Quarterly report pursuant to Section 13 or 15(d)

Basis of Presentation

Basis of Presentation

6 Months Ended

Sep. 30, 2011

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, 2011 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, 2011. The results of operations for the three and six months ended September 30, 2011 are not necessarily indicative of results to be expected for the entire year.

Tegal Corporation and its subsidiaries' (“Tegal”, “the Company”, “we”, “us” or “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 ($1,470) and ($2,334) for the six months ended September 30, 2011 and 2010, respectively. We used ($1,644) and ($3,055) of cash in operating activities for the six months ended September 30, 2011 and 2010, respectively. We believe that our existing balances of cash and cash equivalents, combined with continued cost containment, will be adequate to fund operations through fiscal year 2012.

Throughout most of fiscal 2011, our operations consisted mainly of the sale and support of the Deep Reactive Ionic Etch (“DRIE”) product lines which we had acquired from Alcatel Micro Machining Systems (“AMMS”) in fiscal 2009, including the operation of our Tegal France subsidiary, which had been engaged in several joint development projects partially supported by customers and the government of France. Tegal France had also been the center for the majority of our product and process development efforts and engineering activities related to the improvement of our DRIE product lines.

DRIE systems sales and the associated spares and service revenue represented the sole source of the Company's revenue in fiscal 2011. For all of fiscal 2010, DRIE sales represented approximately 47% of our total revenues. Since the DRIE markets were seriously impacted by the downturn in the semiconductor markets and the lack of available capital for new product development globally, DRIE sales alone were not enough to continue supporting the Company, even with significant reductions in our operating expenses resulting from the sale of our legacy etch and PVD business, as well as the implementation of further cost containment measures. Accordingly, while we focused our efforts on the operation of the DRIE business in the first half of fiscal 2011, we continued to seek and evaluate strategic alternatives, which included 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 remaining assets, and the liquidation or dissolution of the Company, including through a voluntary dissolution or a bankruptcy proceeding.

On January 14, 2011, the Company, se2quel Partners and Sequel Power entered into a Formation and Contribution Agreement. The Company contributed $2 million in cash to Sequel Power in exchange for an approximate 25% ownership interest in Sequel Power. Sequel Power is focused on the promotion of solar power plant development projects worldwide, the development of self-sustaining businesses from such projects, including but not limited to activities relating to and supporting, developing, building and operating solar photovoltaic fabrication facilities and solar farms, and the consideration of other non-photovoltaic renewable energy projects.

Following our investment in Sequel Power, and as a result of our continuing efforts to reduce our operating losses, on February 9, 2011, the Company and SPP Process Technology Systems Limited (“SPTS”) entered into an Asset Purchase Agreement. That agreement included the sale of all of the shares of Tegal France, SAS, the Company's wholly-owned subsidiary and product lines and certain equipment, intellectual property and other assets relating to the DRIE Etch plasma etch systems and certain related technology. The other major asset remaining after the sale of our legacy etch and physical vapor deposition (“PVD”) business and our DRIE business was our Nano-Layer Deposition (“NLD”) intellectual property portfolio. Having discontinued the implementation of NLD during fiscal 2010, we instead began to offer this asset for sale to third parties. Concurrently, we began the process of closing and/or liquidating all of our other wholly-owned subsidiary companies, including SFI and Tegal GmbH, along with branches in Taiwan, Korea and Italy. As a result, all of our activities related to our legacy etch and PVD business, our DRIE business, our NLD development activities and our subsidiaries and branches are now included in discontinued operations.

The process of consolidation and transition, driven by the financial crisis and worsened by our relatively weak strategic and financial position in the semiconductor and micro-electro-mechanical systems (“MEMS”) capital equipment sectors, continues. Our main objective has been to preserve as much value for stockholders as possible as we transitioned to a business model that avoids high fixed costs, but retains our capabilities to attract and exploit emerging technologies. So far, we have invested in one opportunity in a high-growth sector related to semiconductors – photovoltaic (“PV”) based solar. The Sequel Power model for large scale PV-based solar projects is unique in the industry and has won significant acclaim from governments, industrial companies and industry advocates for its innovation and prospect for success. By investing in this new company, we expect to employ our capital equipment know-how, a portion of our cash and potentially the tax benefits of our NOLs. We intend to support the activities of Sequel Power through our direct efforts and through related operations and investments that we may make in the future, should the circumstances be favorable. In addition, we are actively evaluating opportunities for partnerships with other diversified technology-based companies in order to exploit our shared experience and to enhance our value as a public company.

We cannot assure you that we will be successful in pursuing any of these strategic alternatives. If our efforts do not succeed, we may need to 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 consideration of these circumstances, the Company may be forced to consider a merger with or into another company 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. 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.

