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

FORM
10-Q

(Mark One)

|  |                                                                                         
|- | ----------------------------------------------------------------------------------------
|x | QUARTERLY
  REPORT PURSUANT TO SECTION 13 OR 15(d)OF THE SECURITIES EXCHANGE ACT OF 1934

|                                                  | 
|------------------------------------------------- | 
|For the quarterly period ended September 30, 2006

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.

x YES o NO

Indicate by check mark whether the registrant is a
large accelerated filer, an accelerated filer, or a non-accelerated filer.  See definition of accelerated filer and
large accelerated filer in Rule 12b-2 of the Exchange Act.

|                          |                     |                        
|------------------------- | ------------------- | -----------------------
|Large accelerated filer o | Accelerated filer x | Non-accelerated filer o

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

o YES x NO

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.

18,432,704 shares
of Common Stock, $.10 Par Value, at October 26, 2006

1

---



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 and timing of 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 for the fiscal year
ended June 30, 2006.

2

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PART I - Financial Information

Item 1.
Financial Statements

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

|                                                   |  |                                  |        |      |   |        |  
|-------------------------------------------------- |  | -------------------------------- | ------ | ---- | - | ------ | -
|                                                   |  | Three Months Ended September 30, |       
|                                                   |  |                                  |       
|                                                   |  | 2006                             |        | 2005 |  
|                                                   |  |                                  |        |      |  
|                                                   |  |                                  |        |      |   |        |  
|Net sales                                          |  |                                  |        |      |   |        |  
|Products                                           |  | $                                | 38,821 |      | $ | 30,368 |  
|Development services                               |  |                                  | 2,286  |      |   | 3,961  |  
|                                                   |  |                                  |        |      |   |        |  
|                                                   |  |                                  | 41,107 |      |   | 34,329 |  
|                                                   |  |                                  |        |      |   |        |  
|Cost of goods sold                                 |  |                                  |        |      |   |        |  
|Products                                           |  |                                  | 21,743 |      |   | 18,270 |  
|Development services                               |  |                                  | 1,573  |      |   | 2,906  |  
|                                                   |  |                                  |        |      |   |        |  
|                                                   |  |                                  | 23,316 |      |   | 21,176 |  
|                                                   |  |                                  |        |      |   |        |  
|Gross profit                                       |  |                                  | 17,791 |      |   | 13,153 |  
|                                                   |  |                                  |        |      |   |        |  
|Selling, general, and
  administrative expenses    |  |                                  | 7,525  |      |   | 6,368  |  
|Research, development, and
  engineering expenses  |  |                                  | 5,124  |      |   | 3,540  |  
|                                                   |  |                                  |        |      |   |        |  
|Operating profit                                   |  |                                  | 5,142  |      |   | 3,245  |  
|                                                   |  |                                  |        |      |   |        |  
|                                                   |  |                                  |        |      |   |        |  
|Other income                                       |  |                                  |        |      |   |        |  
|Interest income                                    |  |                                  | 725    |      |   | 417    |  
|Miscellaneous income                               |  |                                  | 45     |      |   | 123    |  
|                                                   |  |                                  |        |      |   |        |  
|Total other income                                 |  |                                  | 770    |      |   | 540    |  
|                                                   |  |                                  |        |      |   |        |  
|Earnings before income taxes and minority
interest |  |                                  | 5,912  |      |   | 3,785  |  
|                                                   |  |                                  |        |      |   |        |  
|Income taxes                                       |  |                                  | (2,069 | )    |   | (1,442 | )
|Minority interest                                  |  |                                  | (191   | )    |   | (150   | )
|                                                   |  |                                  |        |      |   |        |  
|Net earnings                                       |  | $                                | 3,652  |      | $ | 2,193  |  
|                                                   |  |                                  |        |      |   |        |  
|                                                   |  |                                  |        |      |   |        |  
|Basic - Earnings per share                         |  | $                                | 0.20   |      | $ | 0.12   |  
|                                                   |  |                                  |        |      |   |        |  
|Diluted - Earnings per
  share                     |  | $                                | 0.20   |      | $ | 0.12   |  
|                                                   |  |                                  |        |      |   |        |  
|                                                   |  |                                  |        |      |   |        |  
|Weighted average shares outstanding                |  |                                  |        |      |   |        |  
|                                                   |  |                                  |        |      |   |        |  
|Basic shares                                       |  |                                  | 18,118 |      |   | 18,013 |  
|                                                   |  |                                  |        |      |   |        |  
|Diluted shares                                     |  |                                  | 18,445 |      |   | 18,137 |  
|                                                   |  |                                  |        |      |   |        |  

See accompanying notes to condensed
consolidated financial statements.

