UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549


FORM
10-Q




(Mark One)þ
                  QUARTERLY
      REPORT PURSUANT TO SECTION 13 OR 15(d)OF
      THE SECURITIES EXCHANGE ACT OF 1934





For
the quarterly period ended June 30, 2010





or





o
              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 þ    No
o





Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (Sec.232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files).   Yes
þNo
o





Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting
company.  See definitions of “large accelerated filer”, “accelerated
filer” and “smaller reporting company” in Rule 12b-2 of the Exchange
Act.





Large
      Accelerated Filer   o
              Accelerated
      Filer  oNon-Accelerated
      Filer o
      (Do not check if a smaller reporting company)
              Smaller reporting companyþ





Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes o  No þ





As of
August 12, 2010 there were 8,439,095 of
the Registrant’s common stock outstanding.










TEGAL
CORPORATION AND SUBSIDIARIES





INDEX





PagePART
      I. FINANCIAL INFORMATIONItem
      1.
                Condensed
      Consolidated Financial Statements (Unaudited)Condensed
      Consolidated Balance Sheets as of  June 30, 2010 and March 31,
      2010
                3Condensed
      Consolidated Statements of Operations for the three months ended June 30,
      2010 and June 30, 2009
                4Condensed
      Consolidated Statements of Cash Flows for the three months ended June 30,
      2010 and June 30, 2009
                5Notes
      to Condensed Consolidated Financial Statements
                6Item
      2.
                Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
                15Item
      3.
                Quantitative
      and Qualitative Disclosures About Market Risk
                22Item
      4.
                Controls
      and Procedures
                22PART
      II. OTHER INFORMATIONItem
      1A.
                Risk
      Factors
                23Item
      6.
                Exhibits
                24Signatures
                25


2


PART
I — FINANCIAL INFORMATION





Item
1.  Condensed
Consolidated Financial Statements





TEGAL
CORPORATION AND SUBSIDIARIES


CONDENSED
CONSOLIDATED BALANCE SHEETS


(Unaudited)


(In
thousands, except share data)





June 30,
                
                
                March 31,2010
                
                
                2010ASSETSCurrent
      assets:Cash
      and cash equivalents
                
                $
                6,205
                
                
                $
                7,298Accounts
      receivable, net of allowances for sales returns and doubtful accounts of
      $264 and $324 at June 30, 2010 and March 31, 2010,
      respectively.
                
                
                1,361
                
                
                
                3,116Notes
      receivable
                
                
                1,268
                
                
                
                1,347Inventories,
      net
                
                
                1,309
                
                
                
                1,221Prepaid
      expenses and other current assets
                
                
                601
                
                
                
                1,243Total
      current assets
                
                
                10,744
                
                
                
                14,225Property
      and equipment, net
                
                
                270
                
                
                
                308Intangible
      assets, net
                
                
                1,174
                
                
                
                1,230Other
      assets
                
                
                503
                
                
                
                540Total
      assets
                
                $
                12,691
                
                
                $
                16,303LIABILITIES
      AND STOCKHOLDERS’ EQUITYCurrent
      liabilities:Accounts
      payable
                
                $
                840
                
                
                $
                1,520Accrued
      product warranty
                
                
                275
                
                
                
                374Common
      stock warrant liability
                
                
                162
                
                
                
                363Deferred
      revenue
                
                
                -
                
                
                
                242Accrued
      expenses and other current liabilities
                
                
                1,690
                
                
                
                1,867Total
      current liabilities
                
                
                2,967
                
                
                
                4,366Commitments
      and contingencies (Item 2)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; 8,439,095 and
      8,438,115 shares issued and outstanding at June 30, 2010 and March 31,
      2010, respectively.
                
                
                84
                
                
                
                84Additional
      paid-in capital
                
                
                128,399
                
                
                
                128,290Accumulated
      other comprehensive loss
                
                
                (3
                )
                
                
                (149
                )Accumulated
      deficit
                
                
                (118,756
                )
                
                
                (116,288
                )Total
      stockholders’ equity
                
                
                9,724
                
                
                
                11,937Total
      liabilities and stockholders’ equity
                
                $
                12,691
                
                
                $
                16,303





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 EndedJune 30,2010
                
                
                2009Revenue
                
                $
                319
                
                
                $
                1,083Cost
      of revenue
                
                
                550
                
                
                
                990Gross
      (loss)/profit
                
                
                (231
                )
                
                
                93Operating
      expenses:Research
      and development expenses
                
                
                1,023
                
                
                
                1,241Sales
      and marketing expenses
                
                
                158
                
                
                
                704General
      and administrative expenses
                
                
                1,150
                
                
                
                1,160Total
      operating expenses
                
                
                2,331
                
                
                
                3,105Operating
      loss
                
                
                (2,562
                )
                
                
                (3,012
                )Other
      income, net
                
                
                96
                
                
                
                354Loss
      before income tax benefit
                
                
                (2,466
                )
                
                
                (2,658
                )Income
      tax expense (benefit)
                
                
                2
                
                
                
                (51
                )Net
      loss
                
                $
                (2,468
                )
                
                $
                (2,607
                )Net
      loss per share:Basic
                
                $
                (0.29
                )
                
                $
                (0.31
                )Diluted
                
                $
                (0.29
                )
                
                $
                (0.31
                )Weighted
      average shares used in per share computation:Basic
                
                
                8,438
                
                
                
                8,413Diluted
                
                
                8,438
                
                
                
                8,413





See
accompanying notes to condensed consolidated financial
statements.


4


TEGAL
CORPORATION AND SUBSIDIARIES


CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS


(Unaudited)


(In
thousands)


Three Months EndedJune 30,2010
                    
                    
                    2009Cash
      flows from operating activities:Net
      Loss
                    
                    $
                    (2,468
                    )
                    
                    $
                    (2,607
                    )Adjustments
      to reconcile net loss to net cash used in operating
      activities:Stock
      compensation expense
                    
                    
                    107
                    
                    
                    
                    192Stock
      issued under stock purchase plan
                    
                    
                    1
                    
                    
                    
                    4Fair
      value adjustment of common stock warrants
                    
                    
                    (201
                    )
                    
                    
                    (112
                    )Provision
      for doubtful accounts and sales returns allowances
                    
                    
                    (60
                    )
                    
                    
                    (24
                    )Depreciation
      and amortization
                    
                    
                    175
                    
                    
                    
                    306Loss
      on disposal of property and equipment
                    
                    
                    8
                    
                    
                    
                    —Changes
      in operating assets and liabilities:Accounts
      receivables and Other receivables
                    
                    
                    2,392
                    
                    
                    
                    988Inventories,
      net
                    
                    
                    (87
                    )
                    
                    
                    (510
                    )Prepaid
      expenses and other assets
                    
                    
                    669
                    
                    
                    
                    (7
                    )Accounts
      payable
                    
                    
                    (693
                    )
                    
                    
                    374Accrued
      expenses and other current liabilities
                    
                    
                    (163
                    )
                    
                    
                    (285
                    )Accrued
      product warranty
                    
                    
                    (94
                    )
                    
                    
                    (171
                    )Deferred
      revenue
                    
                    
                    (242
                    )
                    
                    
                    20Net
      cash used in operating activities
                    
                    
                    (656
                    )
                    
                    
                    (1,832
                    )Cash
      flows used in investing activities:Purchases
      of property and equipment
                    
