UNITED STATES


SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549


FORM 10-Q

|                                                                                                |                                                                                         
|----------------------------------------------------------------------------------------------- | ----------------------------------------------------------------------------------------
|(Mark One)                                                                                     
|                                                                                                |                                                                                         
|x                                                                                               | QUARTERLY REPORT PURSUANT
TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 
|                                                                                                |                                                                                         
|For the
 quarterly period ended September 30, 2010                                             
|                                                                                               
|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 filero                                              | Accelerated
 filer x        
|
| | Non-accelerated
 filero
 (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.

17,569,511 shares of Common Stock, $.10 Par
Value, at November 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 revenues
to our major customer; manufacturing and supplier risks; risks of booking
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 of the assets of ASML US, Incs Richmond,
California facility, if consummated, and integration of the businesses and
employees; and the risk related to the Companys recent and announced changes
to senior management.

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 for
the fiscal year ended June 30, 2010.

2

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PART I -
Financial Information

Item 1. Financial Statements

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

|                                                                                                   |  |                                    |        |      |   |        |  
|-------------------------------------------------------------------------------------------------- |  | ---------------------------------- | ------ | ---- | - | ------ | -
|                                                                                                   |  | Three
 Months Ended
 September 30, |       
|                                                                                                   |  |                                    |       
|                                                                                                   |  | 2010                               |        | 2009 |  
|                                                                                                   |  |                                    |        |      |  
|                                                                                                  
|Net revenues                                                                                       |  | $                                  | 31,119 |      | $ | 21,325 |  
|Cost of goods sold                                                                                 |  |                                    | 16,916 |      |   | 14,151 |  
|                                                                                                   |  |                                    |        |      |   |        |  
|Gross margin                                                                                       |  |                                    | 14,203 |      |   | 7,174  |  
|                                                                                                   |  |                                    |        |      |   |        |  
|Selling, general, and administrative expenses                                                      |  |                                    | 7,211  |      |   | 6,776  |  
|Research, development, and engineering expenses                                                    |  |                                    | 3,365  |      |   | 3,647  |  
|                                                                                                   |  |                                    |        |      |   |        |  
|Operating profit (loss)                                                                            |  |                                    | 3,627  |      |   | (3,249 | )
|                                                                                                   |  |                                    |        |      |   |        |  
|Other income                                                                                       |  |                                    |        |      |   |        |  
|Interest income                                                                                    |  |                                    | 3      |      |   | 51     |  
|Miscellaneous income, net                                                                          |  |                                    | 178    |      |   | 60     |  
|                                                                                                   |  |                                    |        |      |   |        |  
|Total other income                                                                                 |  |                                    | 181    |      |   | 111    |  
|                                                                                                   |  |                                    |        |      |   |        |  
|Earnings (loss) from continuing operations before income taxes,
 including noncontrolling interest |  |                                    | 3,808  |      |   | (3,138 | )
|Income tax expense                                                                                 |  |                                    | (643   | )    |   | (682   | )
|                                                                                                   |  |                                    |        |      |   |        |  
|Net earnings (loss) from continuing operations                                                     |  |                                    | 3,165  |      |   | (3,820 | )
|                                                                                                   |  |                                    |        |      |   |        |  
|Net earnings (loss) from discontinued operations, net of tax                                       |  |                                    | 91     |      |   | (1,835 | )
|                                                                                                   |  |                                    |        |      |   |        |  
|                                                                                                   |  |                                    |        |      |   |        |  
|Net earnings (loss) including noncontrolling interest                                              |  |                                    | 3,256  |      |   | (5,655 | )
|Less: Net earnings attributable to noncontrolling interest                                         |  |                                    | 528    |      |   | 132    |  
|                                                                                                   |  |                                    |        |      |   |        |  
|Net earnings (loss) attributable to Zygo Corporation                                               |  | $                                  | 2,728  |      | $ | (5,787 | )
|                                                                                                   |  |                                    |        |      |   |        |  
|Basic and diluted - Earnings (loss) per share attributable to Zygo
 Corporation                    |  |                                    |        |      |   |        |  
|Continuing operations                                                                              |  | $                                  | 0.15   |      | $ | (0.23  | )
|Discontinued operations                                                                            |  |                                    | 0.01   |      |   | (0.11  | )
|                                                                                                   |  |                                    |        |      |   |        |  
|Net earnings (loss) per share                                                                      |  | $                                  | 0.16   |      | $ | (0.34  | )
|                                                                                                   |  |                                    |        |      |   |        |  
|                                                                                                   |  |                                    |        |      |   |        |  
|Weighted average shares outstanding                                                                |  |                                    |        |      |   |        |  
|Basic shares                                                                                       |  |                                    | 17,512 |      |   | 16,943 |  
|                                                                                                   |  |                                    |        |      |   |        |  
|Diluted shares                                                                                     |  |                                    | 17,772 |      |   | 16,943 |  
|                                                                                                   |  |                                    |        |      |   |        |  
|                                                                                                   |  |                                    |        |      |   |        |  
|Amounts Attributable to Zygo Corporation                                                           |  |                                    |        |      |   |        |  
|Net earnings (loss) from continuing operations attributable to Zygo
 Corporation                   |  | $                                  | 2,637  |      | $ | (3,952 | )
|Discontinued operations, net of tax                                                                |  |                                    | 91     |      |   | (1,835 | )
|                                                                                                   |  |                                    |        |      |   |        |  
|Net earnings (loss) attributable to Zygo Corporation                                               |  | $                                  | 2,728  |      | $ | (5,787 | )
|                                                                                                   |  |                                    |        |      |   |        |  