3

---



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

|                                                                                     |  |                    |         |               |   |         | 
|------------------------------------------------------------------------------------ |  | ------------------ | ------- | ------------- | - | ------- | 
|                                                                                     |  | September 30, 2006 |         | June 30, 2006 |  
|                                                                                     |  |                    |         |               |  
|Assets                                                                               |  |                    |         |               |   |         | 
|Current
  assets:                                                                    |  |                    |         |               |   |         | 
|Cash and cash equivalents                                                            |  | $                  | 13,673  |               | $ | 20,318  | 
|Marketable securities                                                                |  |                    | 24,534  |               |   | 21,415  | 
|Receivables, net of allowance for doubtful
  accounts of $490 and $588, respectively |  |                    | 29,752  |               |   | 33,759  | 
|Inventories                                                                          |  |                    | 40,687  |               |   | 38,082  | 
|Prepaid expenses                                                                     |  |                    | 2,370   |               |   | 2,106   | 
|Deferred income taxes                                                                |  |                    | 12,054  |               |   | 11,959  | 
|                                                                                     |  |                    |         |               |   |         | 
|Total current assets                                                                 |  |                    | 123,070 |               |   | 127,639 | 
|                                                                                     |  |                    |         |               |   |         | 
|Marketable
  securities                                                              |  |                    | 22,675  |               |   | 23,743  | 
|Property,
  plant, and equipment, net                                                |  |                    | 33,237  |               |   | 32,631  | 
|Deferred
  income taxes                                                              |  |                    | 13,663  |               |   | 15,433  | 
|Intangible
  assets, net                                                             |  |                    | 5,922   |               |   | 5,925   | 
|Other assets                                                                         |  |                    | 963     |               |   | 812     | 
|                                                                                     |  |                    |         |               |   |         | 
|Total assets                                                                         |  | $                  | 199,530 |               | $ | 206,183 | 
|                                                                                     |  |                    |         |               |   |         | 
|                                                                                     |  |                    |         |               |   |         | 
|Liabilities and Stockholders Equity                                                 |  |                    |         |               |   |         | 
|Current
  liabilities:                                                               |  |                    |         |               |   |         | 
|Payables                                                                             |  | $                  | 10,058  |               | $ | 13,987  | 
|Accrued progress payments                                                            |  |                    | 14,624  |               |   | 17,031  | 
|Accrued salaries and wages                                                           |  |                    | 4,221   |               |   | 8,445   | 
|Other accrued liabilities                                                            |  |                    | 3,829   |               |   | 4,258   | 
|Income taxes payable                                                                 |  |                    | 1,476   |               |   | 2,004   | 
|                                                                                     |  |                    |         |               |   |         | 
|Total current liabilities                                                            |  |                    | 34,208  |               |   | 45,725  | 
|                                                                                     |  |                    |         |               |   |         | 
|Other
  long-term liabilities                                                        |  |                    | 443     |               |   | 101     | 
|Minority
  interest                                                                  |  |                    | 1,610   |               |   | 1,419   | 
|Commitments
  and contingencies                                                      |  |                    |         |               |   |         | 
|                                                                                     |  |                    |         |               |   |         | 
|Stockholders
  equity:                                                              |  |                    |         |               |   |         | 
|Common Stock, $.10 par value per share:                                              |  |                    |         |               |   |         | 
|40,000,000 shares authorized;                                                        |  |                    |         |               |   |         | 
|18,565,834 shares issued (18,552,684 at
  June 30, 2006);                            |  |                    |         |               |   |         | 
|18,118,629 shares outstanding (18,105,479
  at June 30, 2006)                        |  |                    | 1,856   |               |   | 1,855   | 
|Additional
  paid-in capital                                                         |  |                    | 145,997 |               |   | 145,225 | 
|Retained
  earnings                                                                  |  |                    | 20,704  |               |   | 17,052  | 
|Accumulated
  other comprehensive income (loss):                                     |  |                    |         |               |   |         | 
|Currency translation effects                                                         |  |                    | (17     | )             |   | 74      | 
|Net unrealized gain on marketable
  securities                                       |  |                    | 16      |               |   | 19      | 
|                                                                                     |  |                    |         |               |   |         | 
|                                                                                     |  |                    | 168,556 |               |   | 164,225 | 
|Less treasury
  stock, at cost (447,205 shares)                                      |  |                    | 5,287   |               |   | 5,287   | 
|                                                                                     |  |                    |         |               |   |         | 
|Total stockholders equity                                                           |  |                    | 163,269 |               |   | 158,938 | 
|                                                                                     |  |                    |         |               |   |         | 
|Total liabilities and stockholders equity                                           |  | $                  | 199,530 |               | $ | 206,183 | 
|                                                                                     |  |                    |         |               |   |         | 

See accompanying notes to condensed consolidated
financial statements.

4

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

|                                                                                             |  |                                  |         |      |   |        |  
|-------------------------------------------------------------------------------------------- |  | -------------------------------- | ------- | ---- | - | ------ | -
|                                                                                             |  | Three Months Ended September 30, |        
|                                                                                             |  |                                  |        
|                                                                                             |  | 2006                             |         | 2005 |  
|                                                                                             |  |                                  |         |      |  
|                                                                                             |  |                                  |         |      |   |        |  
|Cash
  provided by (used for) operating activities:                                          |  |                                  |         |      |   |        |  
|Net earnings                                                                                 |  | $                                | 3,652   |      | $ | 2,193  |  
|                                                                                             |  |                                  |         |      |   |        |  
|Adjustments to reconcile net earnings to
  cash provided by (used for) operating activities: |  |                                  |         |      |   |        |  
|Depreciation and amortization                                                                |  |                                  | 1,594   |      |   | 1,499  |  
|Deferred income taxes                                                                        |  |                                  | 1,673   |      |   | 1,052  |  
|Compensation cost related to share-based
  payments arrangements                             |  |                                  | 601     |      |   | 374    |  
|Excess tax benefits from share-based
  payment arrangements                                  |  |                                  | (1      | )    |   | (11    | )
|Minority interest                                                                            |  |                                  | 191     |      |   | 150    |  
|Other, net                                                                                   |  |                                  | (91     | )    |   | 14     |  
|Changes in operating accounts:                                                               |  |                                  |         |      |   |        |  
|Receivables                                                                                  |  |                                  | 4,002   |      |   | 3,082  |  
|Inventories                                                                                  |  |                                  | (2,638  | )    |   | (1,288 | )
|Prepaid expenses                                                                             |  |                                  | (267    | )    |   | 26     |  
|Accounts payable, accrued expenses, and
  taxes payable                                      |  |                                  | (11,138 | )    |   | (3,602 | )
|                                                                                             |  |                                  |         |      |   |        |  
|Net cash provided by (used for) operating
  activities                                       |  |                                  | (2,422  | )    |   | 3,489  |  
|                                                                                             |  |                                  |         |      |   |        |  
|Cash used
  for investing activities:                                                        |  |                                  |         |      |   |        |  
|Additions to property, plant, and
  equipment, net                                           |  |                                  | (2,180  | )    |   | (1,424 | )
|Purchase of marketable securities                                                            |  |                                  | (7,054  | )    |   | (9,478 | )
|Additions to intangibles and other assets                                                    |  |                                  | (90     | )    |   | (209   | )
|Proceeds from the maturity of marketable
securities                                          |  |                                  | 5,000   |      |   | 4,015  |  
|                                                                                             |  |                                  |         |      |   |        |  
|Net cash used for investing activities                                                       |  |                                  | (4,324  | )    |   | (7,096 | )
|                                                                                             |  |                                  |         |      |   |        |  
|Cash provided by (used for) financing activities:                                            |  |                                  |         |      |   |        |  
|Employee stock purchase                                                                      |  |                                  | 161     |      |   | 293    |  
|Exercise of employee stock options                                                           |  |                                  | 12      |      |   | 135    |  
|Excess
        tax benefits from share-based payment arrangements                            |  |                                  | 1       |      |   | 11     |  
|Dividend payment to minority interest                                                        |  |                                  |        |      |   | (622   | )
|                                                                                             |  |                                  |         |      |   |        |  
|Net cash provided by (used for) financing
  activities                                       |  |                                  | 174     |      |   | (183   | )
|                                                                                             |  |                                  |         |      |   |        |  
|Effect of
  exchange rate changes on cash and cash equivalents                               |  |                                  | (73     | )    |   |       |  
|                                                                                             |  |                                  |         |      |   |        |  
|Net decrease
  in cash and cash equivalents                                                  |  |                                  | (6,645  | )    |   | (3,790 | )
|Cash and
  cash equivalents, beginning of period                                             |  |                                  | 20,318  |      |   | 20,949 |  
|                                                                                             |  |                                  |         |      |   |        |  
|Cash and
  cash equivalents, end of period                                                   |  | $                                | 13,673  |      | $ | 17,159 |  
|                                                                                             |  |                                  |         |      |   |        |  