                    
                    (88
                    )
                    
                    
                    (183
                    )Net
      cash used in investing activities:
                    
                    
                    (88
                    )
                    
                    
                    (183
                    )Cash
      flows used in financing activities:Net
      cash used in financing activities
                    
                    
                    —
                    
                    
                    
                    —Effect
      of exchange rates on cash and cash equivalents
                    
                    
                    (349
                    )
                    
                    
                    (23
                    )Net
      decrease in cash and cash equivalents
                    
                    
                    (1,093
                    )
                    
                    
                    (2,038
                    )Cash
      and cash equivalents at beginning of period
                    
                    
                    7,298
                    
                    
                    
                    12,491Cash
      and cash equivalents at end of period
                    
                    $
                    6,205
                    
                    
                    $
                    10,453Supplemental
      disclosure of non-cash activities:Transfer
      of demo lab equipment between inventory (USA) and fixed assets
      (France)
                    
                    $
                    219
                    
                    
                    $
                    —Reclassification
      of common stock warrant liability upon adoption of EITF 07-05 (Topic
      815)
                    
                    $
                    —
                    
                    
                    $
                    848





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 per 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, 2010 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
(“GAAP”).  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, 2010.  The results of operations for the three months ended
June 30, 2010 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 for the foreseeable
future.  We incurred net losses of ($2,468) and ($2,607) for the three
months ended June 30, 2010 and 2009, respectively. We used cash flows from
operations of $656 and $1,832 for the three months ended June 30, 2010 and 2009,
respectively.  We believe that our outstanding balances, combined with
continued cost containment will be adequate to fund operations through fiscal
year 2011.  Our declining cash balance is a key support of the
Company’s ongoing disclosure regarding its ability to continue as a going
concern.   Our business is dependent upon the sales of DRIE
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.  It is not possible to predict
when our business and results of operations will improve in light of the current
economic downturn that continues to dramatically affect our
industry.  Therefore, the realization of assets and discharge of
liabilities are each subject to significant uncertainty.  Accordingly,
substantial doubt exists as to whether we will be able to continue as a going
concern.  If the going concern basis is not appropriate in future
filings, adjustments will be necessary to the carrying amounts and/or
classification of assets and liabilities in our consolidated financial
statements included in such filings.  We indicated this concern in our
Annual Report on Form 10-K for fiscal year ended March 31, 2010, which was also
reflected in the audit opinion at that time.





In
consideration of these circumstances, we have engaged Cowen & Co., LLC to
assist us in evaluating strategic alternatives for the Company, which may
include a merger with or into another company, a sale of all or substantially
all of our assets and the liquidation or dissolution of the Company, including
through a bankruptcy proceeding.   The condensed consolidated
financial statements include an adjustment to the value of the DRIE related
assets to reflect the value of expected realizable market values that might
result from the outcome of this uncertainty.  See Note 6 – Asset
Acquisitions and Sales.





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
June 30, 2010, three customers accounted for approximately 70% of the accounts
receivable balance.  As of June 30, 2009, two customers accounted for
approximately 35% of the accounts receivable balance.





For the
three months ended June 30, 2010, Bruckner Supply, Indo-French High-Tech
Equipment, and SRI International accounted for 47%, 30%, and 12%, respectively,
of total revenue.  For the three months ended June 30, 2009, the
University of Pennsylvania accounted for 21% of total revenues.


6





The
Company’s Note Receivable at June 30, 2010 consisted of the outstanding payments
owed by OEM Group in connection with the sale of legacy assets.





Intangible
Assets





Intangible
assets 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.





Long-lived
assets are reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amount may not be recoverable, as well as at fiscal
year end. 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. During the quarter ended June
30, 2010, we reviewed our long-lived assets for indicators of impairment in
accordance with SFAS No. 144, (Topic 360).  No impairment
charges were recorded for intangible assets for the quarters ended June 30, 2010
and 2009.





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.  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 Employee Stock Purchase Plan (“ESPP”) that
allows qualified employees to purchase Tegal shares at 85% of the fair market
value on specified dates.





Total
stock-based compensation expense related to stock options and restricted stock
units (“RSUs”) for the three months ended June 30, 2010 and 2009was $108 and $196, respectively.  The total compensation
expense related to non-vested stock options and RSUs not yet recognized is
$465.





The
Company used the following valuation assumptions to estimate the fair value of
options granted for the periods ended June 30, 2010 and 2009,
respectively:





STOCK
      OPTIONS:
                  
                  2010
                  
                  
                  2009Expected
      life (years)
                  
                  
                  6.0
                  
                  
                  
                  6.0Volatility
                  
                  
                  74.1
                  %
                  
                  
                  83.3
                  %Risk-free
      interest rate
                  
                  
                  1.79
                  %
                  
                  
                  2.54
                  %Dividend
      yield
                  
                  
                  0
                  %
                  
                  
                  0
                  %





ESPP
awards were valued using the Black-Scholes model with expected volatility
calculated using a six-month historical volatility.





ESPP:
                  
                  2010
                  
                  
                  2009Expected
      life (years)
                  
                  
                  0.5
                  
                  
                  
                  0.5Volatility
                  
                  
                  54.2
                  %
                  
                  
                  86.5
                  %Risk-free
      interest rate
                  
                  
                  0.18
                  %
                  
                  
                  0.19
                  %Dividend
      yield
                  
                  
                  0
                  %
                  
                  
                  0
                  %




Valuation
and Other Assumptions for Stock Options




Valuation and Amortization
Method.    We estimate the fair value of stock
options granted using the Black-Scholes option valuation model. We estimate the
fair value using a single option approach and amortize the fair value on a
straight-line basis for options expected to vest. All options are amortized over
the requisite service periods of the awards, which are generally the vesting
periods.


7




Expected
Term.   The expected term of options granted represents
the period of time that the options are expected to be outstanding. We estimate
the expected term of options granted based on our historical experience of
exercises including post-vesting exercises and termination.




Expected
Volatility.    We estimate the volatility of our
stock options at the date of grant using historical
volatilities.  Historical volatilities are calculated based on the
historical prices of our common stock over a period at least equal to the
expected term of our option grants.




Risk-Free Interest
Rate.    We base the risk-free interest rate used in
the Black-Scholes option valuation model on the implied yield in effect at the
time of option grant on U.S. Treasury zero-coupon issues with remaining terms
equivalent to the expected term of our option grants.




Dividends.    We
have never paid any cash dividends on common stock and we do not anticipate
paying any cash dividends in the foreseeable future.




Forfeitures.    We
use historical data to estimate pre-vesting option forfeitures. We record
stock-based compensation expense only for those awards that are expected to
vest.





The
Company does not use multiple share-based payment arrangements.





During
the three months ended June 30, 2010, no stock option awards were
granted.





