UNITED STATES
SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549

FORM 10-Q/A
AMENDMENT NO.2

|                                                                                                  |                                                                                           
|------------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------
|(Mark One)                                                                                       
|                                                                                                  |                                                                                           
|x                                                                                                 | QUARTERLY
  REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 
|                                                                                                  |                                                                                           
|For the quarterly period ended     September 30, 2005                                            
|                                                                                                  |                                                                                           
|or                                                                                               
|                                                                                                  |                                                                                           
|o                                                                                                 | TRANSITION
  REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
|                                                                                                  |                                                                                           
|For the transition period from
  ______________________________ to ______________________________
|                                                                                                  |                                                                                           
|Commission File Number     0-12944                                                               
|                                                                                                  |                                                                                           
|                                                                                                  |                                                                                           
|ZYGO CORPORATION                                                                                 
|                                                                                                 
|(Exact name of
  registrant as specified in its charter)                                         
|                                                                                                  |                                                                                           

|                                                                 |                                        | 
|---------------------------------------------------------------- | -------------------------------------- | 
|Delaware                                                         | 06-0864500                             | 
|                                                                
|(State or other jurisdiction of incorporation or
  organization) | (I.R.S. Employer
  Identification No.) | 
|                                                                 |                                        | 
|Laurel Brook Road, Middlefield, Connecticut                      | 06455                                  | 
|                                                                
|(Address of principal executive offices)                         | (Zip Code)                             | 

|                                                                                    
|------------------------------------------------------------------------------------
|(860) 347-8506                                                                      
|                                                                                    
|Registrants telephone
  number, including area code                                
|                                                                                    
|N/A                                                                                 
|                                                                                    
|(Former name, former
  address, and former fiscal year, if changed from last report)

Indicate by check mark whether the registrant (1) has
filed all reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.

oYESxNO

Indicate by check mark whether the registrant is an
accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

xYESo NO

Indicate by check mark whether the registrant is a
shell company (as defined in Rule 12b-2 of the Exchange Act).

oYESxNO

APPLICABLE ONLY TO CORPORATE ISSUERS:

Indicate the number of shares outstanding of each of
the issuers classes of common stock, as of the latest practicable date.

18,027,136 shares of Common Stock, $.10 Par Value,
  at November 7, 2005

---



EXPLANATORY NOTE

Zygo Corporation (ZYGO, we, us, our, or Company)
is restating our previously issued consolidated financial statements for the
first quarter of fiscal 2006 (Restatement), because of inadvertent accounting
errors in the consolidation of our intercompany revenues from certain of our
foreign operations for those periods. Further information on the
adjustments can be found in Note 2, Restatement of Financial Statements, to
the accompanying consolidated financial statements.

This Amendment No. 2 on Form 10-Q/A (this Form 10-Q/A)
to the Companys Quarterly Report on Form 10-Q for the quarterly period
ended September 30, 2005, initially filed with the Securities and Exchange
Commission (the SEC) on November 9, 2005, and amended on December 23, 2005 (collectively,
the Original Filing), is being filed pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934, as amended, to amend the Original Filing to
reflect restatements of the Companys consolidated balance sheet as of
September 30, 2005 and the Companys consolidated statements of operations and
cash flows for the three-month periods ended September 30, 2005 and 2004 and
the notes related thereto. For a more detailed description of the Restatement,
see Note 2, Restatement of Financial Statements, to the accompanying
consolidated financial statements and the section entitled Restatement
in Managements Discussion and Analysis of Financial Condition and Results of
Operations contained in this Form 10-Q/A.

Concurrent with the filing of this Form 10-Q/A, we are
filing Amendment No. 2 on Form 10-K/A (the Form 10-K/A) to our Annual Report
on Form 10-K for the year ended June 30, 2005 to reflect restatement of the
Companys consolidated balance sheets as of June 30, 2005 and 2004 and the Companys
consolidated statements of operations, cash flows, and stockholders equity for
the years ended June 30, 2005, 2004, and 2003 and the notes related thereto. In
addition, we are concurrently filing Amendment No. 1 on Form 10-Q/A for the
quarter ended December 31, 2005 to reflect restatement of the Companys
consolidated balance sheet as of December 31, 2005 and the Companys
consolidated statements of operations and cash flows for the three- and
six-month periods ended December 31, 2005 and 2004 and the notes related
thereto.

For the convenience of the reader, this
Form 10-Q/A sets forth the Original Filing in its entirety. However, this
Form 10-Q/A amends and restates only Items 1, 2, and 4 of Part I
of the Original Filing, in each case, solely as a result of, and to reflect,
the Restatement, and no other information in the Original Filing is amended
hereby. The foregoing items have not been updated to reflect other events
occurring after the Original Filing or to modify or update those disclosures affected
by subsequent events. This Form 10-Q/A continues to speak as of the filing date
of the Original Filing for the quarterly period ended September 30, 2005. In
addition, pursuant to the rules of the SEC, Item 6 of Part II of
the Original Filing has been amended to contain currently dated certifications
from the Companys Chief Executive Officer and Chief Financial Officer, as
required by Sections 302 and 906 of the Sarbanes-Oxley Act of 2002. The
certifications of the Companys Chief Executive Officer and Chief Financial
Officer are attached to this Form 10-Q/A as Exhibits 31.1, 31.2, and 32.1.

The Company has not amended and does not intend to
amend its previously filed Quarterly Reports on Form 10-Q for the periods
affected by the Restatement prior to June 30, 2005. For this reason, the
consolidated financial statements and related financial information for the
affected periods contained in such reports should no longer be relied upon.

2

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FORWARD LOOKING STATEMENTS

All statements other than statements of historical
fact included in this Form 10-Q Quarterly Report regarding our financial
position, business strategy, plans, anticipated growth rates, and objectives of
management for future operations (as well as these factors as they may apply to
our customers, suppliers, and others with whom we have critical business
relationships) are forward-looking statements. Forward-looking statements are
intended to provide managements current expectations or plans for the future
operating and financial performance based upon information currently available
and assumptions currently believed to be valid. Forward-looking statements can
be identified by the use of words such as anticipate, believe, estimate, expect,
intend, plans, strategy, project, and other words of similar meaning in
connection with a discussion of future operating or financial performance.
Actual results could differ materially from those contemplated by the
forward-looking statements as a result of certain factors. Among the important
factors that could cause actual events to differ materially from those in the
forward-looking statements are fluctuations in capital spending of our
customers, fluctuations in net sales to our major customer, manufacturing and
supplier risks, dependence on new product development, rapid technological and
market change, risks in international operations, dependence on proprietary
technology and key personnel, length of the sales cycle, environmental
regulations, and stock price fluctuations. Further information on potential
factors that could affect our business is described in our reports on file with
the Securities and Exchange Commission, including our Form 10-K, as amended,
for the fiscal year ended June 30, 2005.

3

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PART I - Financial
Information

Item 1. Financial Statements

CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)(Thousands,
except per share amounts)

|                                                                                |  |                                  |        |            |   |        |  
|------------------------------------------------------------------------------- |  | -------------------------------- | ------ | ---------- | - | ------ | -
|                                                                                |  | Three Months Ended September 30, |       
|                                                                                |  |                                  |       
|                                                                                |  | 2005                             |        | 2004       |  
|                                                                                |  |                                  |        |            |  
|                                                                                |  | (Restated)                       |        | (Restated) |  
|                                                                                |  |                                  |        |            |  
|Net sales                                                                       |  |                                  |        |            |   |        |  
|Products                                                                        |  | $                                | 30,368 |            | $ | 25,725 |  
|Development services                                                            |  |                                  | 3,961  |            |   | 1,695  |  
|                                                                                |  |                                  |        |            |   |        |  
|                                                                                |  |                                  | 34,329 |            |   | 27,420 |  
|                                                                                |  |                                  |        |            |   |        |  
|Cost of goods sold                                                              |  |                                  |        |            |   |        |  
|Products                                                                        |  |                                  | 18,270 |            |   | 15,179 |  
|Development services                                                            |  |                                  | 2,906  |            |   | 1,297  |  
|                                                                                |  |                                  |        |            |   |        |  
|                                                                                |  |                                  | 21,176 |            |   | 16,476 |  
|                                                                                |  |                                  |        |            |   |        |  
|Gross profit                                                                    |  |                                  | 13,153 |            |   | 10,944 |  
|                                                                                |  |                                  |        |            |   |        |  
|Selling, general, and administrative expenses                                   |  |                                  | 6,368  |            |   | 5,659  |  
|Research, development, and engineering expenses                                 |  |                                  | 3,540  |            |   | 3,208  |  
|                                                                                |  |                                  |        |            |   |        |  
|Operating profit                                                                |  |                                  | 3,245  |            |   | 2,077  |  
|                                                                                |  |                                  |        |            |   |        |  
|                                                                                |  |                                  |        |            |   |        |  
|Other income (expense):                                                         |  |                                  |        |            |   |        |  
|Interest income                                                                 |  |                                  | 417    |            |   | 179    |  
|Miscellaneous income (expense), net                                             |  |                                  | 123    |            |   | (56    | )
|                                                                                |  |                                  |        |            |   |        |  
|Total other income                                                              |  |                                  | 540    |            |   | 123    |  
|                                                                                |  |                                  |        |            |   |        |  
|Earnings from continuing operations before income
taxes and minority
  interest |  |                                  | 3,785  |            |   | 2,200  |  
|                                                                                |  |                                  |        |            |   |        |  
|Income tax expense                                                              |  |                                  | (1,442 | )          |   | (767   | )
|Minority interest                                                               |  |                                  | (150   | )          |   | (116   | )
|                                                                                |  |                                  |        |            |   |        |  
|Earnings from continuing operations                                             |  |                                  | 2,193  |            |   | 1,317  |  
|                                                                                |  |                                  |        |            |   |        |  
|                                                                                |  |                                  |        |            |   |        |  
|Discontinued TeraOptix operations, net of tax                                   |  |                                  |       |            |   | (61    | )
|Charges and adjustments on the disposal of TeraOptix, net of
tax                |  |                                  |       |            |   | (4     | )
|                                                                                |  |                                  |        |            |   |        |  
|Loss from discontinued operations                                               |  |                                  |       |            |   | (65    | )
|                                                                                |  |                                  |        |            |   |        |  
|Net earnings                                                                    |  | $                                | 2,193  |            | $ | 1,252  |  
|                                                                                |  |                                  |        |            |   |        |  
|                                                                                |  |                                  |        |            |   |        |  
|Basic - Earnings per share:                                                     |  |                                  |        |            |   |        |  
|Continuing operations                                                           |  | $                                | 0.12   |            | $ | 0.07   |  
|Discontinued operations                                                         |  |                                  |       |            |   |       |  
|                                                                                |  |                                  |        |            |   |        |  
|Net earnings                                                                    |  | $                                | 0.12   |            | $ | 0.07   |  
|                                                                                |  |                                  |        |            |   |        |  
|                                                                                |  |                                  |        |            |   |        |  
|Diluted - Earnings (loss) per share:                                            |  |                                  |        |            |   |        |  
|Continuing operations                                                           |  | $                                | 0.12   |            | $ | 0.07   |  
|Discontinued operations                                                         |  |                                  |       |            |   |       |  
|                                                                                |  |                                  |        |            |   |        |  
|Net earnings                                                                    |  | $                                | 0.12   |            | $ | 0.07   |  
|                                                                                |  |                                  |        |            |   |        |  
|                                                                                |  |                                  |        |            |   |        |  
|Weighted average shares outstanding:                                            |  |                                  |        |            |   |        |  
|Basic shares                                                                    |  |                                  | 18,013 |            |   | 17,923 |  
|                                                                                |  |                                  |        |            |   |        |  
|Diluted shares                                                                  |  |                                  | 18,137 |            |   | 18,115 |  
|                                                                                |  |                                  |        |            |   |        |  

See
accompanying notes to consolidated financial statements.

