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 | December 31, 2009 | 
|                                |                   | 

or

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

For the
transition period from ____________________________________ to
____________________________________

|                        |         | 
|----------------------- | ------- | 
|Commission
 File Number | 0-12944 | 
|                        |         | 

|                                                      
|------------------------------------------------------
|ZYGO CORPORATION                                      
|                                                      
|(Exact name of registrant as specified in its charter)

|                                                                                    |                                      | 
|----------------------------------------------------------------------------------- | ------------------------------------ | 
|Delaware                                                                            | 06-0864500                           | 
|                                                                                    |                                      | 
|(State or
 other jurisdiction of incorporation or organization)                     | (I.R.S. Employer Identification No.) | 
|                                                                                    |                                      | 
|Laurel Brook
 Road, Middlefield, Connecticut                                        | 06455                                | 
|                                                                                    |                                      | 
|(Address of
 principal executive offices)                                           | (Zip Code)                           | 
|                                                                                    |                                      | 
|(860) 347-8506                                                                     
|                                                                                    |                                      | 
|Registrants telephone number, including area code                                 
|                                                                                   
|N/A                                                                                
|                                                                                   
|(Former name, former address, and former fiscal year, if changed from
 last report)

Indicate by
check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.                  
                      
                      
                      
                      
  
                      
                      
                      
              
x YES o NO

Indicate by
check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T during the
preceding 12 months (or for such shorter period that the registrant was
required to submit and post such files). (1)                  
                      
                      
                      
                      
  
                      
                      
                     o YES o NO

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

| |                                                                         |                             
| | ----------------------------------------------------------------------- | ----------------------------
| | Large
 accelerated filer o                                              | Accelerated filer x         
| | Non-accelerated
 filer o
 (Do not check if a smaller reporting company) | Smaller
 reporting company 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.

17,410,525 shares of Common Stock, $.10 Par
Value, at February 1, 2010

(1) The
registrant is not currently required to submit Interactive Data Files pursuant
to Rule 405 of Regulation S-T.

---



FORWARD LOOKING STATEMENTS

All statements
other than statements of historical fact included in this Form 10-Q Quarterly
Report regarding financial performance, condition and operations, and the
business strategy, plans, anticipated revenues, bookings, market acceptance,
growth rates, market opportunities, and objectives of management of the Company
for future operations are forward-looking statements. Forward-looking
statements are intended to provide managements current expectations or plans
for the future operating and financial performance of the Company 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; risks of order cancellations,
push-outs and de-bookings; dependence on timing and market acceptance of new
product development; rapid technological and market change; risks in
international operations; risks related to the reorganization of our business;
dependence on proprietary technology and key personnel; length of the revenue
cycle; environmental regulations; investment portfolio returns; fluctuations in
our stock price; the risk that anticipated growth opportunities may be smaller
than anticipated or may not be realized; risks related to the acquisition of
Zemetrics and integration of the business and employees; the risk related to
the Companys transition to new senior management, and the risk associated with
unsolicited proposals to purchase the outstanding shares of common stock of the
company.

Any
forward-looking statements included in this Quarterly Report speak only as of
the date of this document. We undertake no obligation to publicly update or
revise forward-looking statements to reflect events or circumstances occurring
after the date of this Form 10-Q. Further information on potential factors that
could affect our business is described in this Form 10-Q and 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, 2009.

2

---



PART I - Financial Information

Item 1. Financial Statements

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

|                                                                                         |  |                                  |        |                                |   |        |   |      |        |   |   |        |  
|---------------------------------------------------------------------------------------- |  | -------------------------------- | ------ | ------------------------------ | - | ------ | - | ---- | ------ | - | - | ------ | -
|                                                                                         |  | Three Months Ended 
December 31, |        | Six Months Ended 
December 31, |  
|                                                                                         |  |                                  |        |                                |  
|                                                                                         |  | 2009                             |        | 2008                           |   | 2009   |   | 2008 |       
|                                                                                         |  |                                  |        |                                |   |        |   |      |       
|Net sales                                                                                |  | $                                | 26,081 |                                | $ | 33,400 |   | $    | 47,406 |   | $ | 70,893 |  
|Cost of goods sold                                                                       |  |                                  | 15,128 |                                |   | 21,144 |   |      | 29,279 |   |   | 42,150 |  
|                                                                                         |  |                                  |        |                                |   |        |   |      |        |   |   |        |  
|Gross profit                                                                             |  |                                  | 10,953 |                                |   | 12,256 |   |      | 18,127 |   |   | 28,743 |  
|                                                                                         |  |                                  |        |                                |   |        |   |      |        |   |   |        |  
|                                                                                         |  |                                  |        |                                |   |        |   |      |        |   |   |        |  
|Selling, general, and
 administrative expenses                                           |  |                                  | 8,533  |                                |   | 12,144 |   |      | 15,088 |   |   | 21,229 |  
|Research, development, and
 engineering expenses                                         |  |                                  | 3,896  |                                |   | 5,561  |   |      | 7,543  |   |   | 10,867 |  
|Provision for doubtful
 accounts and notes                                               |  |                                  | (168   | )                              |   | 617    |   |      | 53     |   |   | 999    |  
|                                                                                         |  |                                  |        |                                |   |        |   |      |        |   |   |        |  
|Operating loss                                                                           |  |                                  | (1,308 | )                              |   | (6,066 | ) |      | (4,557 | ) |   | (4,352 | )
|                                                                                         |  |                                  |        |                                |   |        |   |      |        |   |   |        |  
|                                                                                         |  |                                  |        |                                |   |        |   |      |        |   |   |        |  
|Other income                                                                             |  |                                  |        |                                |   |        |   |      |        |   |   |        |  
|Interest income                                                                          |  |                                  | 23     |                                |   | 291    |   |      | 74     |   |   | 660    |  
|Miscellaneous income                                                                     |  |                                  | 24     |                                |   | 467    |   |      | 84     |   |   | 23     |  
|                                                                                         |  |                                  |        |                                |   |        |   |      |        |   |   |        |  
|Total other income                                                                       |  |                                  | 47     |                                |   | 758    |   |      | 158    |   |   | 683    |  
|                                                                                         |  |                                  |        |                                |   |        |   |      |        |   |   |        |  
|Loss from continuing operations before income taxes, including
 non-controlling interest |  |                                  | (1,261 | )                              |   | (5,308 | ) |      | (4,399 | ) |   | (3,669 | )
|Income tax benefit (expense)                                                             |  |                                  | 308    |                                |   | 1,853  |   |      | (374   | ) |   | 1,322  |  
|                                                                                         |  |                                  |        |                                |   |        |   |      |        |   |   |        |  
|Net loss from continuing operations                                                      |  |                                  | (953   | )                              |   | (3,455 | ) |      | (4,773 | ) |   | (2,347 | )
|                                                                                         |  |                                  |        |                                |   |        |   |      |        |   |   |        |  
|Loss from discontinued operations, net of tax                                            |  |                                  | (639   | )                              |   | (214   | ) |      | (2,474 | ) |   | (543   | )
|                                                                                         |  |                                  |        |                                |   |        |   |      |        |   |   |        |  
|                                                                                         |  |                                  |        |                                |   |        |   |      |        |   |   |        |  
|Net loss including non-controlling interest                                              |  |                                  | (1,592 | )                              |   | (3,669 | ) |      | (7,247 | ) |   | (2,890 | )
|Net earnings attributable to non-controlling interest                                    |  |                                  | 313    |                                |   | 372    |   |      | 445    |   |   | 648    |  
|                                                                                         |  |                                  |        |                                |   |        |   |      |        |   |   |        |  
|Net loss attributable to Zygo Corporation                                                |  | $                                | (1,905 | )                              | $ | (4,041 | ) | $    | (7,692 | ) | $ | (3,538 | )
|                                                                                         |  |                                  |        |                                |   |        |   |      |        |   |   |        |  
|                                                                                         |  |                                  |        |                                |   |        |   |      |        |   |   |        |  
|Basic and diluted - Loss per share attributable to Zygo Corporation                      |  |                                  |        |                                |   |        |   |      |        |   |   |        |  
|                                                                                         |  |                                  |        |                                |   |        |   |      |        |   |   |        |  
|Continuing operations                                                                    |  | $                                | (0.07  | )                              | $ | (0.23  | ) | $    | (0.31  | ) | $ | (0.18  | )
|Discontinued operations                                                                  |  |                                  | (0.04  | )                              |   | (0.01  | ) |      | (0.15  | ) |   | (0.03  | )
|                                                                                         |  |                                  |        |                                |   |        |   |      |        |   |   |        |  
|Net loss per share                                                                       |  | $                                | (0.11  | )                              | $ | (0.24  | ) | $    | (0.45  | ) | $ | (0.21  | )
|                                                                                         |  |                                  |        |                                |   |        |   |      |        |   |   |        |  
|Weighted average shares outstanding                                                      |  |                                  |        |                                |   |        |   |      |        |   |   |        |  
|Basic and diluted shares                                                                 |  |                                  | 16,993 |                                |   | 16,834 |   |      | 16,968 |   |   | 16,805 |  
|                                                                                         |  |                                  |        |                                |   |        |   |      |        |   |   |        |  
|Amounts Attributable to Zygo Corporation                                                 |  |                                  |        |                                |   |        |   |      |        |   |   |        |  
|Net loss from continuing operations attributable to Zygo Corporation                     |  |                                  | (1,266 | )                              |   | (3,827 | ) |      | (5,218 | ) |   | (2,995 | )
|Discontinued operations, net of tax                                                      |  |                                  | (639   | )                              |   | (214   | ) |      | (2,474 | ) |   | (543   | )
|                                                                                         |  |                                  |        |                                |   |        |   |      |        |   |   |        |  
|Net loss attributable to Zygo Corporation                                                |  | $                                | (1,905 | )                              | $ | (4,041 | ) | $    | (7,692 | ) | $ | (3,538 | )
|                                                                                         |  |                                  |        |                                |   |        |   |      |        |   |   |        |  

See accompanying notes to condensed
consolidated financial statements.

3

---



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

|                                                                                                                                                                                             |  |                   |         |               |   |         |  
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----------------- | ------- | ------------- | - | ------- | -
|                                                                                                                                                                                             |  | December 31, 2009 |         | June 30, 2009 |  
|                                                                                                                                                                                             |  |                   |         |               |  
|Assets                                                                                                                                                                                       |  |                   |         |               |   |         |  
|Current assets:                                                                                                                                                                              |  |                   |         |               |   |         |  
|Cash and cash equivalents                                                                                                                                                                    |  | $                 | 37,745  |               | $ | 32,723  |  
|Marketable securities                                                                                                                                                                        |  |                   | 1,000   |               |   | 4,015   |  
|Receivables, net of allowance for doubtful accounts of $2,970 and
 $2,550, respectively                                                                                                      |  |                   | 21,015  |               |   | 20,874  |  
|Inventories                                                                                                                                                                                  |  |                   | 24,383  |               |   | 30,452  |  
|Prepaid expenses and other                                                                                                                                                                   |  |                   | 1,846   |               |   | 1,527   |  
|Income tax receivable                                                                                                                                                                        |  |                   | 1,252   |               |   | 1,022   |  
|Current assets of discontinued operations                                                                                                                                                    |  |                   | 78      |               |   | 294     |  
|                                                                                                                                                                                             |  |                   |         |               |   |         |  
|Total current assets                                                                                                                                                                         |  |                   | 87,319  |               |   | 90,907  |  
|                                                                                                                                                                                             |  |                   |         |               |   |         |  
|Marketable securities                                                                                                                                                                        |  |                   | 627     |               |   | 499     |  
|Property, plant, and equipment, net                                                                                                                                                          |  |                   | 24,886  |               |   | 27,325  |  
|Intangible assets, net                                                                                                                                                                       |  |                   | 4,172   |               |   | 4,211   |  
|Other assets                                                                                                                                                                                 |  |                   | 1,011   |               |   | 1,013   |  
|Non-current assets of discontinued operations                                                                                                                                                |  |                   |        |               |   | 144     |  
|                                                                                                                                                                                             |  |                   |         |               |   |         |  
|Total assets                                                                                                                                                                                 |  | $                 | 118,015 |               | $ | 124,099 |  
|                                                                                                                                                                                             |  |                   |         |               |   |         |  
|                                                                                                                                                                                             |  |                   |         |               |   |         |  
|Liabilities and Stockholders Equity                                                                                                                                                         |  |                   |         |               |   |         |  
|Current liabilities:                                                                                                                                                                         |  |                   |         |               |   |         |  
|Accounts payable                                                                                                                                                                             |  | $                 | 4,870   |               | $ | 5,089   |  
|Accrued progress payments and deferred revenue                                                                                                                                               |  |                   | 5,440   |               |   | 5,924   |  
|Accrued salaries and wages                                                                                                                                                                   |  |                   | 3,764   |               |   | 3,508   |  
|Other accrued liabilities                                                                                                                                                                    |  |                   | 5,143   |               |   | 6,313   |  
|Income tax payable                                                                                                                                                                           |  |                   | 673     |               |   |        |  
|Current liabilities of discontinued operations                                                                                                                                               |  |                   | 474     |               |   | 331     |  
|                                                                                                                                                                                             |  |                   |         |               |   |         |  
|Total current liabilities                                                                                                                                                                    |  |                   | 20,364  |               |   | 21,165  |  
|                                                                                                                                                                                             |  |                   |         |               |   |         |  
|Long-term income tax payable                                                                                                                                                                 |  |                   | 1,826   |               |   | 1,826   |  
|Other long-term liabilities                                                                                                                                                                  |  |                   | 1,361   |               |   | 1,081   |  
|Non-current liabilities of discontinued operations                                                                                                                                           |  |                   | 365     |               |   |        |  
|                                                                                                                                                                                             |  |                   |         |               |   |         |  
|Commitments and contingencies                                                                                                                                                                |  |                   |        |               |   |        |  
|                                                                                                                                                                                             |  |                   |         |               |   |         |  
|Stockholders equity:                                                                                                                                                                        |  |                   |         |               |   |         |  
|Common stock, $0.10 par value per share: 40,000,000 shares authorized;
 19,178,001 shares issued (19,044,331 at June 30, 2009); 17,008,800 shares outstanding
 (16,914,978 at June 30, 2009) |  |                   | 1,918   |               |   | 1,904   |  
|Additional paid-in capital                                                                                                                                                                   |  |                   | 157,341 |               |   | 156,176 |  
|Accumulated deficit                                                                                                                                                                          |  |                   | (41,242 | )             |   | (33,550 | )
|Accumulated other comprehensive income (loss):                                                                                                                                               |  |                   |         |               |   |         |  
|Currency translation effects                                                                                                                                                                 |  |                   | 306     |               |   | (306    | )
|Treasury stock, at cost, 2,169,201 shares (2,129,353 at June 30, 2009)                                                                                                                       |  |                   | (25,874 | )             |   | (25,641 | )
|                                                                                                                                                                                             |  |                   |         |               |   |         |  
|Total stockholders equity - Zygo Corporation                                                                                                                                                |  |                   | 92,449  |               |   | 98,583  |  
|Non-controlling interest                                                                                                                                                                     |  |                   | 1,650   |               |   | 1,444   |  
|                                                                                                                                                                                             |  |                   |         |               |   |         |  
|Total stockholders equity                                                                                                                                                                   |  |                   | 94,099  |               |   | 100,027 |  
|                                                                                                                                                                                             |  |                   |         |               |   |         |  
|Total liabilities and stockholders equity                                                                                                                                                   |  | $                 | 118,015 |               | $ | 124,099 |  
|                                                                                                                                                                                             |  |                   |         |               |   |         |  

