UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

(Mark One)

|                                                          |                                                                                           
|--------------------------------------------------------- | ------------------------------------------------------------------------------------------
|x                                                         | QUARTERLY
  REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 
|                                                         
|For the quarterly period ended March 31, 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.

o
 YES   x 
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.

18,107,076 shares
of Common Stock, $.10 Par Value, at June 19, 2006

---



EXPLANATORY NOTE

Zygo Corporation (ZYGO, we, us,
  our, or Company) has restated our previously issued
  consolidated financial statements for fiscal years 2005, 2004, and 2003 and
  our interim consolidated financial statements for the first and second quarters
  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 Quarterly Report on Form 10-Q (Form 10-Q)
for the quarterly period ended March 31, 2006 reflects restatements of the
Companys consolidated statements of operations for the three- and nine-month
periods ended March 31, 2005 and cash flows for the nine-month period ended
March 31, 2005 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.

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

---



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, as
amended, for the fiscal year ended June 30, 2005.

3

---



PART I - Financial
Information

Item 1. Financial Statements

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

|                                                                                |  |                              |        |                             |            |        |   |      |         |            |   |        |  
|------------------------------------------------------------------------------- |  | ---------------------------- | ------ | --------------------------- | ---------- | ------ | - | ---- | ------- | ---------- | - | ------ | -
|                                                                                |  | Three Months Ended March 31, |        | Nine Months Ended March 31, |           
|                                                                                |  |                              |        |                             |           
|                                                                                |  | 2006                         |        | 2005                        |            | 2006   |   | 2005 |        
|                                                                                |  |                              |        |                             |            |        |   |      |        
|                                                                                |  |                              |        |                             | (Restated) |        |   |      |         | (Restated) |  
|                                                                                |  |                              |        |                             |            |        |   |      |         |            |   |        |  
|Net sales                                                                       |  |                              |        |                             |            |        |   |      |         |            |   |        |  
|Products                                                                        |  | $                            | 37,861 |                             | $          | 27,975 |   | $    | 106,226 |            | $ | 87,018 |  
|Development
  services                                                          |  |                              | 5,187  |                             |            | 5,442  |   |      | 14,759  |            |   | 9,614  |  
|                                                                                |  |                              |        |                             |            |        |   |      |         |            |   |        |  
|                                                                                |  |                              | 43,048 |                             |            | 33,417 |   |      | 120,985 |            |   | 96,632 |  
|                                                                                |  |                              |        |                             |            |        |   |      |         |            |   |        |  
|Cost of goods
  sold                                                            |  |                              |        |                             |            |        |   |      |         |            |   |        |  
|Products                                                                        |  |                              | 22,940 |                             |            | 16,769 |   |      | 63,577  |            |   | 52,979 |  
|Development
  services                                                          |  |                              | 3,661  |                             |            | 3,745  |   |      | 10,616  |            |   | 6,766  |  
|                                                                                |  |                              |        |                             |            |        |   |      |         |            |   |        |  
|                                                                                |  |                              | 26,601 |                             |            | 20,514 |   |      | 74,193  |            |   | 59,745 |  
|                                                                                |  |                              |        |                             |            |        |   |      |         |            |   |        |  
|Gross profit                                                                    |  |                              | 16,447 |                             |            | 12,903 |   |      | 46,792  |            |   | 36,887 |  
|                                                                                |  |                              |        |                             |            |        |   |      |         |            |   |        |  
|Selling,
  general, and administrative expenses                                 |  |                              | 7,982  |                             |            | 5,498  |   |      | 22,509  |            |   | 16,880 |  
|Research,
  development, and engineering expenses                               |  |                              | 3,939  |                             |            | 3,809  |   |      | 10,907  |            |   | 10,689 |  
|                                                                                |  |                              |        |                             |            |        |   |      |         |            |   |        |  
|Operating profit                                                                |  |                              | 4,526  |                             |            | 3,596  |   |      | 13,376  |            |   | 9,318  |  
|                                                                                |  |                              |        |                             |            |        |   |      |         |            |   |        |  
|                                                                                |  |                              |        |                             |            |        |   |      |         |            |   |        |  
|Other income                                                                    |  |                              |        |                             |            |        |   |      |         |            |   |        |  
|Interest income                                                                 |  |                              | 646    |                             |            | 189    |   |      | 1,502   |            |   | 543    |  
|Miscellaneous
  income (expense), net                                           |  |                              | (10    | )                           |            | (134   | ) |      | 169     |            |   | 32     |  
|                                                                                |  |                              |        |                             |            |        |   |      |         |            |   |        |  
|Total other
  income                                                            |  |                              | 636    |                             |            | 55     |   |      | 1,671   |            |   | 575    |  
|                                                                                |  |                              |        |                             |            |        |   |      |         |            |   |        |  
|                                                                                |  |                              |        |                             |            |        |   |      |         |            |   |        |  
|Earnings from
  continuing operations before income taxes and minority interest |  |                              | 5,162  |                             |            | 3,651  |   |      | 15,047  |            |   | 9,893  |  
|                                                                                |  |                              |        |                             |            |        |   |      |         |            |   |        |  
|Income tax
  expense                                                            |  |                              | (961   | )                           |            | (1,103 | ) |      | (4,463  | )          |   | (3,288 | )
|Minority
  interest                                                             |  |                              | (104   | )                           |            | (287   | ) |      | (614    | )          |   | (673   | )
|                                                                                |  |                              |        |                             |            |        |   |      |         |            |   |        |  
|Earnings from
  continuing operations                                           |  |                              | 4,097  |                             |            | 2,261  |   |      | 9,970   |            |   | 5,932  |  
|                                                                                |  |                              |        |                             |            |        |   |      |         |            |   |        |  
|                                                                                |  |                              |        |                             |            |        |   |      |         |            |   |        |  
|Discontinued
  TeraOptix operations, net of tax                                 |  |                              |       |                             |            | (100   | ) |      |        |            |   | (210   | )
|Charges and
  adjustments on the disposal of TeraOptix, net of tax              |  |                              |       |                             |            | 11     |   |      |        |            |   | (107   | )
|                                                                                |  |                              |        |                             |            |        |   |      |         |            |   |        |  
|Loss from
  discontinued operations                                             |  |                              |       |                             |            | (89    | ) |      |        |            |   | (317   | )
|                                                                                |  |                              |        |                             |            |        |   |      |         |            |   |        |  
|Net earnings                                                                    |  | $                            | 4,097  |                             | $          | 2,172  |   | $    | 9,970   |            | $ | 5,615  |  
|                                                                                |  |                              |        |                             |            |        |   |      |         |            |   |        |  
|                                                                                |  |                              |        |                             |            |        |   |      |         |            |   |        |  
|Basic - Earnings
  (loss) per share:                                            |  |                              |        |                             |            |        |   |      |         |            |   |        |  
|Continuing
  operations                                                         |  | $                            | 0.23   |                             | $          | 0.12   |   | $    | 0.55    |            | $ | 0.33   |  
|Discontinued
  operations                                                       |  |                              |       |                             |            |       |   |      |        |            |   | (0.02  | )
|                                                                                |  |                              |        |                             |            |        |   |      |         |            |   |        |  
|Net earnings                                                                    |  | $                            | 0.23   |                             | $          | 0.12   |   | $    | 0.55    |            | $ | 0.31   |  
|                                                                                |  |                              |        |                             |            |        |   |      |         |            |   |        |  
|                                                                                |  |                              |        |                             |            |        |   |      |         |            |   |        |  
|Diluted -
  Earnings (loss) per share:                                          |  |                              |        |                             |            |        |   |      |         |            |   |        |  
|Continuing
  operations                                                         |  | $                            | 0.22   |                             | $          | 0.12   |   | $    | 0.54    |            | $ | 0.33   |  
|Discontinued
  operations                                                       |  |                              |       |                             |            |       |   |      |        |            |   | (0.02  | )
|                                                                                |  |                              |        |                             |            |        |   |      |         |            |   |        |  
|Net earnings                                                                    |  | $                            | 0.22   |                             | $          | 0.12   |   | $    | 0.54    |            | $ | 0.31   |  
|                                                                                |  |                              |        |                             |            |        |   |      |         |            |   |        |  
|                                                                                |  |                              |        |                             |            |        |   |      |         |            |   |        |  
|Weighted average
  shares outstanding:                                          |  |                              |        |                             |            |        |   |      |         |            |   |        |  
|Basic shares                                                                    |  |                              | 18,069 |                             |            | 17,974 |   |      | 18,037  |            |   | 17,942 |  
|                                                                                |  |                              |        |                             |            |        |   |      |         |            |   |        |  
|Diluted shares                                                                  |  |                              | 18,475 |                             |            | 18,226 |   |      | 18,318  |            |   | 18,140 |  
|                                                                                |  |                              |        |                             |            |        |   |      |         |            |   |        |  

See
accompanying notes to consolidated financial statements.