4

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CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(Thousands
of dollars, except share amounts)

|                                                                                                                                                        |  |                    |         |               |   |         |  
|------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------ | ------- | ------------- | - | ------- | -
|                                                                                                                                                        |  | September 30, 2005 |         | June 30, 2005 |  
|                                                                                                                                                        |  |                    |         |               |  
|                                                                                                                                                        |  | (Restated)         |         |               |   |        
|Assets                                                                                                                                                  |  |                    |         |               |   |         |  
|Current assets:                                                                                                                                         |  |                    |         |               |   |         |  
|Cash and cash
  equivalents                                                                                                                             |  | $                  | 17,159  |               | $ | 20,949  |  
|Marketable
  securities                                                                                                                                 |  |                    | 20,775  |               |   | 17,242  |  
|Receivables, net
  of allowance for doubtful accounts of $386 and $663, respectively                                                                    |  |                    | 25,080  |               |   | 28,124  |  
|Inventories                                                                                                                                             |  |                    | 35,032  |               |   | 33,727  |  
|Prepaid expenses                                                                                                                                        |  |                    | 2,100   |               |   | 2,126   |  
|Deferred income
  taxes                                                                                                                                 |  |                    | 8,934   |               |   | 8,895   |  
|                                                                                                                                                        |  |                    |         |               |   |         |  
|Total current
  assets                                                                                                                                  |  |                    | 109,080 |               |   | 111,063 |  
|                                                                                                                                                        |  |                    |         |               |   |         |  
|Marketable
  securities                                                                                                                                 |  |                    | 20,615  |               |   | 18,711  |  
|Property, plant,
  and equipment, net                                                                                                                   |  |                    | 31,459  |               |   | 31,420  |  
|Deferred income
  taxes                                                                                                                                 |  |                    | 21,242  |               |   | 22,333  |  
|Intangible
  assets, net                                                                                                                                |  |                    | 5,714   |               |   | 5,638   |  
|Other assets                                                                                                                                            |  |                    | 987     |               |   | 1,017   |  
|                                                                                                                                                        |  |                    |         |               |   |         |  
|Total
  assets                                                                                                                                          |  | $                  | 189,097 |               | $ | 190,182 |  
|                                                                                                                                                        |  |                    |         |               |   |         |  
|                                                                                                                                                        |  |                    |         |               |   |         |  
|Liabilities
  and Stockholders Equity                                                                                                                  |  |                    |         |               |   |         |  
|Current
  liabilities:                                                                                                                                  |  |                    |         |               |   |         |  
|Payables                                                                                                                                                |  | $                  | 11,705  |               | $ | 13,510  |  
|Accrued progress
  payments                                                                                                                             |  |                    | 24,621  |               |   | 21,713  |  
|Accrued salaries
  and wages                                                                                                                            |  |                    | 3,204   |               |   | 6,220   |  
|Other accrued
  liabilities                                                                                                                             |  |                    | 3,204   |               |   | 4,731   |  
|Income taxes
  payable                                                                                                                                  |  |                    | 1,409   |               |   | 1,510   |  
|                                                                                                                                                        |  |                    |         |               |   |         |  
|Total current
  liabilities                                                                                                                             |  |                    | 44,143  |               |   | 47,684  |  
|                                                                                                                                                        |  |                    |         |               |   |         |  
|Other long-term
  liabilities                                                                                                                           |  |                    | 94      |               |   | 96      |  
|Minority
  interest                                                                                                                                     |  |                    | 777     |               |   | 1,249   |  
|                                                                                                                                                        |  |                    |         |               |   |         |  
|Total
  liabilities                                                                                                                                     |  |                    | 45,014  |               |   | 49,029  |  
|                                                                                                                                                        |  |                    |         |               |   |         |  
|                                                                                                                                                        |  |                    |         |               |   |         |  
|Stockholders
  equity:                                                                                                                                 |  |                    |         |               |   |         |  
|Common Stock,
  $.10 par value per share:                                                                                                               |  |                    |         |               |   |         |  
|40,000,000 shares
  authorized;
  18,471,782 shares issued (18,423,026 at June 30, 2005);
  18,024,577 shares outstanding (17,975,821 at June 30, 2005) |  |                    | 1,847   |               |   | 1,842   |  
|Additional
  paid-in capital                                                                                                                            |  |                    | 142,908 |               |   | 142,111 |  
|Retained
  earnings                                                                                                                                     |  |                    | 4,760   |               |   | 2,567   |  
|Accumulated
  other comprehensive income (loss):                                                                                                        |  |                    |         |               |   |         |  
|Currency
  translation effects                                                                                                                          |  |                    | (173    | )             |   | (112    | )
|Net unrealized
  gain on marketable securities                                                                                                          |  |                    | 28      |               |   | 32      |  
|                                                                                                                                                        |  |                    |         |               |   |         |  
|                                                                                                                                                        |  |                    | 149,370 |               |   | 146,440 |  
|Less treasury
  stock, at cost (447,205 shares)                                                                                                         |  |                    | 5,287   |               |   | 5,287   |  
|                                                                                                                                                        |  |                    |         |               |   |         |  
|Total
  stockholders equity                                                                                                                            |  |                    | 144,083 |               |   | 141,153 |  
|                                                                                                                                                        |  |                    |         |               |   |         |  
|Total
  liabilities and stockholders equity                                                                                                            |  | $                  | 189,097 |               | $ | 190,182 |  
|                                                                                                                                                        |  |                    |         |               |   |         |  

See accompanying notes to consolidated financial
statements.

5

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CONSOLIDATED STATEMENTS OF CASH FLOWS 
(UNAUDITED)
(Thousands
of dollars)

|                                                                                             |  |                                  |        |            |   |        |  
|-------------------------------------------------------------------------------------------- |  | -------------------------------- | ------ | ---------- | - | ------ | -
|                                                                                             |  | Three Months Ended September 30, |       
|                                                                                             |  |                                  |       
|                                                                                             |  | 2005                             |        | 2004       |  
|                                                                                             |  |                                  |        |            |  
|                                                                                             |  | (Restated)                       |        | (Restated) |  
|                                                                                             |  |                                  |        |            |  
|Cash provided by
  operating activities:                                                     |  |                                  |        |            |   |        |  
|Net earnings                                                                                 |  | $                                | 2,193  |            | $ | 1,252  |  
|                                                                                             |  |                                  |        |            |   |        |  
|Adjustments to
  reconcile net earnings to cash provided by (used for) operating activities: |  |                                  |        |            |   |        |  
|Loss from
  discontinued operations                                                          |  |                                  |       |            |   | 65     |  
|Depreciation and
  amortization                                                              |  |                                  | 1,499  |            |   | 1,506  |  
|Deferred income
  taxes                                                                      |  |                                  | 1,052  |            |   | 1,121  |  
|Compensation
  cost related to share-based payments arrangements                             |  |                                  | 374    |            |   |       |  
|Excess tax
  benefits from share-based payment arrangements                                  |  |                                  | (11    | )          |   |       |  
|Other, net                                                                                   |  |                                  | 14     |            |   | 53     |  
|Changes in
  operating accounts:                                                             |  |                                  |        |            |   |        |  
|Receivables                                                                                  |  |                                  | 3,082  |            |   | 5,941  |  
|Inventories                                                                                  |  |                                  | (1,288 | )          |   | (5,129 | )
|Prepaid expenses                                                                             |  |                                  | 26     |            |   | 62     |  
|Accounts
  payable, accrued expenses, and taxes payable                                      |  |                                  | (3,602 | )          |   | (2,247 | )
|Minority
  interest                                                                          |  |                                  | 150    |            |   | 116    |  
|                                                                                             |  |                                  |        |            |   |        |  
|Net cash
  provided by continuing operations                                                 |  |                                  | 3,489  |            |   | 2,740  |  
|Net cash used
  for discontinued operations                                                  |  |                                  |       |            |   | (157   | )
|                                                                                             |  |                                  |        |            |   |        |  
|Net cash
  provided by operating activities                                                  |  |                                  | 3,489  |            |   | 2,583  |  
|                                                                                             |  |                                  |        |            |   |        |  
|Cash used for
  investing activities:                                                        |  |                                  |        |            |   |        |  
|Additions to
  property, plant, and equipment, net                                           |  |                                  | (1,424 | )          |   | (2,599 | )
|Purchase of
  marketable securities                                                          |  |                                  | (9,478 | )          |   | (3,515 | )
|Additions to
  intangibles and other assets                                                  |  |                                  | (209   | )          |   | (247   | )
|Proceeds from
  the maturity of marketable securities                                        |  |                                  | 4,015  |            |   | 1,750  |  
|                                                                                             |  |                                  |        |            |   |        |  
|Net cash used
  for investing activities                                                     |  |                                  | (7,096 | )          |   | (4,611 | )
|                                                                                             |  |                                  |        |            |   |        |  
|Cash provided by
  (used for) financing activities:                                          |  |                                  |        |            |   |        |  
|Employee stock
  purchase                                                                    |  |                                  | 293    |            |   | 328    |  
|Exercise of
  employee stock options                                                         |  |                                  | 135    |            |   | 34     |  
|Excess tax
  benefits from share-based payment arangements                                   |  |                                  | 11     |            |   |       |  
|Dividend payment
  to minority interest                                                      |  |                                  | (622   | )          |   |       |  
|                                                                                             |  |                                  |        |            |   |        |  
|Net cash
  provided by (used for) financing activities                                       |  |                                  | (183   | )          |   | 362    |  
|                                                                                             |  |                                  |        |            |   |        |  
|Net decrease in
  cash and cash equivalents                                                  |  |                                  | (3,790 | )          |   | (1,666 | )
|Cash and cash
  equivalents, beginning of period                                             |  |                                  | 20,949 |            |   | 17,462 |  
|                                                                                             |  |                                  |        |            |   |        |  
|Cash and cash
  equivalents, end of period                                                   |  | $                                | 17,159 |            | $ | 15,796 |  
|                                                                                             |  |                                  |        |            |   |        |  

See accompanying notes to
consolidated financial statements

6

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Dollars in thousands, except for per share
amounts)

NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES

Principles of Consolidation and Presentation

Zygo
Corporation is a worldwide developer and supplier of high performance metrology
instruments, high precision optics, optical assemblies, and automation for the
semiconductor and industrial markets. The accompanying consolidated financial
statements include the accounts of Zygo Corporation and its subsidiaries (ZYGO,
we, us, our or Company). All material transactions and accounts with
the subsidiaries have been eliminated from the consolidated financial
statements. The results of operations for the three month period ended
September 30, 2005 are not necessarily indicative of the results to be expected
for the full fiscal year.

The
Consolidated Balance Sheet at September 30, 2005, the Consolidated Statements
of Operations for the three months ended September 30, 2005 and 2004, and the
Consolidated Statements of Cash Flows for the three months ended September 30,
2005 and 2004 are unaudited but, in managements opinion, include all
adjustments, consisting only of normal recurring accruals, necessary for a fair
presentation of the results of the interim periods. The accompanying
consolidated financial statements should be read in conjunction with the
consolidated financial statements and notes included in our June 30, 2005
Annual Report on Form 10-K/A, Amendment No. 2, including items incorporated by
reference therein.

Earnings Per ShareBasic and
diluted earnings per share are calculated in accordance with Statement of
Financial Accounting Standards (SFAS) No. 128, Earnings Per Share.

The following
table sets forth the reconciliation of basic weighted average shares
outstanding and diluted weighted average shares outstanding:

|                                                         |  |                                    |           
|-------------------------------------------------------- |  | ---------------------------------- | ----------
|                                                         |  | Three
  Months Ended September 30, |           
|                                                         |  |                                    |           
|                                                         |  | 2005                               |           
|                                                         |  |                                    |           
|Basic weighted average
  shares outstanding              |  |                                    | 18,013,229
|Dilutive effect of stock
  options and restricted shares |  |                                    | 124,149   
|                                                         |  |                                    |           
|Diluted weighted average
  shares outstanding            |  |                                    | 18,137,378
|                                                         |  |                                    |           

Share-Based PaymentsIn December
2004, the Financial Accounting Standards Board (FASB) issued SFAS 123(R),
Share-Based Payment (as amended). SFAS No. 123(R) eliminates the alternative
to use the intrinsic value method of accounting that was provided in SFAS No.
123, which generally resulted in no compensation expense recorded in the
financial statements related to the issuance of equity awards to employees.
SFAS No. 123(R) requires that the cost resulting from all share-based payment
transactions be recognized in the financial statements. SFAS No. 123(R)
establishes fair value as the measurement objective in accounting for share-based
payment arrangements and requires all companies to apply a fair-value-based
measurement method in accounting generally for all share-based payment
transactions with employees.