Supplemental Cash Flow Information

Income tax
payments amounted to $896 and $392 for the three months ended September 30,
2006 and 2005, respectively.

See accompanying notes to condensed
consolidated financial statements.

5

---



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

Note 1: Principles of Consolidation and
Presentation

Zygo
Corporation is a worldwide supplier of optical metrology instruments, precision
optics, and electro-optical design and manufacturing services, serving
customers in the semiconductor capital equipment and industrial markets.  The accompanying condensed 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 condensed consolidated financial
statements.  The results of operations
for the three months ended September 30, 2006 are not necessarily indicative of
the results to be expected for the full fiscal year.

The Condensed
Consolidated Balance Sheet at September 30, 2006, the Condensed Consolidated
Statements of Operations for the three months ended September 30, 2006 and 2005,
and the Condensed Consolidated Statements of Cash Flows for the three months
ended September 30, 2006 and 2005 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 condensed consolidated
financial statements should be read in conjunction with the consolidated
financial statements and notes included in our Annual Report on Form 10-K for
the year ended June 30, 2006, including items incorporated by reference
therein.

Note 2: Earnings Per Share

Basic 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, |           
|                                                         |  |                                    |           
|                                                         |  | 2006                               |            | 2005 | 
|                                                         |  |                                    |            |      | 
|Basic weighted average shares outstanding                |  |                                    | 18,117,726 |      |  | 18,013,229 | 
|Dilutive effect of stock options and
  restricted shares |  |                                    | 327,677    |      |  | 124,149    | 
|                                                         |  |                                    |            |      |  |            | 
|Diluted weighted average shares outstanding              |  |                                    | 18,445,403 |      |  | 18,137,378 | 
|                                                         |  |                                    |            |      |  |            | 

Note 3: Recent Accounting Pronouncements

In June 2006,
the Financial Accounting Standards Board (FASB) issued FASB Interpretation
No. 48, Accounting for Uncertainty in Income Taxes (FIN 48).  FIN 48 clarifies the accounting for
uncertainty in income taxes recognized in the Companys financial statements in
accordance with FASB Statement No. 109, Accounting for Income Taxes.  The provisions of FIN 48 are effective for
the fiscal year beginning July 1, 2007.
The Company is currently evaluating the impact of the provisions of FIN
48.

In September
2006, the SEC issued Staff Accounting Bulletin 108 (SAB 108) to address
diversity in practice in quantifying financial statement misstatements.  SAB 108 requires that we quantify
misstatements based on their impact on each of our financial statements and
related disclosures. SAB 108 is effective as of the end of our 2007 fiscal
year, allowing a one-time transitional cumulative effect adjustment to retained
earnings as of June 30, 2007 for errors that were not previously deemed
material, but are material under the guidance in SAB 108.  We do not expect the adoption of SAB 108 to
have a material effect on our financial statements.

In September
2006, the FASB issued Statement of Financial Accounting Standard (SFAS) No.
157, Fair Value Measurements (FAS 157).
FAS 157 defines fair value, establishes a framework for measuring fair
value in accordance with generally accepted accounting principles, and expands
disclosures about fair value measurements.
The provisions of FAS 157 are effective for the fiscal year beginning
July 1, 2008.  The Company is currently
evaluating the impact of the provisions of FAS 157.

In September
2006, the FASB issued SFAS No. 158, Employers Accounting for Defined Benefit
Pension and Other Postretirement Plans (FAS 158). FAS 158 requires employers
to fully recognize the obligations associated with single-employer defined
benefit pension, retiree healthcare and other postretirement plans in their
financial statements.  The provisions of
FAS 158 are effective as of the end of the fiscal year ending June 30,
2007.  The Company is currently
evaluating the impact of the provisions of FAS 158.

6

---



Note 4: Share-Based Payments

We recorded
share-based compensation expense for the three months ended September 30, 2006
and 2005 of $601 and $374, respectively, with a related tax benefit of $216 and
$142, respectively.  Beginning after
July 1, 2005, we made changes to our employee stock purchase plan which
rendered the plan non-compensatory in accordance with SFAS No. 123(R),
Share-Based Payment.