See accompanying notes to condensed
consolidated financial statements.

3

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

|                                                                                        |  |                    |         |                |   |         |  
|--------------------------------------------------------------------------------------- |  | ------------------ | ------- | -------------- | - | ------- | -
|                                                                                        |  | September 30, 2010 |         | June
 30, 2010 |  
|                                                                                        |  |                    |         |                |  
|Assets                                                                                  |  |                    |         |                |   |         |  
|Current assets:                                                                         |  |                    |         |                |   |         |  
|Cash and cash equivalents                                                               |  | $                  | 48,725  |                | $ | 46,536  |  
|Marketable securities                                                                   |  |                    | 999     |                |   | 1,000   |  
|Receivables, net of allowance for doubtful accounts of $2,083 and
 $1,975, respectively |  |                    | 23,357  |                |   | 19,948  |  
|Inventories                                                                             |  |                    | 25,062  |                |   | 25,220  |  
|Prepaid expenses and other                                                              |  |                    | 1,656   |                |   | 1,643   |  
|Income tax receivable                                                                   |  |                    |        |                |   | 1,050   |  
|Current assets of discontinued operations                                               |  |                    | 17      |                |   | 17      |  
|                                                                                        |  |                    |         |                |   |         |  
|Total
 current assets                                                                   |  |                    | 99,816  |                |   | 95,414  |  
|                                                                                        |  |                    |         |                |   |         |  
|Marketable securities                                                                   |  |                    | 1,018   |                |   | 922     |  
|Property, plant, and equipment, net                                                     |  |                    | 22,173  |                |   | 23,029  |  
|Intangible assets, net                                                                  |  |                    | 5,334   |                |   | 5,387   |  
|Other assets                                                                            |  |                    | 415     |                |   | 413     |  
|                                                                                        |  |                    |         |                |   |         |  
|Total assets                                                                            |  | $                  | 128,756 |                | $ | 125,165 |  
|                                                                                        |  |                    |         |                |   |         |  
|                                                                                        |  |                    |         |                |   |         |  
|Liabilities and Equity                                                                  |  |                    |         |                |   |         |  
|Current liabilities:                                                                    |  |                    |         |                |   |         |  
|Accounts payable                                                                        |  | $                  | 7,829   |                | $ | 8,426   |  
|Accrued progress payments and deferred revenue                                          |  |                    | 5,566   |                |   | 5,700   |  
|Accrued salaries and wages                                                              |  |                    | 2,935   |                |   | 3,173   |  
|Other accrued liabilities                                                               |  |                    | 5,340   |                |   | 5,191   |  
|Income tax payable                                                                      |  |                    | 313     |                |   | 152     |  
|Current liabilities of discontinued operations                                          |  |                    | 223     |                |   | 287     |  
|                                                                                        |  |                    |         |                |   |         |  
|Total
 current liabilities                                                              |  |                    | 22,206  |                |   | 22,929  |  
|                                                                                        |  |                    |         |                |   |         |  
|Other long-term liabilities                                                             |  |                    | 1,369   |                |   | 1,359   |  
|Non-current liabilities of discontinued operations                                      |  |                    | 198     |                |   | 281     |  
|                                                                                        |  |                    |         |                |   |         |  
|Commitments and contingencies                                                           |  |                    |        |                |   |        |  
|                                                                                        |  |                    |         |                |   |         |  
|Equity:                                                                                 |  |                    |         |                |   |         |  
|Common stock, $0.10 par value per share:                                                |  |                    |         |                |   |         |  
|40,000,000
 shares authorized;                                                          |  |                    |         |                |   |         |  
|19,776,129 shares issued (19,663,414 at June 30, 2010);                                 |  |                    |         |                |   |         |  
|17,560,794 shares outstanding (17,480,219 at June 30, 2010)                             |  |                    | 1,978   |                |   | 1,966   |  
|Additional paid-in capital                                                              |  |                    | 164,008 |                |   | 163,052 |  
|Accumulated deficit                                                                     |  |                    | (37,116 | )              |   | (39,844 | )
|Accumulated other comprehensive income (loss):                                          |  |                    |         |                |   |         |  
|Currency translation effects                                                            |  |                    | 291     |                |   | (728    | )
|Treasury stock, at cost, 2,215,335 shares (2,183,195 at June 30, 2010)                  |  |                    | (26,280 | )              |   | (26,043 | )
|                                                                                        |  |                    |         |                |   |         |  
|Total stockholders equity - Zygo Corporation                                           |  |                    | 102,881 |                |   | 98,403  |  
|Noncontrolling interest                                                                 |  |                    | 2,102   |                |   | 2,193   |  
|                                                                                        |  |                    |         |                |   |         |  
|Total equity                                                                            |  |                    | 104,983 |                |   | 100,596 |  
|                                                                                        |  |                    |         |                |   |         |  
|Total liabilities and equity                                                            |  | $                  | 128,756 |                | $ | 125,165 |  
|                                                                                        |  |                    |         |                |   |         |  