On July 1,
2005, we adopted SFAS No. 123(R) using a modified prospective method resulting
in the recognition of share-based compensation expense of $232, net of related
tax expense of $142. Prior period amounts have not been restated. Under this
application, we are required to record compensation expense for all awards
granted after the date of adoption and for the unvested portion of previously
granted awards that remain outstanding at the date of adoption. In addition, we
made changes to our employee stock purchase plan for periods beginning after
July 1, 2005, which rendered the plan non-compensatory in accordance with SFAS
No. 123(R).

7

---



Prior to the
adoption of SFAS No. 123(R), we applied Accounting Principles Board (APB)
Opinion No. 25, Accounting for Stock Issued to Employees, and related
interpretations in accounting for our plans. The following table details the
effect on net earnings and earnings per share had compensation expense for the
employee share-based awards been recorded in the three months ended September
30, 2004 based on the fair value method under SFAS No. 123.

|                                                                                                                      |  |   |        |  
|--------------------------------------------------------------------------------------------------------------------- |  | - | ------ | -
|Net earnings, as reported (Restated)                                                                                  |  | $ | 1,252  |  
|                                                                                                                      |  |   |        |  
|Deduct: Total stock-based compensation expense determined under fair
  value based method, net of related tax effects |  |   | (1,252 | )
|                                                                                                                      |  |   |        |  
|                                                                                                                      |  |   |        |  
|Pro forma net earnings                                                                                                |  | $ |       |  
|                                                                                                                      |  |   |        |  
|                                                                                                                      |  |   |        |  
|Earnings per share:                                                                                                   |  |   |        |  
|Basic - as reported (Restated)                                                                                        |  | $ | 0.07   |  
|                                                                                                                      |  |   |        |  
|Basic - pro forma                                                                                                     |  | $ |       |  
|                                                                                                                      |  |   |        |  
|                                                                                                                      |  |   |        |  
|Diluted - as reported (Restated)                                                                                      |  | $ | 0.07   |  
|                                                                                                                      |  |   |        |  
|Diluted - pro forma                                                                                                   |  | $ |       |  
|                                                                                                                      |  |   |        |  

Share Based Compensation PlansAs of
September 30, 2005, we have two share-based compensation plans, which are
described below. A third share-based compensation plan expired in September
2002.

The Zygo
Corporation 2002 Equity Incentive Plan permits the granting of restricted stock
and stock options to purchase shares of common stock up to a total of 1,500,000
shares. The exercise price per share of common stock covered by an option may
not be less than the par value per share on the date of grant, and in the case
of an incentive stock option, the exercise price may not be less than the
market value per share on the date of grant. These options generally vest over
a four year period at a rate of 25% each year. The Plan will expire on August
27, 2012. Pursuant to the terms of the Plan, the Board of Directors may also amend
the Plan to authorize the grant of other types of equity-based awards, without
further action by our stockholders. Options issued to non-employee directors
are now issued under this plan. Non-employee directors are granted fully
exercisable options to purchase 6,000 shares of common stock on an annual basis
and each new non-employee director is granted fully exercisable options to
purchase 12,000 shares of common stock on his/her first day of service, in all
instances at the market value per share on the date of grant.

The Zygo
Corporation Amended and Restated Non-Employee Director Stock Option Plan
permits the granting of non-qualified options to purchase a total of 620,000
shares (adjusted for splits) of common stock at prices not less than the market
value of the stock on the date of grant. Under the terms of the Plan, as
amended on September 24, 1999, each new non-employee director (other than a
person who was previously an employee of ZYGO or any of our subsidiaries) was
granted an option to purchase 8,000 shares of common stock, generally, on his
or her first day of service as a non-employee director; and each other
non-employee director was granted an option to purchase 3,000 shares of common
stock on an annual basis. All options were fully exercisable on the date of
grant and had a 10-year term. The Plan, as amended, will expire on November 17,
2009. The Company does not intend to grant further options under the
Non-Employee Director Stock Option Plan.

The Zygo
Corporation Amended and Restated Non-Qualified Stock Option Plan permitted the
granting of non-qualified options to purchase a total of 4,850,000 shares
(adjusted for splits) of common stock at prices not less than the market value
of the stock on the date of grant. Options generally became exercisable at the
rate of 25% of the shares each year commencing one year after the date of
grant. The Plan, as amended, expired on September 3, 2002.

8

---



We use the
Black-Scholes option-pricing model to calculate the fair value of options. The
key assumptions for this valuation method include the expected term of the
option, stock price volatility, risk-free interest rate, dividend yield,
exercise price, and forfeiture rate. Many of these assumptions are judgmental
and highly sensitive in the determination of compensation expense. Under the
assumptions indicated below, the weighted-average fair value of the first
quarter of fiscal 2006 stock option grants was $4.75 and the weighted-average
fair value of the first quarter fiscal 2005 stock option grants was $5.73. The
table below indicates the key assumptions used in the option valuation
calculations for options granted in the three months ended September 30, 2005
and 2004 and a discussion of our methodology for developing each of the
assumptions used in the valuation model:

|                        |  |                                  |          
|----------------------- |  | -------------------------------- | ---------
|                        |  | Three Months Ended September 30, |          
|                        |  |                                  |          
|                        |  | 2005                             |          
|                        |  |                                  |          
|Term                    |  |                                  | 4.1 Years
|Volatility              |  |                                  | 52.9     
|Dividend Yield          |  |                                  | 0.0      
|Risk-free interest rate |  |                                  | 4.1      
|Forfeiture rate         |  |                                  | 10.6     

Term - This is the
period of time over which the options granted are expected to remain
outstanding. Options granted have a maximum term of ten years. An increase in
the expected term will increase compensation expense.

Volatility - This is
a measure of the amount by which a price has fluctuated or is expected to
fluctuate. Volatilities are based on implied volatilities from traded options
of ZYGOs shares, historical volatility of ZYGOs shares, and other factors,
such as expected changes in volatility arising from planned changes in ZYGOs
business operations. An increase in the expected volatility will increase
compensation expense.

Risk-Free Interest Rate - This is the U.S. Treasury rate for the week of the grant having a term equal
to the expected term of the option. An increase in the risk-free interest rate
will increase compensation expense.

Dividend Yield - We
did not make any dividend payments during the last five fiscal years and we
have no plans to pay dividends in the foreseeable future. An increase in the
dividend yield will decrease compensation expense.

Forfeiture Rate -
This is the estimated percentage of options granted that are expected to be
forfeited or canceled before becoming fully vested. An increase in the
forfeiture rate will decrease compensation expense.

The following
table summarizes information about our stock option plans for the three months
ended September 30, 2005.

|                                      |  |                   |           |                                     |   |                                                   |  |                                              |      |  |   |       |  | 
|------------------------------------- |  | ----------------- | --------- | ----------------------------------- | - | ------------------------------------------------- |  | -------------------------------------------- | ---- |  | - | ----- |  | 
|                                      |  | Number of Options |           | Weighted
  Average
  Exercise Price |   | Weighted
  Average
  Remaining
  Contractual life |  | Aggregate
  Intrinsic Value
  (in thousands) |     
|                                      |  |                   |           |                                     |   |                                                   |  |                                              |     
|                                      |  |                   |           |                                     |   |                                                   |  |                                              |      |  |   |       | 
|Balance, July 1, 2005                 |  |                   | 2,069,175 |                                     | $ | 26.95                                             |  |                                              |      |  |   |       | 
|Granted                               |  |                   | 120,000   |                                     | $ | 10.40                                             |  |                                              |      |  |   |       | 
|Excercised                            |  |                   | (14,013   | )                                   | $ | 7.52                                              |  |                                              |      |  |   |       | 
|Forfeited                             |  |                   | (17,563   | )                                   | $ | 49.13                                             |  |                                              |      |  |   |       | 
|                                      |  |                   |           |                                     |   |                                                   |  |                                              |      |  |   |       | 
|                                      |  |                   |           |                                     |   |                                                   |  |                                              |      |  |   |       | 
|Options outstanding, end
  of quarter |  |                   | 2,157,599 |                                     | $ | 25.97                                             |  | $                                            | 6.40 |  | $ | 7,900 | 
|                                      |  |                   |           |                                     |   |                                                   |  |                                              |      |  |   |       | 
|Option exercisable, end of
  quarter  |  |                   | 1,592,383 |                                     | $ | 31.02                                             |  | $                                            | 6.10 |  | $ | 5,085 | 
|                                      |  |                   |           |                                     |   |                                                   |  |                                              |      |  |   |       | 

As of
September 30, 2005 there was $2,651 of total unrecognized compensation cost
related to stock options. These costs are expected to be recognized over a
weighted average period of 1.6 years.

The total
intrinsic value of stock options exercised was $89 and the total fair value of
stock awards vested was $761 during the three months ended September 30, 2005.

9

---



Cash received
from stock option exercises for the three months ended September 30, 2005 was
$105. The income tax benefits from share based arrangements totaled $32, all of
which were attributable to stock option exercises.

The following
table summarizes information about restricted stock awards for the three months
ended September 30, 2005:

|                                         |  |        |         |                                               |   |       | 
|---------------------------------------- |  | ------ | ------- | --------------------------------------------- | - | ----- | 
|                                         |  | Shares |         | Weighted 
  Average Grant- 
  Date Fair Value |  
|                                         |  |        |         |                                               |  
|                                         |  |        |         |                                               |   |       | 
|Non Vested Balance at July 1, 2005       |  |        |        |                                               | $ |      | 
|Granted                                  |  |        | 129,800 |                                               | $ | 10.40 | 
|Vested                                   |  |        |        |                                               | $ |      | 
|Forfeited                                |  |        |        |                                               | $ |      | 
|                                         |  |        |         |                                               |   |       | 
|Non Vested Balance at September 30,
2005 |  |        | 129,800 |                                               | $ | 10.40 | 
|                                         |  |        |         |                                               |   |       | 

These
restricted stock awards were issued under the 2002 Equity Incentive Plan and
50% of the restrictions lapse after three years and the remaining 50% lapse
after four years.

As of
September 30, 2005 there was $1,151 of total unrecognized compensation costs
related to restricted stock awards. These costs are expected to be recognized
over a weighted average period of 4.0 years.

At September
30, 2005 an aggregate of 599,012 shares remained available for future grants
under our stock plans, which cover stock awards and stock options. We issue
shares to satisfy stock option exercises and restricted stock awards.