Reclassifications

As a result of the sale of the Company's DRIE assets in the prior fiscal year, and in accordance with generally accepted accounting principles, the DRIE business operations related to the designing, manufacturing, marketing and servicing of systems and parts within the semiconductor industry has been reclassified to discontinued operations in our condensed consolidated financial statements. Amounts for the prior periods have been reclassified to conform to this presentation. The exit from the DRIE operation was essentially completed by the end of the fourth quarter of our 2011 fiscal year.

Concentration of Credit Risk

Financial instruments that potentially subject the Company to significant concentrations of credit risk consist primarily of cash investments. Prior to the sale of the DRIE assets, the Company's accounts receivable balance was also subject to credit risk. 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 no longer maintains reserves for potential credit losses as such risk has been determined to be immaterial. Write-offs during the periods presented have been insignificant.

As of September 30, 2011, three customers accounted for 100% of the accounts receivable balance. As of September 30, 2010, three customers accounted for approximately 70% of the accounts receivable balance. The full amount of balances in accounts receivable for the period ended September 30, 2010 is included in discontinued operations.

For the six months ended September 30, 2011, Sequel Power accounted for 100% of total revenue, which is included in continuing operations. For the six months ended September 30, 2010, a leading precision timing device manufacturer, STMicroelectronics SA, and Uppsala University accounted for 39%, 30%, and 23%, respectively, of total revenue. Total revenue for the three and six months ended September 30, 2010 is included in discontinued operations.

The balance on the Company's note receivable was paid in full during the first quarter of the current fiscal year. Previously, the note receivable consisted of the outstanding payments owed by OEM Group in connection with our sale to them of our legacy etch and PVD assets completed in March 2010. The Company was entitled to receive an additional contingent payment of $440 related to the terms of the sale, which was paid in full in two installments. The first installment of $300 was paid on July 5, 2011, and the second installment of $140 was paid on October 7, 2011. The first installment was classified as a gain on sale of discontinued operations in the second quarter of the current fiscal year. The second installment will be classified as a gain on sale of discontinued operations in the third quarter of the current fiscal year.

Derivative Instruments

In June 2008, the Financial Accounting Standards Board (“FASB“) ratified the Emerging Issues Task Force (“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 Statement of Financial Accounting Standards (“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 Topic 815 as of April 1, 2009. As a result, warrants to purchase 285,454 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 $30.00-$495.00 and expire between February 2010 and September 2013. As such, effective April 1, 2009, the Company reclassified the fair value of these warrants, 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 $346 from additional paid-in capital, as a cumulative effect adjustment, 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, 2011, 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 2.24%; expected life of 1.1 years; an expected volatility factor of 79.1%; and a dividend yield of 0.0%. At September 30, 2011, the fair value of the warrants was $12, which was calculated using the Black-Scholes pricing model with the following weighted average assumptions: risk-free interest rate of 0.96%; expected life of 1.86 years; an expected volatility factor of 151%; and a dividend yield of 0.0%. The Company recorded a non-cash gain related to the warrants of $3 in the quarter ended September 30, 2011 and a non-cash gain of $141 in the quarter ended September 30, 2010.

Investment in Unconsolidated Affiliate

The Company evaluates its joint venture arrangements to determine whether they should be recorded on a consolidated basis. The percentage of ownership interest in the joint venture, an evaluation of control and whether a variable interest entity (“VIE”) exists are all considered in the consolidation assessment.

We account for our investment in joint ventures where we own a non-controlling interest or where we are not the primary beneficiary of a VIE using the equity method of accounting. Under the equity method, our cost of investment is adjusted for our share of equity in the earnings or losses of the unconsolidated affiliate and reduced by distributions received.

Any differences between the cost of our investment in an unconsolidated affiliate and our underlying equity as reflected in the unconsolidated affiliate's financial statements generally result from a different basis in assets contributed to the joint venture. The net difference between our investment in unconsolidated affiliates and the underlying equity of unconsolidated affiliates is generally amortized over a period of ten years, which is determined to be the estimated useful life of the underlying intangibles which created the difference in carrying amount. The net difference at March 31, 2011 was $1,730. The amortization expense related to this difference for the fiscal year ended March 31, 2011 was $45. The amortization expense related to this difference for the three and six month periods ended September 30, 2011 was $43 and $86, respectively. There was no amortization expense related to this investment for the three and six month periods ended September 30, 2010, respectively.

On a periodic basis, we assess whether there are any indicators that the fair value of our investments in unconsolidated affiliates may be impaired. An investment is impaired only if our estimate of the fair value of the investment is less than the carrying value of the investment, and such decline in value is deemed to be other than temporary. To the extent impairment has occurred, the loss is measured as the excess of the carrying amount of the investment over the fair value of the investment. Our estimates of fair value for each investment are based on a number of assumptions such as future revenue projections, operating forecasts, discount rates and capitalization rates, among others. These assumptions are subject to economic and market uncertainties. As these factors are difficult to predict and are subject to future events that may alter our assumptions, the fair values estimated in the impairment analyses may not be realized. No impairments of investments in unconsolidated affiliates were incurred during the year ended March 31, 2011 or the six month period ended September 30, 2011.