See accompanying notes to condensed consolidated
financial statements.

4

---



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

|                                                                                                                   |  |                                   |        |      |   |        |  
|------------------------------------------------------------------------------------------------------------------ |  | --------------------------------- | ------ | ---- | - | ------ | -
|                                                                                                                   |  | Three
 Months Ended September 30, |       
|                                                                                                                   |  |                                   |       
|                                                                                                                   |  | 2010                              |        | 2009 |  
|                                                                                                                   |  |                                   |        |      |  
|Cash provided by (used for) operating activities:                                                                  |  |                                   |        |      |   |        |  
|Net earnings (loss) including noncontrolling interest                                                              |  | $                                 | 3,256  |      | $ | (5,655 | )
|Adjustments to reconcile net earnings (loss) to cash provided by
 operating activities from continuing operations: |  |                                   |        |      |   |        |  
|(Earnings) loss from discontinued operations                                                                       |  |                                   | (91    | )    |   | 1,835  |  
|Depreciation and amortization                                                                                      |  |                                   | 1,492  |      |   | 1,638  |  
|Loss on disposal of assets                                                                                         |  |                                   | 8      |      |   | 9      |  
|Deferred income taxes                                                                                              |  |                                   |       |      |   | (63    | )
|Provision for doubtful accounts                                                                                    |  |                                   | 104    |      |   | 221    |  
|Compensation cost related to share-based payment arrangements                                                      |  |                                   | 947    |      |   | 667    |  
|Excess tax benefits from share-based payment arrangements                                                          |  |                                   | (3     | )    |   |       |  
|Other                                                                                                              |  |                                   | (119   | )    |   | (88    | )
|Changes in operating accounts:                                                                                     |  |                                   |        |      |   |        |  
|Receivables                                                                                                        |  |                                   | (3,057 | )    |   | 1,026  |  
|Inventories                                                                                                        |  |                                   | 267    |      |   | 2,547  |  
|Prepaid expenses and other current assets                                                                          |  |                                   | 1,069  |      |   | 548    |  
|Accounts payable, accrued expenses, and taxes payable                                                              |  |                                   | (1,001 | )    |   | 279    |  
|                                                                                                                   |  |                                   |        |      |   |        |  
|Net cash provided by operating activities from continuing operations                                               |  |                                   | 2,872  |      |   | 2,964  |  
|                                                                                                                   |  |                                   |        |      |   |        |  
|Net cash used for operating activities from discontinued operations                                                |  |                                   | (141   | )    |   | (701   | )
|                                                                                                                   |  |                                   |        |      |   |        |  
|Cash provided by (used for) investing activities:                                                                  |  |                                   |        |      |   |        |  
|Additions to property, plant, and equipment                                                                        |  |                                   | (223   | )    |   | (245   | )
|Purchase of marketable securities                                                                                  |  |                                   | (999   | )    |   | (999   | )
|Additions to intangibles                                                                                           |  |                                   | (181   | )    |   | (142   | )
|Proceeds from the sale and maturity of marketable securities                                                       |  |                                   | 1,000  |      |   | 2,000  |  
|Proceeds from the sale of other assets                                                                             |  |                                   |       |      |   | 1      |  
|                                                                                                                   |  |                                   |        |      |   |        |  
|Net cash provided by (used for) investing activities                                                               |  |                                   | (403   | )    |   | 615    |  
|                                                                                                                   |  |                                   |        |      |   |        |  
|Cash used for financing activities:                                                                                |  |                                   |        |      |   |        |  
|Dividend payment to noncontrolling interest                                                                        |  |                                   | (721   | )    |   |       |  
|Excess tax benefits from share-based payment arrangements                                                          |  |                                   | 3      |      |   |       |  
|Restricted stock vesting and related tax benefits                                                                  |  |                                   | (236   | )    |   | (212   | )
|Exercise of employee stock options                                                                                 |  |                                   | 20     |      |   | 12     |  
|                                                                                                                   |  |                                   |        |      |   |        |  
|Net cash used for financing activities                                                                             |  |                                   | (934   | )    |   | (200   | )
|                                                                                                                   |  |                                   |        |      |   |        |  
|Effect of exchange rate changes on cash and cash equivalents                                                       |  |                                   | 795    |      |   | 320    |  
|                                                                                                                   |  |                                   |        |      |   |        |  
|Net increase in cash and cash equivalents                                                                          |  |                                   | 2,189  |      |   | 2,998  |  
|Cash and cash equivalents, beginning of year                                                                       |  |                                   | 46,536 |      |   | 32,723 |  
|                                                                                                                   |  |                                   |        |      |   |        |  
|Cash and cash equivalents, end of period                                                                           |  | $                                 | 48,725 |      | $ | 35,721 |  
|                                                                                                                   |  |                                   |        |      |   |        |  