Comprehensive IncomeOur total comprehensive income was as follows:

|                                                     |  |                                    |       |            |   |       |  
|---------------------------------------------------- |  | ---------------------------------- | ----- | ---------- | - | ----- | -
|                                                     |  | Three
  Months Ended September 30, |      
|                                                     |  |                                    |      
|                                                     |  | 2005                               |       | 2004       |  
|                                                     |  |                                    |       |            |  
|                                                     |  | (Restated)                         |       | (Restated) |  
|Net earnings                                         |  | $                                  | 2,193 |            | $ | 1,252 |  
|                                                    
|Unrealized loss on marketable
securities, net of tax |  |                                    | (4    | )          |   | (12   | )
|                                                     |  |                                    |       |            |   |       |  
|Foreign currency translation
effect                  |  |                                    | (61   | )          |   | 75    |  
|                                                     |  |                                    |       |            |   |       |  
|Comprehensive income                                 |  | $                                  | 2,128 |            | $ | 1,315 |  
|                                                     |  |                                    |       |            |   |       |  

Inventories

Inventories
are stated at the lower of cost (determined on a first-in, first-out basis) or
market. At September 30, 2005 and June 30, 2005, inventories were as follows:

|                                     |  |  |                        |        |  |  |                 |   |        | 
|------------------------------------ |  |  | ---------------------- | ------ |  |  | --------------- | - | ------ | 
|                                     |  |  | September
  30,
  2005 |        |  |  | June 30,
  2005 |  
|                                     |  |  |                        |        |  |  |                 |  
|Raw materials and manufactured parts |  |  | $                      | 14,447 |  |  |                 | $ | 14,320 | 
|Work in process                      |  |  |                        | 16,941 |  |  |                 |   | 15,927 | 
|Finished goods                       |  |  |                        | 3,644  |  |  |                 |   | 3,480  | 
|                                     |  |  |                        |        |  |  |                 |   |        | 
|                                     |  |  | $                      | 35,032 |  |  |                 | $ | 33,727 | 
|                                     |  |  |                        |        |  |  |                 |   |        | 

10

---



Property, Plant, and
Equipment

Property,
plant, and equipment are stated at cost. Maintenance and repairs are charged to
expense as incurred. Management evaluates, on an ongoing basis, the carrying
value of our property, plant, and equipment and makes adjustments when
impairments are identified. Depreciation is based on the estimated useful lives
of the various classes of assets and is computed using the straight-line
method. At September 30, 2005 and June 30, 2005, property, plant, and equipment
were as follows:

|                                           |  |  |                        |         |   |  |                 |   |         |                                   |  |  |       | 
|------------------------------------------ |  |  | ---------------------- | ------- | - |  | --------------- | - | ------- | --------------------------------- |  |  | ----- | 
|                                           |  |  | September
  30,
  2005 |         |   |  | June 30,
  2005 |   |         | Estimated
  Useful Life
  (Years) | 
|                                           |  |  |                        |         |   |  |                 |   |         |                                   | 
|Land                                       |  |  | $                      | 615     |   |  |                 | $ | 615     |                                   |  |  |      | 
|Building and improvements                  |  |  |                        | 15,730  |   |  |                 |   | 15,759  |                                   |  |  | 1540 | 
|Machinery, equipment, and office
furniture |  |  |                        | 47,676  |   |  |                 |   | 45,501  |                                   |  |  | 38   | 
|Leasehold improvements                     |  |  |                        | 712     |   |  |                 |   | 715     |                                   |  |  | 15   | 
|Construction in progress                   |  |  |                        | 2,175   |   |  |                 |   | 2,997   |                                   |  |  |      | 
|                                           |  |  |                        |         |   |  |                 |   |         |                                   |  |  |       | 
|                                           |  |  |                        | 66,908  |   |  |                 |   | 65,587  |                                   |  |  |       | 
|Accumulated depreciation                   |  |  |                        | (35,449 | ) |  |                 |   | (34,167 | )                                 |  |  |       | 
|                                           |  |  |                        |         |   |  |                 |   |         |                                   |  |  |       | 
|                                           |  |  | $                      | 31,459  |   |  |                 | $ | 31,420  |                                   |  |  |       | 
|                                           |  |  |                        |         |   |  |                 |   |         |                                   |  |  |       | 

Depreciation
expense for the three months ended September 30, 2005 and 2004 was $1,370 and
$1,377, respectively.

Intangible Assets

Intangible
assets include patents, trademarks, and license agreements. The cost of
intangible assets is amortized on a straight-line basis over estimated useful
lives ranging from 4-20 years. Intangible assets, at cost, at September 30,
2005 and June 30, 2005 were as follows:

|                         |  |  |                        |        |   |  |                 |   |        |  
|------------------------ |  |  | ---------------------- | ------ | - |  | --------------- | - | ------ | -
|                         |  |  | September
  30,
  2005 |        |   |  | June 30,
  2005 |  
|                         |  |  |                        |        |   |  |                 |  
|Patents and Trademarks   |  |  | $                      | 6,740  |   |  |                 | $ | 6,556  |  
|License Agreements       |  |  |                        | 1,350  |   |  |                 |   | 1,350  |  
|                         |  |  |                        |        |   |  |                 |   |        |  
|                         |  |  |                        | 8,090  |   |  |                 |   | 7,906  |  
|Accumulated amortization |  |  |                        | (2,376 | ) |  |                 |   | (2,268 | )
|                         |  |  |                        |        |   |  |                 |   |        |  
|Total                    |  |  | $                      | 5,714  |   |  |                 | $ | 5,638  |  
|                         |  |  |                        |        |   |  |                 |   |        |  

Intangible
amortization expense was $107 and $113 for the three months ended September 30,
2005 and 2004, respectively. Amortization expense related to certain intangible
assets is included in cost of goods sold in the Consolidated Statements of
Operations.

Warranty

A limited
warranty is provided on our products for periods ranging from 3 to 12 months
and allowances for estimated warranty costs are recorded during the period of
sale. The determination of such allowances requires management to make
estimates of product return rates and expected costs to repair or replace
products under warranty. If actual return rates or repair and replacement
costs, or both, differ significantly from managements estimates, adjustments
to the expense may be required.

The following
is a reconciliation of the beginning and ending balances of our accrued
warranty liability, which is included in the Other accrued liabilities line
item in the Consolidated Balance Sheets:

|                                                                         |  |  |                                  |       |   |  |      |   |       |  
|------------------------------------------------------------------------ |  |  | -------------------------------- | ----- | - |  | ---- | - | ----- | -
|                                                                         |  |  | Three Months Ended September 30,
|                                                                         |  |  |                                  |      
|                                                                         |  |  | 2005                             |       |   |  | 2004 |  
|                                                                         |  |  |                                  |       |   |  |      |  
|Beginning balance                                                        |  |  | $                                | 1,396 |   |  |      | $ | 1,486 |  
|Reductions for payments made                                             |  |  |                                  | (277  | ) |  |      |   | (525  | )
|Changes in accruals related to warranties
  issued in the current period |  |  |                                  | 262   |   |  |      |   | 194   |  
|Changes in accruals related to pre-existing
  warranties                 |  |  |                                  | 109   |   |  |      |   | 7     |  
|                                                                         |  |  |                                  |       |   |  |      |   |       |  
|Ending balance                                                           |  |  | $                                | 1,490 |   |  |      | $ | 1,162 |  
|                                                                         |  |  |                                  |       |   |  |      |   |       |  

11

---



Supplemental Cash
Flow Information

There were no
interest payments on debt for the three months ended September 30, 2005 and
2004. Income tax payments amounted to $392 and $199 for the three months ended
September 30, 2005 and 2004, respectively.

NOTE 2: RESTATEMENT OF FINANCIAL STATEMENTS

We are restating our consolidated financial statements for the
  first quarter of fiscal 2006 to account for corrections in the accounting of
  intercompany transactions from certain of our foreign operations. In addition,
  certain disclosures in Notes 1, 5, and 6 to the consolidated financial statements
  contained in this report have been restated to reflect the corrections. The
  corrections are the result of our failure to identify and eliminate certain
  intercompany revenues attributed to our Singapore and Taiwan offices, which
  resulted in our overstating reported revenues from fiscal 2001 through the second
  quarter of fiscal 2006. The tax effects on the corrections and other minor adjustments
  have also been reflected in these restatements.

The impact of the corrections on the consolidated balance sheet
  and consolidated statements of operations is shown in the accompanying tables.
  Adjustments to the statement of operations for the three months ended September
  30, 2005 and 2004 primarily represent adjustments to sales to correct the overstatement
  of revenues and failing to properly eliminate intercompany revenues. Income
  tax expense was adjusted to reflect the income tax effects of the adjustments
  noted for overstating revenues. In addition, the statements of operations reflect
  minor adjustments to correct other miscellaneous items identified in the course
  of the review of the intercompany transactions, none of which were individually
  significant. Balance sheet adjustments for September 30, 2005 primarily represent
  adjustments to retained earnings and currency translation effects to correct
  the balance sheet for overstating revenues and failing to properly eliminate
  intercompany revenues resulting in an improper entry to currency translation
  effects. In addition, deferred taxes were adjusted to reflect the income tax
  effects of the adjustments noted for overstating revenues. The balance sheet
  also reflects minor adjustments to correct other miscellaneous items identified
  in the course of the review of the intercompany transactions, none of which
  were significant individually or in the aggregate.

12

---



The
following table presents the effect of the Restatement on the consolidated
statement of operations for the first quarter of fiscal 2006:

|                                                                                |  |                            |        |             |   |             |   |   |        |  
|------------------------------------------------------------------------------- |  | -------------------------- | ------ | ----------- | - | ----------- | - | - | ------ | -
|                                                                                |  | As
  previously
  reported |        | Adjustments |   | As Restated |  
|                                                                                |  |                            |        |             |   |             |  
|Net sales                                                                       |  |                            |        |             |   |             |   |   |        |  
|Products                                                                        |  | $                          | 30,621 |             | $ | (253        | ) | $ | 30,368 |  
|Development services                                                            |  |                            | 3,961  |             |   |            |   |   | 3,961  |  
|                                                                                |  |                            |        |             |   |             |   |   |        |  
|                                                                                |  |                            | 34,582 |             |   | (253        | ) |   | 34,329 |  
|                                                                                |  |                            |        |             |   |             |   |   |        |  
|Cost of
  goods sold                                                            |  |                            |        |             |   |             |   |   |        |  
|Products                                                                        |  |                            | 18,261 |             |   | 9           |   |   | 18,270 |  
|Development services                                                            |  |                            | 2,906  |             |   |            |   |   | 2,906  |  
|                                                                                |  |                            |        |             |   |             |   |   |        |  
|                                                                                |  |                            | 21,167 |             |   | 9           |   |   | 21,176 |  
|                                                                                |  |                            |        |             |   |             |   |   |        |  
|Gross profit                                                                    |  |                            | 13,415 |             |   | (262        | ) |   | 13,153 |  
|                                                                                |  |                            |        |             |   |             |   |   |        |  
|Selling,
  general, and administrative expenses                                 |  |                            | 6,411  |             |   | (43         | ) |   | 6,368  |  
|Research,
  development and engineering expenses                                |  |                            | 3,540  |             |   |            |   |   | 3,540  |  
|                                                                                |  |                            |        |             |   |             |   |   |        |  
|Operating profit                                                                |  |                            | 3,464  |             |   | (219        | ) |   | 3,245  |  
|                                                                                |  |                            |        |             |   |             |   |   |        |  
|                                                                                |  |                            |        |             |   |             |   |   |        |  
|Other income
  (expense):                                                       |  |                            |        |             |   |             |   |   |        |  
|Interest income                                                                 |  |                            | 417    |             |   |            |   |   | 417    |  
|Miscellaneous income (expense), net                                             |  |                            | 128    |             |   | (5          | ) |   | 123    |  
|                                                                                |  |                            |        |             |   |             |   |   |        |  
|Total other income (expense)                                                    |  |                            | 545    |             |   | (5          | ) |   | 540    |  
|                                                                                |  |                            |        |             |   |             |   |   |        |  
|Earnings from continuing operations before
  income taxes and minority interest |  |                            | 4,009  |             |   | (224        | ) |   | 3,785  |  
|                                                                                |  |                            |        |             |   |             |   |   |        |  
|Income tax
  expense                                                            |  |                            | (1,523 | )           |   | 81          |   |   | (1,442 | )
|Minority
  interest                                                             |  |                            | (150   | )           |   |            |   |   | (150   | )
|                                                                                |  |                            |        |             |   |             |   |   |        |  
|Net earnings                                                                    |  |                            | 2,336  |             |   | (143        | ) |   | 2,193  |  
|                                                                                |  |                            |        |             |   |             |   |   |        |  
|                                                                                |  |                            |        |             |   |             |   |   |        |  
|Net earnings
  per share:                                                       |  |                            |        |             |   |             |   |   |        |  
|Basic                                                                           |  | $                          | 0.13   |             | $ | (0.01       | ) | $ | 0.12   |  
|                                                                                |  |                            |        |             |   |             |   |   |        |  
|Diluted                                                                         |  |                            | 0.13   |             |   | (0.01       | ) |   | 0.12   |  
|                                                                                |  |                            |        |             |   |             |   |   |        |  
|                                                                                |  |                            |        |             |   |             |   |   |        |  
|Weighted
  average number of shares:                                            |  |                            |        |             |   |             |   |   |        |  
|Basic                                                                           |  |                            | 18,013 |             |   | 18,013      |   |   | 18,013 |  
|                                                                                |  |                            |        |             |   |             |   |   |        |  
|Diluted                                                                         |  |                            | 18,137 |             |   | 18,137      |   |   | 18,137 |  
|                                                                                |  |                            |        |             |   |             |   |   |        |  