Stock-Options

An independent
third party assisted the Company in determining the Black-Scholes weighted
average assumptions utilized in both fiscal 2007 and 2006 stock option
valuations.  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 stock option grants for the
three months ended September 30, 2006 and 2005 was $5.93 and $4.75,
respectively.  The table below indicates
the key assumptions used in the option valuation calculations for options
granted in the three months ended September 30, 2006 and 2005, and a discussion
of our methodology for developing each of the assumptions used in the valuation
model:

|                          |  |                                    |           |      |           |      |  
|------------------------- |  | ---------------------------------- | --------- | ---- | --------- | ---- | -
|                          |  | Three
  Months Ended September 30,
|                          |  |                                   
|                          |  | 2006                               |           | 2005
|                          |  |                                    |           |     
|Term                      |  |                                    | 4.1 Years |      | 4.1 Years
|Volatility                |  |                                    | 52.1      | %    |           | 52.9 | %
|Dividend
  yield          |  |                                    | 0.0       | %    |           | 0.0  | %
|Risk-free
  interest rate |  |                                    | 4.8       | %    |           | 4.1  | %
|Forfeiture
  rate         |  |                                    | 10.7      | %    |           | 10.6 | %

Term  This is generally 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.

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.

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.

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.

Restricted Stock

Our
share-based compensation expense also includes the effects of restricted stock
grants.  The compensation expense
related to restricted stock grants is determined based on the market price of
our stock at the date of grant applied to the total number of shares that are
anticipated to fully vest, which is then amortized over the expected term.

7

---



Note 5: Comprehensive Income

Our total
comprehensive income was as follows:

|                                                     |  |                                    |       |      |   |       |  
|---------------------------------------------------- |  | ---------------------------------- | ----- | ---- | - | ----- | -
|                                                     |  | Three
  Months Ended September 30, |      
|                                                     |  |                                    |       |      |  
|                                                     |  | 2006                               |       | 2005 |  
|                                                     |  |                                    |       |      |  
|                                                     |  |                                    |       |      |  
|Net earnings                                         |  | $                                  | 3,652 |      | $ | 2,193 |  
|                                                    
|Unrealized loss on marketable securities, net of
tax |  |                                    | (3    | )    |   | (4    | )
|Foreign currency translation effect                  |  |                                    | (91   | )    |   | (61   | )
|                                                     |  |                                    |       |      |   |       |  
|Comprehensive income                                 |  | $                                  | 3,558 |      | $ | 2,128 |  
|                                                     |  |                                    |       |      |   |       |  

Note 6: Inventories

Inventories
are stated at the lower of cost (determined on a first-in, first-out basis) or
market.  At September 30, 2006 and June
30, 2006, inventories were as follows:

|                                       |  |                      |        |                   |   |        | 
|-------------------------------------- |  | -------------------- | ------ | ----------------- | - | ------ | 
|                                       |  | September 30,
  2006 |        | June
  30,
  2006 |  
|                                       |  |                      |        |                   |  
|                                       |  |                      |        |                   |  
|Raw materials and
  manufactured parts |  | $                    | 18,051 |                   | $ | 17,536 | 
|Work in process                        |  |                      | 18,640 |                   |   | 17,321 | 
|Finished goods                         |  |                      | 3,996  |                   |   | 3,225  | 
|                                       |  |                      |        |                   |   |        | 
|                                       |  | $                    | 40,687 |                   | $ | 38,082 | 
|                                       |  |                      |        |                   |   |        | 

Note 7: 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, 2006 and June 30, 2006,
property, plant, and equipment were as follows:

|                                             |  |                      |         |                   |   |                                   |   |  |       | 
|-------------------------------------------- |  | -------------------- | ------- | ----------------- | - | --------------------------------- | - |  | ----- | 
|                                             |  | September 30,
  2006 |         | June
  30,
  2006 |   | Estimated
  Useful Life
  (Years) |  
|                                             |  |                      |         |                   |   |                                   |  
|Land                                         |  | $                    | 615     |                   | $ | 615                               |   |  |      | 
|Building and
  improvements                  |  |                      | 16,883  |                   |   | 16,848                            |   |  | 1540 | 
|Machinery,
  equipment, and office furniture |  |                      | 50,795  |                   |   | 49,889                            |   |  | 38   | 
|Leasehold
  improvements                     |  |                      | 756     |                   |   | 772                               |   |  | 15   | 
|Construction
  in progress                   |  |                      | 3,857   |                   |   | 2,916                             |   |  |      | 
|                                             |  |                      |         |                   |   |                                   |   |  |       | 
|                                             |  |                      | 72,906  |                   |   | 71,040                            |   |  |       | 
|Accumulated
  depreciation                   |  |                      | (39,669 | )                 |   | (38,409                           | ) |  |       | 
|                                             |  |                      |         |                   |   |                                   |   |  |       | 
|                                             |  | $                    | 33,237  |                   | $ | 32,631                            |   |  |       | 
|                                             |  |                      |         |                   |   |                                   |   |  |       | 

Depreciation expense for the three months ended September 30,
  2006 and 2005 was $1,520 and $1,370, respectively.

8

---



Note 8: 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 5-17
years.  Intangible assets, at cost, at
September 30, 2006 and June 30, 2006 were as follows:

|                           |  |                      |        |                   |   |        |  
|-------------------------- |  | -------------------- | ------ | ----------------- | - | ------ | -
|                           |  | September 30,
  2006 |        | June
  30,
  2006 |  
|                           |  |                      |        |                   |  
|Patents and
  trademarks   |  | $                    | 7,096  |                   | $ | 7,042  |  
|License
  agreements       |  |                      |       |                   |   | 1,350  |  
|                           |  |                      |        |                   |   |        |  
|                           |  |                      | 7,096  |                   |   | 8,392  |  
|Accumulated
  amortization |  |                      | (1,174 | )                 |   | (2,467 | )
|                           |  |                      |        |                   |   |        |  
|Total                      |  | $                    | 5,922  |                   | $ | 5,925  |  
|                           |  |                      |        |                   |   |        |  

Intangible
amortization expense was $74 and $107 for the three months ended September 30,
2006 and 2005, respectively.
Amortization expense related to certain intangible assets is included in
cost of goods sold in the Condensed Consolidated Statements of Operations.