Supplemental Cash Flow Information

Net income tax refunds
amounted to $553 and $445 for the three months ended September 30, 2010 and
2009, respectively.

Dividend declared to
noncontrolling interest but not paid were
$101 for the three months ended September 30, 2010.

See accompanying notes to condensed consolidated financial statements.

5

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)(Thousands, except for share and per share amounts)

Note 1: Accounting Policies

Basis
of Presentation and Principles of ConsolidationZygo 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 months ended September 30, 2010 are not necessarily
indicative of the results to be expected for the full fiscal year.

The condensed consolidated
balance sheet at September 30, 2010, the condensed consolidated statements of
operations for the three months ended September 30, 2010 and 2009, and the
condensed consolidated statements of cash flows for the three months ended
September 30, 2010 and 2009 are unaudited but, in managements opinion, include
all adjustments, consisting only of normal recurring accruals, necessary for a
fair presentation of the results of the interim periods. The accompanying
condensed consolidated financial statements should be read in conjunction with
the consolidated financial statements and notes included in our Annual Report
on Form 10-K for the year ended June 30, 2010, including items incorporated by
reference therein.

Discontinued
OperationsThe 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 consummation of the 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; discount rate; 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 operations of our Vision Systems product line, which is included in
our Metrology Solutions segment.

Recent
Accounting Guidance Not Yet AdoptedIn January 2010, the
Financial Accounting Standards Board (FASB) issued amended standards that
require additional fair value disclosures. These disclosure requirements are
effective in two phases. On January 1, 2010, we adopted the requirements for
disclosures about inputs and valuation techniques used to measure fair value as
well as disclosures about significant transfers. Beginning in fiscal 2012, July
1, 2011, the balance of these amended standards will require presentation of
disaggregated activity within the reconciliation for fair value measurements
using significant unobservable inputs (Level 3). We believe the adoption of the
new guidance will not have a material impact on our financial statements.

Adoption
of New Accounting PronouncementsIn October 2009, the
FASB issued authoritative guidance on revenue recognition that became effective
for us on July 1, 2010. 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. The adoption of this new guidance did not have a
material impact on our financial statements.

6

---



In June 2009, the FASB
issued authoritative guidance on the consolidation of variable interest
entities which became effective for us 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. The adoption of this new guidance did not
have a material impact on our financial statements.

Note 2: Discontinued Operations

We discontinued the
Singapore IC packaging operations of our Vision Systems product line, included
in our Metrology Solutions segment. 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
months ended September 30, 2010 and 2009:

|                                                          |  |                                    |    |      |   |        |  
|--------------------------------------------------------- |  | ---------------------------------- | -- | ---- | - | ------ | -
|                                                          |  | Three
 Months Ended
 September 30, |   
|                                                          |  |                                    |   
|                                                          |  | 2010                               |    | 2009 |  
|                                                          |  |                                    |    |      |  
|Net revenues                                              |  | $                                  |   |      | $ | 321    |  
|Non-cash impairment charge                                |  |                                    |   |      |   | (678   | )
|(Operating expenses) and
 other income                    |  |                                    | 91 |      |   | (1,478 | )
|                                                          |  |                                    |    |      |   |        |  
|Earnings
 (loss) from discontinued operations, net of tax |  | $                                  | 91 |      | $ | (1,835 | )
|                                                          |  |                                    |    |      |   |        |  

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 September 30, 2010
and June 30, 2010:

|                                                   |  |                     |     |                 |   |     | 
|-------------------------------------------------- |  | ------------------- | --- | --------------- | - | --- | 
|                                                   |  | September 30,
 2010 |     | June
 30,
 2010 |  
|                                                   |  |                     |     |                 |  
|Other assets                                       |  | $                   | 17  |                 | $ | 17  | 
|                                                   |  |                     |     |                 |   |     | 
|Current
 assets of discontinued operations         |  | $                   | 17  |                 | $ | 17  | 
|                                                   |  |                     |     |                 |   |     | 
|                                                   |  |                     |     |                 |   |     | 
|Accrued expenses and other
 current liabilities    |  | $                   | 223 |                 | $ | 287 | 
|                                                   |  |                     |     |                 |   |     | 
|Current
 liabilities of discontinued operations    |  | $                   | 223 |                 | $ | 287 | 
|                                                   |  |                     |     |                 |   |     | 
|Other long-term
 liabilities                       |  | $                   | 198 |                 | $ | 281 | 
|                                                   |  |                     |     |                 |   |     | 
|Non-current
 liabilites of discontinued operations |  | $                   | 198 |                 | $ | 281 | 
|                                                   |  |                     |     |                 |   |     | 