4

---



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

|                                                                                     |  |                |         |               |   |         |  
|------------------------------------------------------------------------------------ |  | -------------- | ------- | ------------- | - | ------- | -
|                                                                                     |  | March 31, 2006 |         | June 30, 2005 |  
|                                                                                     |  |                |         |               |  
|Assets                                                                               |  |                |         |               |  
|Current assets:                                                                      |  |                |         |               |   |         |  
|Cash and cash
  equivalents                                                          |  | $              | 16,939  |               | $ | 20,949  |  
|Marketable
  securities                                                              |  |                | 23,331  |               |   | 17,242  |  
|                                                                                     |  |                |         |               |   |         |  
|Receivables, net
  of allowance for doubtful accounts of $650 and $663, respectively |  |                | 26,201  |               |   | 28,124  |  
|Inventories                                                                          |  |                | 37,318  |               |   | 33,727  |  
|Prepaid expenses                                                                     |  |                | 1,325   |               |   | 2,126   |  
|Deferred income
  taxes                                                              |  |                | 9,549   |               |   | 8,895   |  
|                                                                                     |  |                |         |               |   |         |  
|Total current
  assets                                                               |  |                | 114,663 |               |   | 111,063 |  
|                                                                                     |  |                |         |               |   |         |  
|Marketable
  securities                                                              |  |                | 22,815  |               |   | 18,711  |  
|Property, plant,
  and equipment, net                                                |  |                | 31,567  |               |   | 31,420  |  
|Deferred income
  taxes                                                              |  |                | 18,868  |               |   | 22,333  |  
|Intangible
  assets, net                                                             |  |                | 5,787   |               |   | 5,638   |  
|Other assets                                                                         |  |                | 798     |               |   | 1,017   |  
|                                                                                     |  |                |         |               |   |         |  
|Total
  assets                                                                       |  | $              | 194,498 |               | $ | 190,182 |  
|                                                                                     |  |                |         |               |   |         |  
|                                                                                     |  |                |         |               |   |         |  
|Liabilities
  and Stockholders Equity                                               |  |                |         |               |   |         |  
|Current
  liabilities:                                                               |  |                |         |               |   |         |  
|Payables                                                                             |  | $              | 12,308  |               | $ | 13,510  |  
|Accrued progress
  payments                                                          |  |                | 14,516  |               |   | 21,713  |  
|Accrued salaries
  and wages                                                         |  |                | 6,507   |               |   | 6,220   |  
|Other accrued liabilities                                                            |  |                | 4,040   |               |   | 4,731   |  
|Income taxes
  payable                                                               |  |                | 1,971   |               |   | 1,510   |  
|                                                                                     |  |                |         |               |   |         |  
|Total current
  liabilities                                                          |  |                | 39,342  |               |   | 47,684  |  
|                                                                                     |  |                |         |               |   |         |  
|Other long-term
  liabilities                                                        |  |                | 104     |               |   | 96      |  
|Minority
  interest                                                                  |  |                | 1,242   |               |   | 1,249   |  
|Commitments and
  contingencies                                                      |  |                |         |               |   |         |  
|                                                                                     |  |                |         |               |   |         |  
|Stockholders
  equity:                                                              |  |                |         |               |   |         |  
|Common Stock,
  $.10 par value per share:                                            |  |                |         |               |   |         |  
|40,000,000
  shares authorized;                                                      |  |                |         |               |   |         |  
|18,540,963
  shares issued (18,423,026 at June 30, 2005);                            |  |                |         |               |   |         |  
|18,093,758
  shares outstanding (17,975,821 at June 30, 2005)                        |  |                | 1,854   |               |   | 1,842   |  
|Additional
  paid-in capital                                                         |  |                | 144,800 |               |   | 142,111 |  
|Retained
  earnings                                                                  |  |                | 12,537  |               |   | 2,567   |  
|Accumulated
  other comprehensive income (loss):                                     |  |                |         |               |   |         |  
|Currency
  translation effects                                                       |  |                | (116    | )             |   | (112    | )
|Net unrealized
  gain on marketable securities                                       |  |                | 22      |               |   | 32      |  
|                                                                                     |  |                |         |               |   |         |  
|                                                                                     |  |                | 159,097 |               |   | 146,440 |  
|Less treasury
  stock, at cost (447,205 shares)                                      |  |                | 5,287   |               |   | 5,287   |  
|                                                                                     |  |                |         |               |   |         |  
|Total
  stockholders equity                                                         |  |                | 153,810 |               |   | 141,153 |  
|                                                                                     |  |                |         |               |   |         |  
|Total
  liabilities and stockholders equity                                         |  | $              | 194,498 |               | $ | 190,182 |  
|                                                                                     |  |                |         |               |   |         |  

See accompanying notes to consolidated financial
statements.

5

---



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

|                                                                                  |  |                             |         |      |            |         |  
|--------------------------------------------------------------------------------- |  | --------------------------- | ------- | ---- | ---------- | ------- | -
|                                                                                  |  | Nine Months Ended March 31, |        
|                                                                                  |  |                             |        
|                                                                                  |  | 2006                        |         | 2005 |           
|                                                                                  |  |                             |         |      |           
|                                                                                  |  |                             |         |      | (Restated) |        
|Cash provided by operating activities:                                            |  |                             |         |      |            |         |  
|Net earnings                                                                      |  | $                           | 9,970   |      | $          | 5,615   |  
|                                                                                  |  |                             |         |      |            |         |  
|Adjustments to reconcile net
  earnings to cash provided by operating activities: |  |                             |         |      |            |         |  
|Loss from discontinued
  operations                                               |  |                             |        |      |            | 317     |  
|Depreciation and amortization                                                     |  |                             | 4,608   |      |            | 4,379   |  
|Deferred income taxes                                                             |  |                             | 2,811   |      |            | 2,087   |  
|Compensation cost related to
  share-based payments arrangements                  |  |                             | 1,389   |      |            |        |  
|Excess tax benefits from
  share-based payment arrangements                       |  |                             | (120    | )    |            |        |  
|Minority interest                                                                 |  |                             | 614     |      |            | 673     |  
|Other, net                                                                        |  |                             | 119     |      |            | 133     |  
|Changes in operating accounts:                                                    |  |                             |         |      |            |         |  
|Receivables                                                                       |  |                             | 2,094   |      |            | (1,705  | )
|Inventories                                                                       |  |                             | (3,491  | )    |            | (11,903 | )
|Prepaid expenses                                                                  |  |                             | 801     |      |            | (208    | )
|Accounts payable, accrued
  expenses, and taxes payable                           |  |                             | (8,346  | )    |            | 6,580   |  
|                                                                                  |  |                             |         |      |            |         |  
|Net cash provided by
  continuing operations                                      |  |                             | 10,449  |      |            | 5,968   |  
|Net cash used for discontinued
  operations                                       |  |                             |        |      |            | (420    | )
|                                                                                  |  |                             |         |      |            |         |  
|Net cash provided by operating
  activities                                       |  |                             | 10,449  |      |            | 5,548   |  
|                                                                                  |  |                             |         |      |            |         |  
|Cash used for investing activities:                                               |  |                             |         |      |            |         |  
|Additions to property, plant,
  and equipment, net                                |  |                             | (4,501  | )    |            | (7,718  | )
|Purchase of marketable securities                                                 |  |                             | (25,408 | )    |            | (4,763  | )
|Additions to intangibles and
  other assets                                       |  |                             | (460    | )    |            | (868    | )
|Proceeds from the maturity of
  marketable securities                             |  |                             | 15,100  |      |            | 4,325   |  
|                                                                                  |  |                             |         |      |            |         |  
|Net cash used for investing
  activities                                          |  |                             | (15,269 | )    |            | (9,024  | )
|Net cash provided by
  discontinued operations                                    |  |                             |        |      |            | 1,918   |  
|                                                                                  |  |                             |         |      |            |         |  
|Net cash used for investing
  activities                                          |  |                             | (15,269 | )    |            | (7,106  | )
|                                                                                  |  |                             |         |      |            |         |  
|Cash provided by financing activities:                                            |  |                             |         |      |            |         |  
|                                                                                  |  |                             |         |      |            |         |  
|Employee stock purchase                                                           |  |                             | 492     |      |            | 677     |  
|Exercise of employee stock
  options                                              |  |                             | 820     |      |            | 212     |  
|Excess tax benefits from
  share-based payment arangements                        |  |                             | 120     |      |            |        |  
|Dividend payment to minority
  interest                                           |  |                             | (622    | )    |            |        |  
|                                                                                  |  |                             |         |      |            |         |  
|Net cash provided by financing
  activities                                       |  |                             | 810     |      |            | 889     |  
|                                                                                  |  |                             |         |      |            |         |  
|Net decrease in cash and cash equivalents                                         |  |                             | (4,010  | )    |            | (669    | )
|Cash and cash equivalents, beginning of period                                    |  |                             | 20,949  |      |            | 17,462  |  
|                                                                                  |  |                             |         |      |            |         |  
|Cash and cash
  equivalents, end of period                                        |  | $                           | 16,939  |      | $          | 16,793  |  
|                                                                                  |  |                             |         |      |            |         |  

See accompanying notes to consolidated financial statements.

6

---



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 and nine months ended March
31, 2006 are not necessarily indicative of the results to be expected for the
full fiscal year.