Note 9: Warranty

A limited
warranty is provided on our products for periods ranging from 3 to 18 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 will be required.

The following
is a reconciliation of the accrued warranty liability, which is included in the
other accrued liabilities in the Condensed Consolidated Balance Sheets:

|                                                                         |  |                                    |       |      |   |       |  
|------------------------------------------------------------------------ |  | ---------------------------------- | ----- | ---- | - | ----- | -
|                                                                         |  | Three
  Months Ended September 30, |      
|                                                                         |  |                                    |      
|                                                                         |  | 2006                               |       | 2005 |  
|                                                                         |  |                                    |       |      |  
|Beginning balance                                                        |  | $                                  | 1,660 |      | $ | 1,396 |  
|Reductions for payments made                                             |  |                                    | (310  | )    |   | (277  | )
|Changes in accruals related to pre-existing
  warranties                 |  |                                    | 131   |      |   | 109   |  
|Changes in accruals related to warranties
  issued in the current period |  |                                    | 250   |      |   | 262   |  
|                                                                         |  |                                    |       |      |   |       |  
|Ending balance                                                           |  | $                                  | 1,731 |      | $ | 1,490 |  
|                                                                         |  |                                    |       |      |   |       |  

9

---



Note 10: 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, |       
|                             |  |                                  |       
|                             |  | 2006                             |        | 2005 |  
|                             |  |                                  |        |      |  
|                             |  |                                  |        |      |   |        |  
|Semiconductor                |  |                                  |        |      |   |        |  
|Sales                        |  | $                                | 25,798 |      | $ | 18,436 |  
|Gross profit                 |  | $                                | 10,877 |      | $ | 7,141  |  
|Gross profit as a % of sales |  |                                  | 42     | %    |   | 39     | %
|                            
|Industrial                   |  |                                  |        |      |   |        |  
|Sales                        |  | $                                | 15,309 |      | $ | 15,893 |  
|Gross profit                 |  | $                                | 6,914  |      | $ | 6,012  |  
|Gross profit as a % of sales |  |                                  | 45     | %    |   | 38     | %
|                            
|Total                        |  |                                  |        |      |   |        |  
|Sales                        |  | $                                | 41,107 |      | $ | 34,329 |  
|Gross profit                 |  | $                                | 17,791 |      | $ | 13,153 |  
|Gross profit as a % of sales |  |                                  | 43     | %    |   | 38     | %

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, which includes development services, Optical Systems Solutions, and
Precision Positioning Systems (PPS) business units product lines are sold
into our two business segments. Supplementary sales and gross profit data by
business unit is as follows:

|                             |  |                                  |        |      |   |        |  
|---------------------------- |  | -------------------------------- | ------ | ---- | - | ------ | -
|                             |  | Three Months Ended September 30, |       
|                             |  |                                  |       
|                             |  | 2006                             |        | 2005 |  
|                             |  |                                  |        |      |  
|                             |  |                                  |        |      |   |        |  
|Metrology                    |  |                                  |        |      |   |        |  
|Sales                        |  | $                                | 19,501 |      | $ | 16,257 |  
|Gross profit                 |  | $                                | 9,294  |      | $ | 7,367  |  
|Gross profit as a % of sales |  |                                  | 48     | %    |   | 45     | %
|                            
|Optical Systems Solutions    |  |                                  |        |      |   |        |  
|Sales                        |  | $                                | 9,309  |      | $ | 9,496  |  
|Gross profit                 |  | $                                | 3,071  |      | $ | 1,740  |  
|Gross profit as a % of sales |  |                                  | 33     | %    |   | 18     | %
|                            
|PPS                          |  |                                  |        |      |   |        |  
|Sales                        |  | $                                | 12,297 |      | $ | 8,576  |  
|Gross profit                 |  | $                                | 5,426  |      | $ | 4,046  |  
|Gross profit as a % of sales |  |                                  | 44     | %    |   | 47     | %
|                            
|Total                        |  |                                  |        |      |   |        |  
|Sales                        |  | $                                | 41,107 |      | $ | 34,329 |  
|Gross profit                 |  | $                                | 17,791 |      | $ | 13,153 |  
|Gross profit as a % of sales |  |                                  | 43     | %    |   | 38     | %

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, |       
|            |  |                                  |       
|            |  | 2006                             |        | 2005 |  
|            |  |                                  |        |      |  
|            |  |                                  |        |      |   |        | 
|Domestic    |  | $                                | 15,164 |      | $ | 13,010 | 
|Europe      |  |                                  | 3,795  |      |   | 2,781  | 
|Japan       |  |                                  | 15,351 |      |   | 14,162 | 
|Pacific Rim |  |                                  | 6,797  |      |   | 4,376  | 
|            |  |                                  |        |      |   |        | 
|Total       |  | $                                | 41,107 |      | $ | 34,329 | 
|            |  |                                  |        |      |   |        | 

10

---



Note 11: Transactions with Stockholder

Sales to Canon
Inc., a stockholder, and Canon Sales Co., Inc., a distributor of certain of our
products in Japan and a subsidiary of Canon Inc., amounted to $12,617 (31% of
net sales) and $12,353 (36% of net sales) for the three months ended September
30, 2006 and 2005, respectively. Included in these sales to Canon are sales
related to development services of certain interferometers of $2,286 and $3,961
for the three months ended September 30, 2006 and 2005, respectively. 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, 2006 and June 30, 2006, there were, in the aggregate, $5,346 and $5,966,
respectively, of trade accounts receivable from Canon Inc. and Canon Sales Co.,
Inc. In addition, Canon Inc. paid us progress payments related to the
development services of certain interferometers. The total progress payments
related to the development services remaining at September 30, 2006 was $1,049.