13

---



The
following table presents the effect of the Restatement on the consolidated
statement of operations for the first quarter of fiscal 2005:

|                                                                                |  |                            |        |             |   |             |   |   |        |  
|------------------------------------------------------------------------------- |  | -------------------------- | ------ | ----------- | - | ----------- | - | - | ------ | -
|                                                                                |  | As
  previously
  reported |        | Adjustments |   | As Restated |  
|                                                                                |  |                            |        |             |   |             |  
|Net sales                                                                       |  |                            |        |             |   |             |   |   |        |  
|Products                                                                        |  | $                          | 25,883 |             | $ | (158        | ) | $ | 25,725 |  
|Development services                                                            |  |                            | 1,695  |             |   |            |   |   | 1,695  |  
|                                                                                |  |                            |        |             |   |             |   |   |        |  
|                                                                                |  |                            | 27,578 |             |   | (158        | ) |   | 27,420 |  
|                                                                                |  |                            |        |             |   |             |   |   |        |  
|Cost of goods sold                                                              |  |                            |        |             |   |             |   |   |        |  
|Products                                                                        |  |                            | 15,168 |             |   | 11          |   |   | 15,179 |  
|Development services                                                            |  |                            | 1,297  |             |   |            |   |   | 1,297  |  
|                                                                                |  |                            |        |             |   |             |   |   |        |  
|                                                                                |  |                            | 16,465 |             |   | 11          |   |   | 16,476 |  
|                                                                                |  |                            |        |             |   |             |   |   |        |  
|Gross profit                                                                    |  |                            | 11,113 |             |   | (169        | ) |   | 10,944 |  
|                                                                                |  |                            |        |             |   |             |   |   |        |  
|Selling, general, and administrative
  expenses                                 |  |                            | 5,659  |             |   |            |   |   | 5,659  |  
|Research, development and engineering
  expenses                                |  |                            | 3,208  |             |   |            |   |   | 3,208  |  
|                                                                                |  |                            |        |             |   |             |   |   |        |  
|Operating profit                                                                |  |                            | 2,246  |             |   | (169        | ) |   | 2,077  |  
|                                                                                |  |                            |        |             |   |             |   |   |        |  
|                                                                                |  |                            |        |             |   |             |   |   |        |  
|Other income (expense):                                                         |  |                            |        |             |   |             |   |   |        |  
|Interest income                                                                 |  |                            | 179    |             |   |            |   |   | 179    |  
|Miscellaneous income (expense), net                                             |  |                            | (29    | )           |   | (27         | ) |   | (56    | )
|                                                                                |  |                            |        |             |   |             |   |   |        |  
|Total other income (expense)                                                    |  |                            | 150    |             |   | (27         | ) |   | 123    |  
|                                                                                |  |                            |        |             |   |             |   |   |        |  
|Earnings from continuing operations before
  income taxes and minority interest |  |                            | 2,396  |             |   | (196        | ) |   | 2,200  |  
|                                                                                |  |                            |        |             |   |             |   |   |        |  
|Income tax expense (benefit)                                                    |  |                            | (862   | )           |   | 95          |   |   | (767   | )
|Minority interest                                                               |  |                            | (122   | )           |   | 6           |   |   | (116   | )
|                                                                                |  |                            |        |             |   |             |   |   |        |  
|Earnings from continuing operations                                             |  |                            | 1,412  |             |   | (95         | ) |   | 1,317  |  
|                                                                                |  |                            |        |             |   |             |   |   |        |  
|                                                                                |  |                            |        |             |   |             |   |   |        |  
|Discontinued TeraOptix operations, net of
  tax                                 |  |                            | (61    | )           |   |            |   |   | (61    | )
|Charges related to the disposal of
  TeraOptix, net of tax                      |  |                            | (4     | )           |   |            |   |   | (4     | )
|                                                                                |  |                            |        |             |   |             |   |   |        |  
|Loss from discontinued operations                                               |  |                            | (65    | )           |   |            |   |   | (65    | )
|                                                                                |  |                            |        |             |   |             |   |   |        |  
|Net earnings                                                                    |  | $                          | 1,347  |             | $ | (95         | ) | $ | 1,252  |  
|                                                                                |  |                            |        |             |   |             |   |   |        |  
|                                                                                |  |                            |        |             |   |             |   |   |        |  
|Basic - Earnings (loss) per share:                                              |  |                            |        |             |   |             |   |   |        |  
|Continuing operations                                                           |  | $                          | 0.08   |             | $ | (0.01       | ) | $ | 0.07   |  
|Discontinued operations                                                         |  |                            |       |             |   |            |   |   |       |  
|                                                                                |  |                            |        |             |   |             |   |   |        |  
|Net earnings (loss)                                                             |  | $                          | 0.08   |             | $ | (0.01       | ) | $ | 0.07   |  
|                                                                                |  |                            |        |             |   |             |   |   |        |  
|Diluted - Earnings (loss) per share:                                            |  |                            |        |             |   |             |   |   |        |  
|Continuing operations                                                           |  | $                          | 0.08   |             | $ | (0.01       | ) | $ | 0.07   |  
|Discontinued operations                                                         |  |                            | (0.01  | )           |   | 0.01        |   |   |       |  
|                                                                                |  |                            |        |             |   |             |   |   |        |  
|Net earnings (loss)                                                             |  | $                          | 0.07   |             | $ |            |   | $ | 0.07   |  
|                                                                                |  |                            |        |             |   |             |   |   |        |  
|                                                                                |  |                            |        |             |   |             |   |   |        |  
|Weighted average number of shares:                                              |  |                            |        |             |   |             |   |   |        |  
|Basic                                                                           |  |                            | 17,923 |             |   | 17,923      |   |   | 17,923 |  
|                                                                                |  |                            |        |             |   |             |   |   |        |  
|Diluted                                                                         |  |                            | 18,115 |             |   | 18,115      |   |   | 18,115 |  
|                                                                                |  |                            |        |             |   |             |   |   |        |  

14

---



The
following table presents the effect of the Restatement on the consolidated
balance sheet as of September 30, 2005:

|                                                      |  |                            |         |             |   |             |   |   |         |  
|----------------------------------------------------- |  | -------------------------- | ------- | ----------- | - | ----------- | - | - | ------- | -
|                                                      |  | As
  previously
  reported |         | Adjustments |   | As Restated |  
|                                                      |  |                            |         |             |   |             |  
|Assets                                                |  |                            |         |             |   |             |   |   |         |  
|Current assets:                                       |  |                            |         |             |   |             |   |   |         |  
|Cash and cash equivalents                             |  | $                          | 17,159  |             | $ |            |   | $ | 17,159  |  
|Marketable securities                                 |  |                            | 20,775  |             |   |            |   |   | 20,775  |  
|Receivables, net                                      |  |                            | 25,081  |             |   | (1          | ) |   | 25,080  |  
|Inventories                                           |  |                            | 35,032  |             |   |            |   |   | 35,032  |  
|Prepaid expenses                                      |  |                            | 2,114   |             |   | (14         | ) |   | 2,100   |  
|Deferred income taxes                                 |  |                            | 8,934   |             |   |            |   |   | 8,934   |  
|                                                      |  |                            |         |             |   |             |   |   |         |  
|Total current assets                                  |  |                            | 109,095 |             |   | (15         | ) |   | 109,080 |  
|                                                      |  |                            |         |             |   |             |   |   |         |  
|Marketable securities                                 |  |                            | 20,615  |             |   |            |   |   | 20,615  |  
|Property, plant, and equipment, net                   |  |                            | 31,459  |             |   |            |   |   | 31,459  |  
|Deferred income taxes                                 |  |                            | 20,304  |             |   | 938         |   |   | 21,242  |  
|Intangible assets, net                                |  |                            | 5,714   |             |   |            |   |   | 5,714   |  
|Other assets                                          |  |                            | 987     |             |   |            |   |   | 987     |  
|                                                      |  |                            |         |             |   |             |   |   |         |  
|Total assets                                          |  | $                          | 188,174 |             | $ | 923         |   | $ | 189,097 |  
|                                                      |  |                            |         |             |   |             |   |   |         |  
|                                                      |  |                            |         |             |   |             |   |   |         |  
|Liabilities and Stockholders Equity                  |  |                            |         |             |   |             |   |   |         |  
|Current liabilities:                                  |  |                            |         |             |   |             |   |   |         |  
|Accounts payable                                      |  | $                          | 11,705  |             | $ |            |   | $ | 11,705  |  
|Accrued progress payments                             |  |                            | 24,693  |             |   | (72         | ) |   | 24,621  |  
|Accrued salaries and wages                            |  |                            | 3,204   |             |   |            |   |   | 3,204   |  
|Other accrued expenses                                |  |                            | 3,254   |             |   | (50         | ) |   | 3,204   |  
|Income taxes payable                                  |  |                            | 1,409   |             |   |            |   |   | 1,409   |  
|                                                      |  |                            |         |             |   |             |   |   |         |  
|Total current liabilities                             |  |                            | 44,265  |             |   | (122        | ) |   | 44,143  |  
|                                                      |  |                            |         |             |   |             |   |   |         |  
|Other long-term liabilities                           |  |                            | 94      |             |   |            |   |   | 94      |  
|Minority interest                                     |  |                            | 777     |             |   |            |   |   | 777     |  
|                                                      |  |                            |         |             |   |             |   |   |         |  
|Total liabilities                                     |  |                            | 45,136  |             |   | (122        | ) |   | 45,014  |  
|                                                      |  |                            |         |             |   |             |   |   |         |  
|                                                      |  |                            |         |             |   |             |   |   |         |  
|Commitments                                           |  |                            |         |             |   |             |   |   |         |  
|                                                      |  |                            |         |             |   |             |   |   |         |  
|Stockholders equity:                                 |  |                            |         |             |   |             |   |   |         |  
|Common stock, $.10 par value per share:               |  |                            | 1,847   |             |   |            |   |   | 1,847   |  
|Additional paid-in capital                            |  |                            | 142,908 |             |   |            |   |   | 142,908 |  
|Retained earnings (deficit)                           |  |                            | 6,150   |             |   | (1,390      | ) |   | 4,760   |  
|Accumulated other comprehensive income
  (loss):      |  |                            |         |             |   |             |   |   |         |  
|Currency translation effects                          |  |                            | (2,608  | )           |   | 2,435       |   |   | (173    | )
|Net unrealized gain on marketable
  securities        |  |                            | 28      |             |   |            |   |   | 28      |  
|                                                      |  |                            |         |             |   |             |   |   |         |  
|                                                      |  |                            | 148,325 |             |   | 1,045       |   |   | 149,370 |  
|Less treasury stock, at cost; 447,205
  common shares |  |                            | 5,287   |             |   |            |   |   | 5,287   |  
|                                                      |  |                            |         |             |   |             |   |   |         |  
|Total stockholders equity                            |  |                            | 143,038 |             |   | 1,045       |   |   | 144,083 |  
|                                                      |  |                            |         |             |   |             |   |   |         |  
|Total liabilities and stockholders equity            |  | $                          | 188,174 |             | $ | 923         |   | $ | 189,097 |  
|                                                      |  |                            |         |             |   |             |   |   |         |  

15

---



NOTE 3:
RECENT ACCOUNTING PRONOUNCEMENTS

In December 2004, the FASB issued SFAS No. 123(R),
Share Based Payment (as amended). This statement requires companies to
measure and recognize compensation expense for all share-based payments based
on their fair value. The standard becomes effective for interim or annual
periods beginning after June 15, 2005. We adopted SFAS No. 123(R) in the first
quarter of fiscal 2006 using the modified prospective method. SFAS No. 123(R)
primarily resulted in a change in our method of measuring and recognizing the
fair value of our share-based grants, estimating forfeitures for all unvested
awards, and accounting for awards to retirement eligible employees. In
addition, changes made to our employee share purchase plan for periods
beginning July 1, 2005 render the plan non-compensatory in accordance with SFAS
No. 123(R).

The FASB issued SFAS No. 153, Exchanges of
Nonmonetary Assets, that amends Opinion 29 to eliminate the exception for
nonmonetary exchanges of similar productive assets and replaces it with a
general exception for exchanges of nonmonetary assets that do not have
commercial substance. The adoption of SFAS No. 153 in this quarter did not have
a material effect on our financial position or results of operations.