See
accompanying notes to condensed consolidated financial statements.

4

---



CONSOLIDATED STATEMENTS OF STOCKHOLDERS
EQUITY(UNAUDITED) 
(Thousands)

|                                                          |  |              |        |                              |   |                |        |                                            |                   |                                                 |  |               |  |                             |         |   |   |                                                           |   |   |        |   |   |         |   |   |        |   |   |         |   |   |        |  
|--------------------------------------------------------- |  | ------------ | ------ | ---------------------------- | - | -------------- | ------ | ------------------------------------------ | ----------------- | ----------------------------------------------- |  | ------------- |  | --------------------------- | ------- | - | - | --------------------------------------------------------- | - | - | ------ | - | - | ------- | - | - | ------ | - | - | ------- | - | - | ------ | -
|                                                          |  | Common Stock |        | Additional
 Paid-In
 Capital |   | Treasury Stock |        | Retained
 Earnings /
 Accumulated
 Deficit |                   | Accumulated Other
 Comprehensive
 Income (Loss) |  |               |  | Non-
 Controlling
 Interest |         |   |   | Comprehensive
 Income (Loss)
 Attributable
 to Zygo Corp. |  
|                                                          |  |              |        |                              |   |                |        |                                            | Total
 Zygo Corp. |                                                 |  | Total
 Equity |  |                            
|                                                          |  | Shares       |        | Amount                       |   |                | Shares |                                            | Amount            |                                                 |  |               |  |                             |         |  
|                                                          |  |              |        |                              |   |                |        |                                            |                   |                                                 |  |               |  |                             |         |   |   |                                                           |   |   |        |   |  
|Balance at June 30, 2008                                  |  |              | 16,732 |                              | $ | 1,882          |        | $                                          | 152,663           |                                                 |  | 2,092         |  | $                           | (25,390 | ) | $ | 32,514                                                    |   | $ | 855    |   | $ | 162,524 |   | $ | 2,266  |   | $ | 164,790 |   |   |        |  
|Comprehensive income (loss):                              |  |              |        |                              |   |                |        |                                            |                   |                                                 |  |               |  |                             |         |   |   |                                                           |   |   |        |   |   |         |   |   |        |   |   |         |   |   |        |  
|Net (loss) earnings                                       |  |              |       |                              |   |               |        |                                            |                  |                                                 |  |              |  |                             |        |   |   | (3,538                                                    | ) |   |       |   |   | (3,538  | ) |   | 648    |   |   | (2,890  | ) | $ | (3,538 | )
|Unrealized gain on marketable securities                  |  |              |       |                              |   |               |        |                                            |                  |                                                 |  |              |  |                             |        |   |   |                                                          |   |   | 39     |   |   | 39      |   |   |       |   |   | 39      |   |   | 39     |  
|Foreign currency translation effect                       |  |              |       |                              |   |               |        |                                            |                  |                                                 |  |              |  |                             |        |   |   |                                                          |   |   | (1,193 | ) |   | (1,193  | ) |   | (326   | ) |   | (1,519  | ) |   | (1,193 | )
|                                                          |  |              |        |                              |   |                |        |                                            |                   |                                                 |  |               |  |                             |         |   |   |                                                           |   |   |        |   |   |         |   |   |        |   |   |         |   |   |        |  
|                                                          |  |              |        |                              |   |                |        |                                            |                   |                                                 |  |               |  |                             |         |   |   |                                                           |   |   |        |   |   |         |   |   |        |   |   |         |   | $ | (4,692 | )
|                                                          |  |              |        |                              |   |                |        |                                            |                   |                                                 |  |               |  |                             |         |   |   |                                                           |   |   |        |   |   |         |   |   |        |   |   |         |   |   |        |  
|Non-cash compensation charges related to stock options    |  |              |       |                              |   |               |        |                                            | 1,652             |                                                 |  |              |  |                             |        |   |   |                                                          |   |   |       |   |   | 1,652   |   |   |       |   |   | 1,652   |   |   |        |  
|Employee stock purchase                                   |  |              | 13     |                              |   | 2              |        |                                            | 121               |                                                 |  |              |  |                             |        |   |   |                                                          |   |   |       |   |   | 123     |   |   |       |   |   | 123     |   |   |        |  
|Restricted stock vesting and related tax effect           |  |              | 84     |                              |   | 9              |        |                                            | (10               | )                                               |  | 14            |  |                             | (134    | ) |   |                                                          |   |   |       |   |   | (135    | ) |   |       |   |   | (135    | ) |   |        |  
|Exercise of employee stock options and related tax effect |  |              | 26     |                              |   | 2              |        |                                            | 183               |                                                 |  |              |  |                             |        |   |   |                                                          |   |   |       |   |   | 185     |   |   |       |   |   | 185     |   |   |        |  
|Dividend Paid                                             |  |              |       |                              |   |               |        |                                            |                  |                                                 |  |              |  |                             |        |   |   |                                                          |   |   |       |   |   |        |   |   | (1,302 | ) |   | (1,302  | ) |   |        |  
|                                                          |  |              |        |                              |   |                |        |                                            |                   |                                                 |  |               |  |                             |         |   |   |                                                           |   |   |        |   |   |         |   |   |        |   |   |         |   |   |        |  
|Balance at December 31, 2008                              |  |              | 16,855 |                              | $ | 1,895          |        | $                                          | 154,609           |                                                 |  | 2,106         |  | $                           | (25,524 | ) | $ | 28,976                                                    |   | $ | (299   | ) | $ | 159,657 |   | $ | 1,286  |   | $ | 160,943 |   |   |        |  
|                                                          |  |              |        |                              |   |                |        |                                            |                   |                                                 |  |               |  |                             |         |   |   |                                                           |   |   |        |   |   |         |   |   |        |   |   |         |   |   |        |  
|                                                          |  |              |        |                              |   |                |        |                                            |                   |                                                 |  |               |  |                             |         |   |   |                                                           |   |   |        |   |   |         |   |   |        |   |   |         |   |   |        |  
|Balance at June 30, 2009                                  |  |              | 16,915 |                              | $ | 1,904          |        | $                                          | 156,176           |                                                 |  | 2,129         |  | $                           | (25,641 | ) | $ | (33,550                                                   | ) | $ | (306   | ) | $ | 98,583  |   | $ | 1,444  |   | $ | 100,027 |   |   |        |  
|Comprehensive income (loss):                              |  |              |        |                              |   |                |        |                                            |                   |                                                 |  |               |  |                             |         |   |   |                                                           |   |   |        |   |   |         |   |   |        |   |   |         |   |   |        |  
|Net (loss) earnings                                       |  |              |       |                              |   |               |        |                                            |                  |                                                 |  |              |  |                             |        |   |   | (7,692                                                    | ) |   |       |   |   | (7,692  | ) |   | 445    |   |   | (7,247  | ) | $ | (7,692 | )
|Foreign currency translation effect                       |  |              |       |                              |   |               |        |                                            |                  |                                                 |  |              |  |                             |        |   |   |                                                          |   |   | 612    |   |   | 612     |   |   | (239   | ) |   | 373     |   |   | 612    |  
|                                                          |  |              |        |                              |   |                |        |                                            |                   |                                                 |  |               |  |                             |         |   |   |                                                           |   |   |        |   |   |         |   |   |        |   |   |         |   |   |        |  
|                                                          |  |              |        |                              |   |                |        |                                            |                   |                                                 |  |               |  |                             |         |   |   |                                                           |   |   |        |   |   |         |   |   |        |   |   |         |   | $ | (7,080 | )
|                                                          |  |              |        |                              |   |                |        |                                            |                   |                                                 |  |               |  |                             |         |   |   |                                                           |   |   |        |   |   |         |   |   |        |   |   |         |   |   |        |  
|Non-cash compensation charges related to stock options    |  |              |       |                              |   |               |        |                                            | 1,170             |                                                 |  |              |  |                             |        |   |   |                                                          |   |   |       |   |   | 1,170   |   |   |       |   |   | 1,170   |   |   |        |  
|Restricted stock vesting and related tax effect           |  |              | 93     |                              |   | 15             |        |                                            | (15               | )                                               |  | 40            |  |                             | (238    | ) |   |                                                          |   |   |       |   |   | (238    | ) |   |       |   |   | (238    | ) |   |        |  
|Exercise of employee stock options and related tax effect |  |              | 1      |                              |   | (1             | )      |                                            | 10                |                                                 |  |              |  |                             | 5       |   |   |                                                          |   |   |       |   |   | 14      |   |   |       |   |   | 14      |   |   |        |  
|                                                          |  |              |        |                              |   |                |        |                                            |                   |                                                 |  |               |  |                             |         |   |   |                                                           |   |   |        |   |   |         |   |   |        |   |   |         |   |   |        |  
|Balance at December 31, 2009                              |  |              | 17,009 |                              | $ | 1,918          |        | $                                          | 157,341           |                                                 |  | 2,169         |  | $                           | (25,874 | ) | $ | (41,242                                                   | ) | $ | 306    |   | $ | 92,449  |   | $ | 1,650  |   | $ | 94,099  |   |   |        |  
|                                                          |  |              |        |                              |   |                |        |                                            |                   |                                                 |  |               |  |                             |         |   |   |                                                           |   |   |        |   |   |         |   |   |        |   |   |         |   |   |        |  

See accompanying notes to condensed consolidated financial statements.