The
Consolidated Balance Sheet at March 31, 2006, the Consolidated Statements of
Operations for the three and nine months ended March 31, 2006 and 2005, and the
Consolidated Statements of Cash Flows for the nine months ended March 31, 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 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,
as amended, including items incorporated by reference therein.

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 March 31, |            | Nine Months Ended March 31, | 
|                                                       |  |                              |            |                             | 
|                                                       |  | 2006                         |            | 2005                        |  | 2006       |  | 2005 |           
|                                                       |  |                              |            |                             |  |            |  |      |           
|Basic weighted average shares outstanding              |  |                              | 18,068,637 |                             |  | 17,973,834 |  |      | 18,037,323 |  |  | 17,942,028 | 
|Dilutive effect of stock options and restricted
shares |  |                              | 406,137    |                             |  | 252,156    |  |      | 280,753    |  |  | 197,737    | 
|                                                       |  |                              |            |                             |  |            |  |      |            |  |  |            | 
|Diluted weighted average shares
outstanding            |  |                              | 18,474,774 |                             |  | 18,225,990 |  |      | 18,318,076 |  |  | 18,139,765 | 
|                                                       |  |                              |            |                             |  |            |  |      |            |  |  |            | 

Share-Based Payments

In 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 and
directors. 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. SFAS 123(R) does not require
the recording of compensation expense in periods prior to the date of adoption.

On July 1,
2005, we adopted SFAS No. 123(R) using a modified prospective method resulting
in the recognition of share-based compensation expense for the three and nine
months ended March 31, 2006 of $128 and $892, net of related tax expense of $71
and $497, respectively. 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 and nine months ended
March 31, 2005 based on the fair value method under SFAS No. 123.

|                                                                                                                      |  |                                        |            |                                       |   |            |  
|--------------------------------------------------------------------------------------------------------------------- |  | -------------------------------------- | ---------- | ------------------------------------- | - | ---------- | -
|                                                                                                                      |  | Three Months
  Ended 
  March 31, 2005 |            | Nine Months
  Ended 
  March 31, 2005 |  
|                                                                                                                      |  |                                        |            |                                       |  
|                                                                                                                      |  |                                        | (Restated) |                                       |   | (Restated) |  
|                                                                                                                      |  |                                        |            |                                       |   |            |  
|Net earnings, as reported                                                                                             |  | $                                      | 2,172      |                                       | $ | 5,615      |  
|                                                                                                                      |  |                                        |            |                                       |   |            |  
|Deduct: Total stock-based compensation expense determined under fair
  value based method, net of related tax effects |  |                                        | (474       | )                                     |   | (2,110     | )
|                                                                                                                      |  |                                        |            |                                       |   |            |  
|                                                                                                                      |  |                                        |            |                                       |   |            |  
|Pro forma net earnings                                                                                                |  | $                                      | 1,698      |                                       | $ | 3,505      |  
|                                                                                                                      |  |                                        |            |                                       |   |            |  
|                                                                                                                      |  |                                        |            |                                       |   |            |  
|Earnings per share:                                                                                                   |  |                                        |            |                                       |   |            |  
|Basic - as reported                                                                                                   |  | $                                      | 0.12       |                                       | $ | 0.31       |  
|                                                                                                                      |  |                                        |            |                                       |   |            |  
|Basic - pro forma                                                                                                     |  | $                                      | 0.09       |                                       | $ | 0.19       |  
|                                                                                                                      |  |                                        |            |                                       |   |            |  
|                                                                                                                      |  |                                        |            |                                       |   |            |  
|Diluted - as reported                                                                                                 |  | $                                      | 0.12       |                                       | $ | 0.31       |  
|                                                                                                                      |  |                                        |            |                                       |   |            |  
|Diluted - pro forma                                                                                                   |  | $                                      | 0.09       |                                       | $ | 0.19       |  
|                                                                                                                      |  |                                        |            |                                       |   |            |  

Share Based Compensation Plans

Zygo has two
share-based compensation plans, which are described hereafter. The Zygo
Corporation 2002 Equity Incentive Plan (2002 Plan) permits the granting of
stock options to purchase shares of common stock and the granting of restricted
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.
Generally, restricted stock awards have 50% of their restrictions lapse after
three years and the remaining 50% lapse after four years. The 2002 Plan will
expire on August 27, 2012. Pursuant to the terms of the 2002 Plan, the Board of
Directors may also amend the 2002 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 or
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
(Director 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 Director 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 Director
Plan, as amended, will expire on November 17, 2009. The Company ceased granting
options under this plan in fiscal 2003 and does not intend to grant further
options under the Director Plan.

8

---



We use the
Black-Scholes option-pricing model to calculate the fair value of share based
awards. 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 nine months ended March 31, 2006 and 2005 was $5.41 and $5.86,
respectively. The table below indicates the key assumptions used in the option
valuation calculations for options granted in the nine months ended March 31,
2006 and 2005 (no options granted in the three months ended March 31, 2006 and
2005), and a discussion of our methodology for developing each of the
assumptions used in the valuation model:

| |                         |  |                               |           |      |  |             |  
| | ----------------------- |  | ----------------------------- | --------- | ---- |  | ----------- | -
| |                         |  | Nine
  Months Ended March 31, |          
| |                         |  |                               |          
| |                         |  | 2006                          |           | 2005 | 
| |                         |  |                               |           |      | 
| | Term                    |  |                               | 4.1 Years |      |  | 4.5
  Years |  
| | Volatility              |  |                               | 52.9      | %    |  | 71.0        | %
| | Dividend Yield          |  |                               | 0.0       | %    |  | 0.0         | %
| | Risk-free interest rate |  |                               | 3.9%-4.4  | %    |  | 3.2%-3.5    | %
| | Forfeiture rate         |  |                               | 10.6      | %    |  | 4.0         | %

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 options granted under our
share-based compensation plans for the nine months ended March 31, 2006.
Included in the information below are outstanding options from the Zygo
Corporation Amended and Restated Non-Qualified Stock Option Plan which expired
in fiscal 2003, to the extent the options remain available for exercise.

|                                      |  |                   |           |                                 |   |                                             |  |                                             |      |  |   |       | 
|------------------------------------- |  | ----------------- | --------- | ------------------------------- | - | ------------------------------------------- |  | ------------------------------------------- | ---- |  | - | ----- | 
|                                      |  | 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                               |  |                   | 186,000   |                                 | $ | 11.80                                       |  |                                             |      |  |   |       | 
|Exercised                             |  |                   | (71,619   | )                               | $ | 8.92                                        |  |                                             |      |  |   |       | 
|Forfeited                             |  |                   | (87,724   | )                               | $ | 34.12                                       |  |                                             |      |  |   |       | 
|                                      |  |                   |           |                                 |   |                                             |  |                                             |      |  |   |       | 
|                                      |  |                   |           |                                 |   |                                             |  |                                             |      |  |   |       | 
|Options outstanding, March
  31, 2006 |  |                   | 2,095,832 |                                 | $ | 25.92                                       |  |                                             | 6.15 |  | $ | 8,854 | 
|                                      |  |                   |           |                                 |   |                                             |  |                                             |      |  |   |       | 
|Options exercisable, March
  31, 2006 |  |                   | 1,586,754 |                                 | $ | 31.14                                       |  |                                             | 5.55 |  | $ | 5,435 | 
|                                      |  |                   |           |                                 |   |                                             |  |                                             |      |  |   |       | 

As of March
31, 2006 there was $2,311 of total unrecognized compensation cost related to
stock options. These costs are expected to be recognized over a weighted
average period of 2.1 years.

The total
intrinsic value of stock options exercised was $544 and the total fair value of
stock awards vested was $1,858 during the nine months ended March 31, 2006.

9

---



Cash received
from stock option exercises for the nine months ended March 31, 2006 was $639.
The income tax benefits from share based arrangements totaled $196, all of
which were attributable to stock option exercises.

The following
table summarizes information about restricted stock awards granted under
share-based compensation plans for the nine months ended March 31, 2006:

|                                       |  |        |         |                                              |  |   |       |  | 
|-------------------------------------- |  | ------ | ------- | -------------------------------------------- |  | - | ----- |  | 
|                                       |  | Shares |         | Weighted 
  Average Grant-
  Date Fair Value | 
|                                       |  |        |         |                                              | 
|                                       |  |        |         |                                              |  |   |       |  | 
|Non Vested Balance at July
  1, 2005   |  |        |        |                                              |  | $ |      |  | 
|Granted                                |  |        | 154,800 |                                              |  | $ | 11.46 |  | 
|Vested                                 |  |        |        |                                              |  | $ |      |  | 
|Forfeited                              |  |        | (5,700  | )                                            |  | $ | 10.40 |  | 
|                                       |  |        |         |                                              |  |   |       |  | 
|Non Vested Balance at
  March 31, 2006 |  |        | 149,100 |                                              |  | $ | 11.50 |  | 
|                                       |  |        |         |                                              |  |   |       |  | 

As of March
31, 2006 there was $1,183 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 March 31,
2006 an aggregate of 541,062 shares remained available for future grants under
our share-based compensation plans, which cover stock awards and stock options.
The Company issues shares to satisfy stock option exercises and restricted
stock awards.