Stock
Options & Warrants





A summary
of stock option and warrant activity during the quarter ended June 30, 2010is as
follows:





WeightedWeighted
                  
                  
                  AverageAverage
                  
                  
                  Remaining
                  
                  
                  AggregateExercise
                  
                  
                  Contractual
                  
                  
                  IntrinsicShares
                  
                  
                  Price
                  
                  
                  Term(inYears)
                  
                  
                  ValueBeginning
      outstanding
                  
                  
                  2,380,031
                  
                  
                  $
                  8.80GrantedPrice=market
      value
                  
                  
                  —
                  
                  
                  
                  -Total
                  
                  
                  —
                  
                  
                  
                  -Exercised
                  
                  
                  —
                  
                  
                  
                  0.00CancelledForfeited
                  
                  
                  (17,907
                  )
                  
                  
                  3.75Expired
                  
                  
                  (114,605
                  )
                  
                  
                  7.92Total
                  
                  
                  (132,512
                  )
                  
                  
                  7.35Ending
      outstanding
                  
                  
                  2,247,519
                  
                  
                  $
                  8.88
                  
                  
                  
                  2.56
                  
                  
                  $
                  —Ending
      vested and expected to vest
                  
                  
                  2,194,064
                  
                  
                  $
                  9.03
                  
                  
                  
                  2.44
                  
                  
                  $
                  —Ending
      exercisable
                  
                  
                  1,920,616
                  
                  
                  $
                  9.92
                  
                  
                  
                  1.76
                  
                  
                  $
                  —





The
aggregate intrinsic value of stock options and warrants outstanding at June 30,
2010 is calculated as the difference between the exercise price of the
underlying options and the market price of our common stock as of June 30,
2010.


8


The
following table summarizes information with respect to stock options and
warrants outstanding as of June 30, 2010:





WeightedWeighted
                                
                                
                                
                                
                                
                                
                                
                                
                                AverageNumber
                                
                                
                                Average
                                
                                
                                Weighted
                                
                                
                                Number
                                
                                
                                ExerciseOutstanding
                                
                                
                                Remaining
                                
                                
                                Average
                                
                                
                                Exercisable
                                
                                
                                PriceRange of
                                
                                
                                As of
                                
                                
                                Contractual
                                
                                
                                Exercise
                                
                                
                                As of
                                
                                
                                As ofExercise Prices
                                
                                
                                June 30,
                                
                                
                                Term
                                
                                
                                Price
                                
                                
                                June 30,
                                
                                
                                June 30,2010
                                
                                
                                (inyears)
                                
                                
                                
                                
                                
                                2010
                                
                                
                                2010$
                                1.20
                                
                                
                                
                                1.25
                                
                                
                                
                                24,997
                                
                                
                                
                                0.63
                                
                                
                                
                                1.22
                                
                                
                                
                                8,330
                                
                                
                                
                                1.232.34
                                
                                
                                
                                2.34
                                
                                
                                
                                306,347
                                
                                
                                
                                8.05
                                
                                
                                
                                2.34
                                
                                
                                
                                78,463
                                
                                
                                
                                2.343.44
                                
                                
                                
                                4.60
                                
                                
                                
                                364,492
                                
                                
                                
                                5.87
                                
                                
                                
                                4.30
                                
                                
                                
                                283,390
                                
                                
                                
                                4.354.63
                                
                                
                                
                                8.28
                                
                                
                                
                                224,586
                                
                                
                                
                                3.57
                                
                                
                                
                                6.43
                                
                                
                                
                                224,586
                                
                                
                                
                                6.4312.00
                                
                                
                                
                                12.00
                                
                                
                                
                                1,284,990
                                
                                
                                
                                0.18
                                
                                
                                
                                12.00
                                
                                
                                
                                1,284,990
                                
                                
                                
                                12.0012.36
                                
                                
                                
                                30.00
                                
                                
                                
                                38,333
                                
                                
                                
                                2.71
                                
                                
                                
                                15.86
                                
                                
                                
                                37,083
                                
                                
                                
                                15.8630.37
                                
                                
                                
                                30.37
                                
                                
                                
                                166
                                
                                
                                
                                0.35
                                
                                
                                
                                30.37
                                
                                
                                
                                166
                                
                                
                                
                                30.3734.80
                                
                                
                                
                                34.80
                                
                                
                                
                                46
                                
                                
                                
                                3.43
                                
                                
                                
                                34.80
                                
                                
                                
                                46
                                
                                
                                
                                34.8037.08
                                
                                
                                
                                37.08
                                
                                
                                
                                230
                                
                                
                                
                                3.43
                                
                                
                                
                                37.08
                                
                                
                                
                                230
                                
                                
                                
                                37.0846.50
                                
                                
                                
                                46.50
                                
                                
                                
                                3,332
                                
                                
                                
                                0.22
                                
                                
                                
                                46.50
                                
                                
                                
                                3,332
                                
                                
                                
                                46.50$
                                1.20
                                
                                
                                $
                                46.50
                                
                                
                                
                                2,247,519
                                
                                
                                
                                2.56
                                
                                
                                $
                                8.88
                                
                                
                                
                                1,920,616
                                
                                
                                $
                                9.92





As of
June 30,
2010, there was $417 of total unrecognized compensation cost related to
outstanding options and warrants which the Company expects to recognize over a
period of 2.03 years.





Restricted
Stock Units





The
following table summarizes the Company’s restricted stock unit (“RSU”)
activity for the three months ended June 30,
2010:





Number
                  
                  
                  Weighted
                    Avg.of
                  
                  
                  Grant DateShares
                  
                  
                  Fair ValueBalance
      March 31, 2010
                  
                  
                  28,027
                  
                  
                  $
                  1.18Granted
                  
                  
                  -
                  
                  
                  $
                  -Forfeited
                  
                  
                  (6,408
                  )
                  
                  $
                  -Vested
                  
                  
                  -
                  
                  
                  $
                  -Balance,
      June 30, 2010
                  
                  
                  21,619
                  
                  
                  $
                  0.78





Unvested
restricted stock at June 30, 2010





As of
June 30, 2010there was $48 of total unrecognized compensation cost related to
outstanding RSUs which the Company expects to recognize over a period of 0.38
years.





2.
            Inventories:





Inventories
are stated at the lower of cost or market. 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. Any excess and obsolete
provision is only released if and when the related inventory is sold or
scrapped.  The Company did not sell or scrap previously reserved
inventory during the three months ended June 30, 2010 and June 30, 2009,
respectively.The inventory
provision balance atJune 30, 2010 and June 30, 2009 was $1,021and $626,
respectively.


9





Net
inventories for the periods presented consisted of:





June 30,
                  
                  
                  March 31,2010
                  
                  
                  2010Raw
      materials
                  
                  $
                  766
                  
                  
                  $
                  386Work
      in progress
                  
                  
                  91
                  
                  
                  
                  39Finished
      goods and spares
                  
                  
                  452
                  
                  
                  
                  796$
                  1,309
                  
                  
                  $
                  1,221





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.





3.
            Product
      Warranty:





The
Company provides warranties 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 months ended June 30, 2010 and 2009 is as
follows:





Warranty Activity for theThree Months EndedJune 30,2010
                  
                  
                  2009Balance
      at the beginning of the period
                  
                  $
                  374
                  
                  
                  $
                  702Additional
      warranty accruals for
                  
                  
                  -
                  
                  
                  
                  41warranties
      issued during the periodWarranty
      expense during the period
                  
                  
                  (99
                  )
                  
                  
                  (221
                  )Balance
      at the end of the period
                  
                  $
                  275
                  
                  
                  $
                  522





Certain
of the Company’s sales contracts include provisions under which customers would
be indemnified by the Company in the event of, among other things, a third-party
claim against the customer for intellectual property rights infringement related
to the Company’s products. There are no limitations on the maximum potential
future payments under these guarantees. The Company has accrued no amounts in
relation to these provisions as no such claims have been made and the Company
believes it has valid, enforceable rights to the intellectual property embedded
in its products.