5

---



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

|                                                                                                        |  |                               |        |      |   |        |  
|------------------------------------------------------------------------------------------------------- |  | ----------------------------- | ------ | ---- | - | ------ | -
|                                                                                                        |  | Six Months Ended December 31, |       
|                                                                                                        |  |                               |        |      |   |        |  
|                                                                                                        |  | 2009                          |        | 2008 |  
|                                                                                                        |  |                               |        |      |   |        |  
|Cash provided by (used for) operating
 activities:                                                      |  |                               |        |      |   |        |  
|Net loss including non-controlling interest                                                             |  | $                             | (7,247 | )    | $ | (2,890 | )
|Adjustments to reconcile net loss to cash
 provided by operating activities from continuing operations: |  |                               |        |      |   |        |  
|Depreciation and amortization                                                                           |  |                               | 3,121  |      |   | 3,989  |  
|Loss on disposal of assets                                                                              |  |                               | 22     |      |   | 69     |  
|Deferred income taxes                                                                                   |  |                               | (61    | )    |   | (2,391 | )
|Impairment of marketable securities                                                                     |  |                               |       |      |   | 238    |  
|Provision for doubtful accounts                                                                         |  |                               | 227    |      |   | 1,014  |  
|Compensation cost related to share-based
 payment arrangements                                          |  |                               | 1,170  |      |   | 1,632  |  
|Excess tax benefits from share-based
 payment arrangements                                              |  |                               |       |      |   | (9     | )
|Other                                                                                                   |  |                               | (146   | )    |   |       |  
|Changes in operating accounts:                                                                          |  |                               |        |      |   |        |  
|Receivables                                                                                             |  |                               | (180   | )    |   | 4,225  |  
|Inventories                                                                                             |  |                               | 6,364  |      |   | (3,498 | )
|Prepaid expenses                                                                                        |  |                               | (504   | )    |   | (495   | )
|Accounts payable, accrued expenses, and
 taxes payable                                                  |  |                               | 112    |      |   | 1,902  |  
|                                                                                                        |  |                               |        |      |   |        |  
|Net cash provided by operating activities
 from continuing operations                                   |  |                               | 2,878  |      |   | 3,786  |  
|                                                                                                        |  |                               |        |      |   |        |  
|Net cash used for operating activities from
 discontinued operations                                    |  |                               | (89    | )    |   | (988   | )
|                                                                                                        |  |                               |        |      |   |        |  
|Cash provided by investing activities:                                                                  |  |                               |        |      |   |        |  
|Additions to property, plant, and equipment                                                             |  |                               | (625   | )    |   | (3,021 | )
|Purchase of marketable securities                                                                       |  |                               | (999   | )    |   | (8,174 | )
|Additions to intangibles and other assets                                                               |  |                               | (312   | )    |   | (314   | )
|Proceeds from the sale and maturity of
 marketable securities                                           |  |                               | 4,000  |      |   | 18,892 |  
|Proceeds from the sale of other assets                                                                  |  |                               | 291    |      |   |       |  
|                                                                                                        |  |                               |        |      |   |        |  
|Net cash provided by investing activities                                                               |  |                               | 2,355  |      |   | 7,383  |  
|                                                                                                        |  |                               |        |      |   |        |  
|Cash used for financing activities:                                                                     |  |                               |        |      |   |        |  
|Employee stock purchase                                                                                 |  |                               |       |      |   | 122    |  
|Dividend payment to minority interest                                                                   |  |                               |       |      |   | (1,301 | )
|Excess tax benefits from share-based
 payment arrangements                                              |  |                               |       |      |   | 9      |  
|Restricted stock vesting and related tax
 benefits                                                      |  |                               | (238   | )    |   | (134   | )
|Exercise of employee stock options                                                                      |  |                               | 13     |      |   | 185    |  
|                                                                                                        |  |                               |        |      |   |        |  
|Net cash used for financing activities                                                                  |  |                               | (225   | )    |   | (1,119 | )
|                                                                                                        |  |                               |        |      |   |        |  
|Effect of exchange rate changes on cash and
 cash equivalents                                           |  |                               | 103    |      |   | (796   | )
|                                                                                                        |  |                               |        |      |   |        |  
|Net increase in cash and cash equivalents                                                               |  |                               | 5,022  |      |   | 8,266  |  
|Cash and cash equivalents, beginning of
 year                                                           |  |                               | 32,723 |      |   | 26,421 |  
|                                                                                                        |  |                               |        |      |   |        |  
|Cash and cash equivalents, end of period                                                                |  | $                             | 37,745 |      | $ | 34,687 |  
|                                                                                                        |  |                               |        |      |   |        |  

Supplemental Cash Flow Information

Net cash paid
for income tax amounted to $418 and $1,172 for the six months ended December
31, 2009 and 2008, respectively.

See accompanying notes to condensed consolidated
financial statements.

6

---



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

Note 1: Accounting Policies

Basis of Presentation and Principles of Consolidation

Zygo
Corporation is a worldwide supplier of optical metrology instruments, precision
optics, and electro-optical design and manufacturing services, serving
customers in the semiconductor capital equipment and industrial markets. The
accompanying condensed consolidated financial statements include the accounts
of Zygo Corporation and its subsidiaries (ZYGO, we, us, our or the
Company). The Company follows accounting principles generally accepted in the
United States of America (US GAAP). ZYGOs reporting currency is the U.S.
dollar. The functional currency of the majority of our foreign subsidiaries is
their local currency and, as such, amounts included in the consolidated
statements of operations are translated at the weighted-average exchange rates
for the period. Assets and liabilities are translated at period-end exchange
rates and resulting foreign exchange translation adjustments are recorded in
the consolidated balance sheets as a component of accumulated other
comprehensive income (loss). All transactions and accounts with the
subsidiaries have been eliminated from the condensed consolidated financial
statements. The results of operations for the three and six months ended
December 31, 2009 are not necessarily indicative of the results to be expected
for the full fiscal year.

The Condensed
Consolidated Balance Sheet at December 31, 2009, the Condensed Consolidated
Statements of Operations for the three and six months ended December 31, 2009
and 2008, and the Condensed Consolidated Statements of Cash Flows for the six
months ended December 31, 2009 and 2008 are unaudited but, in managements
opinion, include all adjustments, consisting only of normal recurring accruals,
necessary for a fair presentation of the results of the interim periods. The
accompanying condensed consolidated financial statements should be read in
conjunction with the consolidated financial statements and notes included in
our Annual Report on Form 10-K, as amended, for the year ended June 30, 2009,
including items incorporated by reference therein.

Discontinued Operations

The Company
classifies operations as discontinued when the operations have either ceased,
or are expected to be disposed of in a sale transaction in the near term, and
the operations and cash flows of all discontinued operations have been
eliminated or will be eliminated upon the ceasing of operations or the
consummation of an expected sale transaction, and the Company will not have any
significant continuing involvement in the discontinued operations.
Authoritative guidance related to the impairment or disposal of long-lived
assets requires the calculation of estimated fair value less cost to sell of
long-lived assets for assets held for sale. The calculation of estimated fair
value less cost to sell includes significant estimates and assumptions,
including, but not limited to: operating projections; excess working capital
levels; property values; and the anticipated costs involved in the selling process.

As more fully
described in Note 2, Discontinued Operations, we have discontinued the
Singapore IC packaging metrology operations of our Vision Systems product line,
which was included in our Metrology Solutions segment.

Reclassification

Certain
amounts have been reclassified to conform with current-year presentations
related to discontinued operations and non-controlling interests.

Subsequent Events

We evaluated
events occurring between the end of our fiscal quarter, December 31, 2009, and
February 9, 2010 when the condensed consolidated financial statements were
issued.

Adoption of New Accounting Pronouncements

On July 1,
2009, we adopted authoritative guidance issued by the Financial Accounting
Standards Board (FASB) on changes to the accounting and reporting of
non-controlling interests. This guidance requires
that ownership interests in subsidiaries held by parties other than the parent
be clearly identified, labeled, and presented in the consolidated balance
sheets within equity, but separate from the parents equity. Furthermore, the
amount of consolidated net income (loss) attributable to the parent and to the
non-controlling interest must be clearly identified and presented on the face
of the consolidated statement of operations. The new guidance is reflected in
the condensed consolidated financial statements for all periods presented.

On July 1,
2009, we adopted authoritative guidance issued by the FASB on business
combinations. The guidance
provides specific guidance on how the acquirer recognizes and measures in its
financial statements the identifiable assets acquired, the liabilities assumed,
any non-controlling interest in the acquirer, and goodwill acquired or any
bargain purchase gains. The adoption of the new guidance did not have a
material effect on our consolidated financial statements.

7

---



Recent Accounting Guidance Not Yet Adopted

In October
2009, the FASB issued authoritative guidance on revenue recognition that will
become effective for us beginning on July 1, 2010, with earlier adoption
permitted. Under the new guidance on arrangements that include software
elements, tangible products that have software components that are essential to
the functionality of the tangible product will no longer be within the scope of
the software revenue recognition guidance, and software-enabled products will
now be subject to other relevant revenue recognition guidance. Additionally,
the FASB issued authoritative guidance on revenue arrangements with multiple
deliverables that are outside the scope of the software revenue recognition
guidance. Under the new guidance, when vendor specific objective evidence or
third party evidence for deliverables in an arrangement cannot be determined, a
best estimate of the selling price is required to separate deliverables and
allocate arrangement consideration using the relative selling price method. The
new guidance includes new disclosure requirements on how the application of the
relative selling price method affects the timing and amount of revenue
recognition. We believe adoption of this new guidance will not have a material
impact on our financial statements.In June 2009, the FASB issued authoritative
guidance on the consolidation of variable interest entities, which is effective
for us beginning on July 1, 2010. The new guidance requires revised evaluations
of whether entities represent variable interest entities, ongoing assessments
of power over such entities, and additional disclosures for variable interests.
We believe adoption of this new guidance will not have a material impact on our
financial statements.

Note 2: Discontinued Operations

During the
quarter ended September 30, 2009, we determined to sell or otherwise close down
the Singapore IC packaging metrology operations of our Vision Systems product
line, included in our Metrology Solutions segment. As of December 31, 2009,
operations had ceased at this location. In accordance with authoritative
guidance, the results of operations for the aforementioned operations are
presented in the Companys Condensed Consolidated Financial Statements as
discontinued operations. In addition, adjustments are made to the carrying
value of assets held for sale if the carrying value exceeds their estimated
fair value less cost to sell.

The following
table summarizes the operating results of our discontinued operations for the
three and six months ended December 31, 2009 and 2008:

|                                               |  |                                  |      |                                |   |      |   |      |        |   |   |        |  
|---------------------------------------------- |  | -------------------------------- | ---- | ------------------------------ | - | ---- | - | ---- | ------ | - | - | ------ | -
|                                               |  | Three Months Ended
 December 31, |      | Six Months Ended
 December 31, |  
|                                               |  |                                  |      |                                |  
|                                               |  | 2009                             |      | 2008                           |   | 2009 |   | 2008 |       
|                                               |  |                                  |      |                                |   |      |   |      |       
|Net sales                                      |  | $                                | 344  |                                | $ | 50   |   | $    | 665    |   | $ | 949    |  
|Non-cash charge                                |  |                                  |     |                                |   |     |   |      | (678   | ) |   |       |  
|Operating expenses                             |  |                                  | (983 | )                              |   | (309 | ) |      | (2,461 | ) |   | (1,607 | )
|                                               |  |                                  |      |                                |   |      |   |      |       
|Loss before income taxes                       |  |                                  | (639 | )                              |   | (259 | ) |      | (2,474 | ) |   | (658   | )
|Income tax benefit                             |  |                                  |     |                                |   | 45   |   |      |       |   |   | 115    |  
|                                               |  |                                  |      |                                |   |      |   |      |       
|Loss from
 discontinued operations, net of tax |  | $                                | (639 | )                              | $ | (214 | ) | $    | (2,474 | ) | $ | (543   | )
|                                               |  |                                  |      |                                |   |      |   |      |       

The following
table sets forth the assets and liabilities of our discontinued operations
included in the Condensed Consolidated Balance Sheets of the Company as of
December 31, 2009 and June 30, 2009:

|                                                   |  |                    |     |                |   |     | 
|-------------------------------------------------- |  | ------------------ | --- | -------------- | - | --- | 
|                                                   |  | December 31,
 2009 |     | June 30,
 2009 |  
|                                                   |  |                    |     |                |  
|Receivables                                        |  | $                  | 53  |                | $ | 269 | 
|Other assets                                       |  |                    | 25  |                |   | 25  | 
|                                                   |  |                    |     |                |   |     | 
|Current
 assets of discontinued operations         |  | $                  | 78  |                | $ | 294 | 
|                                                   |  |                    |     |                |   |     | 
|                                                  
|Property, plant, and
 equipment                    |  | $                  |    |                | $ | 144 | 
|                                                   |  |                    |     |                |   |     | 
|Non-current
 assets of discontinued operations     |  | $                  |    |                | $ | 144 | 
|                                                   |  |                    |     |                |   |     | 
|                                                   |  |                    |     |                |   |     | 
|Accounts payable                                   |  | $                  |    |                | $ | 102 | 
|Accrued expenses and other
 current liabilities    |  |                    | 474 |                |   | 229 | 
|                                                   |  |                    |     |                |   |     | 
|Current
 liabilities of discontinued operations    |  | $                  | 474 |                | $ | 331 | 
|                                                   |  |                    |     |                |   |     | 
|                                                  
|Other long-term
 liabilities                       |  | $                  | 365 |                | $ |    | 
|                                                   |  |                    |     |                |   |     | 
|Non-current
 liabilites of discontinued operations |  | $                  | 365 |                | $ |    | 
|                                                   |  |                    |     |                |   |     | 

8

---



Note 3: Restructuring and related costs

In connection
with ongoing cost reduction efforts during fiscal 2009, we initiated
restructuring actions related to workforce reductions and the consolidation of
manufacturing operations in Tucson, Arizona. During the six months ended
December 31, 2009, we recorded restructuring and related charges, consisting
primarily of additional severance charges, totaling $602, of which $383 was
included in selling, general, and administration, and $219 was included in was
included in research, development, and engineering.