Comprehensive Income

Our total
comprehensive income was as follows:

|                                                     |  |                              |       |                             |   |       |   |            |       |   |   |       |  
|---------------------------------------------------- |  | ---------------------------- | ----- | --------------------------- | - | ----- | - | ---------- | ----- | - | - | ----- | -
|                                                     |  | Three Months Ended March 31, |       | Nine Months Ended March 31, |  
|                                                     |  |                              |       |                             |  
|                                                     |  | 2006                         |       | 2005                        |   | 2006  |   | 2005       |      
|                                                     |  |                              |       |                             |   |       |   |            |      
|                                                     |  |                              |       | (Restated)                  |   |       |   | (Restated) |      
|                                                     |  |                              |       |                             |   |       |   |            |      
|Net earnings                                         |  | $                            | 4,097 |                             | $ | 2,172 |   | $          | 9,970 |   | $ | 5,615 |  
|Unrealized loss on marketable securities, net of
tax |  |                              | (3    | )                           |   | (5    | ) |            | (10   | ) |   | (25   | )
|Foreign currency translation effect                  |  |                              | 114   |                             |   | (410  | ) |            | (4    | ) |   | 151   |  
|                                                     |  |                              |       |                             |   |       |   |            |       |   |   |       |  
|Comprehensive income                                 |  | $                            | 4,208 |                             | $ | 1,757 |   | $          | 9,956 |   | $ | 5,741 |  
|                                                     |  |                              |       |                             |   |       |   |            |       |   |   |       |  

Inventories

Inventories
are stated at the lower of cost (determined on a first-in, first-out basis) or
market. At March 31, 2006 and June 30, 2005, inventories were as follows:

|                                       |  |                  |        |                 |   |        | 
|-------------------------------------- |  | ---------------- | ------ | --------------- | - | ------ | 
|                                       |  | March 31,
  2006 |        | June 30,
  2005 |  
|                                       |  |                  |        |                 |  
|Raw
  materials and manufactured parts |  | $                | 15,980 |                 | $ | 14,320 | 
|Work in
  process                      |  |                  | 16,005 |                 |   | 15,927 | 
|Finished
  goods                       |  |                  | 5,333  |                 |   | 3,480  | 
|                                       |  |                  |        |                 |   |        | 
|                                       |  | $                | 37,318 |                 | $ | 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 March 31, 2006 and June 30, 2005, property, plant, and equipment
were as follows:

|                                             |  |                  |         |                 |   |                                   |   |  |       | 
|-------------------------------------------- |  | ---------------- | ------- | --------------- | - | --------------------------------- | - |  | ----- | 
|                                             |  | March 31,
  2006 |         | June 30,
  2005 |   | Estimated
  Useful Life
  (Years) |  
|                                             |  |                  |         |                 |   |                                   |  
|Land                                         |  | $                | 615     |                 | $ | 615                               |   |  |      | 
|Building and
  improvements                  |  |                  | 16,086  |                 |   | 15,759                            |   |  | 1540 | 
|Machinery,
  equipment, and office furniture |  |                  | 48,913  |                 |   | 45,501                            |   |  | 38   | 
|Leasehold
  improvements                     |  |                  | 770     |                 |   | 715                               |   |  | 15   | 
|Construction
  in progress                   |  |                  | 2,756   |                 |   | 2,997                             |   |  |      | 
|                                             |  |                  |         |                 |   |                                   |   |  |       | 
|                                             |  |                  | 69,140  |                 |   | 65,587                            |   |  |       | 
|Accumulated
  depreciation                   |  |                  | (37,573 | )               |   | (34,167                           | ) |  |       | 
|                                             |  |                  |         |                 |   |                                   |   |  |       | 
|                                             |  | $                | 31,567  |                 | $ | 31,420                            |   |  |       | 
|                                             |  |                  |         |                 |   |                                   |   |  |       | 

Depreciation
expense for the three months ended March 31, 2006 and 2005 was $1,442 and
$1,207, respectively. Depreciation expense for the nine months ended March 31,
2006 and 2005 was $4,243 and $3,964, 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 March 31, 2006
and June 30, 2005 were as follows:

|                           |  |                  |        |                 |   |        |  
|-------------------------- |  | ---------------- | ------ | --------------- | - | ------ | -
|                           |  | March 31,
  2006 |        | June 30,
  2005 |  
|                           |  |                  |        |                 |  
|Patents and
  trademarks   |  | $                | 6,817  |                 | $ | 6,556  |  
|License
  agreements       |  |                  | 1,350  |                 |   | 1,350  |  
|                           |  |                  |        |                 |   |        |  
|                           |  |                  | 8,167  |                 |   | 7,906  |  
|Accumulated
  amortization |  |                  | (2,380 | )               |   | (2,268 | )
|                           |  |                  |        |                 |   |        |  
|Total                      |  | $                | 5,787  |                 | $ | 5,638  |  
|                           |  |                  |        |                 |   |        |  

Intangible
amortization expense was $92 and $146 for the three months ended March 31, 2006
and 2005, respectively, and $260 and $370 for the nine months ended March 31,
2006 and 2005, 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 accrued warranty liability, which is included in the
other accrued liabilities in the Consolidated Balance Sheets:

|                                                                         |  |                               |       |      |   |       |  
|------------------------------------------------------------------------ |  | ----------------------------- | ----- | ---- | - | ----- | -
|                                                                         |  | Nine
  Months Ended March 31, |      
|                                                                         |  |                               |      
|                                                                         |  | 2006                          |       | 2005 |  
|                                                                         |  |                               |       |      |  
|Beginning
  balance                                                      |  | $                             | 1,395 |      | $ | 1,486 |  
|Reductions
  for payments made                                           |  |                               | (937  | )    |   | (917  | )
|Changes in
  accruals related to pre-existing warranties                 |  |                               | 326   |      |   | (40   | )
|Changes in
  accruals related to warranties issued in the current period |  |                               | 955   |      |   | 520   |  
|                                                                         |  |                               |       |      |   |       |  
|Ending
  balance                                                         |  | $                             | 1,739 |      | $ | 1,049 |  
|                                                                         |  |                               |       |      |   |       |  

Supplemental Cash Flow Information

Income tax
payments amounted to $921 and $482 for the nine months ended March 31, 2006 and
2005, respectively.

11

---



NOTE 2: RESTATED FINANCIAL STATEMENTS

We have restated our consolidated financial statements for the
  third quarter of fiscal 2005 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 are being 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 statements of
  operations is shown in the accompanying tables. Adjustments to the statement
  of operations for the three and nine months ended March 31, 2005 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 significant individually or in the aggregate.

12

---



The
following table presents the effect of the Restatement on the consolidated
statement of operations for the three months ended March 31, 2005:

|                                                                                |  |                            |        |             |   |               |   |   |        |  
|------------------------------------------------------------------------------- |  | -------------------------- | ------ | ----------- | - | ------------- | - | - | ------ | -
|                                                                                |  | As
  previously
  reported |        | Adjustments |   | As
  restated |  
|                                                                                |  |                            |        |             |   |               |  
|Net sales                                                                       |  |                            |        |             |   |               |   |   |        |  
|Products                                                                        |  | $                          | 28,245 |             | $ | (270          | ) | $ | 27,975 |  
|Development services                                                            |  |                            | 5,442  |             |   |              |   |   | 5,442  |  
|                                                                                |  |                            |        |             |   |               |   |   |        |  
|                                                                                |  |                            | 33,687 |             |   | (270          | ) |   | 33,417 |  
|                                                                                |  |                            |        |             |   |               |   |   |        |  
|Cost of goods sold                                                              |  |                            |        |             |   |               |   |   |        |  
|Products                                                                        |  |                            | 16,812 |             |   | (43           | ) |   | 16,769 |  
|Development services                                                            |  |                            | 3,745  |             |   |              |   |   | 3,745  |  
|                                                                                |  |                            |        |             |   |               |   |   |        |  
|                                                                                |  |                            | 20,557 |             |   | (43           | ) |   | 20,514 |  
|                                                                                |  |                            |        |             |   |               |   |   |        |  
|Gross profit                                                                    |  |                            | 13,130 |             |   | (227          | ) |   | 12,903 |  
|                                                                                |  |                            |        |             |   |               |   |   |        |  
|Selling, general, and administrative
  expenses                                 |  |                            | 5,498  |             |   |              |   |   | 5,498  |  
|Research, development and engineering
  expenses                                |  |                            | 3,809  |             |   |              |   |   | 3,809  |  
|                                                                                |  |                            |        |             |   |               |   |   |        |  
|Operating profit                                                                |  |                            | 3,823  |             |   | (227          | ) |   | 3,596  |  
|                                                                                |  |                            |        |             |   |               |   |   |        |  
|                                                                                |  |                            |        |             |   |               |   |   |        |  
|Other income (expense)                                                          |  |                            |        |             |   |               |   |   |        |  
|Interest income                                                                 |  |                            | 189    |             |   |              |   |   | 189    |  
|Miscellaneous expense, net                                                      |  |                            | (133   | )           |   | (1            | ) |   | (134   | )
|                                                                                |  |                            |        |             |   |               |   |   |        |  
|Total other income                                                              |  |                            | 56     |             |   | (1            | ) |   | 55     |  
|                                                                                |  |                            |        |             |   |               |   |   |        |  
|Earnings from continuing operations before
  income taxes and minority interest |  |                            | 3,879  |             |   | (228          | ) |   | 3,651  |  
|                                                                                |  |                            |        |             |   |               |   |   |        |  
|Income tax expense                                                              |  |                            | (1,217 | )           |   | 114           |   |   | (1,103 | )
|Minority interest                                                               |  |                            | (287   | )           |   |              |   |   | (287   | )
|                                                                                |  |                            |        |             |   |               |   |   |        |  
|Earnings from continuing operations                                             |  |                            | 2,375  |             |   | (114          | ) |   | 2,261  |  
|                                                                                |  |                            |        |             |   |               |   |   |        |  
|                                                                                |  |                            |        |             |   |               |   |   |        |  
|Discontinued TeraOptix operations, net of
  tax                                 |  |                            | (100   | )           |   |              |   |   | (100   | )
|Charges related to the disposal of
  TeraOptix, net of tax                      |  |                            | 11     |             |   |              |   |   | 11     |  
|                                                                                |  |                            |        |             |   |               |   |   |        |  
|Loss from discontinued operations                                               |  |                            | (89    | )           |   |              |   |   | (89    | )
|                                                                                |  |                            |        |             |   |               |   |   |        |  
|Net earnings                                                                    |  | $                          | 2,286  |             | $ | (114          | ) | $ | 2,172  |  
|                                                                                |  |                            |        |             |   |               |   |   |        |  
|                                                                                |  |                            |        |             |   |               |   |   |        |  
|Basic - Earnings (loss) per share:                                              |  |                            |        |             |   |               |   |   |        |  
|Continuing operations                                                           |  | $                          | 0.13   |             | $ | (0.01         | ) | $ | 0.12   |  
|Discontinued operations                                                         |  |                            |       |             |   |              |   |   |       |  
|                                                                                |  |                            |        |             |   |               |   |   |        |  
|Net earnings                                                                    |  | $                          | 0.13   |             | $ | (0.01         | ) | $ | 0.12   |  
|                                                                                |  |                            |        |             |   |               |   |   |        |  
|Diluted - Earnings (loss) per share:                                            |  |                            |        |             |   |               |   |   |        |  
|Continuing operations                                                           |  | $                          | 0.13   |             | $ | (0.01         | ) | $ | 0.12   |  
|Discontinued operations                                                         |  |                            |       |             |   |              |   |   |       |  
|                                                                                |  |                            |        |             |   |               |   |   |        |  
|Net earnings                                                                    |  | $                          | 0.13   |             | $ | (0.01         | ) | $ | 0.12   |  
|                                                                                |  |                            |        |             |   |               |   |   |        |  
|                                                                                |  |                            |        |             |   |               |   |   |        |  
|Weighted average number of shares:                                              |  |                            |        |             |   |               |   |   |        |  
|Basic                                                                           |  |                            | 17,974 |             |   | 17,974        |   |   | 17,974 |  
|                                                                                |  |                            |        |             |   |               |   |   |        |  
|Diluted                                                                         |  |                            | 18,226 |             |   | 18,226        |   |   | 18,226 |  
|                                                                                |  |                            |        |             |   |               |   |   |        |  

13

---



The
following table presents the effect of the Restatement on the consolidated
statement of operations for the nine months ended March 31, 2005:

|                                                                                |  |                            |        |             |   |               |   |   |        |  
|------------------------------------------------------------------------------- |  | -------------------------- | ------ | ----------- | - | ------------- | - | - | ------ | -
|                                                                                |  | As
  previously
  reported |        | Adjustments |   | As
  restated |  
|                                                                                |  |                            |        |             |   |               |  
|Net sales                                                                       |  |                            |        |             |   |               |   |   |        |  
|Products                                                                        |  | $                          | 87,658 |             | $ | (640          | ) | $ | 87,018 |  
|Development services                                                            |  |                            | 9,614  |             |   |              |   |   | 9,614  |  
|                                                                                |  |                            |        |             |   |               |   |   |        |  
|                                                                                |  |                            | 97,272 |             |   | (640          | ) |   | 96,632 |  
|                                                                                |  |                            |        |             |   |               |   |   |        |  
|Cost of goods sold                                                              |  |                            |        |             |   |               |   |   |        |  
|Products                                                                        |  |                            | 53,005 |             |   | (26           | ) |   | 52,979 |  
|Development services                                                            |  |                            | 6,766  |             |   |              |   |   | 6,766  |  
|                                                                                |  |                            |        |             |   |               |   |   |        |  
|                                                                                |  |                            | 59,771 |             |   | (26           | ) |   | 59,745 |  
|                                                                                |  |                            |        |             |   |               |   |   |        |  
|Gross profit                                                                    |  |                            | 37,501 |             |   | (614          | ) |   | 36,887 |  
|                                                                                |  |                            |        |             |   |               |   |   |        |  
|Selling, general, and administrative
  expenses                                 |  |                            | 16,880 |             |   |              |   |   | 16,880 |  
|Research, development and engineering
  expenses                                |  |                            | 10,689 |             |   |              |   |   | 10,689 |  
|                                                                                |  |                            |        |             |   |               |   |   |        |  
|Operating profit                                                                |  |                            | 9,932  |             |   | (614          | ) |   | 9,318  |  
|                                                                                |  |                            |        |             |   |               |   |   |        |  
|                                                                                |  |                            |        |             |   |               |   |   |        |  
|Other income                                                                    |  |                            |        |             |   |               |   |   |        |  
|Interest income                                                                 |  |                            | 543    |             |   |              |   |   | 543    |  
|Miscellaneous income, net                                                       |  |                            | 81     |             |   | (49           | ) |   | 32     |  
|                                                                                |  |                            |        |             |   |               |   |   |        |  
|Total other income                                                              |  |                            | 624    |             |   | (49           | ) |   | 575    |  
|                                                                                |  |                            |        |             |   |               |   |   |        |  
|Earnings from continuing operations before
  income taxes and minority interest |  |                            | 10,556 |             |   | (663          | ) |   | 9,893  |  
|                                                                                |  |                            |        |             |   |               |   |   |        |  
|Income tax expense                                                              |  |                            | (3,621 | )           |   | 333           |   |   | (3,288 | )
|Minority interest                                                               |  |                            | (684   | )           |   | 11            |   |   | (673   | )
|                                                                                |  |                            |        |             |   |               |   |   |        |  
|Earnings from continuing operations                                             |  |                            | 6,251  |             |   | (319          | ) |   | 5,932  |  
|                                                                                |  |                            |        |             |   |               |   |   |        |  
|                                                                                |  |                            |        |             |   |               |   |   |        |  
|Discontinued TeraOptix operations, net of
  tax                                 |  |                            | (210   | )           |   |              |   |   | (210   | )
|Charges related to the disposal of
  TeraOptix, net of tax                      |  |                            | (107   | )           |   |              |   |   | (107   | )
|                                                                                |  |                            |        |             |   |               |   |   |        |  
|Loss from discontinued operations                                               |  |                            | (317   | )           |   |              |   |   | (317   | )
|                                                                                |  |                            |        |             |   |               |   |   |        |  
|Net earnings                                                                    |  | $                          | 5,934  |             | $ | (319          | ) | $ | 5,615  |  
|                                                                                |  |                            |        |             |   |               |   |   |        |  
|                                                                                |  |                            |        |             |   |               |   |   |        |  
|Basic - Earnings (loss) per share:                                              |  |                            |        |             |   |               |   |   |        |  
|Continuing operations                                                           |  | $                          | 0.35   |             | $ | (0.02         | ) | $ | 0.33   |  
|Discontinued operations                                                         |  |                            | (0.02  | )           |   |              |   |   | (0.02  | )
|                                                                                |  |                            |        |             |   |               |   |   |        |  
|Net earnings                                                                    |  | $                          | 0.33   |             | $ | (0.02         | ) | $ | 0.31   |  
|                                                                                |  |                            |        |             |   |               |   |   |        |  
|Diluted - Earnings (loss) per share:                                            |  |                            |        |             |   |               |   |   |        |  
|Continuing operations                                                           |  | $                          | 0.35   |             | $ | (0.02         | ) | $ | 0.33   |  
|Discontinued operations                                                         |  |                            | (0.02  | )           |   |              |   |   | (0.02  | )
|                                                                                |  |                            |        |             |   |               |   |   |        |  
|Net earnings                                                                    |  | $                          | 0.33   |             | $ | (0.02         | ) | $ | 0.31   |  
|                                                                                |  |                            |        |             |   |               |   |   |        |  
|                                                                                |  |                            |        |             |   |               |   |   |        |  
|Weighted average number of shares:                                              |  |                            |        |             |   |               |   |   |        |  
|Basic                                                                           |  |                            | 17,942 |             |   | 17,942        |   |   | 17,942 |  
|                                                                                |  |                            |        |             |   |               |   |   |        |  
|Diluted                                                                         |  |                            | 18,140 |             |   | 18,140        |   |   | 18,140 |  
|                                                                                |  |                            |        |             |   |               |   |   |        |  

14

---



NOTE 3: RECENT ACCOUNTING PRONOUNCEMENTS

In May 2005,
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
any future accounting changes beginning in fiscal 2007.