4.
            Net
      Loss Per Common Share (EPS):





Basic EPS
is computed by dividing income (loss) available to common stockholders
(numerator) by the weighted average number of common shares outstanding
(denominator) for the period. Diluted EPS gives effect to all dilutive potential
common shares outstanding during the period. The computation of diluted EPS uses
the average market prices during the period. All amounts in the following table
are in thousands except per share data.





Basic net
income (loss) per common share is computed using the weighted-average number of
shares of common stock outstanding.




10


The
following table represents the calculation of basic and diluted net income
(loss) per common share (in thousands, except per share data):





Three Months EndedJune 30,2010
                        
                        
                        2009Net
      loss applicable to common stockholders
                        
                        $
                        (2,468
                        )
                        
                        $
                        (2,607
                        )Basic
      and diluted:Weighted-average
      common shares outstanding
                        
                        
                        8,438
                        
                        
                        
                        8,413Weighted-average
      common shares used in diluted net (loss) income per common
      share
                        
                        
                        8,438
                        
                        
                        
                        8,413Basic
      net loss per common share
                        
                        $
                        (0.29
                        )
                        
                        $
                        (0.31
                        )Diluted
      net loss per common share
                        
                        $
                        (0.29
                        )
                        
                        $
                        (0.31
                        )





Outstanding
options, warrants and RSUs of 3,167,713 and 2,645,897 shares of common stock at
a weighted-average exercise price per share of $8.64 and $8.71 on June 30,
2010 and 2009, 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.





5.
            Financial
      Instruments:





The
carrying amount of the Company’s financial instruments, including cash and cash
equivalents, accounts receivable and accounts payable, notes payable, accrued
expenses and other liabilities approximates fair value due to their relatively
short maturity. The Company sells products in various global markets. As a
result, the Company is exposed to changes in foreign currency exchange
rates.  The Company does not hold derivative financial instruments for
speculative purposes.  Foreign currency transaction gains and (losses)
included in other income (expense), were ($185) and $198 for the three months
ended June 30, 2010 and 2009.  On June 30, 2010, the Company had no
open foreign exchange contracts to sell Euros or any other foreign
currencies.





6.
            Asset
      Acquisitions and Sales:





On
September 16, 2008, the Company acquired certain assets from Alcatel Micro
Machining Systems (“AMMS”) and Alcatel Lucent (together, the
“Sellers”).  With this acquisition, we entered the DRIE
market.  DRIE is a highly anisotropic etch process used to create
deep, steep-sided holes and trenches in wafers, with aspect ratios of 20:1 or
more.  DRIE was developed for micro-electro-mechanical systems
(“MEMS”), which require these features, but is also used to excavate trenches
for high-density capacitors for DRAM and more recently for creating TSVs in
advanced 3-D wafer level packaging technology. The acquisition was designed to
enable us to pursue the high-growth markets in MEMS and certain segments of
integrated semiconductor device manufacturing and packaging.  Current
end-markets include production of a variety of MEMS and power devices, memory
stacking (flash and DRAM), logic, RF-SiP, and CMOS image sensors.  The
Company paid $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 by the Company was calculated
by obtaining  the quotient of (a) $4,000,000 divided by (b) the
average of the closing sales prices of the Common Stock as reported on the
Nasdaq Capital Market on the five (5) consecutive trading days immediately prior
to (but excluding) the closing date.





In
connection with this acquisition, the Company and Alcatel Lucent entered into an
intellectual property agreement providing for the transfer of specified
intellectual property rights to the Company, a trademark license agreement
allowing for the limited use of the AMMS trademark by the Company, and a
preferred supplier agreement pursuant to which the Company will purchase certain
equipment from an affiliate of the Sellers.  AMMS designated Mr.
Gilbert Bellini to serve as a member of the Company’s board of directors. AMMS’
designation right terminates upon the later of (a) the termination or expiration
of certain customer services related agreements, and (b) when AMMS beneficially
owns less than 5% of the number of shares of Common Stock issued and outstanding
(including the shares to be issued to the Sellers).




11





The
purchase price was allocated as follows (in thousands):





Assets
      acquired:Trademarks
                  
                  $
                  428Patents
                  
                  
                  2,648Total
      Intangible Assets
                  
                  
                  3,076Fixed
      Assets
                  
                  
                  24Inventory
                  
                  
                  1,900Total
      Tangible Assets
                  
                  
                  1,924Total
      Acquired Assets
                  
                  $
                  5,000





Beginning
in the fiscal third quarter of 2009, following the acquisition of the DRIE
product lines from AMMS, the Company experienced a sharp decline in revenues
related to its legacy Etch and PVD products, a result of the overall collapse of
the semiconductor capital equipment market and the global financial
crisis.  The management and the Board of Directors of the Company
considered several alternatives for dealing with this decline in revenues,
including the sale of assets which the Company could no longer
support.  On March 19, 2010, the Company and its wholly owned
subsidiary, SFI, sold inventory, equipment, intellectual property and other
assets related to the Company’s legacy Etch and PVD products to OEM Group Inc.
(“OEM Group”), a company  based in Phoenix, Arizona that specializes
in “life cycle management” of legacy product lines for several semiconductor
equipment companies.  The sale included the product lines and
associated spare parts and service business of the Company’s 900 and 6500 series
plasma etch systems, along with the Endeavor and AMS PVD systems from
SFI.  In connection with the sale of the assets, OEM Group assumed the
Company’s warranty liability for recently sold legacy Etch and PVD
systems.





The
Company and OEM Group entered into related agreements for the transfer and
licensing of patents, trademarks and other intellectual property associated with
the legacy Etch and PVD Products.  These included a Trademark
Assignment Agreement for certain trademarks used in the legacy Etch and PVD
Products, a royalty-free Trademark License Agreement allowing for the limited
use of the Tegal trademark by the Purchaser solely in connection with future
sales of legacy Etch and PVD Products and solely in combination with the
trademarks transferred to Purchaser, a Patent Assignment Agreement for the
transfer of certain patents related to the Etch and PVD Products, and a
perpetual, irrevocable, non-exclusive, worldwide, fully-paid, royalty-free,
Intellectual Property Cross License Agreement, pursuant to which the Company
granted OEM Group a license to certain intellectual property owned by the
Company for use in OEM Group’s manufacture and sale of the legacy Etch and PVD
Products, and OEM Group licensed back to the Company certain intellectual
property for the Company’s continued use.





The
consideration paid by OEM Group for the Disposition consisted of the
following:





·
            Cash
      in the amount of $250,000 paid at closing, which occurred on March 19,
      2010;





·
            An
      aggregate of $1,750,000 cash payable to the Company by four installment
      payments of $250,000, $500,000, $500,000 and $500,000 each on July 1,
      2010, October 1, 2010, January 1, 2011 and April 1, 2011, respectively;
      and





·
            A
      contingent payment in cash of up to $1,000,000 payable to the Company by
      April 15, 2011 based on the following percentage of applicable bookings of
      Etch and PVD Products in excess of $6,000,000 received by the Company or
      OEM Group during the period beginning March 19, 2010 through March 31,
      2011:





o
            if applicable bookings are
      greater than or equal to $6,000,000 but less than $8,000,000, the
      contingent payment will be 5% of the applicable bookings in excess of
      $6,000,000;





o
            if
      applicable bookings are greater than or equal to $8,000,000 but less than
      $10,000,000, the contingent payment will be $100,000 plus 10% of the
      applicable bookings in excess of
$8,000,000;


12


o
            if
      applicable bookings are greater than or equal to $10,000,000 but less than
      $12,000,000, the contingent payment will be $300,000 plus 15% of the
      applicable bookings in excess of $10,000,000;
  and





o
            if applicable bookings are
      greater than or equal to $12,000,000, the contingent payment will be
      $600,000plus20% of the
      applicable bookings in excess of
  $12,000,000.