The FASB issued SFAS No. 154, Accounting Changes and
Error Corrections, which primarily changes the requirements for the accounting
for and reporting of a change in accounting principle for all voluntary changes
or when an accounting pronouncement does not include specific transition
provisions. This applies to accounting changes made after July 1, 2006.

NOTE 4:
DIVESTITURES AND DISCONTINUED OPERATIONS

In September 2002, we committed to a planned
disposition of our TeraOptix business unit (TeraOptix). We discontinued all
operations by January 2003. The sale of the facility was completed in March
2005 for $1,918, net of selling expenses.

The results and loss on disposal of the TeraOptix
business unit have been presented as separate line items in the accompanying
Consolidated Statements of Operations as Discontinued TeraOptix operations,
net of tax, for all periods presented. The components of cash flow from
discontinued operations are as follows:

|                                                                      |  |  |                                                       |      |  
|--------------------------------------------------------------------- |  |  | ----------------------------------------------------- | ---- | -
|                                                                      |  |  |                                                       |     
|                                                                      |  |  | For the three 
  months ended 
  September 30,
  2004 |     
|                                                                      |  |  |                                                       |     
|Cash flow from operating activities from
  discontinued operations:   |  |  |                                                       |      |  
|Loss from discontinued operations                                     |  |  | $                                                     | (65  | )
|Deferred income taxes                                                 |  |  |                                                       | (36  | )
|Other, net                                                            |  |  |                                                       | (56  | )
|                                                                      |  |  |                                                       |      |  
|Net cash used for operating activities from discontinued
  operations |  |  |                                                       | (157 | )
|                                                                      |  |  |                                                       |      |  
|                                                                      |  |  |                                                       |      |  
|Net cash used by discontinued operations                              |  |  | $                                                     | (157 | )
|                                                                      |  |  |                                                       |      |  

There was no cash flow impact from discontinued
operations in fiscal 2006.

16

---



NOTE 5:
SEGMENT INFORMATION

We operate in two principal business segments
globally: Semiconductor and Industrial. The segment data is presented below in
a manner consistent with managements internal measurement of the business.

|                             |  |                                  |        |            |   |        |  
|---------------------------- |  | -------------------------------- | ------ | ---------- | - | ------ | -
|                             |  | Three Months Ended September 30, |       
|                             |  |                                  |       
|                             |  | 2005                             |        | 2004       |  
|                             |  |                                  |        |            |  
|                             |  | (Restated)                       |        | (Restated) |  
|Semiconductor                |  |                                  |        |            |  
|Sales                        |  | $                                | 18,436 |            | $ | 15,844 |  
|Gross profit                 |  |                                  | 7,141  |            |   | 6,394  |  
|Gross profit as a % of sales |  |                                  | 39     | %          |   | 40     | %
|                             |  |                                  |        |            |   |        |  
|Industrial                   |  |                                  |        |            |   |        |  
|Sales                        |  | $                                | 15,893 |            | $ | 11,576 |  
|Gross profit                 |  |                                  | 6,012  |            |   | 4,550  |  
|Gross profit as a % of sales |  |                                  | 38     | %          |   | 39     | %
|                             |  |                                  |        |            |   |        |  
|Total                        |  |                                  |        |            |   |        |  
|Sales                        |  | $                                | 34,329 |            | $ | 27,420 |  
|Gross profit                 |  |                                  | 13,153 |            |   | 10,944 |  
|Gross profit as a % of sales |  |                                  | 38     | %          |   | 40     | %

Separate financial information by segment for total
assets, capital expenditures, and depreciation and amortization is not
available and is not evaluated by the chief operating decision-maker.

ZYGOs, Metrology, Optical Systems Solutions, and
Precision Positioning Systems (PPS) product lines are sold into its two
business segments. Supplementary sales and gross profit data by product line is
as follows:

|                             |  |                                  |        |            |   |        |  
|---------------------------- |  | -------------------------------- | ------ | ---------- | - | ------ | -
|                             |  | Three Months Ended September 30, |       
|                             |  |                                  |       
|                             |  | 2005                             |        | 2004       |  
|                             |  |                                  |        |            |  
|                             |  | (Restated)                       |        | (Restated) |  
|Metrology                    |  |                                  |        |            |   |        |  
|Sales                        |  | $                                | 16,257 |            | $ | 10,608 |  
|Gross profit                 |  |                                  | 7,367  |            |   | 4,412  |  
|Gross profit as a % of sales |  |                                  | 45     | %          |   | 42     | %
|                             |  |                                  |        |            |   |        |  
|Optical Systems Solutions    |  |                                  |        |            |   |        |  
|Sales                        |  | $                                | 9,496  |            | $ | 6,631  |  
|Gross profit                 |  |                                  | 1,740  |            |   | 1,399  |  
|Gross profit as a % of sales |  |                                  | 18     | %          |   | 21     | %
|                             |  |                                  |        |            |   |        |  
|PPS                          |  |                                  |        |            |   |        |  
|Sales                        |  | $                                | 8,576  |            | $ | 10,181 |  
|Gross profit                 |  |                                  | 4,046  |            |   | 5,133  |  
|Gross profit as a % of sales |  |                                  | 47     | %          |   | 50     | %
|                             |  |                                  |        |            |   |        |  
|Total                        |  |                                  |        |            |   |        |  
|Sales                        |  | $                                | 34,329 |            | $ | 27,420 |  
|Gross profit                 |  |                                  | 13,153 |            |   | 10,944 |  
|Gross profit as a % of sales |  |                                  | 38     | %          |   | 40     | %

17

---



Substantially all of our operating expenses, assets,
and depreciation and amortization are U.S. based. Sales by geographic area were
as follows:

|            |  |                                  |        |            |   |        | 
|----------- |  | -------------------------------- | ------ | ---------- | - | ------ | 
|            |  | Three Months Ended September 30, |       
|            |  |                                  |       
|            |  | 2005                             |        | 2004       |  
|            |  |                                  |        |            |  
|            |  | (Restated)                       |        | (Restated) |  
|           
|Domestic    |  | $                                | 13,010 |            | $ | 8,044  | 
|Europe      |  |                                  | 2,781  |            |   | 2,648  | 
|Japan       |  |                                  | 14,162 |            |   | 14,057 | 
|Pacific Rim |  |                                  | 4,376  |            |   | 2,671  | 
|            |  |                                  |        |            |   |        | 
|Total       |  | $                                | 34,329 |            | $ | 27,420 | 
|            |  |                                  |        |            |   |        | 

NOTE 6:
RELATED PARTY TRANSACTIONS AND MAJOR CUSTOMER

Sales to Canon Inc., one of our significant
stockholders, and Canon Sales Co., Inc., a distributor of certain of our
products in Japan and a subsidiary of Canon Inc., amounted to $12,353 (36% of
net sales) for the three months ended September 30, 2005, as compared with
$12,592 (46% of net sales) for the comparable prior year period. These sales
include revenues generated from the development agreements referenced below.
Selling prices of products sold to Canon Inc. and Canon Sales Co., Inc. are
based, generally, on the terms customarily given to distributors. Revenues
generated from the development agreements are recorded on a cost-plus basis. At
September 30, 2005 and June 30, 2005, there were, in the aggregate, $4,689 and
$3,951, respectively, of trade accounts receivable from Canon Inc. and Canon
Sales Co., Inc.

In September 2002, we entered into a contract with
Canon Inc. related to the development of certain interferometers. In March
2004, we signed a preliminary agreement to begin further add-on work; the
definitive agreement for this additional work was signed in December 2004. In
February 2005, we entered into two additional agreements with Canon Inc.
related to the development of prototype production tools and accessories.
During the three months ended September 30, 2005 and September 30, 2004, we
recognized revenue in the semiconductor segment of $3,961and $1,695,
respectively, for these contracts. In addition, Canon Inc. paid us progress
payments in accordance with the terms of the developmental contract. The total
progress payments related to the developmental contract remaining at September
30, 2005 were $13,238.

NOTE 7:
HEDGING ACTIVITIES

During the third quarter of fiscal 2005, we began
entering into foreign currency forward contracts to reduce the impact of
adverse fluctuations on earnings associated with foreign currency exchange rate
changes. We do not enter into any derivative transactions for speculative
purposes. These contracts are not designated as cash flow, fair value, or net
investment hedges under SFAS No. 133, Accounting for Derivative Instruments
and Hedging Activities, as amended, and therefore, are marked-to-market with
changes in fair value recorded in the Statement of Operations. These contracts
are entered into for periods consistent with the currency transaction
exposures, generally three to six months. Any gains and losses on the fair
value of these contracts would largely offset corresponding losses and gains on
the underlying transactions.

As of September 30, 2005, we had four foreign currency
forward contracts (Yen) outstanding of $2,718. Net gains recognized from
foreign currency forward contracts for the first quarter of fiscal 2006 was
$82, and are included in other income in the consolidated statements of
operations. These gains are substantially offset by foreign exchange losses on
intercompany balances recorded by our subsidiaries. We did not enter into any
derivative instruments to hedge foreign currency exposure prior to the third
quarter of fiscal 2005.

18

---



Item 2. Managements Discussion and Analysis
of Financial Condition and Results of Operations

RESULTS OF OPERATIONS

Introduction

Zygo Corporation designs, develops, and manufactures ultra-high
precision measurement solutions and optical components and systems. ZYGOs
measurement solutions are designed to improve quality, increase productivity,
and decrease the overall cost of manufacturing and product development for
high-technology manufacturing processes. The Companys optical component and
systems products provide high-end solutions for laser fusion research, imaging
systems, and measurement system components. We conduct the
majority of our manufacturing in our 153,500 square foot facility in
Middlefield, Connecticut.

We serve the semiconductor and industrial markets through our three
core product lines, metrology, optical systems solutions, and precision
positioning systems. Our semiconductor product offerings include OEM solutions
and major technology development projects for the semiconductor capital equipment
industry and direct supplied in-line automated yield improvement systems for
both flat panel displays and advanced semiconductor packaging manufacturing.
Our industrial market products serve the automotive, consumer electronics,
defense/aerospace, and all markets other than semiconductor. Industrial market
products include optical components, optical systems and measurement-based
process control systems for defense, aerospace, and medical device customers
and measurement-based process control and yield-enhancement systems for
automotive and consumer electronics customers.

We also
perform development services, which have produced a significant amount of our
revenue over the past two years. In September 2002, we entered into a contract
with Canon Inc. related to the development of certain interferometers. In March
2004, we signed a preliminary agreement to begin further add-on work; the
definitive agreement for this additional work was signed in December 2004. In
February 2005, we entered into two additional agreements with Canon Inc.
related to the development of prototype production tools and accessories. In
the first quarter of fiscal 2006, we recognized $4.0 million of revenue from
these developmental services contracts as compared with $1.7 million in the
prior year comparable quarter. The development services contracts that were
signed in fiscal 2005 were cost plus contracts and were expected to represent
approximately $41.0 million in additional revenue through fiscal 2007. To date,
a total of $18.2 million of this revenue has been recognized. To the extent
that total actual costs on the contracts may be less than originally
anticipated, the resulting development services revenue could be less than the
original estimated value of the contract. Additionally, our period over period
comparable sales, in the future could be adversely affected if we do not
continue to provide these development services at similar levels.

We achieved an
order level for the first quarter of fiscal 2006 of $38.3 million as compared
with $33.9 million for the first quarter of fiscal 2005. This order flow
increased backlog at September 30, 2005 to $70.6 million. Orders for the first
quarter of our fiscal year are normally lower than the remaining quarters in
our fiscal year. Orders in the semiconductor segment of $19.8 million decreased
$0.7 million, or 3%, as compared with the fourth quarter of fiscal 2005;
however, increased $8.9 million, or 82%, as compared with the first quarter of
fiscal 2005. We continue to receive orders from the flat panel market of the
semiconductor segment and expect orders to continue for the immediate future.
We also experienced an increase in lithography orders over the prior year
period, which continued a strengthening in that market area over the last six
months. Orders in the industrial segment of $18.6 million decreased by $3.3
million, or 15%, as compared with the fourth quarter of fiscal 2005 and $4.5
million, or 19%, as compared with the first quarter of fiscal 2005.