In November
2005, the FASB issued FASB Staff Positions (FSP) SFAS 115-1 and SFAS 124-1,
The Meaning of Other-Than-Temporary Impairment and Its Application to Certain
Investments. FSP SFAS 115-1 and SFAS 124-1 address the determination as to
when an investment is considered impaired, whether that impairment is other
than temporary, and the measurement of an impairment loss. They also include
accounting considerations subsequent to the recognition of an
other-than-temporary impairment and require certain disclosures about
unrealized losses that have not been recognized as other-than-temporary
impairments. We will be adopting FSP SFAS 115-1 and SFAS 124-1 beginning in
fiscal 2007 and expect the effect on our consolidated financial statements to
be immaterial.

In February
2006, the FASB issued SFAS No. 155, Accounting for Certain Hybrid Financial
Instruments - an amendment of FASB Statements No. 133 and 140 which is
effective for fiscal years beginning after September 15, 2006. The statement
was issued to clarify the application of FASB Statement No. 133 to beneficial
interests in securitized financial assets and to improve the consistency of
accounting for similar financial instruments, regardless of the form of the
instruments. Currently, we do not invest in hybrid instruments or securitized
financial assets and would expect any effect on our consolidated financial
statements in the future to be immaterial.

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 nine
  months ended
  March 31,
  2005 |      
|                                                                      |  |                                                |      
|Cash flow
  from operating activities from discontinued operations:   |  |                                                |       |  
|Loss from discontinued operations                                     |  | $                                              | (317  | )
|Loss on sale and impairment of assets                                 |  |                                                | 94    |  
|Deferred income taxes                                                 |  |                                                | (178  | )
|Other, net                                                            |  |                                                | (19   | )
|                                                                      |  |                                                |       |  
|Net cash
  used for operating activities from discontinued operations |  |                                                | (420  | )
|                                                                      |  |                                                |       |  
|Net cash
  provided by investing activities                           |  |                                                | 1,918 |  
|                                                                      |  |                                                |       |  
|Net cash
  provided by discontinued operations                        |  | $                                              | 1,498 |  
|                                                                      |  |                                                |       |  

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

15

---



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 March 31, |        | Nine Months Ended March 31, |  
|                             |  |                              |        |                             |  
|                             |  | 2006                         |        | 2005                        |   | 2006   |   | 2005       |        
|                             |  |                              |        |                             |   |        |   |            |        
|                             |  |                              |        | (Restated)                  |   |        |   | (Restated) |        
|Semiconductor                |  |                              |        |                             |   |        |   |            |         |   |   |        |  
|Sales                        |  | $                            | 25,534 |                             | $ | 18,463 |   | $          | 68,182  |   | $ | 52,722 |  
|Gross profit                 |  |                              | 10,731 |                             |   | 7,023  |   |            | 27,242  |   |   | 20,495 |  
|Gross profit as a % of sales |  |                              | 42     | %                           |   | 38     | % |            | 40      | % |   | 39     | %
|Industrial                   |  |                              |        |                             |   |        |   |            |         |   |   |        |  
|Sales                        |  | $                            | 17,514 |                             | $ | 14,954 |   | $          | 52,803  |   | $ | 43,910 |  
|Gross profit                 |  |                              | 5,716  |                             |   | 5,880  |   |            | 19,550  |   |   | 16,392 |  
|Gross profit as a % of sales |  |                              | 33     | %                           |   | 39     | % |            | 37      | % |   | 37     | %
|Total                        |  |                              |        |                             |   |        |   |            |         |   |   |        |  
|Sales                        |  | $                            | 43,048 |                             | $ | 33,417 |   | $          | 120,985 |   | $ | 96,632 |  
|Gross profit                 |  |                              | 16,447 |                             |   | 12,903 |   |            | 46,792  |   |   | 36,887 |  
|Gross profit as a % of sales |  |                              | 38     | %                           |   | 39     | % |            | 39      | % |   | 38     | %

ZYGOs
Metrology, which includes development services, 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 March 31, |        | Nine Months Ended March 31, |  
|                             |  |                              |        |                             |  
|                             |  | 2006                         |        | 2005                        |   | 2006   |   | 2005       |        
|                             |  |                              |        |                             |   |        |   |            |        
|                             |  |                              |        | (Restated)                  |   |        |   | (Restated) |        
|Metrology                    |  |                              |        |                             |   |        |   |            |         |   |   |        |  
|Sales                        |  | $                            | 19,862 |                             | $ | 17,511 |   | $          | 60,168  |   | $ | 43,996 |  
|Gross profit                 |  |                              | 8,379  |                             |   | 8,227  |   |            | 26,705  |   |   | 20,035 |  
|Gross profit as a % of sales |  |                              | 42     | %                           |   | 47     | % |            | 44      | % |   | 46     | %
|Optical Systems Solutions    |  |                              |        |                             |   |        |   |            |         |   |   |        |  
|Sales                        |  | $                            | 11,482 |                             | $ | 9,202  |   | $          | 30,047  |   | $ | 26,525 |  
|Gross profit                 |  |                              | 2,681  |                             |   | 1,707  |   |            | 6,212   |   |   | 4,839  |  
|Gross profit as a % of sales |  |                              | 23     | %                           |   | 19     | % |            | 21      | % |   | 18     | %
|PPS                          |  |                              |        |                             |   |        |   |            |         |   |   |        |  
|Sales                        |  | $                            | 11,704 |                             | $ | 6,704  |   | $          | 30,770  |   | $ | 26,111 |  
|Gross profit                 |  |                              | 5,387  |                             |   | 2,969  |   |            | 13,875  |   |   | 12,013 |  
|Gross profit as a % of sales |  |                              | 46     | %                           |   | 44     | % |            | 45      | % |   | 46     | %
|Total                        |  |                              |        |                             |   |        |   |            |         |   |   |        |  
|Sales                        |  | $                            | 43,048 |                             | $ | 33,417 |   | $          | 120,985 |   | $ | 96,632 |  
|Gross profit                 |  |                              | 16,447 |                             |   | 12,903 |   |            | 46,792  |   |   | 36,887 |  
|Gross profit as a % of sales |  |                              | 38     | %                           |   | 39     | % |            | 39      | % |   | 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 March 31, |        | Nine Months Ended March 31, |  
|            |  |                              |        |                             |  
|            |  | 2006                         |        | 2005                        |   | 2006   |  | 2005       |        
|            |  |                              |        |                             |   |        |  |            |        
|            |  |                              |        | (Restated)                  |   |        |  | (Restated) |        
|Domestic    |  | $                            | 14,400 |                             | $ | 12,742 |  | $          | 41,385  |  | $ | 32,774 | 
|Europe      |  |                              | 2,966  |                             |   | 4,217  |  |            | 10,606  |  |   | 11,719 | 
|Japan       |  |                              | 22,156 |                             |   | 14,929 |  |            | 55,698  |  |   | 44,379 | 
|Pacific Rim |  |                              | 3,526  |                             |   | 1,529  |  |            | 13,296  |  |   | 7,760  | 
|            |  |                              |        |                             |   |        |  |            |         |  |   |        | 
|Total       |  | $                            | 43,048 |                             | $ | 33,417 |  | $          | 120,985 |  | $ | 96,632 | 
|            |  |                              |        |                             |   |        |  |            |         |  |   |        | 

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.

16

---



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 $16,403 (38% of net sales) and $44,385 (37% of net sales) for the
three months and nine months ended March 31, 2006, as compared with $12,839
(38% of net sales) and $38,189 (40% of net sales) for the comparable prior year
periods. 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 March 31, 2006 and June 30, 2005, there were, in the aggregate,
$5,141 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 and nine months ended March 31, 2006, we
recognized revenue in the semiconductor segment of $5,187 and $14,759,
respectively, for these contracts compared with $5,442 and $9,615,
respectively, for the comparable prior year periods. In addition, Canon Inc.
paid us progress payments in accordance with the terms of the development
contract. The total progress payments related to the development contract
remaining at March 31, 2006 were $5,149 and $11,287 at June 30, 2005.

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 March
31, 2006, we had six foreign currency forward contracts (yen) outstanding
aggregating to $5,700. For the three months ended March 31, 2006, we recognized
a gain from foreign currency forward contracts of $14. For the nine months
ended March 31, 2006, we recognized a net loss of $2. These gains and losses
are included in other income in the Consolidated Statements of Operations.
These gains and losses are substantially offset by foreign exchange losses and
gains 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.