Note 12: Hedging Activities

We enter 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 Condensed Statement of Operations. These contracts
are entered into for periods consistent with the expected currency transaction
exposures, generally three to six months. Any gains and losses on the fair
value of these contracts should largely offset corresponding losses and gains
on the underlying transactions.

As of
September 30, 2006, we had five foreign currency forward contracts (Yen)
outstanding aggregating to $4,000. For the three months ended September 30,
2006 and 2005, we recognized gains from foreign currency forward contracts of
$159 and $82, respectively. These gains and losses are substantially offset by
foreign exchange losses and gains on intercompany balances recorded by our
subsidiaries. These net gains and losses are included in other income in the
Condensed Consolidated Statements of Operations.

Note 13: Income Taxes

The income tax
rate for the three months ended September 30, 2006 was 35% compared with 38%
for the three months ended September 30, 2005. This decrease in the tax rate is
primarily impacted by an increased deduction related to foreign trading income
from the Extraterritorial Income Exclusion, an increase in earnings in lower
tax jurisdictions, and a decrease in monies repatriated from foreign
jurisdictions.

11

---



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

OVERVIEW

Zygo
Corporation is a worldwide supplier of optical metrology instruments, precision
optics, and electro-optical design and manufacturing services, serving
customers in the semiconductor capital equipment and industrial markets.  Optical instruments products encompass
non-contact optical measurement instruments.
Optics products consist of high performance macro-optics components,
optical coatings, and optical system assemblies.  We conduct the majority of our manufacturing in our 153,500
square foot facility in Middlefield, Connecticut and our 22,560 square foot
facility in Tucson, Arizona.

We serve our semiconductor and industrial market segments through our
three core business units: Metrology, Optical Systems Solutions, and Precision
Positioning Systems.  Our semiconductor
product offerings include OEM solutions for the semiconductor capital equipment
industry and direct supplied in-line automated process metrology and inspection
systems for both flat panel display and chip manufacturing.  Our industrial market products serve the
automotive, consumer electronics, defense, aerospace, medical, 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 several years.
These development services contracts with Canon Inc. are expected to be
completed during the first half of fiscal 2007.  In fiscal 2006, we recognized $20.0 million on these development
services contracts and expect approximately $4 million to be recognized in
fiscal 2007, of which $2.3 million has been recognized during the first
quarter.  Currently, we do not expect comparable
total sales to be adversely affected year over year due to the completion of
the development services contracts.
Increases in overall sales and new product sales demonstrated in the
current quarter, coupled with strong orders and commitments, is expected to
more than offset the decrease in the development services revenue in the
current year.

We achieved an
order level for the first quarter of fiscal 2007 of $47.8 million as compared
with $38.3 million for the first quarter of fiscal 2006.  This order flow increased backlog at
September 30, 2006 to $87.4 million.  Orders in the semiconductor segment
of $30.1 million increased $10.4 million, or 53%, as compared with the first
quarter of fiscal 2006.  We continue to
receive orders from the flat panel market of the semiconductor segment and
received a multi-million dollar commitment for our new front-end semiconductor
process tool, the Z3D-7000.  We also
continue to experience an increase in lithography orders.  Orders are included in our backlog to the
extent they are expected to be delivered within a twelve month period.  Backlog does not include commitments from
customers with expected delivery dates beyond twelve months.

CRITICAL ACCOUNTING POLICIES, SIGNIFICANT
JUDGMENTS, AND ESTIMATES

The discussion
and analysis of our financial condition and results of operations are based
upon our condensed consolidated financial statements, which have been prepared
in accordance with accounting principles generally accepted in the United
States of America.  The preparation of
these condensed 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 condensed
consolidated financial statements.  On
an on-going basis, management evaluates its estimates and judgments, including
those related to bad debts, inventories, marketable securities, warranty
obligations, income taxes, long-lived assets, and share-based payments.  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.
As discussed in Item 7, Managements Discussion and Analysis of
Financial Condition and Results of Operations of the Companys Annual Report
on Form 10-K for the fiscal year ended June 30, 2006, management considers the
Companys policies on Revenue Recognition and Allowance for Doubtful Accounts;
Inventory Valuation; Other than Temporary Impairment of Marketable Securities;
Share-Based Compensation; Warranty Costs; Accounting for Income Taxes; Valuation
of Long-Lived Assets; and accruals for Health Insurance to be critical
accounting policies due to the estimates; assumptions and application of
judgment involved in each.

12

---



RESULTS OF OPERATIONS

Net Sales

|                             |  |               |      |               |  |        |   |             |      |  |  |     |  
|---------------------------- |  | ------------- | ---- | ------------- |  | ------ | - | ----------- | ---- |  |  | --- | -
|                             |  | Fiscal
  2007 |      | Fiscal
2006   | 
|                             |  |               |      |               | 
|(In millions)                |  | Amount        |      | Net
  Sales % |  | Amount |   | Net Sales
% |     
|                             |  |               |      |               |  |        |   |             |     
|                             |  |               |      |               |  |        |   |             |      |  |  |     |  
|Quarter
  ended September 30 |  |               |      |               |  |        |   |             |      |  |  |     |  
|Semiconductor                |  | $             | 23.5 |               |  | 57     | % | $           | 14.4 |  |  | 42  | %
|Development services         |  |               | 2.3  |               |  | 6      | % |             | 4.0  |  |  | 12  | %
|                             |  |               |      |               |  |        |   |             |      |  |  |     |  
|Total Semiconductor          |  |               | 25.8 |               |  | 63     | % |             | 18.4 |  |  | 54  | %
|                             |  |               |      |               |  |        |   |             |      |  |  |     |  
|Total Industrial             |  |               | 15.3 |               |  | 37     | % |             | 15.9 |  |  | 46  | %
|                             |  |               |      |               |  |        |   |             |      |  |  |     |  
|                             |  |               |      |               |  |        |   |             |      |  |  |     |  
|Total                        |  | $             | 41.1 |               |  | 100    | % | $           | 34.3 |  |  | 100 | %
|                             |  |               |      |               |  |        |   |             |      |  |  |     |  