The following
table summarizes the accrual balances and utilization by cost type for the
fiscal 2010 and fiscal 2009 restructuring actions:

|                              |  |           |      |                                                   |   |       |   |   |      |  
|----------------------------- |  | --------- | ---- | ------------------------------------------------- | - | ----- | - | - | ---- | -
|                              |  | Severance |      | December 31, 2009
 Facility
 Consolidation
 Costs |   | Total |  
|                              |  |           |      |                                                   |   |       |  
|Balance at
 June 30, 2009     |  | $         | 262  |                                                   | $ | 452   |   | $ | 714  |  
|Restructuring
 charges        |  |           | 602  |                                                   |   |      |   |   | 602  |  
|Payments                      |  |           | (310 | )                                                 |   | (111  | ) |   | (421 | )
|                              |  |           |      |                                                   |   |       |   |   |      |  
|Balance at
 December 31, 2009 |  | $         | 554  |                                                   | $ | 341   |   | $ | 895  |  
|                              |  |           |      |                                                   |   |       |   |   |      |  

|                              |  |           |      |                                                   |   |       |  |   |      |  
|----------------------------- |  | --------- | ---- | ------------------------------------------------- | - | ----- |  | - | ---- | -
|                              |  | Severance |      | December 31, 2008
 Facility
 Consolidation
 Costs |   | Total | 
|                              |  |           |      |                                                   |   |       | 
|Balance at June 30, 2008      |  | $         | 226  |                                                   | $ |      |  | $ | 226  |  
|Restructuring charges         |  |           |     |                                                   |   |      |  |   |     |  
|Payments                      |  |           | (226 | )                                                 |   |      |  |   | (226 | )
|                              |  |           |      |                                                   |   |       |  |   |      |  
|Balance at December 31,
 2008 |  | $         |     |                                                   | $ |      |  | $ |     |  
|                              |  |           |      |                                                   |   |       |  |   |      |  

Note 4: Earnings Per Share

Basic and
diluted earnings per share are calculated in accordance with U.S. GAAP. For the
three and six months ended December 31, 2009, an aggregate of 1,810,846 and
1,978,312, respectively, (for the three and six months ended December 31, 2008,
an aggregate of 2,325,660 and 1,988,810, respectively) of the Companys
outstanding stock options and restricted stock awards (Stock Grants) were
excluded from the calculation of diluted earnings per share because they were
antidilutive.

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

|                                                        |  |                                 |            |                               |  |            |  |      |            |  |  |            | 
|------------------------------------------------------- |  | ------------------------------- | ---------- | ----------------------------- |  | ---------- |  | ---- | ---------- |  |  | ---------- | 
|                                                        |  | Three Months Ended December 31, |            | Six Months Ended December 31, | 
|                                                        |  |                                 |            |                               | 
|                                                        |  | 2009                            |            | 2008                          |  | 2009       |  | 2008 |           
|                                                        |  |                                 |            |                               |  |            |  |      |           
|Basic
 weighted average shares outstanding              |  |                                 | 16,993,467 |                               |  | 16,834,363 |  |      | 16,967,988 |  |  | 16,804,757 | 
|Dilutive
 effect of stock options and restricted shares |  |                                 |           |                               |  |           |  |      |           |  |  | 0          | 
|                                                        |  |                                 |            |                               |  |            |  |      |            |  |  |            | 
|Diluted
 weighted average shares outstanding            |  |                                 | 16,993,467 |                               |  | 16,834,363 |  |      | 16,967,988 |  |  | 16,804,757 | 
|                                                        |  |                                 |            |                               |  |            |  |      |            |  |  |            | 

Basic and
diluted weighted average shares are the same for all periods presented due to
the net loss in each period.

9

---



Note 5. Fair Value Measurements

Authoritative
guidance related to fair value measurements and disclosures establishes a
valuation hierarchy for disclosure of the inputs to valuation used to measure
fair value. This hierarchy prioritizes the inputs into three broad levels.
Level 1 inputs are quoted prices (unadjusted) in active markets for identical
assets or liabilities. Level 2 inputs are quoted prices for similar assets and
liabilities in active markets or inputs that are observable for the asset or
liability, either directly or indirectly through market corroboration, for
substantially the full term of the financial instrument. Level 3 inputs are
unobservable inputs based on the managements assumptions used to measure
assets and liabilities at fair value. A financial asset or liabilitys
classification within the hierarchy is determined based on the lowest level
input that is significant to the fair value measurement.

The following
table provides the assets and liabilities carried at fair value measured on a
recurring basis as of December 31, 2009 and June 30, 2009:

|                                                |  |                                              |     |                                              |                                              |                                                   |  |                                        |    |   |   |   | 
|----------------------------------------------- |  | -------------------------------------------- | --- | -------------------------------------------- | -------------------------------------------- | ------------------------------------------------- |  | -------------------------------------- | -- | - | - | - | 
|Assets and
 Liabilities Measured at Fair Value: |  |                                              |     |                                              |                                              |                                                   |  |                                        |    |   |   |   | 
|(Dollars in thousands)                          |  |                                              |     |                                              | Fair value measurements at December 31, 2009 |                                                  
|                                                |  |                                              |     |                                              |                                              |                                                  
|                                                |  | Total carrying
 value at
 December 31,
 2009 |     | Quoted prices
 in active
 markets
 (Level 1) |                                              | Significant
 other
 observable
 inputs
 (Level 2) |  | Significantunobservableinputs(Level 3) |   
|                                                |  |                                              |     |                                              |                                              |                                                   |  |                                        |   
|Trading security                                |  | $                                            | 627 |                                              | $                                            | 627                                               |  | $                                      |   |   | $ |  | 
|Foreign currency hedge                          |  |                                              | (1  | )                                            |                                              |                                                  |  |                                        | (1 | ) |   |  | 
|                                                |  |                                              |     |                                              |                                              |                                                   |  |                                        |    |   |   |   | 
|Total                                           |  | $                                            | 626 |                                              | $                                            | 627                                               |  | $                                      | (1 | ) | $ |  | 
|                                                |  |                                              |     |                                              |                                              |                                                   |  |                                        |    |   |   |   | 

|                                                |  |                                           |     |                                              |                                          |                                                   |  |                                          |     |   |   |   | 
|----------------------------------------------- |  | ----------------------------------------- | --- | -------------------------------------------- | ---------------------------------------- | ------------------------------------------------- |  | ---------------------------------------- | --- | - | - | - | 
|Assets and
 Liabilities Measured at Fair Value: |  |                                           |     |                                              |                                          |                                                   |  |                                          |     |   |   |   | 
|(Dollars in thousands)                          |  |                                           |     |                                              | Fair value measurements at June 30, 2009 |                                                  
|                                                |  |                                           |     |                                              |                                          |                                                  
|                                                |  | Total carrying 
 value at 
 June 30, 2009 |     | Quoted prices
 in active
 markets
 (Level 1) |                                          | Significant
 other
 observable
 inputs
 (Level 2) |  | Significant
 unobservableinputs(Level 3) |    
|                                                |  |                                           |     |                                              |                                          |                                                   |  |                                          |    
|Trading security                                |  | $                                         | 499 |                                              | $                                        | 499                                               |  | $                                        |    |   | $ |  | 
|Foreign currency hedge                          |  |                                           | (14 | )                                            |                                          |                                                  |  |                                          | (14 | ) |   |  | 
|                                                |  |                                           |     |                                              |                                          |                                                   |  |                                          |     |   |   |   | 
|Total                                           |  | $                                         | 485 |                                              | $                                        | 499                                               |  | $                                        | (14 | ) | $ |  | 
|                                                |  |                                           |     |                                              |                                          |                                                   |  |                                          |     |   |   |   | 

Trading
security consists of a mutual fund invested in international corporations. When
available, the Company uses quoted market prices to determine the fair value
    of its marketable securities included in Level 1. When quoted market prices
    are unobservable, the Company uses quotes from independent pricing sources.
    The carrying value of other financial instruments, including cash, accounts
    receivable, accounts payable, and accrued liabilities, approximates fair
    value due to their short maturities.

10

---



Note 6: Share-Based Payments

We recorded
share-based compensation expense for the three months ended December 31, 2009
and 2008 of $496 and $630, respectively, with a related tax benefit of $179 and
$227, respectively. We recorded share-based compensation expense for the six
months ended December 31, 2009 and 2008 of $1,170 and $1,652, respectively,
with a related tax benefit of $421 and $595, respectively. For the three months
ended December 31, 2009 and 2008, $46 and $10, respectively, were recorded in
discontinued operations. For the six months ended December 31, 2009 and 2008,
$54 and $20, respectively, were recorded in discontinued operations.

Stock Options

We utilized
the Black-Scholes valuation method to determine the weighted average fair value
of the stock option grants for both fiscal 2010 and 2009 stock option
valuations. The key assumptions for this valuation method include the expected
term of the option, stock price volatility, risk-free interest rate, dividend
yield, exercise price, and forfeiture rate. Many of these assumptions are
judgmental and highly sensitive in the determination of compensation expense.
The weighted-average fair value of stock option grants for the six months ended
December 31, 2009 and 2008 were $3.67 and $4.43, respectively. During the six
months ended December 31, 2009 and 2008, we issued options to purchase an
aggregate of 140,000 and 137,000 shares of common stock, respectively. During
the three months ended December 31, 2009 and 2008, there were no stock grants
issued.

The table
below indicates the key assumptions used in the option valuation calculations
for options granted in the periods presented and a discussion of our methodology
for developing each of the assumptions used in the valuation model:

|                        |  |                               |           |      |  |           |  
|----------------------- |  | ----------------------------- | --------- | ---- |  | --------- | -
|                        |  | Six Months Ended December 31, |          
|                        |  |                               |          
|                        |  | 2009                          |           | 2008 | 
|                        |  |                               |           |      | 
|Term                    |  |                               | 5.1 Years |      |  | 4.6 Years |  
|Volatility              |  |                               | 59.8      | %    |  | 45.5      | %
|Dividend yield          |  |                               | 0.0       | %    |  | 0.0       | %
|Risk-free interest rate |  |                               | 2.5       | %    |  | 2.9       | %
|Forfeiture rate         |  |                               | 10.8      | %    |  | 9.5       | %

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

Volatility  This is a measure of the amount
by which a price has fluctuated or is expected to fluctuate. Volatilities are
based on implied volatilities from traded options of ZYGOs shares and
historical volatility of ZYGOs shares. An increase in the expected volatility
will increase compensation expense.

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

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

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

Restricted Stock

Our
share-based compensation expense also includes the effects of the issuance of
restricted stock and restricted stock units. The compensation expense related
to restricted stock awards is determined based on the market price of our stock
at the date of grant applied to the total number of shares that are anticipated
to fully vest, which is then amortized over the expected term. During the three
months ended December 31, 2009, an aggregate of 1,000 of restricted stock units
were issued at a weighted average grant price of $7.18. During the three months
ended December 31, 2008, there were no grants of restricted stock. During the
six months ended December 31, 2009 and 2008, an aggregate of 269,000 and
156,700 of restricted stock units were issued at a weighted average grant price
of $5.39 and $10.68, respectively. Generally, the restrictions on the
restricted stock and restricted stock units granted to employees lapse at a
rate of 50% after three years and the remaining 50% after the fourth year.

11

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Note 7: Receivables

At December
31, 2009 and June 30, 2009, receivables were as follows:

|                                                        |  |                   |        |               |   |        |  
|------------------------------------------------------- |  | ----------------- | ------ | ------------- | - | ------ | -
|                                                        |  | December
 31,2009 |        | June 30, 2009 |  
|                                                        |  |                   |        |               |  
|Trade                                                   |  | $                 | 20,096 |               | $ | 19,601 |  
|Receivable from Nanometrics
 for sale of certain assets |  |                   | 3,349  |               |   | 3,392  |  
|Other                                                   |  |                   | 540    |               |   | 431    |  
|                                                        |  |                   |        |               |   |        |  
|                                                        |  |                   | 23,985 |               |   | 23,424 |  
|Allowance for doubtful
 accounts                        |  |                   | (2,970 | )             |   | (2,550 | )
|                                                        |  |                   |        |               |   |        |  
|                                                        |  | $                 | 21,015 |               | $ | 20,874 |  
|                                                        |  |                   |        |               |   |        |  

On June 17,
2009, we and Nanometrics Incorporated (Nanometrics) announced that
Nanometrics purchased inventory and certain other assets relating to ZYGOs
Semiconductor Solutions business for approximately $3,392 and that the two
companies entered into a supply agreement. Under an exclusive OEM supply
agreement aimed at wafer-based markets, ZYGO will provide interferometer
sensors to Nanometrics for incorporation into the Unifire line of products as
well as Nanometrics family of automated metrology systems. Under the terms of
the agreement, Nanometrics assumed all inventory, backlog and customer orders
and support responsibilities.