7

---



Note 3: Acquisitions

In January 2010, the Company
entered into an agreement to purchase all of the outstanding stock and to
retire the outstanding shareholder notes of Zemetrics, Inc., an Arizona
corporation (Zemetrics), in exchange for 361,217 shares of the Companys
common stock. The value of the common stock issued was $3,901, based on the
fair value of the common stock on the closing date of $10.80. In accordance
with the purchase agreement, the number of shares delivered was calculated by
taking the sum of $1,941 and the outstanding shareholder notes (including
accrued interest) of $856 divided by the average of the closing prices of the
Companys common stock reported by the NASDAQ Stock Market during the forty
trading days ended two days prior to the closing date of January 22, 2010 of
$7.74 (the Average Trading Price).

Dr. Chris L. Koliopoulos,
Zygos President and CEO, was a major shareholder of Zemetrics stock as well as
being the major holder of Zemetrics outstanding shareholder notes. Dr.
Koliopoulos received a total of 195,790 shares of Company common stock
consisting of 106,233 shares of Company common stock as consideration for the
purchase of his shares of Zemetrics stock and 89,557 shares of Company common
stock in payment of $680 principal amount of outstanding shareholder notes
(plus accrued interest thereon) issued by Zemetrics to Dr. Koliopoulos.

Acquisition costs for the
twelve months ended June 30, 2010 were $457, and are included in selling,
general & administrative expenses. An escrow account with 38,743 shares
(including 16,421 shares issued to Dr. Koliopoulos) of Company common stock was
established to secure potential indemnification claims until the date that is
fifteen days after completion of the audit of the Companys financial
statements for the first fiscal year ending after the closing.

The following is the final
purchase price allocation based on the estimated fair values of the assets
acquired and liabilities assumed as of the date of acquisition on January 22,
2010:

| |                           |  |   |       | 
| | ------------------------- |  | - | ----- | 
| | Cash                      |  | $ | 11    | 
| | Inventories               |  |   | 403   | 
| | Prepaid expenses          |  |   | 18    | 
| | Property and equipment    |  |   | 15    | 
| | Customer relationships    |  |   | 112   | 
| | Technology                |  |   | 1,428 | 
| | Goodwill                  |  |   | 2,003 | 
| |                           |  |   |       | 
| | Total assets              |  |   | 3,990 | 
| | Less: Liabilities assumed |  |   | 89    | 
| |                           |  |   |       | 
| | Total                     |  | $ | 3,901 | 
| |                           |  |   |       | 

In addition, net deferred
tax assets of $360 were recorded in the opening balance sheet at zero value,
net of a full valuation allowance. Based on the Companys expectations of
future U.S. taxable income, the Company believes it is more likely than not that
such net deferred tax assets will not be realized.

The purchase price was
allocated to the underlying assets acquired and liabilities assumed based on
their fair values. Analyses supporting the purchase price allocation include a
valuation of assets and liabilities as of the closing date, an analysis of
intangible assets and a detailed review of the opening balance sheet to
determine other significant adjustments required to recognize assets and
liabilities at fair value. Intangible assets of technology and customer
relationships were valued on an income approach based on future earnings
projections.

The following disclosure
presents certain information regarding the Companys acquired intangible assets
as of June 30, 2010. All acquired intangible assets were valued by the income
approach and are being amortized over their initial estimated useful lives of
three years for customer relationships and seven years for technology, in both
instances with no estimated residual values. We review our intangible assets
for impairment annually.

8

---



|                            |  |                         |     |            |   |       |   |   |       |  
|--------------------------- |  | ----------------------- | --- | ---------- | - | ----- | - | - | ----- | -
|                            |  | Customer
 Relationships |     | Technology |   | Total |  
|                            |  |                         |     |            |   |       |  
|                            |  |                         |     |            |   |       |   |   |       |  
|Balance at January 22, 2010 |  | $                       | 112 |            | $ | 1,428 |   | $ | 1,540 |  
|                            |  |                         |     |            |   |       |   |   |       |  
|Amortization expense        |  |                         | (16 | )          |   | (85   | ) |   | (101  | )
|                            |  |                         |     |            |   |       |   |   |       |  
|                            |  |                         |     |            |   |       |   |   |       |  
|Balance at June 30, 2010    |  | $                       | 96  |            | $ | 1,343 |   | $ | 1,439 |  
|                            |  |                         |     |            |   |       |   |   |       |  

The Company recorded an
impairment charge of $2,003 relating to acquired goodwill in the quarter ended
March 31, 2010 subsequent to the acquisition date. The Zemetrics reporting unit
had minimal sales history and cumulative losses since inception. In addition,
the fair value of common stock issued as consideration on the closing date was
$10.80 per share, which was significantly in excess of the implied value per
share in the formula used in the purchase agreement to determine the number of
common shares issued as consideration (which was based on the market price per
share during the 40-day period prior to closing). In consideration of these
factors, management determined the carrying value of the reporting unit
exceeded its fair value, and that the implied fair value of goodwill was zero
at March 31, 2010.