NOTE 8: INCOME TAXES

Income tax
expense for both the three and nine months ended March 31, 2006 was favorably
impacted by the Companys redetermination of deductions attributable to foreign
trading income, also referred to as an Extraterritorial Income Exclusion
(EIE), related to the current fiscal year and to fiscal 2004. The impact of
the EIE reduced the effective tax rate for the three months ended March 31,
2006 to 19% from 30% in the prior year period. The tax rate for the nine months
ended March 31, 2006 decreased to 30% from 33% in the comparable prior year
period. The EIE had the effect of lowering the estimated annual effective tax
rate for the first nine months of fiscal 2006 from 38% to 35%. An additional
EIE, which was related to fiscal 2004, further reduced the tax rate from 35% to
30%. Income tax expense for the nine months ended March 31, 2006 was also
affected by increased income in foreign jurisdictions, which operate in higher
tax jurisdictions and an increase in tax upon additional monies repatriated
from these foreign operations, which were partially offset by the release of
tax reserves in a foreign jurisdiction that occurred in the second quarter.

17

---



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.

Our
development services 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. During the three and
nine months ended March 31, 2006, we recognized $5.2 million and $14.8 million,
respectively, of revenue from these development services contracts as compared
with $5.4 million and $9.6 million, respectively, in the prior year comparable
periods. The development services contracts that were signed in fiscal 2005
were cost plus contracts. We currently expect the remaining revenues on those
contracts to be approximately $7.5 million which should be recognized over the
next three to four quarters. To the extent that total actual costs on the
contracts may be less than currently anticipated, the resulting development
services revenue could be less than the currently estimated value of the
contract. Additionally, our period over period comparable sales in the future
could be adversely affected if we do not expand our overall business
sufficiently to offset the decline in development services revenue.

We achieved an
order level for the third quarter of fiscal 2006 of $45.3 million as compared
with $50.3 million for the second quarter of fiscal 2006 and $37.7 million for
the third quarter of fiscal 2005. This order flow increased backlog at March
31, 2006 to $79.3 million. Orders in the semiconductor segment of $30.4 million
increased $4.3 million, or 16%, as compared with the second quarter of fiscal
2006; and increased $6.8 million, or 29%, as compared with the third quarter of
fiscal 2005. We continue to receive orders from the flat panel market of the
semiconductor segment and expect orders from that market 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 nine months. Orders in the industrial segment of $14.9 million
decreased by $9.3 million, or 38%, as compared with the second quarter of
fiscal 2006 but increased by $0.8 million, or 6%, as compared with the third
quarter of fiscal 2005. The decrease in industrial orders from the second
quarter of fiscal 2006 was primarily due to the large government orders
received in the second quarter which were not expected to be repeated in this
quarter.

Beginning in the first quarter of fiscal 2006, we are required
  to record the expense of share-based payment transactions. Under the modified
  prospective method, 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 March 31, 2006, operating
  income was reduced by $0.2 million for share-based payment compensation expense,
  which reduced our quarterly diluted earnings per share by $0.01. For the nine
  months ended March 31, 2006, operating income was reduced by $1.4 million for
  share-based payment compensation expense, which reduced our nine month diluted
  earnings per share by $0.05. The share-based compensation expense related to
  current outstanding stock options and restricted shares and to future issuances
  of stock options which are presently known to us is estimated to be approximately
  $0.4 million in the fourth quarter of fiscal 2006.

Restatement

We have restated our consolidated financial statements for the
  third quarter of fiscal 2005 for corrections in the accounting of intercompany
  transactions from certain of our foreign operations. 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

18

---



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.

Net
Sales

|                           |  |             |       |               |  |            |   |               |      |  |     |  
|-------------------------- |  | ----------- | ----- | ------------- |  | ---------- | - | ------------- | ---- |  | --- | -
|                           |  | Fiscal 2006 |       | Fiscal 2005   | 
|                           |  |             |       |               | 
|(In
  millions)            |  | Amount      |       | Net Sales
  % |  | Amount     |   | Net Sales
  % |     
|                           |  |             |       |               |  |            |   |               |     
|                           |  |             |       |               |  | (Restated) |   | (Restated)    |     
|Quarter ended March 31     |  |             |       |               |  |            |   |               |      |  |     |  
|Semiconductor              |  | $           | 20.3  |               |  | 47         | % | $             | 13.0 |  | 39  | %
|Development Services       |  |             | 5.2   |               |  | 12         | % |               | 5.4  |  | 16  | %
|                           |  |             |       |               |  |            |   |               |      |  |     |  
|Total Semiconductor        |  |             | 25.5  |               |  | 59         | % |               | 18.4 |  | 55  | %
|                          
|Total Industrial           |  |             | 17.5  |               |  | 41         | % |               | 15.0 |  | 45  | %
|                           |  |             |       |               |  |            |   |               |      |  |     |  
|                           |  |             |       |               |  |            |   |               |      |  |     |  
|Total                      |  | $           | 43.0  |               |  | 100        | % | $             | 33.4 |  | 100 | %
|                           |  |             |       |               |  |            |   |               |      |  |     |  
|                           |  |             |       |               |  |            |   |               |      |  |     |  
|Nine months ended March 31 |  |             |       |               |  |            |   |               |      |  |     |  
|Semiconductor              |  | $           | 53.4  |               |  | 44         | % | $             | 43.1 |  | 45  | %
|Development Services       |  |             | 14.8  |               |  | 12         | % |               | 9.6  |  | 10  | %
|                           |  |             |       |               |  |            |   |               |      |  |     |  
|Total Semiconductor        |  |             | 68.2  |               |  | 56         | % |               | 52.7 |  | 55  | %
|                          
|Total Industrial           |  |             | 52.8  |               |  | 44         | % |               | 43.9 |  | 45  | %
|                           |  |             |       |               |  |            |   |               |      |  |     |  
|                           |  |             |       |               |  |            |   |               |      |  |     |  
|Total                      |  | $           | 121.0 |               |  | 100        | % | $             | 96.6 |  | 100 | %
|                           |  |             |       |               |  |            |   |               |      |  |     |  

Net sales in
the semiconductor segment increased 39% in the third quarter of fiscal 2006 as
compared with the prior year. This increase was due primarily to an increase in
lithography sales of $4.9 million and flat panel sales of $0.9 million. For the
nine month period ended March 31, 2006, the semiconductor segment increased 29%
as compared with the prior year period due to an increase in development
services of $5.2 million, lithography sales $3.9 million, and flat panel sales
of $2.7 million.

Net sales in
the industrial segment increased by 17% in the third quarter of fiscal 2006 as
compared with the prior year period primarily due to increased volume related
to contract manufacturing and optical systems shipments. For the nine month period
ended March 31, 2006, the industrial segment net sales increased 20% as
compared with the prior year period due to increased volume related to contract
manufacturing and optical systems assemblies of $5.4 million.

Sales in U.S. dollars for the
three and nine months of fiscal 2006 were $34.3 million, or 80%, and $99.2, or
82%, respectively, 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. 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.

19

---



Gross Profit by Segment

|                           |  |             |      |                  |  |        |   |                   |            |  |  |            |  
|-------------------------- |  | ----------- | ---- | ---------------- |  | ------ | - | ----------------- | ---------- |  |  | ---------- | -
|                           |  | Fiscal 2006 |      | Fiscal 2005      | 
|                           |  |             |      |                  | 
|(In millions)              |  | Amount      |      | Gross 
  Profit% |  | Amount |   | Gross 
  Profit % |           
|                           |  |             |      |                  |  |        |   |                   |           
|                           |  |             |      |                  |  |        |   |                   | (Restated) |  |  | (Restated) |  
|Quarter ended March 31     |  |             |      |                  |  |        |   |                   |            |  |  |            |  
|Semiconductor              |  | $           | 9.2  |                  |  | 45     | % | $                 | 5.4        |  |  | 42         | %
|Developmental
services     |  |             | 1.5  |                  |  | 29     | % |                   | 1.6        |  |  | 30         | %
|                           |  |             |      |                  |  |        |   |                   |            |  |  |            |  
|Total Semiconductor        |  |             | 10.7 |                  |  | 42     | % |                   | 7.0        |  |  | 38         | %
|                           |  |             |      |                  |  |        |   |                   |            |  |  |            |  
|Total Industrial           |  |             | 5.7  |                  |  | 33     | % |                   | 5.9        |  |  | 39         | %
|                           |  |             |      |                  |  |        |   |                   |            |  |  |            |  
|                           |  |             |      |                  |  |        |   |                   |            |  |  |            |  
|Total                      |  | $           | 16.4 |                  |  | 38     | % | $                 | 12.9       |  |  | 39         | %
|                           |  |             |      |                  |  |        |   |                   |            |  |  |            |  
|                           |  |             |      |                  |  |        |   |                   |            |  |  |            |  
|Nine months ended March 31 |  |             |      |                  |  |        |   |                   |            |  |  |            |  
|Semiconductor              |  | $           | 23.0 |                  |  | 43     | % | $                 | 17.7       |  |  | 41         | %
|Developmental
services     |  |             | 4.2  |                  |  | 28     | % |                   | 2.8        |  |  | 29         | %
|                           |  |             |      |                  |  |        |   |                   |            |  |  |            |  
|Total Semiconductor        |  |             | 27.2 |                  |  | 40     | % |                   | 20.5       |  |  | 39         | %
|                           |  |             |      |                  |  |        |   |                   |            |  |  |            |  
|Total Industrial           |  |             | 19.6 |                  |  | 37     | % |                   | 16.4       |  |  | 37         | %
|                           |  |             |      |                  |  |        |   |                   |            |  |  |            |  
|                           |  |             |      |                  |  |        |   |                   |            |  |  |            |  
|Total                      |  | $           | 46.8 |                  |  | 39     | % | $                 | 36.9       |  |  | 38         | %
|                           |  |             |      |                  |  |        |   |                   |            |  |  |            |  

Gross profit
as a percentage of sales for the three and nine months of fiscal 2006 remained
flat as compared to prior year periods primarily due to decreases in the
industrial segment margins being offset by increases in the semiconductor
segment margins. Industrial segment margins decreased due in part to
manufacturing interruptions within the optical systems group. The overall
semiconductor segment margins stayed relatively stable despite a decrease in
development services margins. Margins on semiconductor product sales increased
primarily due to improved factory performance but were also negatively impacted
by two development tools that carried lower than planned margins. General
factory costs, including warranty, factory efficiency costs, and inventory
related costs, were lower than in the prior year.