In no
case will the contingent payment exceed $1,000,000.





The
Company has retained the DRIE products which it had acquired from AMMS, along
with the Compact(TM)cluster platform and
the NLD technology that it had developed over the past several
years.  However the DRIE products and a small amount of associated
spares and service revenue, represent the sole source of the Company’s
revenue.  Since the DRIE markets have also been seriously impacted by
the downturn in the semiconductor markets and the lack of available capital for
new product development globally, it is not clear that DRIE sales alone will be
enough to support the Company, even with significant reductions in operating
expenses.  As a result, the Company continues to operate with a focus
on DRIE and at the same time is seeking a strategic partner for its remaining
business.  The Company is also continuing to evaluate various other
alternative strategies, including sale of its DRIE products, Compact(TM)platform and NLD
technology, the transition to a new business model, or its voluntary
liquidation.





7.
            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 (Topic 280), Disclosures
About Segments of an Enterprise and Related Information, (“SFAS 131”)
(Topic 280) 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 theThree Months EndedJune 30,2010
                  
                  
                  2009Sales
      to customers located in:United
      States
                  
                  $
                  269
                  
                  
                  $
                  640Asia
                  
                  
                  —
                  
                  
                  
                  202Germany
                  
                  
                  10
                  
                  
                  
                  29France
                  
                  
                  —
                  
                  
                  
                  60Europe,
      excluding Germany and France
                  
                  
                  40
                  
                  
                  
                  152Total
      sales
                  
                  $
                  319
                  
                  
                  $
                  1,083





June 302010
                    
                    
                    2009Long-Lived
      assets at period-end:United
      States
                    
                    $
                    260
                    
                    
                    $
                    1,035Europe
                    
                    
                    10
                    
                    
                    
                    159Total
      Long-lived assets, net
                    
                    $
                    270
                    
                    
                    $
                    1,194


13


8.
            Recent
      Accounting Pronouncements:





In June
2008, the Financial Accounting Standards Board (“FASB”)  ratified the
EITF consensus on EITF Issue No. 07-05, Determining Whether an Instrument
(or Embedded Feature) Is Indexed to an Entity's Own Stock (“EITF Issue
07-05”) (Topic 815) which applies to the determination of whether any
freestanding financial instruments or embedded features that have the
characteristics of a derivative, as defined by SFAS No. 133 (Topic 815), Accounting for Derivative
Instruments and Hedging Activities, and to any freestanding financial
instruments are potentially indexed to an entity’s own common
stock.  EITF Issue No. 07-05 (Topic 815) became effective for fiscal
years beginning after December 15, 2008.  The Company adopted EITF
07-05 (Topic 815) as of April 1, 2009.  As a result, warrants to
purchase 1,427,272 shares of our common stock previously treated as equity
pursuant to the derivative treatment exemption were no longer afforded equity
treatment. The warrants had exercise prices ranging from $6.00-$99.00 and expire
between February 2010 and September 2013. As such, effective April 1, 2009, the
Company reclassified the fair value of these warrants to purchase common stock,
which had exercise price reset features, from equity to liability status as if
these warrants were treated as a derivative liability since their date of issue
between February 2000 and January 2006.  On April 1, 2009, the Company
reclassified from additional paid-in capital, as a cumulative effect adjustment,
$346 to beginning accumulated deficit and $502 to common stock warrant liability
to recognize the fair value of such warrants on such date.  As of
March 31, 2010, the fair value of the warrants was estimated using the
Black-Scholes pricing model with the following weighted average assumptions,
risk-free interest rate of 2.55%, expected life of 1.06 years, an expected
volatility factor of 74.2% and a dividend yield of 0.0%.  Adoption of
this standard had a material non-cash impact on the Company’s consolidated
financial statements.





In
September 2009, FASB ratified Accounting Standards Update (ASU) 2009-13 (ASU
2009-13) (previously Emerging Issues Task Force (EITF) Issue No. 08-1,
Revenue Arrangements with
Multiple Deliverables(EITF 08-1)). ASU 2009-13 superseded
EITF 00-21 and addresses criteria for separating the consideration in
multiple-element arrangements. ASU 2009-13 will require companies to allocate
the overall consideration to each deliverable by using a best estimate of the
selling price of individual deliverables in the arrangement in the absence of
vendor-specific objective evidence or other third-party evidence of the selling
price. ASU 2009-13 will be effective prospectively for revenue arrangements
entered into or materially modified in fiscal years beginning on or after
June 15, 2010 and early adoption will be permitted.  While we are
currently evaluating the potential impact, if any, of the adoption of ASU
2009-13, the Company does not expect the adoption of this guidance to have a
material impact on the Company’s consolidated financial
statements.





In
September 2009, the FASB ratified ASU 2009-14 (ASU 2009-14) (previously EITF No.
09-3, Certain Revenue
Arrangements That Include Software Elements). ASU 2009-14 modifies the
scope of Software Revenue Recognition to exclude (a) non-software
components of tangible products and (b) software components of tangible products
that are sold, licensed, or leased with tangible products when the software
components and non-software components of the tangible product function together
to deliver the tangible product’s essential functionality. ASU 2009-14 has an
effective date that is consistent with ASU 2009-13. While we are currently
evaluating the potential impact, if any, of the adoption of ASU 2009-13, the
Company does not expect the adoption of this guidance to have a material impact
on the Company’s consolidated financial statements.





In
February 2010, FASB issued ASU No. 2010-09, which amends the Subsequent Events
Topic of the Accounting Standards Codification (ASC) to eliminate the
requirement for public companies to disclose the date through which subsequent
events have been evaluated. The Company will continue to evaluate subsequent
events through the date of the issuance of the financial statements, however,
consistent with the guidance, this date will no longer be
disclosed.  The Company does not expect the adoption of this guidance
to have a material impact on the Company’s consolidated financial statements,
financial condition or liquidity.





In
January 2010, FASB issued ASU No. 2010-06, Fair Value Measurements and
Disclosures (Topic 820): Improving Disclosures about Fair Value
Measurements. ASU No. 2010-06 amends ASC 820 and clarifies and provides
additional disclosure requirements on the transfers of assets and liabilities
between Level 1 (quoted prices in active market for identical assets or
liabilities) and Level 2 (significant other observable inputs) of the fair value
measurement hierarchy, including the reasons for and the timing of the
transfers. Additionally, the guidance requires a roll forward of activities on
purchases, sales, issuance, and settlements of the assets and liabilities
measured using significant unobservable inputs (Level 3 fair value
measurements).   Other than requiring additional disclosures,
adoption of this new guidance will not have a material impact on our financial
statements.


