              The
      impairment of acquired intangible assets as a result of technological
      advancements, or worse-than-expected performance of acquired
      companies.
 
 When we make a decision
to sell assets or a business, we may encounter difficulty completing the
transaction as a result of a range of possible factors such as new or changed
demands from the buyer. These circumstances may cause us to incur additional
time or expense or to accept less favorable terms, which may adversely affect
the overall benefits of the transaction.  Acquisitions, divestitures,
and other transactions are inherently risky, and we cannot provide any assurance
that our previous or future transactions will be successful. The inability to
effectively manage the risks associated with these transactions could materially
and adversely affect our business, financial condition or results of
operations.
 
 - 15
-
 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 system typically range between $1.8 million and $3.0 million. 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.
 
 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;
 
 ·
              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 enough fashion.
 
 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 and may have difficulty in hiring
new employees to replace them. 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.  The loss of
any significant employee or a large number of employees over a short period of
time could have a material adverse effect on us.
 
 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
thereunder 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.
 
 Litigation
to protect our intellectual property could result in substantial cost and
diversion of effort by us, which by itself could have a material adverse 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, 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 72%, and 67% of total revenue for fiscal 2008 and 2007,
respectively. For the three and nine months ended December 31, 2008,
international sales accounted for 38% and 32% of total revenue,
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 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 standards relating to corporate governance and public
disclosure, including the Sarbanes-Oxley Act of 2002, new Securities and
Exchange Commission (“SEC”) regulations and Nasdaq 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 materially adversely affected.
 
 - 16
-
 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.
 
 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, 2008, there were 8,412,676 shares of our common stock issued and
outstanding, 3,323,908 shares of our common stock reserved for issuance of
shares issuable upon exercise of outstanding warrants, and shares underlying
equity awards created or available for grant under our equity incentive plans,
and shares available under our stock purchase plan.
 
 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
outstanding 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.
 
 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 subassemblies included in our systems from a limited
group of suppliers, and occasionally from a single source supplier. Such
components and subassemblies include robots, electrostatic chucks, power
supplies and flow control devices.  Disruption or termination of
certain of these sources 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, alteration of our manufacturing
processes or cessation of our operations.
 
 
 Item
6.   Exhibits
 
 Exhibit
 Number
              Description
 
 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.
  - 17
-
  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 OfficerDate:
      February 13, 2009
  - 18
-
  
 
 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 am 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)
Designed such internal control over financial reporting, or caused such internal
control over financial reporting to be designed under our supervision, to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles;
 
 (c)
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; and
 
 (d)
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 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 13,
2009
 /s/   Thomas
R.
Mika
 Chief
Executive Officer and President
  - 19
-
  
 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 am 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)
Designed such internal control over financial reporting, or caused such internal
control over financial reporting to be designed under our supervision, to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles;
 
 (c)
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; and
 
 (d)
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 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 13,
2009
 /s/ Christine
Hergenrother
 Chief
Financial Officer
 
 
 
 
 
 
 
 - 20
-
 
 
 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, 2008 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
13, 2009
 
 - 21
-
 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,, 2008 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
13, 2009