From the date of
acquisition, the Zemetrics reporting unit had revenues of $103 and an operating
loss of $2,658 (including the aforementioned $2,003 goodwill impairment
charge), which are included in the consolidated financial statements for the
period ended June 30, 2010. The following unaudited proforma condensed
financial information shows the results of operations for the year ended June
30, 2010 as though the acquisition of Zemetrics had occurred at the beginning
of such respective fiscal year. The proforma information is presented for
informational purposes only and is not necessarily indicative of the results of
operations that actually would have been achieved had the acquisition been
consummated as of that time:

|                                           |  |                             |         |  
|------------------------------------------ |  | --------------------------- | ------- | -
|                                           |  | Year
 ended
 June 30,
 2010 |        
|                                           |  |                             |        
|                                           |  |                             |         |  
|Net revenues                               |  | $                           | 101,330 |  
|Net loss attributable to
 Zygo Corporation |  | $                           | (3,565  | )
|                                           |  |                             |         |  
|Loss per share amounts:                    |  |                             |         |  
|Basic and Diluted - Loss per share         |  | $                           | (0.21   | )
|Diluted - Loss per share                   |  | $                           | (0.21   | )

9

---



Note 4: Restructuring and related costs

During fiscal 2009, we
initiated restructuring actions related to ongoing cost reduction efforts
comprised of workforce reductions and the consolidation of manufacturing
operations in Tucson, Arizona.

The following table
summarizes the accrual balances and utilization by cost type for the fiscal
2011 and fiscal 2010 restructuring actions:

|                               |  |           |      |                                  |   |       |   |   |      |  
|------------------------------ |  | --------- | ---- | -------------------------------- | - | ----- | - | - | ---- | -
|                               |  | Severance |      | Facility 
 Consolidation 
 Costs |   | Total |  
|                               |  |           |      |                                  |   |       |  
|Balance at
 June 30, 2010      |  | $         | 290  |                                  | $ | 227   |   | $ | 517  |  
|Payments                       |  |           | (182 | )                                |   | (48   | ) |   | (230 | )
|                               |  |           |      |                                  |   |       |   |   |      |  
|Balance at
 September 30, 2010 |  | $         | 108  |                                  | $ | 179   |   | $ | 287  |  
|                               |  |           |      |                                  |   |       |   |   |      |  
|                               |  |           |      |                                  |   |       |   |   |      |  
|                               |  | Severance |      | Facility
 
 Consolidation
 Costs |   | Total |  
|                               |  |           |      |                                  |   |       |  
|Balance at June 30, 2009       |  | $         | 262  |                                  | $ | 452   |   | $ | 714  |  
|Restructuring charges          |  |           | 84   |                                  |   |      |   |   | 84   |  
|Payments                       |  |           | (63  | )                                |   | (56   | ) |   | (119 | )
|                               |  |           |      |                                  |   |       |   |   |      |  
|Balance at September 30,
 2009 |  | $         | 283  |                                  | $ | 396   |   | $ | 679  |  
|                               |  |           |      |                                  |   |       |   |   |      |  

Note 5: Earnings Per Share

Basic and diluted earnings
per share are calculated in accordance with US GAAP. For the three months ended
September 30, 2010, 1,546,665 (for the three months ended September 30, 2009,
2,071,598) 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 September 30, |           
|                                                       |  |                                   |           
|                                                       |  | 2010                              |            | 2009 | 
|                                                       |  |                                   |            |      | 
|Basic weighted average shares outstanding              |  |                                   | 17,512,130 |      |  | 16,942,509 | 
|Dilutive effect of stock options and restricted shares |  |                                   | 260,011    |      |  |           | 
|                                                       |  |                                   |            |      |  |            | 
|Diluted weighted average shares outstanding            |  |                                   | 17,772,141 |      |  | 16,942,509 | 
|                                                       |  |                                   |            |      |  |            | 

10

---



Note 6: Comprehensive Income (Loss)