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

|                           |  |             |      |             |    |        |  |            |      |  |    |   | 
|-------------------------- |  | ----------- | ---- | ----------- | -- | ------ |  | ---------- | ---- |  | -- | - | 
|                           |  | Fiscal 2006 |      | Fiscal 2005 |   
|                           |  |             |      |             |   
|(In millions)              |  | Amount      |      | % of Sales  |    | Amount |  | % of Sales |     
|                           |  |             |      |             |    |        |  |            |     
|                           |  |             |      |             |    |        |  |            |      |  |    |   | 
|Quarter ended March 31     |  | $           | 8.0  |             | 19 | %      |  | $          | 5.5  |  | 16 | % | 
|Nine months ended March 31 |  | $           | 22.5 |             | 19 | %      |  | $          | 16.9 |  | 17 | % | 

The third
quarter increase in SG&A was primarily due to increased employee expenses,
including management incentives of $1.3 million, increased selling expenses
related to new market initiatives of $0.8 million, primarily related to the new
offices in Korea, Taiwan, and mainland China, and share-based compensation
expense of $0.1 million. For the nine months ended March 31, 2006, the increase
in SG&A was due to increased employee expenses, including management
incentives of $3.5 million, costs associated with increasing our presence in
the Pacific Rim with the opening of new offices within the last year in Korea,
Taiwan, and mainland China of $1.2 million, share-based compensation expense of
$0.9 million, and increased selling and general expenses related to new
initiatives in our west coast operations of $0.4 million.

20

---



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

|                           |  |             |      |             |   |        |  |           |      |  |    |   | 
|-------------------------- |  | ----------- | ---- | ----------- | - | ------ |  | --------- | ---- |  | -- | - | 
|                           |  | Fiscal 2006 |      | Fiscal 2005 |  
|                           |  |             |      |             |  
|(In millions)              |  | Amount      |      | % of Sales  |   | Amount |  | %of Sales |     
|                           |  |             |      |             |   |        |  |           |     
|                           |  |             |      |             |   |        |  |           |      |  |    |   | 
|Quarter ended March 31     |  | $           | 3.9  |             | 9 | %      |  | $         | 3.8  |  | 11 | % | 
|Nine months ended March 31 |  | $           | 10.9 |             | 9 | %      |  | $         | 10.7 |  | 11 | % | 

Their was a small increase in RD&E for the third quarter and
  first nine months of fiscal 2006 as compared with the prior year periods. In
  the third quarter of fiscal 2006 the increase in RD&E expenses was primarily
  due to the opening of our Oregon engineering and product development office
  earlier in the year. For the first nine months of fiscal 2006, RD&E expenses
  increased as compared with the prior year period due to the Oregon office. Additionally,
  RD&E expenses for the year were reduced by a reimbursement from a customer
  of $0.7 million for research costs incurred. Current year initiatives are focused
  in the semiconductor segment, most notably in the display and packaging markets,
  and include the opening of our Oregon office as mentioned above. Share-based
  compensation expense included in RD&E for the first nine months of fiscal
  2006 was $0.2 million.

Income Tax Expense

|                           |  |             |     |             |    |        |  |            |     |            |    |   | 
|-------------------------- |  | ----------- | --- | ----------- | -- | ------ |  | ---------- | --- | ---------- | -- | - | 
|                           |  | Fiscal 2006 |     | Fiscal 2005 |   
|                           |  |             |     |             |   
|(In millions)              |  | Amount      |     | Tax Rate%   |    | Amount |  | Tax Rate % |    
|                           |  |             |     |             |    |        |  |            |    
|                           |  |             |     |             |    |        |  | (Restated) |     | (Restated) |   
|                           |  |             |     |             |    |        |  |            |     |            |    |   | 
|Quarter ended March 31     |  | $           | 1.0 |             | 19 | %      |  | $          | 1.1 |            | 30 | % | 
|Nine months ended March 31 |  | $           | 4.5 |             | 30 | %      |  | $          | 3.3 |            | 33 | % | 

Income tax
expense for both the three and nine months ended March 31, 2006 was favorably
impacted by the Companys redetermination of deductions attributable to foreign
trading income, also referred to as an Extraterritorial Income Exclusion
(EIE), related to the current fiscal year and to fiscal 2004. The impact of
the EIE reduced the effective tax rate for the three months ended March 31,
2006 to 19% from 30% in the prior year period. The tax rate for the nine months
ended March 31, 2006 decreased to 30% from 33% in the comparable prior year
period. The EIE had the effect of lowering the estimated annual effective tax
rate for the first nine months of fiscal 2006 from 38% to 35%. An additional
EIE, which was related to fiscal 2004, further reduced the tax rate from 35% to
30%. Income tax expense for the nine months ended March 31, 2006 was also
affected by increased income in foreign jurisdictions, which operate in higher
tax jurisdictions and an increase in tax upon additional monies repatriated
from these foreign operations, which were partially offset by the release of
tax reserves in a foreign jurisdiction that occurred in the second quarter.

RELATED PARTY TRANSACTIONS

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 $16.4 million (38% of net sales) and
$44.4 million (37% of net sales) for the third quarter and nine months ended
March 31, 2006, as compared with $12.8 million (38% of net sales) and $38.2
million (40% of net sales) for the comparable prior year periods. 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
March 31, 2006 and June 30, 2005, there were, in the aggregate, $5.1 million
and $4.0 million, 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 and nine month ended March 31, 2006, we
recognized revenue in the semiconductor segment of $5.2 million and $14.8
million, respectively, from these contracts as compared with $5.4 million and
$9.6 million, respectively, for the comparable prior year periods. According to
the terms of the agreements, we also receive progress payments during the
course of the contract. As of March 31, 2006 and June 30, 2005, we received
$5.1 million and $11.3 million, respectively, of progress payments in excess of
services performed.

21

---



LIQUIDITY AND CAPITAL RESOURCES

At March 31,
2006, working capital was $75.3 million, an increase of $11.9 million from
$63.4 million at June 30, 2005. We maintained cash, cash equivalents, and
marketable securities at March 31, 2006 totaling $63.1 million, an increase of
$6.2 million, from $56.9 million at June 30, 2005. Cash flow from operations
contributed $10.4 million in the nine months ended March 31, 2006, with the
benefit derived primarily from our results of operations of $10.0 million,
which included non-cash expenses of $9.4 million, along with a decrease in our
receivables of $2.1 million. Offsetting these incoming cash flows were an
increase in inventories of $3.5 million and a decrease in accounts payable,
accrued expenses, and taxes payable of $8.3 million.

Acquisitions
of property, plant, and equipment totaled $1.5 million and $4.5 during the
three and nine months ended March 31, 2006. 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 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, 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. We consider certain
accounting policies related to revenue recognition and allowance for doubtful
accounts, inventory valuation, warranty costs, accounting for income taxes,
valuation of long-lived assets, and valuation of share-based payments to be
critical policies due to the estimates and judgments involved in each.

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

22

---



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.

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 for domestic and foreign locations, 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.

Share-Based Payments

In December
2004, FASB issued SFAS No. 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.

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.

23

---



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.

24

---



RISK FACTORS THAT MAY IMPACT FUTURE RESULTS

Risk factors
that may impact future results include those disclosed in our Form 10-K, as
amended, 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 nine 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 losses and gains 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 on
Form 10-K, as amended, for the year ended June 30, 2005 filed with the
Securities and Exchange Commission.

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 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 Form 10-K/A 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.

In response to this material weakness, management performed additional
  analyses and other post-closing procedures to ensure our consolidated financial
  statements included in this Form 10-Q were prepared in accordance with generally
  accepted accounting principles. 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 intercompany
  transactions, including dedicating additional resources to our consolidation
  process 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 identified and eliminated
  in consolidation.

Accordingly,
management, including our Chief Executive Officer and Chief Financial Officer,
believes the 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.

25

---



|                              |           |                                                                       
|----------------------------- | --------- | ----------------------------------------------------------------------
|PART II -
  Other Information
|                              |           |                                                                       
|Item 6.                       | Exhibits  |                                                                       
|                              |           |                                                                       
|(a)                           | Exhibits: |                                                                       
|                              |           |                                                                       
|                              | 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

26

---





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

27

---