Overall, net
sales increased 20% in the first quarter of fiscal 2007 as compared with the
prior year.  Net sales in the
semiconductor segment increased 40% in the first quarter of fiscal 2007 as
compared with the prior year.  This increase
was due primarily to volume increases in lithography sales of $4.4 million,
flat panel sales of $2.1 million, and new product sales of $1.6 million,
partially offset by the anticipated decline in development services of $1.7
million.  Net sales in the industrial
segment decreased by 4% in the first quarter of fiscal 2007 as compared with
the prior year period.  This decrease
was primarily due to lower sales in the Japan and Pacific rim region of $1.2
million related to larger than average sales volume which occurred in the prior
year and was partially offset by increased contract manufacturing and overall
general product sales increases in the U.S of $0.6 million.

Sales in U.S.
dollars for the first quarter of fiscal 2007 were $34.6 million or 84% of total
net sales for the periods.  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.
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
condensed consolidated financial position and results of operations.

Gross Profit by Segment

|                           |  |               |      |                  |  |        |   |               |      |  |  |    |  
|-------------------------- |  | ------------- | ---- | ---------------- |  | ------ | - | ------------- | ---- |  |  | -- | -
|                           |  | Fiscal
  2007 |      | Fiscal
2006      | 
|                           |  |               |      |                  | 
|(In millions)              |  | Amount        |      | Gross
  Profit % |  | Amount |   | GrossProfit % |     
|                           |  |               |      |                  |  |        |   |               |     
|                           |  |               |      |                  |  |        |   |               |      |  |  |    |  
|Quarter ended September 30 |  |               |      |                  |  |        |   |               |      |  |  |    |  
|Semiconductor              |  | $             | 10.2 |                  |  | 43     | % | $             | 6.1  |  |  | 42 | %
|Development services       |  |               | 0.7  |                  |  | 30     | % |               | 1.1  |  |  | 28 | %
|                           |  |               |      |                  |  |        |   |               |      |  |  |    |  
|Total Semiconductor        |  |               | 10.9 |                  |  | 42     | % |               | 7.2  |  |  | 39 | %
|                           |  |               |      |                  |  |        |   |               |      |  |  |    |  
|Total Industrial           |  |               | 6.9  |                  |  | 45     | % |               | 6.0  |  |  | 38 | %
|                           |  |               |      |                  |  |        |   |               |      |  |  |    |  
|                           |  |               |      |                  |  |        |   |               |      |  |  |    |  
|Total                      |  | $             | 17.8 |                  |  | 43     | % | $             | 13.2 |  |  | 38 | %
|                           |  |               |      |                  |  |        |   |               |      |  |  |    |  

Gross profit
as a percentage of sales for the first quarter of fiscal 2007 increased by 5
percentage points as compared with the prior year period.  Improved factory performance and material
cost reductions across both segments contributed almost 3 percentage points of
the overall increase of the gross profit as a percentage of sales in the first
quarter of fiscal 2007 over the prior year period.  We are continuing to implement lean manufacturing initiatives
which has contributed to improved utilization of our manufacturing resources.  Changes in product mix accounted for 2
percentage points of the increase as lower margin sales, such as development
services and contract manufacturing, represented a lower percentage of sales,
18%, in the first quarter of fiscal 2007 as compared with 27% in the first
quarter of the prior year.  These lower
margin sales also showed improvement in margins over the prior year.

13

---



Selling, General, and
Administrative Expenses (SG&A)

|                           |  |               |     |             |  |        |   |            |     |  |  |    |  
|-------------------------- |  | ------------- | --- | ----------- |  | ------ | - | ---------- | --- |  |  | -- | -
|                           |  | Fiscal
  2007 |     | Fiscal
2006 | 
|                           |  |               |     |             | 
|(In millions)              |  | Amount        |     | % of Sales  |  | Amount |   | % of Sales |    
|                           |  |               |     |             |  |        |   |            |    
|                           |  |               |     |             |  |        |   |            |     |  |  |    |  
|Quarter ended September 30 |  | $             | 7.5 |             |  | 18     | % | $          | 6.4 |  |  | 19 | %

The first
quarter increase in SG&A primarily was due to increased employee expenses
of $0.7 million, and increased selling expenses related to new market
initiatives of $0.1 million.  The
increase in employee expenses includes increased sales and technical support
and increased costs relating to management incentives.

Research, Development, and
Engineering Expenses (RD&E)

|                           |  |               |     |             |  |        |   |            |     |  |  |    |  
|-------------------------- |  | ------------- | --- | ----------- |  | ------ | - | ---------- | --- |  |  | -- | -
|                           |  | Fiscal
  2007 |     | Fiscal
2006 | 
|                           |  |               |     |             | 
|(In millions)              |  | Amount        |     | % of Sales  |  | Amount |   | % of Sales |    
|                           |  |               |     |             |  |        |   |            |    
|                           |  |               |     |             |  |        |   |            |     |  |  |    |  
|Quarter ended September 30 |  | $             | 5.1 |             |  | 12     | % | $          | 3.5 |  |  | 10 | %

The increase
in RD&E for the first quarter of fiscal 2007 as compared with the prior
year periods was primarily attributable to an increase in expenses related to
semiconductor projects of $1.2 million.
We expect this trend of higher RD&E activity within semiconductor
projects, most notably in the display and packaging markets, to continue.