Beginning in
the first quarter of fiscal 2006, we were required to record the expense of
share-based payment transactions. Under the method adopted, we were not
required to restate the prior year financial statements or include in the
current year any expenses related to stock option grants vested as of June 30,
2005. In the quarter ended September 30, 2005, $0.4 million of share-based
payment compensation expense was included in operating income. Operating income
included share-based payment compensation expense of $0.1 million in cost of
goods sold, $0.2 million in selling, general, and administrative expenses
(SG&A), and $0.1 million in research, development, and engineering
expenses (RD&E). Share-based compensation expense reduced our diluted
earnings per share by $0.01. The share-based compensation expense is estimated
to be approximately $0.8 million in the second quarter of fiscal 2006 and $0.4
million in each of the third and fourth quarters of fiscal 2006. These
estimates include the expected compensation expense related to current
outstanding stock options and restricted shares and to future issuances of
stock options which are presently known to us.

19

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RestatementWe are restating our consolidated financial statements
for the first quarter of fiscal 2006 for corrections in the accounting of
intercompany transactions from certain of our foreign operations. The
corrections are a result of our failure to identify and eliminate certain
intercompany revenues attributed to our Singapore and Taiwan offices, which
resulted in our overstating reported revenues, from fiscal 2001 through the
second quarter of fiscal 2006. The tax effects on the corrections and other
minor adjustments have also been reflected in these restatements.

The restated financial statements do not affect our business outlook
  for future fiscal periods, nor impact our cash position or future cash flows
  from operations. The impact of the corrections on the consolidated balance sheets
  and consolidated financial statements of operations is shown in note 2 to our
  consolidated financial statements included in this Form 10-Q/A.

Continuing OperationsWe recorded earnings from continuing operations for
the first quarter of fiscal 2006 of $2.2 million, or $0.12 per diluted share,
as compared with earnings of $1.3 million, or $0.07 per diluted share, for the
first quarter of fiscal 2005.

Net sales by
segment are as follows:

|                     |  |                       |            |            |  |                        |   |            |            |  |  |            |  
|-------------------- |  | --------------------- | ---------- | ---------- |  | ---------------------- | - | ---------- | ---------- |  |  | ---------- | -
|                     |  | Net Sales By Segment  |           
|                     |  |                       |            |            |  |                        |   |            |            |  |  |            |  
|(In
  millions)      |  | Three Months Ended    |           
|                     |  |                       |           
|                     |  | September 30, 
  2005 |            | Net Sales% |  | September, 30, 
  2004 |   | Net Sales% |           
|                     |  |                       |            |            |  |                        |   |            |           
|                     |  |                       | (Restated) |            |  | (Restated)             |   |            | (Restated) |  |  | (Restated) |  
|                     |  |                       |            |            |  |                        |   |            |            |  |  |            |  
|Semiconductor        |  | $                     | 14.4       |            |  | 42                     | % | $          | 14.1       |  |  | 52         | %
|Development Services |  |                       | 4.0        |            |  | 12                     | % |            | 1.7        |  |  | 6          | %
|                     |  |                       |            |            |  |                        |   |            |            |  |  |            |  
|Total Semiconductor  |  |                       | 18.4       |            |  | 54                     | % |            | 15.8       |  |  | 58         | %
|                     |  |                       |            |            |  |                        |   |            |            |  |  |            |  
|Total Industrial     |  |                       | 15.9       |            |  | 46                     | % |            | 11.6       |  |  | 42         | %
|                     |  |                       |            |            |  |                        |   |            |            |  |  |            |  
|Total                |  | $                     | 34.3       |            |  | 100                    | % | $          | 27.4       |  |  | 100        | %
|                     |  |                       |            |            |  |                        |   |            |            |  |  |            |  

|                     |  |                         |            |               |  |                       |   |               |            |  |  |            |  
|-------------------- |  | ----------------------- | ---------- | ------------- |  | --------------------- | - | ------------- | ---------- |  |  | ---------- | -
|                     |  | Gross Profit By Segment |           
|                     |  |                         |            |               |  |                       |   |               |            |  |  |            |  
|(In
  millions)      |  | Three Months Ended      |           
|                     |  |                         |           
|                     |  | September 30,
  2005    |            | Gross Profit% |  | September, 30,
  2004 |   | Gross Profit% |           
|                     |  |                         |            |               |  |                       |   |               |           
|                     |  |                         | (Restated) |               |  | (Restated)            |   |               | (Restated) |  |  | (Restated) |  
|                     |  |                         |            |               |  |                       |   |               |            |  |  |            |  
|Semiconductor        |  | $                       | 6.1        |               |  | 42                    | % | $             | 6.0        |  |  | 43         | %
|Development Services |  |                         | 1.1        |               |  | 28                    | % |               | 0.4        |  |  | 24         | %
|                     |  |                         |            |               |  |                       |   |               |            |  |  |            |  
|Total Semiconductor  |  |                         | 7.2        |               |  | 39                    | % |               | 6.4        |  |  | 41         | %
|                     |  |                         |            |               |  |                       |   |               |            |  |  |            |  
|Total Industrial     |  |                         | 6.0        |               |  | 38                    | % |               | 4.5        |  |  | 39         | %
|                     |  |                         |            |               |  |                       |   |               |            |  |  |            |  
|Total                |  | $                       | 13.2       |               |  | 38                    | % | $             | 10.9       |  |  | 40         | %
|                     |  |                         |            |               |  |                       |   |               |            |  |  |            |  

Net sales for
the first quarter of fiscal 2006 increased $6.9 million, or 25%, to $34.3
million. For the first quarter of fiscal 2006, net sales in the semiconductor
segment were $18.4 million, or 54%, of total net sales, as compared with $15.8
million, or 57%, of total net sales, in the comparable prior year period,
primarily due to an increase in metrology revenues related to development
services of $2.3 million and flat panel revenues of $0.8 million. The increase
in semiconductor sales was partially offset by a decline in PPS product sales
due to a reduction in orders received in the third and fourth quarters of
fiscal 2005 as compared with orders received in the same period of the prior
year. Net sales in the industrial segment were $15.9 million, or 46% of total
net sales, as compared with the $11.6 million, or 42% of total net sales, in
the comparable prior year period. The increase of $4.3 million was primarily
due to an increase in optical systems solutions sales of medical devices of
$2.3 million and next generation introductions of existing metrology products
of $1.8 million.

20

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Sales in U.S.
dollars for the first quarter of fiscal 2006 were $29.7 million, or 87%, of
total net sales for the period. For our sales which are based in foreign
currency, we are exposed to foreign exchange fluctuations from the time
customers are invoiced in foreign currency until collection occurs. Significant
changes in the values of foreign currencies relative to the value of the U.S.
dollar can impact the sales of our products in export markets, as would changes
in the general economic conditions in those markets. Management believes the
percentage of sales in foreign currencies may increase in the current year due
to an increase in sales denominated in yen to Japanese customers. In the
absence of a substantial increase in sales orders in currency other than U.S.
dollars, we believe a 10% appreciation or depreciation of the U.S. dollar
against the euro and yen would have an immaterial impact on our consolidated
financial position and results of operations.

Gross profit
for the first quarter of fiscal 2006 totaled $13.2 million, an increase of $2.3
million, or 21%, from $10.9 million in the first quarter of fiscal 2005. Gross
profit as a percentage of sales for the first quarters of fiscal 2006 and 2005
were 38% and 40%, respectively. The decrease in gross profit as a percentage of
sales in the first quarter of fiscal 2006 was primarily due to a change in
product mix, whereby a greater percentage of sales in the first quarter of
fiscal 2006 were generated from traditionally low margin products and services,
including development services. The products and services generating the lower
margins, including development services, certain optics, and opto-mechanical
assemblies, accounted for 27% of sales in the first quarter of fiscal 2006 as
compared with 14% in the prior year period.

SG&A in
the first quarter of fiscal 2006 amounted to $6.4 million, an increase of $0.7
million, or 12%, from $5.7 million in the first quarter of fiscal 2005. As a
percentage of net sales, SG&A for the first quarter of fiscal 2006 and
fiscal 2005 was 19% and 21%, respectively. The increase in SG&A as a
percentage of sales was due to increasing our presence in the Pacific Rim with
the opening of new offices within the last year in Korea, Taiwan, and mainland
China to support anticipated future growth. Additionally, $0.2 million was
attributable to share-based compensation expense.

RD&E for
the first quarter of fiscal 2006 totaled $3.5 million, an increase of $0.3
million, or 9%, from $3.2 million in the first quarter of fiscal 2005. This
increase was primarily due to costs associated with our semiconductor
initiatives in the flat panel display and process control areas and $0.1
million in share-based compensation expense.

The income tax
expense from operations in the first quarter of fiscal 2006 totaled $1.4
million, or 38% of pre-tax earnings, which compares with an income tax expense
of $0.8 million, or 35% of pre-tax earnings, in the first quarter of fiscal
2005. The increase in the effective tax rate is primarily due to increased
income in foreign operations, which operate in higher tax jurisdictions, and an
increase in tax upon additional monies repatriated from these foreign
operations.

RELATED PARTY TRANSACTIONS

In September
2002, we entered into a contract with Canon Inc. related to the development of
certain interferometers. In March 2004, we signed a preliminary agreement to
begin further add-on work; the definitive agreement for this additional work
was signed in December 2004. In February 2005, we entered into two additional
agreements with Canon Inc. related to the development of prototype production
tools and accessories. During the three months ended September 30, 2005 and
September 30, 2004, we recognized revenue in the semiconductor segment of $4.0
million and $1.7 million, respectively, from these contracts.

LIQUIDITY AND CAPITAL RESOURCES

At September
30, 2005, working capital was $64.9 million, an increase of $1.6 million from
$63.3 million at June 30, 2005. We maintained cash, cash equivalents, and
marketable securities at September 30, 2005 totaling $58.5 million, an increase
of $1.6 million, from $56.9 million at June 30, 2005. Major fluctuations in
working capital included decreases in accrued liabilities of $4.5 million, due
to the timing of several payments, and $1.8 million in accounts payable, and an
increase in inventory of $1.3 million, partially offset by a $3.0 million
decrease in accounts receivables due to several large customer payments and an
increase in progress payments from customers of $2.9 million. There were no
borrowings outstanding under our $3.0 million bank line of credit at September
30, 2005.

Acquisitions
of property, plant, and equipment were $1.4 million during the first quarter
ended September 30, 2005. Management believes that cash generated from
operations, together with the liquidity provided by existing cash balances,
will be sufficient to satisfy our liquidity requirements for the next 12
months.

CRITICAL ACCOUNTING POLICIES, SIGNIFICANT
JUDGMENTS, AND ESTIMATES

The 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

21

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America. The preparation of these consolidated
financial statements requires us to make estimates and judgments that affect
the reported amounts of assets, liabilities, revenues, and expenses, and
related disclosures at the date of our consolidated financial statements. On an
on-going basis, management evaluates its estimates and judgments, including
those related to bad debts, inventories, warranty obligations, income taxes,
and long-lived assets. Management bases its estimates and judgments on
historical experience and current market conditions and on various other
factors that are believed to be reasonable under the circumstances, the results
of which form the basis for making judgments about the carrying values of
assets and liabilities that are not readily apparent from other sources. Actual
results may differ from these estimates under different assumptions or
conditions. We consider certain accounting policies related to revenue
recognition and allowance for doubtful accounts, inventory valuation, warranty
costs, accounting for income taxes, and valuation of long-lived assets to be
critical policies due to the estimates and judgments involved in each.

Share-Based Payments
In December 2004, FASB issued SFAS 123(R), Share-Based Payment (as amended).
SFAS No. 123(R) eliminates the alternative to use the intrinsic value method of
accounting that was provided in SFAS No. 123, which generally resulted in no
compensation expense recorded in the financial statements related to the
issuance of equity awards to employees. SFAS No. 123(R) requires that the cost
resulting from all share-based payment transactions be recognized in the
financial statements. SFAS No. 123(R) establishes fair value as the measurement
objective in accounting for share-based payment arrangements and requires all
companies to apply a fair-value-based measurement method in accounting for
generally all share-based payment transactions with employees. This method
includes estimates and judgments pertaining to term, volatility, risk-free interest
rates, dividend yields and forfeiture rates.