14


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 “Part II, 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 specialized plasma etch systems used
primarily in the production of micro-electrical mechanical systems (“MEMS”)
devices, such as sensors and accelerometers as well as power
devices.  The Company’s Deep Reactive Ion Etch (“DRIE”) systems are
also employed in certain sophisticated manufacturing techniques, such as 3-D
interconnect structures formed by intricate silicon etching, also known as Deep
Silicon Etch (“DSE”) for so-called Through Silicon Vias (“TSVs”). Prior to its
fiscal year FY 2011, Tegal also sold systems for the etching and deposition of
materials found in other devices, such as integrated circuits (“ICs”) and
optoelectronic devices found in products like smart phones, networking gear,
solid-state lighting, and digital imaging.    Tegal’s plasma
etch and deposition tools enable sophisticated manufacturing techniques, such as
3-D interconnect structures formed by intricate silicon etch, also known as Deep
Reactive Ion Etching (“DRIE”). Etching and deposition constitute two of the
principal device production process steps and each must be performed numerous
times in the production of such devices.





In the
recent past, our business objective has been to utilize the technologies that we
have developed internally or acquired externally in order to increase our market
share in process equipment for MEMS and power device fabrication, advanced 3-D
packaging, and certain areas of semiconductor manufacturing.  In
September 2008, we acquired the products lines of AMMS and the related
intellectual property of Alcatel, in order to pursue more fully the smaller, but
higher-growth markets of MEMS and 3-D packaging.  Our acquisition of
these products served two purposes: (i) to increase revenue, and (ii) to enable
us to focus our various technologies on specific applications that served the
common markets of MEMS and 3-D device manufacturing and packaging.





At the
present time, we are continuing to transition our involvement in specialized
aspects of traditional semiconductor markets to the faster-growth but smaller
markets for MEMS, power devices and specialized compound semiconductors.
However, given the severe economic downturn generally, and in the semiconductor
capital equipment industry in particular, achieving wins with customers in these
markets has been extremely challenging for us.  We expect that orders
for our systems will continue to fluctuate from quarter to quarter, and we
expect demand to continue to be low and our ability to forecast demand will be
limited as the global financial crisis and the resulting recession
continues.  Although we have over the past several years streamlined
our cost structure by headcount reductions, salary and benefit reductions and
limits on discretionary spending of all types, our costs for maintaining our
research and development efforts and our service and manufacturing
infrastructure have remained constant or in some cases increased.  We
intend to continue our cost-containment measures, including outsourcing certain
activities, such as engineering and software development, and maintaining or
further reducing our headcount as we strive to improve operational efficiency
within this challenging economic environment.  However, since we are
unable to predict the timing of a stable reemergence of demand for our products
and services, we believe that the realization of assets and discharge of
liabilities are each subject to significant uncertainty and a substantial doubt
exists as to whether we will be able to continue as a going
concern.  In consideration of these circumstances, we continue to
evaluate strategic alternatives for the Company, which may include a merger with
or into another company, a sale of all or substantially all of our assets and
the liquidation or dissolution of the Company, including through a bankruptcy
proceeding.  We cannot assure you that we will be successful in
pursuing any of these strategic alternatives.  As we pursue various
strategic alternatives and determine that some are more or less likely than
others, the consequences of such determinations will be reflected in our
financial statements as required by generally accepted accounting principles
(“GAAP”) or the Financial Accounting Standards Board (“FASB”).


15


Beginning
in the fiscal third quarter of 2009, following the acquisition of the DRIE
product lines from AMMS, the Company experienced a sharp decline in revenues
related to its legacy Etch and PVD products, a result of the collapse of the
semiconductor capital equipment market and the global financial
crisis.  The management and the Board of Directors of the Company
considered several alternatives for dealing with this decline in revenues,
including the sale of assets which the Company could no longer
support.  On March 19, 2010, the Company and its wholly owned
subsidiary, SFI, sold inventory, equipment, intellectual property and other
assets related to the Company’s legacy Etch and PVD products to OEM Group Inc.
(“OEM Group”), a company  based in Phoenix, Arizona that specializes
in “life cycle management” of legacy product lines for several semiconductor
equipment companies.  The sale included the product lines and
associated spare parts and service business of the Company’s 900 and 6500 series
plasma etch systems, along with the Endeavor and AMS PVD systems from
SFI.  In connection with the sale of the assets, OEM Group assumed the
Company’s warranty liability for recently sold legacy Etch and PVD
systems.





The
Company retained the DRIE products which it had acquired from AMMS, along with
the Compact(TM)cluster platform and
the NLD technology that it had developed over the past several
years.  However, the DRIE products and a small amount of associated
spares and service revenue, represent the sole source of the Company’s
revenue.  Since the DRIE markets have also been seriously impacted by
the downturn in the semiconductor markets and the lack of available capital for
new product development globally, it is not clear that DRIE sales alone will be
enough to support the Company, even with significant reductions in operating
expenses.  As a result, the Company continues to operate with a focus
on DRIE and at the same time is seeking a strategic partner for its remaining
business.  The Company is also continuing to evaluate various other
alternative strategies, including sale of its DRIE products, Compact(TM)platform and NLD
technology, the transition to a new business model, or its voluntary
liquidation.





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 audited consolidated financial statements have been
prepared using the going concern basis, which assumes that we will be able to
realize our assets and discharge our liabilities in the normal course of
business for the foreseeable future.  However, it is not possible to
predict when our business and results of operations will improve in light of the
current economic downturn that continues to dramatically affect our
industry.  Therefore, the realization of assets and discharge of
liabilities are each subject to significant uncertainty.  Accordingly,
substantial doubt exists as to whether we will be able to continue as a going
concern.  If the going concern basis is not appropriate in future
filings, adjustments will be necessary to the carrying amounts and/or
classification of assets and liabilities in our consolidated financial
statements included in such filings.





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.





In
consideration of these circumstances, we continue to evaluate strategic
alternatives for the Company, which may include a merger with or into another
company, a sale of all or substantially all of our assets or the liquidation or
dissolution of the Company, including through a bankruptcy
proceeding.  We cannot assure you that we will be successful in
pursuing any of these strategic alternatives.  As we pursue various
strategic alternatives and determine that some are more or less likely than
others, the consequences of such determinations will be reflected in our
financial statements as required by GAAP or FASB.





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, Accounting for Revenue Arrangements
with Multiple Deliverables (“EITF Issue 00-21”) (Topic
605).  We first refer to EITF Issue 00-21 (Topic 605) in order to
determine if there is more than one unit of accounting and then we refer to
Staff Accounting Bulletin (“SAB”) 104 (Topic 605) 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.


16


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 Company relieves the entire amount from
inventory at the time of sale, and the related deferred revenue liability is
recognized upon installation and customer acceptance.  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.





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.





Accounting
for Stock-Based Compensation





The
Company has 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.  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.  The Company also has an
Employee Stock Purchase Plan (“ESPP”) that allows qualified employees to
purchase Tegal shares at 85% of the fair 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 SFAS No. 123
(revised 2004), Share Based
Payment(“SFAS 123R”) (Topic 718).





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 June 30, 2010, three
customers accounted for approximately 70% of the accounts receivable
balance.  As of June 30, 2009, two customers accounted for
approximately 35% 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. 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. Any excess and obsolete
provision is only released if and when the related inventory is sold or
scrapped.  The Company did not sell or scrap previously reserved
inventory during the three months ended June 30, 2010 and June 30, 2009,
respectively.  The inventory provision
balanceatJune 30, 2010 and June 30, 2009 was $1,021and $626,
respectively.