Income Taxes

|                           |  |               |     |             |  |        |   |           |     |  |  |    |  
|-------------------------- |  | ------------- | --- | ----------- |  | ------ | - | --------- | --- |  |  | -- | -
|                           |  | Fiscal
  2007 |     | Fiscal
2006 | 
|                           |  |               |     |             | 
|(In millions)              |  | Amount        |     | Tax Rate%   |  | Amount |   | Tax Rate% |    
|                           |  |               |     |             |  |        |   |           |    
|                           |  |               |     |             |  |        |   |           |     |  |  |    |  
|Quarter ended September 30 |  | $             | 2.1 |             |  | 35     | % | $         | 1.4 |  |  | 38 | %

The income tax
rate for the three months ended September 30, 2006 was 35% compared with 38%
for the three months ended September 30, 2005.
This decrease in the tax rate is primarily impacted by an increased
deduction related to foreign trading income from the Extraterritorial Income
Exclusion, an increase in earnings in lower tax jurisdictions, and a decrease
in monies repatriated from foreign jurisdictions.

TRANSACTIONS WITH STOCKHOLDER

Sales to Canon
Inc., a stockholder, and Canon Sales Co., Inc., a distributor of certain of our
products in Japan and a subsidiary of Canon Inc., amounted to $12.6 million
(31% of net sales) and $12.4 million (36% of net sales) for the three months
ended September 30, 2006 and 2005, respectively.  Included in these sales to Canon are sales related to development
services of certain interferometers of $2.3 million and $4.0 million for the
three months ended September 30, 2006 and 2005, respectively.  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, 2006 and June
30, 2006, there were, in the aggregate, $5.3 million and $6.0 million,
respectively, of trade accounts receivable from Canon Inc. and Canon Sales Co.,
Inc.  In addition, Canon Inc. paid us
progress payments related to the development services of certain
interferometers.  The total progress
payments related to the development services remaining at September 30, 2006
was $1.0 million.

14

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LIQUIDITY AND CAPITAL RESOURCES

At September
30, 2006, cash and marketable securities were $60.9 million, a decrease of $4.6
million from the $65.5 million at June 30, 2006. Cash flows from operating
activities were a negative $2.4 million for the first quarter of fiscal 2007 as
compared with positive cash flows of $3.5 million in the prior year. The
decrease in operating cash flows was primarily due to decreases in accounts
payable of $4.0 million, payments of bonus and profit sharing accruals of $4.2
million, a decrease in progress payments of $2.4 million, and an increase in
inventory of $2.6 million to support the backlog. These decreases in cash were
partially offset by decreases in receivables of $4.1 million and deferred
income taxes of $1.7 million.

Acquisitions
of property, plant, and equipment were $2.2 million for the first quarter of
fiscal 2007 as compared with $1.4 million for the first quarter of fiscal 2006.

There were no
borrowings outstanding under our $3.0 million bank line of credit agreement at
September 30, 2006 and June 30, 2005. The agreement contains certain financial
covenants which, among others, relate to debt service and consolidated debt
ratios. The agreement expires in November 2006 and is expected to be renewed
for an additional year. Although cash requirements will fluctuate based on the
timing and extent of various factors, management believes that cash generated
from operations, together with the liquidity provided by existing cash and
marketable securities balances and borrowing capability, will be sufficient to
satisfy our liquidity requirements for the next 12 months.

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 2007. For
discussion of our exposure to market risk, refer to Item 7a., Quantitative and
Qualitative Disclosures about Market Risk, presented in our Annual Report on
Form 10-K for the year ended June 30, 2006 filed with the Securities and
Exchange Commission.

Item 4. Controls and Procedures

The
effectiveness of our or any system of disclosure controls and procedures is
subject to certain limitations, including the exercise of judgment in designing,
implementing, and evaluating the controls and procedures, the assumptions used
in identifying the likelihood of future events, and the inability to eliminate
misconduct completely. In designing, implementing, 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.

Our
management, with the participation of our Chief Executive Officer and Chief
Financial Officer, carried out an evaluation, as of the end of the period
covered by this report, of the effectiveness of our disclosure controls and
procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the
Exchange Act). Based upon their evaluation the Chief Executive Officer and
Chief Financial Officer concluded that, as of the end of such period, our
disclosure controls and procedures were effective in recording, processing,
summarizing and reporting on a timely basis information required to be
disclosed by ZYGO in the reports that it files or submits under the Exchange
Act and were effective in ensuring that information required to be disclosed by
ZYGO in the reports that it files or submits under the Exchange Act is
accumulated and communicated to our management, including the Chief Executive
Officer and Chief Financial Officer, as appropriate to allow timely decisions
regarding required disclosure.

There were no
changes in our internal control over financial reporting that occurred in our
most recent fiscal quarter that materially affected, or are reasonably likely
to materially affect, our internal control over financial reporting.

15

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PART II - Other Information

Item 1A. Risk Factors

In addition to
the other information set forth in this report, the reader should carefully
consider the factors discussed in Part I, Item 1A. Risk Factors
in our Annual Report on Form 10-K for the year ended June 30, 2006, which could
materially affect our business, financial condition or future results. The
risks described in our Annual Report on Form 10-K are not the only risks facing
our Company. Additional risks and uncertainties not currently known to us or
that we currently deem to be immaterial also may materially adversely affect
our business, financial condition and/or operating results.

Item 6. Exhibits

|    |           |                                                                                                                                                                         
|--- | --------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(a) | Exhibits:
|    |          
|    | 31.1      | Certification
  Pursuant to Rule 13A-14(a) or 15D-14(a) of the Securities Exchange Act of
  1934, as adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of
  2002
|    |           |                                                                                                                                                                         
|    | 31.2      | Certification
  Pursuant to Rule 13A-14(a) or 15D-14(a) of the Securities Exchange Act of
  1934, as adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of
  2002
|    |           |                                                                                                                                                                         
|    | 32.1      | Certification
  Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the
  Sarbanes-Oxley Act of 2002                                              
|    |           |                                                                                                                                                                         
|    | 32.2      | Certification
  Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the
  Sarbanes-Oxley Act of 2002                                              

16

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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: November
9, 2006

17

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