Note 8: Inventories

Inventories
are stated at the lower of cost (determined on a first-in, first-out basis) or
market. At December 31, 2009 and June 30, 2009, inventories were as follows:

|                                      |  |                    |        |                |   |        | 
|------------------------------------- |  | ------------------ | ------ | -------------- | - | ------ | 
|                                      |  | December 31,
 2009 |        | June 30,
 2009 |  
|                                      |  |                    |        |                |  
|Raw materials and
 manufactured parts |  | $                  | 13,428 |                | $ | 15,214 | 
|Work in process                       |  |                    | 7,912  |                |   | 11,313 | 
|Finished goods                        |  |                    | 3,043  |                |   | 3,925  | 
|                                      |  |                    |        |                |   |        | 
|                                      |  | $                  | 24,383 |                | $ | 30,452 | 
|                                      |  |                    |        |                |   |        | 

Note 9: 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 December 31, 2009 and June 30, 2009, property, plant, and equipment
were as follows:

|                                            |  |                    |         |                |   |                                |   |       | 
|------------------------------------------- |  | ------------------ | ------- | -------------- | - | ------------------------------ | - | ----- | 
|                                            |  | December 31,
 2009 |         | June 30,
 2009 |   | Estimated Useful Life
 (Years) |  
|                                            |  |                    |         |                |   |                                |  
|Land                                        |  | $                  | 615     |                | $ | 615                            |   |      | 
|Building and improvements                   |  |                    | 17,390  |                |   | 17,390                         |   | 15-40 | 
|Machinery, equipment, and
 office furniture |  |                    | 56,266  |                |   | 55,938                         |   | 3-8   | 
|Leasehold improvements                      |  |                    | 1,006   |                |   | 908                            |   | 1-5   | 
|Construction in progress                    |  |                    | 253     |                |   | 570                            |   |      | 
|                                            |  |                    |         |                |   |                                |   |       | 
|                                            |  |                    | 75,530  |                |   | 75,421                         |   |       | 
|Accumulated depreciation                    |  |                    | (50,644 | )              |   | (48,096                        | ) |       | 
|                                            |  |                    |         |                |   |                                |   |       | 
|                                            |  | $                  | 24,886  |                | $ | 27,325                         |   |       | 
|                                            |  |                    |         |                |   |                                |   |       | 

Depreciation
expense was $1,328 and $1,888 for the three months ended December 31, 2009 and
2008, respectively. Depreciation expense was $2,757 and $3,731 for the six
months ended December 31, 2009 and 2008, respectively.

12

---



Note 10: Intangible Assets

Intangible
assets include patents, trademarks, and a covenant not-to-compete. The cost of
patents and trademarks is amortized on a straight-line basis over estimated
useful lives ranging from 5-17 years. We entered into a non-compete agreement
with a former officer and director of the Company effective February 28, 2009.
The agreement calls for payments over a four year period of declining amounts
totaling $878, which includes $27 of imputed interest. As of December 31, 2009,
current liabilities include $169 and long-term liabilities include $186 related
to the payments under this agreement. We are amortizing the value of the
non-compete over four years on a declining balance method.

Intangible
assets, at cost, at December 31, 2009 and June 30, 2009 were as follows:

|                         |  |                    |        |                |   |        |  
|------------------------ |  | ------------------ | ------ | -------------- | - | ------ | -
|                         |  | December 31,
 2009 |        | June 30,
 2009 |  
|                         |  |                    |        |                |  
|Patents and trademarks   |  | $                  | 5,776  |                | $ | 5,586  |  
|Covenant not-to-compete  |  |                    | 851    |                |   | 851    |  
|                         |  |                    |        |                |   |        |  
|                         |  |                    | 6,627  |                |   | 6,437  |  
|Accumulated amortization |  |                    | (2,455 | )              |   | (2,226 | )
|                         |  |                    |        |                |   |        |  
|Total                    |  | $                  | 4,172  |                | $ | 4,211  |  
|                         |  |                    |        |                |   |        |  

Intangible
amortization expense was $145 and $190 for the three months ended December 31,
2009 and 2008, respectively. Intangible amortization expense was $350 and $375
for the six months ended December 31, 2009 and 2008, respectively. This
amortization expense related to certain intangible assets is included in Cost
of goods sold in the Condensed Consolidated Statements of Operations.

Note 11: Warranty

A limited
warranty is provided on our products for periods ranging from 3 to 24 months
and allowances for estimated warranty costs are recorded during the period of
sale. The determination of such allowances requires management to make
estimates of product return rates and expected costs to repair or replace
products under warranty. If actual return rates or repair and replacement
costs, or both, differ significantly from managements estimates, adjustments
to the expense will be required.

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

|                                                                      |  |                               |       |      |   |       |  
|--------------------------------------------------------------------- |  | ----------------------------- | ----- | ---- | - | ----- | -
|                                                                      |  | Six Months Ended December 31, |      
|                                                                      |  |                               |      
|                                                                      |  | 2009                          |       | 2008 |  
|                                                                      |  |                               |       |      |  
|Beginning balance                                                     |  | $                             | 1,614 |      | $ | 1,263 |  
|Reductions for payments made                                          |  |                               | (453  | )    |   | (601  | )
|Changes in accruals related to
 pre-warranties                        |  |                               | (195  | )    |   | 281   |  
|Changes in accruals related to warranties
 made in the current period |  |                               | 418   |      |   | 449   |  
|                                                                      |  |                               |       |      |   |       |  
|Ending balance                                                        |  | $                             | 1,384 |      | $ | 1,392 |  
|                                                                      |  |                               |       |      |   |       |  

13

---



Note 12: Segment Information

ZYGOs
Metrology Solutions division (segment) consists of direct and OEM sales
primarily for the semiconductor and industrial markets. The Optical Systems
division (segment) consists of components and opto-mechanical assemblies
primarily for the medical, defense, and aerospace industries, which are
included in the industrial market. For the three and six months ended December
31, 2009 and 2008, segment revenues and gross profit were as follows:

|                             |  |                                 |        |                               |   |        |   |      |        |   |   |        |  
|---------------------------- |  | ------------------------------- | ------ | ----------------------------- | - | ------ | - | ---- | ------ | - | - | ------ | -
|                             |  | Three Months Ended December 31, |        | Six Months Ended December 31, |  
|                             |  |                                 |        |                               |  
|                             |  | 2009                            |        | 2008                          |   | 2009   |   | 2008 |       
|                             |  |                                 |        |                               |   |        |   |      |       
|Metrology Solutions          |  |                                 |        |                               |   |        |   |      |        |   |   |        |  
|Sales                        |  | $                               | 17,157 |                               | $ | 24,366 |   | $    | 33,134 |   | $ | 51,204 |  
|Gross profit                 |  | $                               | 8,865  |                               | $ | 11,005 |   | $    | 16,342 |   | $ | 24,215 |  
|Gross profit as a % of sales |  |                                 | 52     | %                             |   | 45     | % |      | 49     | % |   | 47     | %
|Optical Systems              |  |                                 |        |                               |   |        |   |      |        |   |   |        |  
|Sales                        |  | $                               | 8,924  |                               | $ | 9,034  |   | $    | 14,272 |   | $ | 19,689 |  
|Gross profit                 |  | $                               | 2,088  |                               | $ | 1,251  |   | $    | 1,785  |   | $ | 4,528  |  
|Gross profit as a % of sales |  |                                 | 23     | %                             |   | 14     | % |      | 13     | % |   | 23     | %
|                             |  |                                 |        |                               |   |        |   |      |        |   |   |        |  
|Total                        |  |                                 |        |                               |   |        |   |      |        |   |   |        |  
|Sales                        |  | $                               | 26,081 |                               | $ | 33,400 |   | $    | 47,406 |   | $ | 70,893 |  
|Gross profit                 |  | $                               | 10,953 |                               | $ | 12,256 |   | $    | 18,127 |   | $ | 28,743 |  
|Gross profit as a % of sales |  |                                 | 42     | %                             |   | 37     | % |      | 38     | % |   | 41     | %

Separate financial information by segment for total assets, capital
expenditures, and depreciation and amortization is not evaluated by our chief operating
decision-maker. Substantially all of our operating expenses, assets, and
depreciation and amortization are U.S. based.

Revenues by geographic area were as follows:

|            |  |                                 |        |                               |   |        |  |      |        |  |   |        | 
|----------- |  | ------------------------------- | ------ | ----------------------------- | - | ------ |  | ---- | ------ |  | - | ------ | 
|            |  | Three Months Ended December 31, |        | Six Months Ended December 31, |  
|            |  |                                 |        |                               |  
|            |  | 2009                            |        | 2008                          |   | 2009   |  | 2008 |       
|            |  |                                 |        |                               |   |        |  |      |       
|Americas    |  | $                               | 12,932 |                               | $ | 16,751 |  | $    | 26,216 |  | $ | 32,806 | 
|Europe      |  |                                 | 3,780  |                               |   | 4,400  |  |      | 6,097  |  |   | 8,682  | 
|Japan       |  |                                 | 3,421  |                               |   | 8,031  |  |      | 7,249  |  |   | 17,689 | 
|Pacific Rim |  |                                 | 5,948  |                               |   | 4,218  |  |      | 7,844  |  |   | 11,716 | 
|            |  |                                 |        |                               |   |        |  |      |        |  |   |        | 
|Total       |  | $                               | 26,081 |                               | $ | 33,400 |  | $    | 47,406 |  | $ | 70,893 | 
|            |  |                                 |        |                               |   |        |  |      |        |  |   |        | 

Note 13: Transactions with Stockholder

Sales to Canon
Inc., a stockholder, and Canon Sales Co., Inc., a distributor of certain of our
products in Japan and a subsidiary of Canon Inc. (collectively referred to as
Canon), amounted to $2,031 and $4,914 (8% and 15% of revenues, respectively)
for the three months ended December 31, 2009 and 2008, respectively. For the
six months ended December 31, 2009 and 2008, sales to Canon amounted to $3,020
and $12,121, respectively (6% and 17% of revenues, respectively). Selling
prices of products sold to Canon are based, generally, on the terms customarily
given to distributors. At December 31, 2009 and June 30, 2009, there were, in
the aggregate, $804 and $592, respectively, of trade accounts receivable from
Canon.

14

---



Note 14: Derivatives and Hedging Activities

We enter into
foreign currency forward contracts to reduce the impact of adverse fluctuations
on earnings associated with foreign currency exchange rate changes. We do not
enter into any derivative transactions for speculative purposes. These
contracts are not designated as cash flow, fair value, or net investment hedges
under authoritative guidance on accounting for derivative instruments and
hedging activities and, therefore, are marked-to-market with changes in fair
value recorded in the Condensed Consolidated Statement of Operations. These
contracts are entered into for periods consistent with the expected currency
transaction exposures, generally three to six months. Any gains and losses on
the fair value of these contracts are expected to substantially offset
corresponding losses and gains on the underlying transactions.

As of December
31, 2009, we had six currency contracts outstanding involving our Japanese and
German operations with notional amounts aggregating $1,870. These foreign
currency hedges are not considered designated hedging instruments. For the
three months ended December 31, 2009 and 2008, we recognized net unrealized gains
of $160 and unrealized losses of $285, respectively, from foreign currency
forward contracts. For the six months ended December 31, 2009 and 2008, we
recognized net unrealized gains of $13 and unrealized losses of $357,
respectively, from foreign currency forward contracts. These unrealized losses
and gains are substantially offset by foreign exchange gains on intercompany
balances recorded by our subsidiary and are recorded in miscellaneous income
(expense) on our Condensed Consolidated Statements of Operations.

The following table summarizes the fair value of derivative instruments
as of December 31, 2009:

|                                                   |  |                       
|-------------------------------------------------- |  | ----------------------
|Derivatives
 not designated as hedging instruments |  | Balance Sheet Location
|                                                   |  |                       
|                                                   |  |                       
|Foreign
 exchange
 contracts             6         |  | Prepaid
 expenses $11 
|                                                   |  | Accrued
 expenses $12 

Note 15: Income Taxes

|                             |  |                                 |      |                               |  |        |   |             |       |        |  |             |   |        |     |             |  |   |   |   |       |  |  |    |  
|---------------------------- |  | ------------------------------- | ---- | ----------------------------- |  | ------ | - | ----------- | ----- | ------ |  | ----------- | - | ------ | --- | ----------- |  | - | - | - | ----- |  |  | -- | -
|                             |  | Three Months ended December 31, |      | Six Months ended December 31, | 
|                             |  |                                 |      |                               | 
|                             |  | 2009                            |      | 2008                          |  | 2009   |   | 2008        |      
|                             |  |                                 |      |                               |  |        |   |             |      
|                             |  | Amount                          |      | Tax
 Rate %                   |  | Amount |   | Tax
 Rate % |       | Amount |  | Tax
 Rate % |   | Amount |     | Tax
 Rate % | 
|                             |  |                                 |      |                               |  |        |   |             |       |        |  |             |   |        |     |             | 
|                             |  |                                 |      |                               |  |        |   |             |       |        |  |             |   |        |     |             |  |   |   |   |       |  |  |    |  
|Income tax expense (benefit) |  | $                               | (308 | )                             |  | 24     | % | $           | 1,853 |        |  | 34          | % | $      | 374 |             |  | 9 | % | $ | 1,322 |  |  | 33 | %

Income tax benefits for the three months ended December 31, 2009
included $789 related to alternative minimum taxes previously paid, for which a
change enacted in tax laws during the quarter allow for an additional carryback
period. We recorded no increase in net deferred tax benefit for the domestic
operating loss incurred in this period. We continue to maintain a valuation
allowance on all of our net deferred tax assets totaling $40,874 at December
31, 2009.