Our
Stockholders Equity and Noncontrolling Interest for the three months ended
September 30, 2010 and 2009 is as follows:

|                                                          |  |                                   |         |                           |   |              |   |                                   |         |                             |   |               |   |   |       |  |   |         |  
|--------------------------------------------------------- |  | --------------------------------- | ------- | ------------------------- | - | ------------ | - | --------------------------------- | ------- | --------------------------- | - | ------------- | - | - | ----- |  | - | ------- | -
|                                                          |  | Three
 Months Ended September 30, |        
|                                                          |  |                                   |        
|                                                          |  | 2010                              |         | 2009                      |  
|                                                          |  |                                   |         |                           |  
|                                                          |  | Stockholders
Equity
Zygo Corp.   |         | Non-
Controlling
Interest |   | Total
Equity |   | Stockholders
 Equity
 Zygo Corp. |         | Non-
 Controlling
 Interest |   | Total
 Equity |  
|                                                          |  |                                   |         |                           |   |              |   |                                   |         |                             |   |               |  
|Equity, beginning of period                               |  | $                                 | 98,403  |                           | $ | 2,193        |   | $                                 | 100,596 |                             | $ | 98,583        |   | $ | 1,444 |  | $ | 100,027 |  
|Comprehensive income (loss):                              |  |                                   |         |                           |   |              |   |                                   |         |                             |   |               |   |   |       |  |   |         |  
|Net earnings (loss)                                       |  |                                   | 2,728   |                           |   | 528          |   |                                   | 3,256   |                             |   | (5,787        | ) |   | 132   |  |   | (5,655  | )
|Foreign currency translation effect                       |  |                                   | 1,019   |                           |   | 203          |   |                                   | 1,222   |                             |   | 574           |   |   | 60    |  |   | 634     |  
|                                                          |  |                                   |         |                           |   |              |   |                                   |         |                             |   |               |   |   |       |  |   |         |  
|Total other comprehensive income (loss)                   |  |                                   | 3,747   |                           |   | 731          |   |                                   | 4,478   |                             |   | (5,213        | ) |   | 192   |  |   | (5,021  | )
|                                                          |  |                                   |         |                           |   |              |   |                                   |         |                             |   |               |   |   |       |  |   |         |  
|Non-cash compensation charges related to stock options    |  |                                   | 947     |                           |   |             |   |                                   | 947     |                             |   | 674           |   |   |      |  |   | 674     |  
|Restricted stock vesting and related tax effect           |  |                                   | (236    | )                         |   |             |   |                                   | (236    | )                           |   | (212          | ) |   |      |  |   | (212    | )
|Exercise of employee stock options and related tax effect |  |                                   | 20      |                           |   |             |   |                                   | 20      |                             |   | 13            |   |   |      |  |   | 13      |  
|Dividends attributable to noncontrolling interests        |  |                                   |        |                           |   | (822         | ) |                                   | (822    | )                           |   |              |   |   |      |  |   |        |  
|                                                          |  |                                   |         |                           |   |              |   |                                   |         |                             |   |               |   |   |       |  |   |         |  
|Equity, end of period                                     |  | $                                 | 102,881 |                           | $ | 2,102        |   | $                                 | 104,983 |                             | $ | 93,845        |   | $ | 1,636 |  | $ | 95,481  |  
|                                                          |  |                                   |         |                           |   |              |   |                                   |         |                             |   |               |   |   |       |  |   |         |  

11

---



Note 7: Marketable Securities

Marketable securities
consisted primarily of corporate and government agency securities for fiscal
2011 and 2010. The Company classifies these securities as held-to-maturity,
trading, or available-for-sale. Dividend and interest income is recognized when
earned. Straight-line amortization related to discounts and premiums on the
purchase of marketable securities is recorded in interest income. Realized
gains and losses are included in earnings and are derived using the specific
identification method for determining the cost of securities sold.

At September
30, 2010 and June 30, 2010, the held-to maturity securities consisted of a
government treasury bill. We have both the intent and the ability to hold the
government treasury bill to maturity. The amortized cost, gross unrealized
gains and losses, and fair value of held-to-maturity securities at September
30, 2010 and June 30, 2010 were as follows:

|                                                |  |                 |       |                          |   |                           |  |             |   |  |   |       | 
|----------------------------------------------- |  | --------------- | ----- | ------------------------ | - | ------------------------- |  | ----------- | - |  | - | ----- | 
|                                                |  | Amortized
 Cost |       | Gross
 Unrealized
 Gains |   | Gross
 Unrealized
 Losses |  | Fair
 Value |  
|                                                |  |                 |       |                          |   |                           |  |             |  
|At September 30, 2010
 Government treasury bill |  | $               | 999   |                          | $ | 1                         |  | $           |  |  | $ | 1,000 | 
|                                                |  |                 |       |                          |   |                           |  |             |   |  |   |       | 
|                                                |  |                 |       |                          |   |                           |  |             |   |  |   |       | 
|At June 30,
 2010
 Government treasury bill     |  | $               | 1,000 |                          | $ |                          |  | $           |  |  | $ | 1,000 | 
|                                                |  |                 |       |                          |   |                           |  |             |   |  |   |       | 

The government
treasury bill of $999 at September 30, 2010 and $1,000 at June 30, 2010 is
being held in an account designated as loan collateral to cover our outstanding
letters of credit.