17


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 as well as at fiscal
year end. 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. During the quarter ended June
30, 2010, we reviewed our long-lived assets for indicators of impairment in
accordance with SFAS No. 144, (Topic 360).  No impairment
charges were recorded for long-lived assets for the quarters ended June 30, 2010
or 2009.





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.


18


Results
of Operations





The
following table sets forth certain financial data for the three months ended
June 30, 2010 and 2009as a
percentage of revenue:





Three Months EndedJune 30,2010
                  
                  
                  2009Revenue
                  
                  
                  100.0
                  %
                  
                  
                  100.0
                  %Cost
      of revenue
                  
                  
                  172.4
                  %
                  
                  
                  91.4
                  %Gross
      (loss)/profit
                  
                  
                  (72.4
                  )%
                  
                  
                  8.6
                  %Operating
      expenses:Research
      and development
                  
                  
                  320.4
                  %
                  
                  
                  114.6
                  %Sales
      and marketing
                  
                  
                  49.4
                  %
                  
                  
                  65.0
                  %General
      and administrative
                  
                  
                  360.3
                  %
                  
                  
                  107.1
                  %Total
      operating expenses
                  
                  
                  730.1
                  %
                  
                  
                  286.7
                  %Operating
      loss
                  
                  
                  (802.5
                  )%
                  
                  
                  (278.1
                  )%Other
      income, net
                  
                  
                  30.1
                  %
                  
                  
                  32.7
                  %Loss
      before income tax benefit
                  
                  
                  (772.4
                  )%
                  
                  
                  (245.4
                  )%Tax
      Expense
                  
                  
                  0.5
                  %
                  
                  
                  (4.7
                  )%Net
      loss
                  
                  
                  (772.9
                  )%
                  
                  
                  (240.7
                  )%





The
following table sets forth certain financial items for the three months ended
June 30, 2010 and 2009:




Three Months EndedJune 30,2010
                
                
                2009Revenue
                
                $
                319
                
                
                $
                1,083Cost
      of revenue
                
                
                550
                
                
                
                990Gross
      (loss)/profit
                
                
                (231
                )
                
                
                93Operating
      expenses:Research
      and development expenses
                
                
                1,023
                
                
                
                1,241Sales
      and marketing expenses
                
                
                158
                
                
                
                704General
      and administrative expenses
                
                
                1,150
                
                
                
                1,160Total
      operating expenses
                
                
                2,331
                
                
                
                3,105Operating
      loss
                
                
                (2,562
                )
                
                
                (3,012
                )Other
      income, net
                
                
                96
                
                
                
                354Loss
      before income tax benefit
                
                
                (2,466
                )
                
                
                (2,658
                )Income
      tax expense (benefit)
                
                
                2
                
                
                
                (51
                )Net
      loss
                
                $
                (2,468
                )
                
                $
                (2,607
                )Net
      loss per share:Basic
                
                $
                (0.29
                )
                
                $
                (0.31
                )Diluted
                
                $
                (0.29
                )
                
                $
                (0.31
                )Weighted
      average shares used in per share computation:Basic
                
                
                8,438
                
                
                
                8,413Diluted
                
                
                8,438
                
                
                
                8,413


19


Revenue





Our
revenue is derived from sales of new and refurbished systems, spare parts and
non-warranty service.  Revenue of $319 for the three months ended June
30, 2010 decreased 71% from revenue for the three months ended June 30,
2009.  The revenue decrease was due principally to the sale of legacy
Etch and PVD assets to OEM Group, as well as the number and mix of systems sold
and the global economic recession that dramatically impacted our
industry.  During the three months ended June 30, 2010 we sold no
systems. Our revenue for the three months ended June 30, 2010 consisted
primarily of spare parts and service sales.  During the three months
ended June 30, 2009, we sold one new Endeavor system.   Our
revenue for the three months ended June 30, 2009 consisted of the sale of one
new Endeavor system, as well spare parts and service sales, including sales
derived from our legacy assets.





As a
percentage of total revenue for the three months ended June 30, 2010
international sales were approximately 16%.  International sales as a
percentage of total revenue for the three monthsended
June 30, 2009 was approximately 41%.  The decrease in international
sales as a percentage of revenue can be attributed to no systems being sold in
the first quarter of fiscal year 2011.  The Company typically sells
more systems in international markets.





Gross
(Loss) Profit





Gross
loss of ($231) for the three months ended June 30, 2010 decreased by $324 from
gross profit of $93 for the three months ended June 30, 2009, representing a
349% decrease.  The decrease in the gross margin was primarily
attributable to the sale of legacy Etch and PVD assets to OEM Group and the lack
of systems sold and product mix.  The decrease in the gross margin is
also affected by the increased costs associated with the outsourcing of the
manufacturing of the DRIE systems while also absorbing the costs of our existing
manufacturing, purchasing and support infrastructure.   At our
existing revenue levels, the Company cannot fully absorb its fixed manufacturing
related expenses.





Gross
margins for our DRIE series systems are typically lower than those of our more
mature systems due to the competitive differences in the MEMS market compared to
the semi-conductor industry.  We believe that the dominant business
model driving the lower margins in this market segment is unsustainable and
expect gross margins for this product to eventually normalize to levels
comparable with our previous product lines.





Our gross
profit as a percentage of revenue has been, and will continue to be, affected by
a variety of factors, including the mix and average selling prices of systems
sold and the costs to manufacture, service and support new product introductions
and enhancements.  Gross margins for our DRIE systems are generally
lower than we have experienced in the past from the sale of our legacy Etch and
PVD products, which were sold to OEM Group in March 2010.  The
principal reasons for the lower margins are: (i) price pressure resulting from
customers’ historic expectations for the equipment for MEMS productions versus
semiconductors; (ii) extreme competition from competitors seeking to gain market
share; and (iii) our current manufacturing model, which includes substantial
outsourcing of system assembly and final testing.





At the
present time, we are focusing our efforts on the continued operation of the
Company with the DRIE product lines acquired from AMMS as our main business. Due
to limited resources, we have discontinued our development efforts in NLD, but
we are offering these assets for sale to third-parties.  Since the
DRIE markets have also been seriously impacted by the downturn in the
semiconductor markets and the lack of available capital for new product
development globally, we believe that DRIE sales alone may not be enough to
continue supporting the Company, even with significant reductions in the
Company’s operating expenses resulting from the sale of the legacy Etch and PVD
business, as well as a continuation of cost containment
measures.  Accordingly, while we continue to focus our efforts on the
operation of the DRIE business, we continue to seek and evaluate strategic
alternatives, which include a continued operation of the Company as a
stand-alone business with a different business plan, a merger with or into
another company, a sale of all or substantially all of our assets, and the
liquidation or dissolution of the Company, including through a voluntary
dissolution or a bankruptcy proceeding.  We cannot assure you that we
will be successful in pursuing any of these strategic alternatives.





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 for our
DRIE product line. The spending decrease for the three months ended June 30,
2010 compared to the three months ended June 30, 2009 resulted primarily from a
decrease in consulting, payroll, and DRIE amortization and depreciation
expense.  These decreases were partially offset by increased spending
on our R&D operations conducted by our subsidiary, Tegal
France.