We previously adopted the authoritative guidance for accounting for
uncertainty in income taxes. Due to our net operating loss carry-forwards, we
have accrued no interest and penalties for the unrecognized tax benefits;
however, our accounting policy is to recognize interest related to unrecognized
tax benefits in interest expense. Penalties, if incurred, would be recognized
as a component of income tax expense. In the normal course of business, we
provide for uncertain tax positions and adjust our unrecognized tax benefits
accordingly. For the quarter ended December 31, 2009, we did not recognize an
additional liability or realize any benefit for uncertain tax positions. The
total liability for uncertain tax liabilities was $1,825 at both December 31,
2009 and June 30, 2009. We are not currently aware of any tax positions that
would require a material adjustment to our unrecognized tax benefits (or
liabilities).

We are subject to U.S. federal income tax as well as income tax in
multiple state and foreign jurisdictions. We remain subject to U.S. federal
income tax audit adjustments for years after June 30, 2001 due to our
significant NOL and credit carry-forwards. We are no longer subject to state
and foreign income tax audit or tax adjustments for years prior to June 30,
2005. We are currently under a federal U.S. income tax audit for domestic taxes
for the period ended June 30, 2007. The resolution of this audit may have a
future effect on the liabilities or benefits associated with our uncertain tax
positions.

15

---



Note 16: Commitments and Contingencies

From time to time we are subject to certain legal proceedings
    and claims that arise in the normal course of our business. At December 31,
    2009 we have a reserve of $1,360 for potential royalty claims. In the opinion
    of management, any excess settlement of the royalty claims above the amount
    recorded is not expected to have an adverse effect on our financial condition,
results of operation, or liquidity.

We are aware
of certain levels of contamination on our property which are below reportable
levels. In addition, we are aware of certain contamination on an adjacent
property that we formerly owned. The future effect of environmental matters,
including potential liabilities, is often difficult to estimate. Presently, we
are unable to determine or reasonably estimate the amount of costs, if any,
that we might incur or for which we may potentially be responsible. We will record an environmental
reserve when it is both probable that a liability has been incurred and the
amount of any liability can be reasonably estimated, whether a claim has been
asserted or unasserted.

Note 17: Subsequent Events

On January 19, 2010, we announced that Dr. Chris L. Koliopoulos was
appointed President and Chief Executive Officer, effective immediately. With
the commencement of his employment, Dr. Koliopoulos also became a member of the
Board of Directors of ZYGO. Dr. Koliopoulos succeeds J. Bruce Robinson, who
announced in October his planned retirement as Chief Executive Officer, and
from the Board. On January 22, 2010, we acquired 100% of the outstanding shares
of Zemetrics, Inc., a small interferometric metrology company in which Dr.
Koliopoulus was a major shareholder, for 361,212 shares of our common stock. The
acquisition of Zemetrics, which has recently introduced an advanced product in
the optical instrumentation market, further strengthens our offering in our
core markets, which is a strategic focus of ZYGO. The shares of common stock
issued in connection with the acquisition includes 110,585 shares to satisfy
payment of debt owed by Zemetrics to two individuals, one of whom was Dr.
Koliopoulos. The fair value of the total shares of stock issued was $3,901,
based on the closing stock price of $10.80 per share. Due to the recent date of
the acquisition, a valuation of the assets acquired is not available at this
time. We estimate that the tangible assets will comprise less than $1,000 of
the purchase price. The operations of the Zemetrics product line will be
included in our Metrology Solutions segment. There were no revenues for
Zemetrics in the three and six months ended December 31, 2009. In addition, in
connection with the acquisition, 110,000 options to purchase shares of our
common stock were issued to two founding shareholder employees.

16

---



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

OVERVIEW

Zygo
Corporation is a worldwide supplier of optical metrology instruments, precision
optics, and electro-optical design and manufacturing services, serving
customers in the semiconductor capital equipment and industrial markets. We
conduct the majority of our manufacturing in our 153,500 square foot facility
in Middlefield, Connecticut and our 39,780 square foot facility in Tucson,
Arizona.

On January 19,
2010, we announced that Dr. Chris L. Koliopoulos was appointed President and
Chief Executive Officer, effective immediately. With the commencement of his
employment, Dr. Koliopoulos also became a member of the Board of Directors of
ZYGO. Dr. Koliopoulos succeeds J. Bruce Robinson, who announced in October his
planned retirement as Chief Executive Officer, and from the Board of Directors.
On January 22, 2010, we completed the acquisition of Zemetrics, Inc.
(Zemetrics), a small interferometric metrology company in which Dr.
Koliopoulos was a major shareholder, for 361,212 shares of our common stock.
The acquisition of Zemetrics, which has recently introduced an advanced product
in the optical instrumentation market, further strengthens our offering in our core
markets, which is a strategic focus of ZYGO.

On January 7,
2010, we announced that our Board of Directors received from II-VI Incorporated
(II-VI) on January 5, 2010 an unsolicited proposal to acquire all of the
outstanding shares of common stock of ZYGO for $10.00 per share in cash or
II-VI common stock (subject to a limitation on the aggregate amount of II-VI
common stock). The Board of Directors has engaged an independent financial
advisor and is evaluating this proposal carefully.

Bookings for the
three months ended December 31, 2009 (our second quarter of fiscal 2010) were
$28.6 million, as compared with $22.7 million and $22.6 million for the first
quarter of fiscal 2010 and second quarter of fiscal 2009, respectively.
Bookings for our Metrology Solutions segment accounted for 58% of the bookings
received for the three months ended December 31, 2009, with the Optical Systems
segment accounting for 42% of bookings. The increase in bookings from the first
quarter of fiscal 2010 is due to increases in the Metrology Solutions segment
of $1.1 million and of $4.8 million in the Optical Systems segment. The
increase in Metrology Solutions segment bookings was primarily for our
instruments products and extended over a number of different industries. Within
the Optical Systems segment, bookings increased primarily due to an increase in
bookings of laser fusion optics of $1.7 million and contract manufacturing of
$3.8 million, partially offset by a decrease of $1.5 million in contract
manufacturing product development services. We received several large bookings
in our Optical System segment, including $3.4 million in laser fusion optics,
$3.2 million related to the Advanced Helmet Mounted Display, and a $2.9 booking
for medical device contract manufacturing. We can receive large optics bookings
that have delivery dates that span several quarters and the timing of these
bookings can cause fluctuations in our bookings from quarter to quarter. The
increase in bookings from the second quarter of fiscal 2009 is due to an
increase of $6.9 million in the Optical Systems segment and a decrease in the
Metrology Solutions segment of $0.9 million. The increase in the Optical
Systems segment is related to the bookings referred to above. Our Optical
Systems segment continues to include our optical components and electro-optics
contract manufacturing products. Our Metrology Solutions segment now includes
an OEM product category, which consists of lithography products, display sensor
heads, and semiconductor sensor heads.

On October 5,
2009, we announced a strategic business relationship with Toho Technology
Corporation (Toho), pursuant to which Toho will have the exclusive right to
certain technology in the manufacturing and distribution of products to the
large substrate Flat Panel Display (FPD) market. As part of this strategic
relationship, we will be selling sensor heads to Toho, to be incorporated into
the FPD systems it sells. The agreement with Toho also provides for a royalty
payment to the Company of 5% of the sales price of each FPD system sold by Toho
during the first five years of the agreement.

Over the last
three fiscal quarters, we have divested ourselves of our Semiconductor and FPD
product lines and shut down our IC packaging operations in Singapore in order
to concentrate on our core technologies. We continue to sell OEM sensor heads
related to semiconductor and FPD systems manufactured through our Instruments
product line. The IC packaging metrology operations in Singapore were shut down
by December 31, 2009. These changes in our organization are expected to
significantly reduce our research, development and engineering (RD&E)
spending in the remainder of our fiscal year as compared with the prior year.
Our RD&E expenses included in continuing operations for the six months
ended December 31, 2009 decreased $3.0 million as compared with the prior year
period. To a lesser extent, our selling, general and administrative expenses
are expected to decrease with these changes. The average sales price for the OEM
sensors is significantly less than the average sales price of an in-line
semiconductor or FPD system. Therefore, our total revenues related to these
markets will be less than if we remained in the in-line market. However, we
believe these product lines will be more profitable in the future with the
reduction in operating expenses, combined with the gross profit on the OEM
sensor heads.

17

---



CRITICAL ACCOUNTING POLICIES, SIGNIFICANT
JUDGMENTS, AND ESTIMATES

The discussion
and analysis of our financial condition and results of operations are based
upon our condensed consolidated financial statements, which have been prepared
in accordance with accounting principles generally accepted in the United
States of America. The preparation of these condensed consolidated financial
statements requires us to make estimates and judgments that affect the reported
amounts of assets, liabilities, revenues, and expenses, and related disclosures
at the date of our condensed consolidated financial statements. On an on-going
basis, management evaluates its estimates and judgments, including those
related to bad debts, inventories, marketable securities, warranty obligations,
income taxes, long-lived assets, and share-based payments. Management bases its
estimates and judgments on historical experience and current market conditions
and on various other factors that are believed to be reasonable under the
circumstances, the results of which form the basis for making judgments about
the carrying values of assets and liabilities that are not readily apparent
from other sources. Actual results may differ from these estimates under
different assumptions or conditions. As discussed in Item 7, Managements
Discussion and Analysis of Financial Condition and Results of Operations of the
Companys Annual Report on Form 10-K, as amended, for the fiscal year ended
June 30, 2009, management considers the Companys policies on revenue
recognition and allowance for doubtful accounts; inventory valuation; other
than temporary impairment of marketable securities; share-based compensation;
warranty costs; accounting for income taxes; valuation of long-lived assets;
and accruals for health insurance to be critical accounting policies due to the
estimates, assumptions, and application of judgment involved in each.

On July 1,
2009, we adopted authoritative guidance that changes the accounting and
reporting for minority interests. Minority interests have been recharacterized
as non-controlling interests and are reported as a component of equity separate
from the parents equity. Purchases or sales of equity interests that do not
result in a change in control will be accounted for as equity transactions. In
addition, net income attributable to the non-controlling interest will be
included in consolidated net income on the face of the condensed consolidated
statements of operations, and upon a loss of control, the interest sold, as
well as any interest retained, will be recorded at fair value with any gain or
loss recognized in earnings. We have classified non-controlling interest
(previously minority interest) as a component of equity for all periods
presented. The new guidance is reflected in the condensed consolidated
financial statements for all periods presented.

18

---



RESULTS OF OPERATIONS

Net Sales

|                              |                     |  |             |      |              |  |        |   |              |      |  |  |     |   | 
|----------------------------- | ------------------- |  | ----------- | ---- | ------------ |  | ------ | - | ------------ | ---- |  |  | --- | - | 
|                              |                     |  | Fiscal 2010 |      | Fiscal 2009  | 
|                              |                     |  |             |      |              | 
|(Dollars
 in millions)        |                     |  | Amount      |      | Net Sales
 % |  | Amount |   | Net Sales
 % |     
|                              |                     |  |             |      |              |  |        |   |              |     
|Quarter ended December 31     |                     |  |             |      |              |  |        |   |              |      |  |  |    
|                              | Metrology Solutions |  | $           | 17.2 |              |  | 66     | % | $            | 24.4 |  |  | 73  | %
|                              | Optical Systems     |  |             | 8.9  |              |  | 34     | % |              | 9.0  |  |  | 27  | %
|                              |                     |  |             |      |              |  |        |   |              |      |  |  |     |  
|                              | Total               |  | $           | 26.1 |              |  | 100    | % | $            | 33.4 |  |  | 100 | %
|                              |                     |  |             |      |              |  |        |   |              |      |  |  |     |  
|                              |                     |  |             |      |              |  |        |   |              |      |  |  |     |  
|Six months ended December
 31 |                     |  |             |      |              |  |        |   |              |      |  |  |    
|                              | Metrology Solutions |  | $           | 33.1 |              |  | 70     | % | $            | 51.2 |  |  | 72  | %
|                              | Optical Systems     |  |             | 14.3 |              |  | 30     | % |              | 19.7 |  |  | 28  | %
|                              |                     |  |             |      |              |  |        |   |              |      |  |  |     |  
|                              | Total               |  | $           | 47.4 |              |  | 100    | % | $            | 70.9 |  |  | 100 | %
|                              |                     |  |             |      |              |  |        |   |              |      |  |  |     |  

Overall,
revenues for the three months ended December 31, 2009 decreased 22% as compared
with the prior year period, reflecting decreases in the Metrology Solutions
segment revenues of 30% and in the Optical Solutions segment revenues of 1%.
The decrease in Metrology Solutions segment revenues was primarily due to
volume decreases in display solutions of $3.3 million, lithography of $3.1
million, and instruments of $1.8 million. New business in the Metrology
Solutions segment related to Original Equipment Manufacturer (OEM) heads
increased revenues by $0.2 million. The decrease in display solution revenues
is due to the arrangement with Toho in October 2009. We expect the display
volume to decrease as we complete acceptance testing on the remaining systems
we delivered under bookings placed with us. Future revenue related to display
will be derived from the sale of sensor heads that will be included in the Metrology
Solutions segment related to OEM revenues. These OEM revenues will be less in
value than the full display system revenues. Lithography and instrument
revenues decreases, in large measure, are due to a reduction in bookings that
appears to be tied directly to the general global economic downturn, most
notably in the semiconductor industry. A decrease in bookings from Canon
accounted for the majority of the decrease in lithography revenues. The
decrease in the Optical Systems segment revenues of $0.1 million was primarily
due to decreases in precision optics of $1.1 million, which was partially
offset by increased revenues in laser fusion optics of $1.0 million.