Intangible Assets

Intangible assets include patents and trademarks that are amortized on a straight-line basis over periods ranging from 5 years to 7 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. As of fiscal year end 2011, all of the Company's remaining intangible assets were included in the asset sale of the DRIE product line to SPTS, except for those that were internally developed, which have a carrying value of zero.

Impairment of Long-Lived Assets

Long-lived assets are reviewed for indicators of 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. No impairment charges were recorded for fixed assets for the six months ended September 30, 2011.

Pension Obligations

Going into fiscal year 2011, the Company began the process of closing and/or liquidating all of our wholly-owned subsidiary companies, not already sold, including Tegal Germany. The subsidiaries are now included in discontinued operations. The Company has recognized an ongoing liability for pensions related to the Tegal Germany subsidiary. However, in fiscal year 2011, the Company recognized an additional liability for the independent third-party administration of the pension program once this subsidiary is closed. The total pension liability for the period ended September 30, 2011 was $662. The pension liability decreased by $38 from the prior period as a result of foreign currency changes. The pension liability was settled on October 6, 2011. The settlement of the pension obligation will be classified as a reduction of liabilities of discontinued operations. Any related foreign exchange gain or loss will be classified as a gain or loss on the sale of discontinued operations in the third quarter of the current fiscal year.

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 six months ended September 30, 2011 and 2010was $81 and $258, respectively. The total compensation expense related to non-vested stock options and RSUs not yet recognized at September 30, 2011 is $517.

The Company used the following valuation assumptions to estimate the fair value of options granted for the three month periods ended September 30, 2011 and 2010, respectively:

STOCK OPTIONS:	2011			2010
Expected life (years)		6.0			6.0
Volatility		151.3	%		75.1	%
Risk-free interest rate		0.96	%		1.27	%
Dividend yield		0	%		0	%

ESPP awards were valued using the Black-Scholes model with expected volatility calculated using a six-month historical volatility. No ESPP awards were made in the six month period ended September 30, 2011. The valuation assumptions are included for comparison only.

ESPP:	2011			2010
Expected life (years)		0.5			0.5
Volatility		141.1	%		86.2	%
Risk-free interest rate		0.02	%		0.14	%
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 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.

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 September 30, 2011, no stock option awards were granted.

Stock Options & Warrants

There was no stock option and warrant activity during the quarter ended September 30, 2011. A summary of the balances is as follows:

	Shares		Weighted Average Exercise Price		Weighted Average Remaining Contractual Term (in Years)		Aggregate Intrinsic Value
Beginning outstanding		151,245	$	21.63

Ending outstanding		151,245	$	21.63		5.26	$	-
Ending vested and expected to vest		151,176	$	21.60		5.00	$	-
Ending exercisable		132,937	$	22.93		5.00	$	-

The aggregate intrinsic value of stock options and warrants outstanding at September 30, 2011 is calculated as the difference between the exercise price of the underlying options and the market price of our common stock as of September 30, 2011.

The following table summarizes information with respect to stock options and warrants outstanding as of September 30, 2011:

Range of Exercise Prices				Number Outstanding As of September 30, 2011		Weighted Average Remaining Contractual Term (in years)		Weighted Average Exercise Price		Number Exercisable As of September 30, 2011		Weighted Average Exercise Price As of September 30, 2011
$	2.90	$	6.00		5,831		8.92	$	5.16		4,580	$	5.16
	6.25		11.70		57,435		6.78		11.48		42,043		11.48
	17.20		26.30		64,562		4.45		21.55		62,941		21.55
	28.10		61.80		19,421		3.25		42.49		19,413		42.49
	61.94		151.94		3,936		0.88		90.23		3,914		90.23
	152.21		285.00		58		1.73		174.00		46		174.00
	286.72		300.27		2		0.00		-		-		-


$	2.90	$	300.27		151,245		5.26	$	21.63		132,937	$	22.93

As of September 30, 2011, there was $20 of total unrecognized compensation cost related to outstanding options and warrants which the Company expects to recognize over a period of 0.86 years.

Restricted Stock Units

The following table summarizes the Company's RSU activity for the three months ended September 30, 2011:

	Number of Shares		Weighted Avg. Grant Date Fair Value
Balance July 1, 2011		272,405	$	2.18
Granted		-	$	-
Forfeited		-	$	-
Vested		-
Balance, June 30, 2011		272,405	$	2.18

Unvested restricted stock at September 30, 2011

As of September 30, 2011,there was $497 of total unrecognized compensation cost related to outstanding RSUs, which the Company expects to recognize over a period of 3.33 years.