20





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 in
sales and marketing spending of $546 for the three months ended June 30, 2010,
as compared to the same period in 2009 was primarily due to the decrease of
employee costs and decreased sales commissions for systems.





General
and Administrative





General
and administrative expenses consist of salaries, legal, accounting and related
administrative services and expenses associated with general management,
finance, information systems, human resources and investor relations activities.
Overall general and administrative expenses for the three months ended June 30,
2010 as compared to the three months ended June 30, 2009 were relatively
unchanged.  The increase in accounting and bad debt expenses was
offset by a decrease in consulting costs, stock compensation charges and payroll
costs.  Bad debt increased comparatively due to the net of the
collection of previously reserved balances in the three months ended June 30,
2009.  In addition, during the three months ended June 30, 2010, the
Company reserved an additional $60 for outstanding balances related to the
legacy product line, which was sold in the fourth quarter of fiscal year
2010.





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 June 30, 2010 compared to the
three months ended June 30, 2009, other income, net decreased by $258, primarily
due to changes in foreign exchange rates offset by  the change in fair
value of the common stock warrant liability pursuant to EITF 07-05 (Topic
815).





Contractual
Obligation





The
following summarizes our contractual obligations at June 30, 2010, and the
effect such obligations are expected to have on our liquidity and cash flows in
future periods (in thousands).





Contractual obligations:
                  
                  
                  
                  
                  Less than
                  
                  
                  
                  
                  
                  
                  
                  
                  AfterTotal
                  
                  
                  1 Year
                  
                  
                  1-3 Years
                  
                  
                  3-5 Years
                  
                  
                  5 YearsNon-cancelable
      operating lease obligations
                  
                  $
                  152
                  
                  
                  $
                  117
                  
                  
                  $
                  35
                  
                  
                  $
                  -
                  
                  
                  $
                  -





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
thethree months
endedJune 30, 2010, we financed our operations from existing cash on
hand.  In fiscal year ended March 31, 2010 we financed our operations
through the use of existing cash balances.  The primary significant
changes in our cash flow statement for the three months ended June 30, 2010 were
decreases in accounts receivable and prepaid expenses offset by our net loss of
($2,468) and accounts payable.





Net cash
used in operating activities during the three months ended June 30, 2010 was
($656), primarily due to our net loss of ($2,468) and decreases in accounts
receivable of $2,392.  Net cash used in operating activities during
the three months ended June 30, 2009 was ($1,832), due primarily to the net loss
of ($2,607), increases in inventory of $510, offset by decreases in accounts
receivable of $988.


21


The
consolidated financial statements contemplate the realization of assets and the
satisfaction of liabilities in the normal course of business for the foreseeable
future. We incurred net losses of ($2,468) and ($2,607) for the three months endedJune 30, 2010 and 2009, respectively. We used cash flows from operations
of ($656) and ($1,832) for the three months ended June 30, 2010 and 2009,
respectively.  Although we believe that our outstanding cash balances,
combined with continued cost containment will be adequate to fund operations
through fiscal year 2011, we believe there is substantial doubt as to our
ability to continue as a going concern if there is not significant improvement
in the semiconductor capital equipment industry that has been dramatically
impacted by the global economic recession. Our long-term viability of our
operations is dependent upon our ability to generate sufficient cash to support
our operating needs, fulfill business objectives and fund continued investment
in technology and product development without incurring substantial indebtedness
that will hinder our ability to compete, adapt to market changes and grow our
business in the future.   More specifically, 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 would need to reduce expenses further and/or raise
additional capital which may include capital raises through the issuance of debt
or equity securities in order to continue our business.  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.  Therefore, the realization of assets and discharge of
liabilities are each subject to significant uncertainty.  Accordingly,
substantial doubt exists as to whether we will be able to continue as a going
concern.  If the going concern basis is not appropriate in future
filings, no adjustments will be necessary to the carrying amounts and/or
classification of assets and liabilities in our consolidated financial
statements included in such filings as the consolidated financial statements
have been prepared using the going concern basis, which assumes that we will be
able to realize our assets and discharge our liabilities in the normal course of
business for the foreseeable future.





Item
3.  Quantitative and
Qualitative Disclosures About Market Risk





Foreign
Currency Exchange Risk





At June
30, 2010 and 2009,all of the Company’s investments were classified as cash equivalents in
the consolidated balance sheets. The investment portfolio at June 30, 2010 and
2009 was
comprised of money market funds.  Our exposure to foreign currency
fluctuations is primarily related to purchases in Europe and Japan, which are
denominated in the Euro and Yen. Foreign currency transaction gains and (losses)
included in other income (expense), net were $185 and ($198) for the three
months ended June 30, 2010 and 2009, respectively.  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. Periodically, the Company enters into foreign exchange
contracts to sell Euros, which are used to hedge a sales transaction in which
costs are denominated in U.S. dollars and the related revenue is generated in
Euros.  As of June 30, 2010 there were no outstanding foreign exchange
contracts.





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 June 30, 2010, 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 June 30, 2010 that materially affected, or are reasonably likely
to materially affect, our internal control over financial
reporting.


22


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.





PART
II — OTHER INFORMATION





Item
1A.  Risk
Factors





We
wish to caution you that there are risks and uncertainties that could affect our
business. A description of the risk factors associated with our business that
you should consider when evaluating our business is included under “Risk
Factors” contained in Item 1A. of our Annual Report on Form 10-K for the year
ended March 31, 2010.  In addition to those factors and to other
information in this Form 10-Q, the following updates to the risk factors should
be considered carefully when evaluating Tegal or our business.





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 (loss) income of ($18,469), ($7,902), and $18,104 for the years ended March
31, 2010, 2009, and 2008, respectively.  We used cash flows from
operations of ($4,887), ($5,541), and ($5,057) in these respective
years.  For the three months ended June 30, 2010 and 2009, we had a
net loss of ($2,468) and ($2,607), respectively. Although we believe that our
outstanding cash balances, combined with continued cost containment will be
adequate to fund operations through fiscal year 2011, we believe there is
substantial doubt as to our ability to continue as a going concern if there is
not significant improvement in the semiconductor capital equipment industry that
has been dramatically impacted by the global economic recession. Our long-term
viability of our operations is dependent upon our ability to generate sufficient
cash to support our operating needs, fulfill business objectives and fund
continued investment in technology and product development without incurring
substantial indebtedness that will hinder our ability to compete, adapt to
market changes and grow our business in the future. More specifically, 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 would need to reduce expenses further
and/or raise additional capital which may include capital raises through the
issuance of debt or equity securities in order to continue our
business.  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.





In
consideration of these circumstances, we have engaged Cowen & Co., LLC to
assist us in evaluating strategic alternatives for the Company, which may
include a merger with or into another company, a sale of all or substantially
all of our assets and the liquidation or dissolution of the company, including
through a bankruptcy proceeding. We cannot assure you that we will be successful
in pursuing any of these strategic alternatives.  If we were to
liquidate or dissolve the company through or outside of a bankruptcy proceeding,
you could lose all of your investment in Tegal common stock.


23


Item
6.   Exhibits





ExhibitNumber
              
              Description31.1
              
              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.


24


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
      HERGENROTHERChristine
      HergenrotherChief
      Financial OfficerDate:
      August 13,
2010


25