Revenues for
the six months ended December 31, 2009 decreased 33% as compared with the prior
year period, reflecting decreases in the Metrology Solutions segment revenues
of 35% and in the Optical Solutions segment revenues of 27%. The decrease in
Metrology Solutions segment revenues was primarily due to volume decreases in
lithography of $7.6 million, display solutions of $7.2 million, and instruments
of $6.0 million, partially offset by increased revenues in semiconductor
solutions of $1.4 million and vision systems of $1.0 million. New business in
the Metrology Solutions segment related to OEM heads increased revenues by $0.4
million. These volume decreases in lithography and instruments revenues, in
large measure, are due to a reduction in bookings that appears to be tied
directly to the general global economic downturn, most notably in the semiconductor
industry. A decrease in bookings from Canon accounted for the majority of the
decrease in lithography revenues. The decrease in display solution revenues is
due to the arrangement with Toho in October 2009 as referenced above. The
increase in semiconductor revenues was due to the acceptance of a large system
in the current fiscal year while there were no similar revenues in the prior
year. With the sale of the semiconductor product line in June 2009, we will no
longer have any large system revenues. Revenues related to semiconductor
products will be sensor head revenues that will be included in the Metrology
Solutions segment related to OEM revenues. The decrease in the Optical Systems
segment revenues was primarily due to decreases in contract manufacturing of
$3.9 million and in precision optics of $2.4 million, partially offset by
increased revenues in laser fusion optics of $0.9 million. The decreases in
contract manufacturing and precision were related to a reduction in bookings
from key customers during the latter part of fiscal 2009 and early in fiscal
2010. We have recently seen an increase in bookings in both of these areas.

Revenues in
U.S. dollars for the three months ended December 31, 2009 and 2008 were
approximately 73% and 76% of total revenues, respectively, with the remaining
27% and 24%, respectively, being in Euro or Yen. Revenues in U.S. dollars for
the six months ended December 31, 2009 and 2008 were approximately 70% and 76%
of total revenues, respectively, with the remaining 30% and 24%, respectively,
being in Euro or Yen. For our revenues 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, or in
the general economic conditions in our export markets, could materially impact
the revenues of our products in these markets and our Condensed Consolidated
Balance Sheets and Statements of Operations.

19

---



Gross Profit by Segment

|                              |                      |  |             |      |                 |  |        |   |                 |      |  |  |    |   | 
|----------------------------- | -------------------- |  | ----------- | ---- | --------------- |  | ------ | - | --------------- | ---- |  |  | -- | - | 
|                              |                      |  | Fiscal 2010 |      | Fiscal 2009     | 
|                              |                      |  |             |      |                 | 
|(Dollars
 in millions)        |                      |  | Amount      |      | Gross
 Profit % |  | Amount |   | Gross
 Profit % |     
|                              |                      |  |             |      |                 |  |        |   |                 |     
|Quarter
 ended December 31    |                      |  |             |      |                 |  |        |   |                 |      |  |  |   
|                              | Metrology
 Solutions |  | $           | 8.9  |                 |  | 52     | % | $               | 11.0 |  |  | 45 | %
|                              | Optical
 Systems     |  |             | 2.1  |                 |  | 23     | % |                 | 1.3  |  |  | 14 | %
|                              |                      |  |             |      |                 |  |        |   |                 |      |  |  |    |  
|                              | Total                |  | $           | 11.0 |                 |  | 42     | % | $               | 12.3 |  |  | 37 | %
|                              |                      |  |             |      |                 |  |        |   |                 |      |  |  |    |  
|                              |                      |  |             |      |                 |  |        |   |                 |      |  |  |    |  
|Six months
 ended December 31 |                      |  |             |      |                 |  |        |   |                 |      |  |  |   
|                              | Metrology
 Solutions |  | $           | 16.3 |                 |  | 49     | % | $               | 24.2 |  |  | 47 | %
|                              | Optical
 Systems     |  |             | 1.8  |                 |  | 13     | % |                 | 4.5  |  |  | 23 | %
|                              |                      |  |             |      |                 |  |        |   |                 |      |  |  |    |  
|                              | Total                |  | $           | 18.1 |                 |  | 38     | % | $               | 28.7 |  |  | 41 | %
|                              |                      |  |             |      |                 |  |        |   |                 |      |  |  |    |  

Gross profit
as a percentage of revenues for the three months ended December 31, 2009 was
42%, which represents an increase of five percentage points from the comparable
prior year period. Within the Metrology Solutions segment, the gross profit as
a percentage of revenues was 52% for the three months ended December 31, 2009
as compared with the prior year comparable period of 45%. This increase was
primarily due to improved factory costs and a decrease in low margin display
revenues. Within the Optical Systems segment, the gross profit increased as a
percentage of revenues to 24% for the three months ended December 31, 2009 as
compared with 14% in the comparable prior year period, primarily due to
improving revenues and operations in the current fiscal year. The prior period
experienced production issues related to certain optics resulting in increased
manufacturing costs and delayed shipments. During the second quarter of fiscal
2010, we continued to take actions to reduce costs in both segments in light of
the lower order levels, including pay reductions and unpaid furloughs.

Gross profit
as a percentage of revenues for the six months ended December 31, 2009 was 38%,
which represents a decrease of three percentage points from the comparable
prior year period. Within the Metrology Solutions segment, gross profit
increased as a percentage of revenues to 49% for the six months ended December
31, 2009 as compared with the prior year comparable period of 47% primarily due
to improved factory costs and a decrease in low margin display revenues. Within
the Optical Systems segment, the gross profit decreased as a percentage of
revenues to 13% for the six months ended December 31, 2009 as compared with 23%
in the comparable prior year period, primarily due to production issues
experienced in the first quarter of fiscal 2010 related to certain optics,
resulting in increased manufacturing costs and delayed shipments in that
quarter.

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

|                              |  |   |             |  |             |    |        |   |            |  |  |    |   | 
|----------------------------- |  | - | ----------- |  | ----------- | -- | ------ | - | ---------- |  |  | -- | - | 
|                              |  |   | Fiscal 2010 |  | Fiscal 2009 |   
|                              |  |   |             |  |             |   
|(Dollars in
 millions)        |  |   | Amount      |  | % of Sales  |    | Amount |   | % of Sales | 
|                              |  |   |             |  |             |    |        |   |            | 
|Quarter ended December 31     |  | $ | 8.5         |  |             | 33 | %      | $ | 12.1       |  |  | 36 | %
|Six months ended December
 31 |  | $ | 15.1        |  |             | 32 | %      | $ | 21.2       |  |  | 30 | %

SG&A
expenses decreased in the three months ended December 31, 2009 by $3.6 million
from the comparable prior year period. This decrease is primarily attributable
to $2.2 million of merger related expenses and $1.4 million related to a
royalty claim that were recorded in the second quarter of fiscal 2009, and a
reduction in personnel-related expenses of $0.6 million and the elimination of
costs related to semiconductor products of $0.6 million in conjunction with the
transaction with Nanometrics in June 2009. The second quarter of fiscal 2010
also included $0.9 million related to the retirement of our CEO and search
costs for a new CEO, partially offsetting the decreases described above. Other
cost reductions included decreases in travel of $0.2 million as part of our
expense management. The decrease was also related to SG&A expenses
decreased in the six months ended December 31, 2009 by $6.1 million from the
comparable prior year period, primarily due a reduction in personnel-related
expenses of $1.4 million and the elimination of costs related to semiconductor
products of $1.2 million in conjunction with the transaction with Nanometrics
in June 2009. Other cost reductions included decreases in travel of $0.4
million as part of our expense management and in legal costs of $2.2 million
related to merger related expenses recorded in fiscal 2009. Fiscal 2009
expenses also included the charge for $1.4 million related to the royalty
claim.

20

---



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

|                              |  |             |     |             |  |        |   |            |      |  |  |    |  
|----------------------------- |  | ----------- | --- | ----------- |  | ------ | - | ---------- | ---- |  |  | -- | -
|                              |  | Fiscal 2010 |     | Fiscal 2009 | 
|                              |  |             |     |             | 
|(Dollars
 in millions)        |  | Amount      |     | % of Sales  |  | Amount |   | % of Sales |     
|                              |  |             |     |             |  |        |   |            |     
|                              |  |             |     |             |  |        |   |            |     
|Quarter
 ended December 31    |  | $           | 3.9 |             |  | 15     | % | $          | 5.6  |  |  | 17 | %
|Six months
 ended December 31 |  | $           | 7.5 |             |  | 16     | % | $          | 10.9 |  |  | 15 | %

RD&E for the three and
six months ended December 31, 2009 decreased by $1.7 million and $3.4 million,
respectively, as compared with the prior year period. The decrease in RD&E
was primarily due to the elimination of costs related to the semiconductor
product line in June 2009.

Provision for Doubtful Accounts and Notes

|                              |  |             |      |             |  |        |   |            |     |  |  |   |  
|----------------------------- |  | ----------- | ---- | ----------- |  | ------ | - | ---------- | --- |  |  | - | -
|                              |  | Fiscal 2010 |      | Fiscal 2009 | 
|                              |  |             |      |             | 
|(Dollars
 in millions)        |  | Amount      |      | % of Sales  |  | Amount |   | % of Sales |    
|                              |  |             |      |             |  |        |   |            |    
|                              |  |             |      |             |  |        |   |            |    
|Quarter
 ended December 31    |  | $           | (0.2 | )           |  | -1     | % | $          | 0.6 |  |  | 2 | %
|Six months
 ended December 31 |  | $           | 0.1  |             |  | 0      | % | $          | 1.0 |  |  | 1 | %

Provision for doubtful
accounts and notes for the three and six months ended December 31, 2009
decreased by $0.8 million and $0.9 million as compared with the prior year
period primarily due to the Solvision note receivable being reserved in fiscal
2009.

Other Income

|                              |  |             |     |             |  |        |   |            |     |  |  |   |  
|----------------------------- |  | ----------- | --- | ----------- |  | ------ | - | ---------- | --- |  |  | - | -
|                              |  | Fiscal 2010 |     | Fiscal 2009 | 
|                              |  |             |     |             | 
|(Dollars
 in millions)        |  | Amount      |     | % of Sales  |  | Amount |   | % of Sales |    
|                              |  |             |     |             |  |        |   |            |    
|                              |  |             |     |             |  |        |   |            |    
|Quarter
 ended December 31    |  | $           |    |             |  | 0      | % | $          | 0.8 |  |  | 2 | %
|Six months
 ended December 31 |  | $           | 0.2 |             |  | 1      | % | $          | 0.7 |  |  | 1 | %

Other income (expense) for
the three and six months ended December 31, 2009 decreased by $0.8 million and
$0.5 million, respectively, as compared with the prior year period, primarily
due to a decrease in investment income. We changed our investment portfolio and
have re-invested maturing corporate bonds into low risk government security
mutual funds, which carries a significantly lower interest rate than corporate
bonds.

Income Tax Benefit (Expense)

|                              |  |             |      |             |  |        |   |           |     |  |  |    |  
|----------------------------- |  | ----------- | ---- | ----------- |  | ------ | - | --------- | --- |  |  | -- | -
|                              |  | Fiscal 2010 |      | Fiscal 2009 | 
|                              |  |             |      |             | 
|(Dollars
 in millions)        |  | Amount      |      | Tax Rate%   |  | Amount |   | Tax Rate% |    
|                              |  |             |      |             |  |        |   |           |    
|                              |  |             |      |             |  |        |   |           |    
|Quarter
 ended December 31    |  | $           | 0.3  |             |  | 24     | % | $         | 1.9 |  |  | 34 | %
|Six months
 ended December 31 |  | $           | (0.4 | )           |  | 9      | % | $         | 1.3 |  |  | 33 | %

Income tax benefit (expense)
for the three months ended December 31, 2009 included income taxes in state and
foreign jurisdictions, which could not be offset by current and prior net operating
losses. We continue to maintain a valuation allowance on all of our net
deferred tax assets totaling $40.9 million at December 31, 2009. In future
periods, the valuation allowance could be reduced based upon sufficient
evidence indicating that it is more likely than not that a portion of the
deferred tax assets will be realized.

21

---



TRANSACTIONS WITH STOCKHOLDER

Sales to Canon Inc., a
stockholder, and Canon Sales Co., Inc., a distributor of certain of our
products in Japan and a subsidiary of Canon Inc. (collectively referred to as
Canon), amounted to $2.0 million and $4.9 million (8% and 15% of revenues,
respectively) for the three months ended December 31, 2009 and 2008,
respectively. For the six months ended December 31, 2009 and 2008, sales to
Canon amounted to $3.0 million and $12.1 million, respectively (6% and 17% of
revenues, respectively). Selling prices of products sold to Canon are based,
generally, on the terms customarily given to distributors. At December 31, 2009
and June 30, 2009, there were, in the aggregate, $0.8 million and $0.6 million,
respectively, of trade accounts receivable from Canon.