Revenue Recognition and Allowance for Doubtful Accounts
We recognize revenue based on guidance provided in SEC Staff Accounting
Bulletin (SAB) No. 104, Revenue Recognition and in accordance with the Emerging
Issues Task Force (EITF) Issue No. 00-21, Revenue Arrangements with Multiple
Deliverables. We recognize revenue when persuasive evidence of an arrangement
exists, delivery has occurred or services have been rendered, our price is
fixed or determinable, and collectibility is reasonably assured. We recognize
revenue on our standard products when title passes to the customer upon
shipment. While our standard products generally require installation, the
installation is considered a perfunctory performance obligation. Standard
products do not have customer acceptance criteria. Generally, software is a
component of our standard product and, as such, is not separately recognized as
revenue. We have standard rights of return that we account for as a warranty
provision under SFAS No. 5, Accounting for Contingencies. We do not have any
price protection agreements or other post shipment obligations. For custom
equipment where customer acceptance is part of the sales agreement, revenue is
recognized when the customer has accepted the product. In cases where custom
equipment does not have customer acceptance as part of the sales agreement, we
recognize revenue upon shipment as long as the system meets the specifications
as agreed upon with the customer. Certain transactions have multiple
deliverables, with the deliverables clearly defined. To the extent that the
secondary deliverables are other than perfunctory, we recognize the revenue on
each deliverable, if separable, or on the completion of all deliverables, if
not separable, all in a manner consistent with SAB No. 104 and EITF 00-21.
Standalone software products are recognized as revenue when they are shipped.
Revenue generated from development contracts are recorded on a cost-plus basis
in the period services are rendered.

We maintain an allowance for doubtful accounts based
on a continuous review of customer accounts, payment patterns, and specific
collection issues. We perform on-going credit evaluations of our customers and
do not require collateral from our customers. For many of our international
customers, we require an irrevocable letter of credit to be issued by the
customer before a shipment is made. If the financial condition of our customers
were to deteriorate, resulting in an impairment of their ability to make
payments, additional allowances would be required.

Inventory Valuation
Inventories are valued at the lower of cost or market, cost being determined on
a first-in, first-out basis. Management evaluates the need to record
adjustments for impairment of inventory on a monthly basis. Our policy is to
assess the valuation of all inventories, including raw materials,
work-in-process, and finished goods. Obsolete inventory or inventory in excess
of managements estimated future usage is written down to estimated market
value, if less than its cost. Contracts with fixed prices are evaluated to
determine if estimated total costs will exceed revenues. A loss provision is
recorded when the judgment is made that actual costs incurred plus estimated
costs remaining to be incurred will exceed total revenues from the contract.
Inherent in the estimates of market value are managements estimates related to
current economic trends, future demand for our products, and technological
obsolescence. Significant management judgments must be made when providing for
obsolete and excess inventory and losses on contracts. If actual market
conditions are different than those projected by management, additional
inventory write-downs and loss accruals may be required.

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Warranty Costs
We provide for the estimated cost of product warranties at the time revenue is
recognized. We consider historical warranty costs actually incurred and
specifically identified circumstances to establish the warranty liability. The
warranty liability is reviewed on a quarterly basis. Should actual costs or
revised estimated costs differ from managements prior estimates, revisions to
the estimated warranty liability would be required.

Accounting for Income Taxes
Deferred income tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the consolidated financial
statement carrying amounts of existing assets and liabilities and their
respective income tax bases, and operating loss and tax credit carryforwards.
SFAS No. 109, Accounting for Income Taxes, requires the establishment of a
valuation allowance to reflect the likelihood of the realization of deferred
tax assets. We record a valuation allowance to reduce our deferred tax assets
to an estimated realizable amount based on historical and forecasted results.
While management has considered future taxable income and ongoing prudent and
feasible tax planning strategies in assessing the need for the valuation
allowance, in the event management were to determine that Zygo would be able to
realize its deferred tax assets in the future in excess of its net recorded
amount, an adjustment to the valuation allowance would increase income in the
period such determination was made. Likewise, should management determine that
Zygo would not be able to realize all or part of its net deferred tax asset in
the future, an adjustment to the valuation allowance would be charged to income
in the period such determination was made. Our effective tax rate may vary from
period to period, generally based on changes in estimated taxable income or
loss, changes to the valuation allowance, changes to federal, state or foreign
tax laws, and deductibility of certain costs and expenses by jurisdiction.

Valuation of Long-Lived Assets
In accordance with SFAS No. 144, Accounting for the Impairment or Disposal of
Long-Lived Assets, the carrying value of intangible assets and other
long-lived assets is reviewed on a regular basis for the existence of facts or
circumstances, both internally and externally, that may suggest impairment.
Some factors we consider important, which could trigger the impairment review,
include a significant decrease in the market value of an asset, a significant
change in the extent or manner in which an asset is used, a significant adverse
change in the business climate that could affect the value of an asset, an
accumulation of costs for an asset in excess of the amount originally expected,
a current period operating or cash flow loss combined with a history of
operating or cash flow losses or a projection that demonstrates continuing
losses, and a current expectation that, more likely than not, a long-lived
asset will be disposed of significantly before the end of its estimated useful
life.

If such circumstances exist, we evaluate the carrying
value of long-lived assets to determine if impairment exists based upon
estimated undiscounted future cash flows over the remaining useful life of the
assets and comparing that value with the carrying value of the assets. If the
carrying value of the assets is greater than the estimated future cash flows,
the assets are written down to the estimated fair value. We determine the
estimated fair value of the assets based on a current market value of the
assets. If a current market value is not readily available, a projected
discounted cash flow method is applied using a discount rate determined by
management to be commensurate with the risk inherent in the current business
model. Our cash flow estimates are based upon managements best estimates,
using appropriate and customary assumptions and projections at the time.

Health Insurance
We are self-insured for the majority of our group health insurance. We rely on
claims experience in determining an adequate liability for claims incurred, but
not reported. To the extent actual claims exceed estimates, we may be required
to record additional expense. A one percent change in actual claims would have
an annual impact of approximately $25,000 on our financial condition and results
of operations.

Off-Balance Sheet Arrangements
We have not created, and are not party to, any special-purpose or off-balance
sheet entities for the purpose of raising capital, incurring debt, or operating
parts of our business that are not consolidated into our financial statements.
We have not guaranteed any obligations of a third party.

23

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RISK
FACTORS THAT MAY IMPACT FUTURE RESULTS

Risk factors that may impact future results include
those disclosed in our Annual report on Form 10-K, as amended by Amendment No.
2, for the year ended June 30, 2005.

Item 3. Quantitative and Qualitative Disclosures about Market
Risk

There have been no material changes that have occurred
in our quantitative and qualitative market risk disclosures during the first
three months of fiscal 2006. In the third quarter of fiscal 2005, we began
hedging certain intercompany transactions by entering into forward contracts to
reduce the impact of adverse fluctuations on earnings associated with foreign
currency exchange rate changes. We do not enter into any derivative
transactions for speculative purposes. These contracts are entered into for
periods consistent with the currency transaction exposures, generally three to
six months. Generally, any gains and losses on the fair value of these
contracts are expected to be largely offset by gains and losses on the
underlying transactions.

For discussion of our exposure to market risk, refer
to Item 7a., Quantitative and Qualitative Disclosures about Market Risk,
presented in our Annual Report filed with the Securities and Exchange
Commission on Form 10-K for the year ended June 30, 2005.

Item 4. Controls and Procedures

As previously disclosed in a Current Report on Form 8-K which
  we filed on March 29, 2006 and as described in our Explanatory Note to this
  Form 10-Q/A and note 2 to our accompanying consolidated financial statements
  included herein, in connection with conducting an internal review of our tax
  return, we determined that inadvertent accounting errors were made in the consolidation
  of our intercompany revenues from certain of our foreign operations. The errors
  are the result of our failure to identify and eliminate certain intercompany
  revenues attributed to our Singapore and Taiwan offices, which resulted in our
  overstating reported revenues, from fiscal 2001 through the second quarter of
  fiscal 2006. Based on the impact of the aforementioned accounting errors, we
  determined to restate our financial statements as of June 30, 2005 and 2004
  and for each of the years in the three-year period ended June 30, 2005, as well
  as interim financial statements for the quarters ended September 30, 2005 and
  December 31, 2005. Our restated consolidated financial statements for fiscal
  years 2005, 2004, and 2003 included in our Form 10-K/A being filed concurrently
  herewith also include disclosure of restated quarterly results for 2005 and
  2004.

Management has determined that the internal control
deficiency that resulted in the aforementioned accounting errors is a material
weakness, as defined by the Public Company Accounting Oversight Boards
Auditing Standard No. 2. We have determined that the material weakness was that
we did not maintain adequate controls and procedures to ensure that
intercompany accounts were properly reconciled and intercompany transactions
were properly identified and eliminated in the consolidation process. The
Public Company Accounting Oversight Board has defined a material weakness as a
significant deficiency, or combination of significant deficiencies, that
results in more than a remote likelihood that a material misstatement of the
annual or interim financial statements will not be prevented or detected.

In designing and evaluating the disclosure controls
and procedures, our management recognized that any controls and procedures, no
matter how well designed and operated, can provide only reasonable assurance of
achieving the desired control objectives and our management necessarily was
required to apply its judgment in evaluating the cost-benefit relationship of
possible controls and procedures. We had carried out an evaluation, as of
September 30, 2005, under the supervision and with the participation of our
management, including our Chief Executive Officer and Chief Financial Officer,
of the effectiveness of the design and operation of our disclosure controls and
procedures. In light of the material weakness in internal control over
financial reporting referenced above, our Chief Executive Officer and Chief
Financial Officer now have concluded that our disclosure controls and
procedures were not effective at a reasonable assurance level as of September
30, 2005.

In response to this material weakness, management
performed additional analyses and other post-closing procedures to ensure our
restated consolidated financial statements were prepared in accordance with
generally accepted accounting principles. Accordingly, management, including
our Chief Executive Officer and Chief Financial Officer, believes the restated
consolidated financial statements included in this report fairly present, in
all material respects, our financial condition, results of operations and cash
flows for the periods presented.

During the period from April to May 2006, we
implemented remedial measures to address the identified material weakness. We
improved procedures related to the recording and reporting of our inter-company
transactions, including dedicating additional resources to our consolidation
processes and the procedures and controls surrounding the consolidation
process, and increased review and approval controls by senior financial
personnel over the personnel that perform the consolidation. These improved
procedures included ensuring that the inter-company activity is properly
eliminated in consolidation.

24

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PART II - Other
Information

|                   |           |                                                                       
|------------------ | --------- | ----------------------------------------------------------------------
|Item
  6. Exhibits |          
|                   |           |                                                                       
|(a)                | Exhibits: |                                                                       
|                   |           |                                                                       
|                   | 10.1*     | Zygo Restricted Stock Agreement                                       
|                   |           |                                                                       
|                   | 10.2*     | Zygo Stock Option Agreement                                           
|                   |           |                                                                       
|                   | 31.1      | Certification of Chief Executive Officer under Rule
  13a-14(a)       
|                   |           |                                                                       
|                   | 31.2      | Certification of Chief Financial Officer under Rule
  13a-14(a)       
|                   |           |                                                                       
|                   | 32.1      | Certification of Chief Executive Officer and Chief
  Financial Officer

* Exhibits were filed with the form 10-Q as originally
filed on November 9, 2005.

25

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SIGNATURE

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.

| |  |                                                                  
| |  | -----------------------------------------------------------------
| |  | Zygo Corporation                                                 
| |  |                                                                  
| |  | (Registrant)                                                     
| |  |                                                                  
| |  | /s/ J. Bruce Robinson                                            
| |  |                                                                  
| |  | J. Bruce Robinson                                                
| |  | President, Chairman, and Chief Executive Officer                 
| |  |                                                                  
| |  | /s/ Walter A. Shephard                                           
| |  |                                                                  
| |  | Walter A. Shephard                                               
| |  | Vice President, Finance, Chief Financial Officer,
  and Treasurer

Date: June 26, 2006

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