LIQUIDITY AND CAPITAL RESOURCES

We assess our liquidity in
terms of our ability to generate cash to fund our operating, investing, and
financing activities. Our principal source of liquidity is operating cash
flows. In addition to operating cash flows, other significant factors that
affect our overall management of liquidity include: capital expenditures,
customer credit requirements, investments in businesses, expenses related to
our partnerships and leadership transition, and the adequacy of available bank
lines of credit.

The distress in the
financial markets has led to severely diminished liquidity and credit
availability, rating downgrades and declining valuations of certain
investments, and extreme volatility in security prices. We have assessed the
implications the distress in the financial markets has on our current business
and determined that there has not been a significant impact to our financial
position, results of operations, or liquidity during the first half of fiscal
2010, other than the indirect effect that the current uncertainty in global
economic conditions resulting from the recent disruption in credit markets has
had on customer demand for our products.

At December 31, 2009, cash
and marketable securities were $38.7 million, an increase of $2.0 million from
$36.7 million at June 30, 2009. Our marketable security consists of $1.0
million in a United States Treasury Bill as security for bank guarantees and
standby letters of credit. These are used primarily overseas to cover the
warranty period up to one year and are valued at 10% of the contract value. As
of December 31, 2009, $0.1 million in standby letters of credit have been used
and are expected to expire at varying dates through January 2011.

The cash equivalents balance
in our money market account, which is invested primarily in U.S. government
securities, is $19.9 million as of December 31, 2009. We do not believe there
is any risk to liquidity in the money market account, nor are there currently
any limits on redemptions.

We have $4.2 million of
gross accounts receivable related to our display customers which are overdue.
Of this amount, $1.7 million has been reserved for. We have agreed to payment
terms with several display customers and are in negotiations with other
customers. Although we believe such amounts are collectible, our liquidity will
be affected by the timing of the receipt of such payments. We have not
experienced significant delays in payments from non-display customers.

We currently have no debt or
lines of credit. In the future, if the need for debt or credit lines arose
there is no assurance that we would be able to secure such financing due to the
lack of credit availability in the financial markets or our own financial
position.

We believe we have
sufficient operating flexibility and cash reserves to maintain adequate amounts
of liquidity and to meet our future liquidity requirements for at least the
next twelve months. The impact of continued market volatility, however, cannot
be predicted.

22

---



Cash Flow
from Operating Activities

|                                                                            |  |                               |      |      |   |      |  
|--------------------------------------------------------------------------- |  | ----------------------------- | ---- | ---- | - | ---- | -
|                                                                            |  | Six Months Ended December 31, |     
|                                                                            |  |                               |     
|                                                                            |  | 2009                          |      | 2008 |  
|                                                                            |  |                               |      |      |  
|Net cash flows provided by operating activities
 from continuing operations |  | $                             | 2.9  |      | $ | 3.8  |  
|Net cash flows used for operating
 activities from discontinued operations  |  | $                             | (0.1 | )    | $ | (1.0 | )

Cash flows from operating
activities from continuing operations for the first half of fiscal 2010
decreased by $0.9 million as compared with the prior year period. This was
primarily due to an increase in our net loss, including discontinued operations
of $4.2 million, a decrease in net receivables of $5.2 million due to lower
revenue volume, and a decrease in accounts payable, accrued expenses and taxes
payable of $1.8 million, offset by the positive change in inventory related
cash flows of $9.9 million. The change in inventory related cash flows is
primarily a result of decreasing inventory levels in the six months ended
December 31, 2009 as we continue to manage inventory levels down to our current
order rate.

Cash Flow from Investing Activities

|                                                 |  |                               |     |      |   |     | 
|------------------------------------------------ |  | ----------------------------- | --- | ---- | - | --- | 
|                                                 |  | Six Months Ended December 31, |    
|                                                 |  |                               |    
|                                                 |  | 2009                          |     | 2008 |  
|                                                 |  |                               |     |      |  
|Net cash flows provided by investing
 activities |  | $                             | 2.4 |      | $ | 7.4 | 

Cash flows provided by
investing activities for the first half of fiscal 2010 decreased by $5.0
million as compared with the prior year period. This decrease was primarily
related to a decrease in net purchases and proceeds from marketable securities
of $7.7 million, partially offset by a decrease in fixed asset additions of
$2.4 million.

Cash Flow from Financing Activities

|                                              |  |                               |      |      |   |      |  
|--------------------------------------------- |  | ----------------------------- | ---- | ---- | - | ---- | -
|                                              |  | Six Months Ended December 31, |     
|                                              |  |                               |     
|                                              |  | 2009                          |      | 2008 |  
|                                              |  |                               |      |      |  
|Net cash flows used for financing
 activities |  | $                             | (0.2 | )    | $ | (1.1 | )

Cash flows used for
financing activities in the six months ended December 31, 2009 decreased by
$0.9 million as compared with the prior year period. For the six months ended
December 31, 2008, there was a dividend payment of $1.3 million to a minority
interest partner. No dividend was paid in the six months ended December 31,
2009.

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.

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 six months ended December 31, 2009 except for the
ongoing economic uncertainty which is impacting us through decreased order
levels and order push-outs by some of our customers. Our exposure to market
risk is presented in Item 7a., Quantitative and Qualitative Disclosures about
Market Risk, of our Annual Report on Form 10-K, as amended, for the year ended
June 30, 2009, filed with the Securities and Exchange Commission (the 2009
Annual Report).

Current uncertainty in
global economic conditions resulting from among other things, the recent
disruptions in credit and financial markets, poses a risk to the overall
economy that could impact customer demand for our products, impact our ability
to manage relationships with our customers, suppliers and creditors, or cause
supplier or customer disruptions resulting from tighter credit markets, among
other risks.

Item 4. Controls and Procedures

The effectiveness of our or
any system of disclosure controls and procedures is subject to certain
limitations, including the exercise of judgment in designing, implementing, and
evaluating the controls and procedures, the assumptions used in identifying the
likelihood of future events, and the inability to eliminate misconduct
completely. In designing, implementing, and evaluating the disclosure controls
and procedures, our management recognized that any controls and procedures, no
matter how well designed and operated, can provide only reasonable assurance of
achieving the desired control objectives and our management necessarily was
required to apply its judgment in evaluating the cost-benefit relationship of
possible controls and procedures.

Our management, with the
participation of our Chief Executive Officer and Chief Financial Officer,
carried out an evaluation, as of the end of the period covered by this report,
of the effectiveness of our disclosure controls and procedures (as such term is
defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of
1934, as amended (the Exchange Act)). Based upon their evaluation, the Chief
Executive Officer and Chief Financial Officer concluded that, as of the end of
such period, our disclosure controls and procedures were effective in
recording, processing, summarizing and reporting on a timely basis information
required to be disclosed by us in the reports that we file or submit under the
Exchange Act and were effective in ensuring that information required to be
disclosed by us in the reports that we file or submit under the Exchange Act is
accumulated and communicated to our management, including the Chief Executive
Officer and Chief Financial Officer, as appropriate to allow timely decisions
regarding required disclosure.

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

24

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PART II - Other Information

Item 1A. Risk Factors

In addition to
the information set forth below and elsewhere in this report, the reader should
carefully consider the factors discussed in Part I, Item 1A. Risk Factors in
our 2009 Annual Report, which could materially affect our business, financial
condition, or future results. The risks described in our 2009 Annual Report are
not the only risks facing our Company. Additional risks and uncertainties not
currently known to us or that we currently deem to be immaterial also may
materially adversely affect our business, financial condition, and/or operating
results.

Our recent senior
management change may impact our ability to execute our business strategy.

On January 18,
2010, we announced the appointment of Dr. Chris L. Koliopoulos as our new
President and Chief Executive Officer and member of our Board of Directors. Dr.
Koliopoulos replaced J. Bruce Robinson, our former Chief Executive Officer, who
in October 2009 announced his impending retirement. Although Dr. Koliopoulos is
considered a leading expert in optical interferometry and founded and led two
successful optical metrology businesses, we cannot assure you that he will be
successful in integrating with other members of our senior management or in executing
our growth strategy.

Potential changes in
U.S. tax law could materially affect our future results.

In May 2009,
President Obama and the U.S. Treasury Department proposed changing certain of
the U.S. tax rules for U.S. corporations doing business outside the United
States. The proposed changes include limiting the ability of U.S. corporations
to deduct expenses attributable to offshore earnings, modifying the foreign tax
credit rules and further restricting the ability of U.S. corporations to transfer
funds between foreign subsidiaries without triggering U.S. income tax. On
February 1, 2010, President Obama and the Office of Management and Budget
released the federal governments budget for the 2011 fiscal year, which
contained certain similar proposals. Although the scope of the proposed changes
remains unclear and the likelihood of enactment is uncertain, it is possible
that these or other changes in the U.S. tax laws could increase our effective
tax rate and adversely affect our after-tax profitability.

II-VIs unsolicited
proposal to acquire our common stock may require a significant expenditure of
time and resources on our part.

On January 5,
2010, we received an unsolicited proposal from II-VI Incorporated to acquire
all of the outstanding shares of common stock of the company for $10.00 per
share in cash or II-VI common stock (subject to a limitation on the aggregate
amount of II-VI common stock). On January 7, 2010, our Board of Directors
announced that it would engage an independent financial advisor, and
subsequently hired an advisor, and evaluate this proposal carefully in the
context of our current strategic plans, and pursue the best course of action to
enhance value for our stockholders. A financial review and consideration of the
II-VI proposal (and any alternate proposals that may be made by other parties)
have required, and may continue to require, the expenditure of significant time
and resources by us, and be a source of distraction for our employees.

Reorganization
activities could adversely affect our ability to execute our business strategy.

We have been
in the process of reorganizing our business structure due to worldwide market
conditions and other factors that have reduced the demand for our products and
services. The reorganization includes the discontinuation of our Singapore IC
packaging metrology operations and other personnel cost reductions. As a result
of these and other initiatives, our ability to execute our business strategy
going forward could be adversely affected in a number of ways, including the
loss of key employees; diversion of managements attention from normal daily
operations of the business; diminished ability to respond to customer
requirements, both as to products and services; loss of reputation with our
customers if we exit a business line; increased difficulty in maintaining
existing bookings and collecting accounts receivable impacted by the
reorganization; and disruption of our engineering and manufacturing processes.
Depending on market conditions, we may implement additional restructuring
initiatives in future periods.

25

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Item 2. Unregistered Sales of Equity
Securities and Use of Proceeds

The following
table provides information about our purchases during the quarter ended
December 31, 2009 of equity securities that are registered by us pursuant to
Section 12 of the Exchange Act.

|                                      |  |                                       |       |                               |   |                                                                                          |  |                                                                                                            |   |  |   |     | 
|------------------------------------- |  | ------------------------------------- | ----- | ----------------------------- | - | ---------------------------------------------------------------------------------------- |  | ---------------------------------------------------------------------------------------------------------- | - |  | - | --- | 
|Period                                |  | Total number of
 shares purchased (1) |       | Average price
 paid per share |   | Total number of
 shares purchased as
 part of publicly
 announced
 plans or programs (2) |  | Approximate dollar
 value of shares that
 may yet be purchased
 under the plans or
 programs (in millions) |  
|                                      |  |                                       |       |                               |   |                                                                                          |  |                                                                                                            |  
|                                      |  |                                       |       |                               |   |                                                                                          |  |                                                                                                            |   |  |   |     | 
|October 1, 2009 - October
 31, 2009   |  |                                       | 127   |                               | $ | 7.38                                                                                     |  |                                                                                                            |  |  | $ | 5.0 | 
|November 1, 2009 -
 November 30, 2009 |  |                                       | 1,708 |                               | $ | 6.88                                                                                     |  |                                                                                                            |  |  | $ | 5.0 | 
|December 1, 2009 -
 December 31, 2009 |  |                                       | 1,928 |                               | $ | 6.83                                                                                     |  |                                                                                                            |  |  | $ | 5.0 | 

| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (1) | Shares were
 repurchased from certain of our employees in satisfaction of withholding tax
 obligations arising from the vesting of their restricted stock.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | (2) | In August
 2007, our Board of Directors authorized the repurchase of up to $25.0 million
 of our outstanding common stock. During the three months ended December 31,
 2009, there were no repurchases of common stock in the open market. The share
 repurchases have been effected pursuant to plans in conformity with Rule
 10b5-1 under the Securities Exchange Act of 1934. This rule allows public
 companies to adopt written, pre-arranged stock trading plans when they do not
 have material, non-public information in their possession. The adoption of
 this stock trading plan allows us to repurchase our shares during periods
 when we otherwise might be prevented from doing so under insider trading laws
 or because of self-imposed trading blackout periods.

Item 6. Exhibits

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

26

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SIGNATURE

Pursuant to
the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.

| |                                                       
| | ------------------------------------------------------
| | Zygo
 Corporation                                     
| |                                                       
| | (Registrant)                                          
| |                                                       
| |                                                       
| | /s/ Chris L.
 Koliopoulos                             
| |                                                       
| | Chris L.
 Koliopoulos                                 
| | President
 and Chief Executive Officer                
| |                                                       
| |                                                       
| | /s/ Walter
 A. Shephard                               
| |                                                       
| | Walter A.
 Shephard                                   
| | Vice
 President, Finance, Chief Financial Officer, and
| | Treasurer                                             

Date: February 9, 2010

27

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EXHIBIT INDEX

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

---