Trading
securities consist of a mutual fund investment corresponding to elections made
in our deferred compensation program. The cost, gross unrealized gains and
losses, and fair value of trading securities at September 30, 2010 and 2009
were as follows:

|                                    |  |                    |     |                          |   |                           |  |                 |   |  |   |       | 
|----------------------------------- |  | ------------------ | --- | ------------------------ | - | ------------------------- |  | --------------- | - |  | - | ----- | 
|                                    |  | Beginning
 Balance |     | Gross
 Unrealized
 Gains |   | Gross
 Unrealized
 Losses |  | Ending
 Balance |  
|                                    |  |                    |     |                          |   |                           |  |                 |  
|At September 30, 2010
 Mutual fund  |  | $                  | 922 |                          | $ | 96                        |  | $               | 0 |  | $ | 1,018 | 
|                                    |  |                    |     |                          |   |                           |  |                 |   |  |   |       | 
|                                    |  |                    |     |                          |   |                           |  |                 |   |  |   |       | 
|At September
 30, 2009
 Mutual Fund |  | $                  | 499 |                          | $ | 104                       |  | $               |  |  | $ | 603   | 
|                                    |  |                    |     |                          |   |                           |  |                 |   |  |   |       | 

Maturities of
investment securities classified as held-to-maturity at September 30, 2010 and
June 30, 2010 were as follows:

|                     |  |                    |     |               |   |                 |  |             |       |  |   |       | 
|-------------------- |  | ------------------ | --- | ------------- | - | --------------- |  | ----------- | ----- |  | - | ----- | 
|                     |  | September 30, 2010 |     | June 30, 2010 |  
|                     |  |                    |     |               |  
|                     |  | Amortized
 Cost    |     | Fair
 Value   |   | Amortized
 Cost |  | Fair
 Value |      
|                     |  |                    |     |               |   |                 |  |             |      
|Due within
 one year |  | $                  | 999 |               | $ | 1,000           |  | $           | 1,000 |  | $ | 1,000 | 
|                     |  |                    |     |               |   |                 |  |             |       |  |   |       | 
|Total                |  | $                  | 999 |               | $ | 1,000           |  | $           | 1,000 |  | $ | 1,000 | 
|                     |  |                    |     |               |   |                 |  |             |       |  |   |       | 

There were no
securities in a continuous unrealized loss position at September 30, 2010 and
June 30, 2010.

In determining
whether investment holdings are other than temporarily impaired, we consider
the nature, cause, severity, and duration of the impairment. We and our
investment advisors use analyst reports, credit ratings and other items as part
of our review.

12

---



Note 8. 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. The classification of financial assets
and liabilities 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 September 30, 2010 and June 30, 2010:

|                                                          |  |                                               |        |                                              |                                                          |                                                   |  |                                              |     |   |   |   | 
|--------------------------------------------------------- |  | --------------------------------------------- | ------ | -------------------------------------------- | -------------------------------------------------------- | ------------------------------------------------- |  | -------------------------------------------- | --- | - | - | - | 
|Assets and Liabilities Measured
           at Fair Value:
|(Dollars in Thousands)                                    |  |                                               |        |                                              |                                                          |                                                   |  |                                              |     |   |   |   | 
|                                                          |  |                                               |        |                                              | Fair value measurements
           at September 30, 2010 |                                                  
|                                                          |  |                                               |        |                                              |                                                          |                                                  
|                                                          |  | Total carrying
 value at
 September 30,
 2010 |        | Quoted prices
 in active
 markets
 (Level 1) |                                                          | Significantother
 observable
 inputs
 (Level 2)   |  | Significant
 unobservable
 inputs
 (Level 3) |    
|                                                          |  |                                               |        |                                              |                                                          |                                                   |  |                                              |    
|Money market funds                                        |  | $                                             | 21,924 |                                              | $                                                        | 21,924                                            |  | $                                            |    |   | $ |  | 
|Trading securities                                        |  |                                               | 1,018  |                                              |                                                          | 1,018                                             |  |                                              |    |   |   |  | 
|Foreign currency hedge                                    |  |                                               | (67    | )                                            |                                                          |                                                  |  |                                              | (67 | ) |   |  | 
|                                                          |  |                                               |        |                                              |                                                          |                                                   |  |                                              |     |   |   |   | 
|Total                                                     |  | $                                             | 22,875 |                                              | $                                                        | 22,942                                            |  | $                                            | (67 | ) | $ |  | 
|                                                          |  |                                               |        |                                              |                                                          |                                                   |  |                                              |     |   |   |   | 
|                                                          |  |                                               |        |                                              |                                                          |                                                   |  |                                              |     |   |   |   | 
|Assets and
Liabilities Measured at Fair Value:           
|                                                          |  |                                               |        |                                              |                                                          |                                                   |  |                                              |     |   |   |   | 
|                                                          |  |                                               |        |                                              | Fair value measurements at June 30, 2010                 |                                                  
|                                                          |  |                                               |        |                                              |                                                          |                                                  
|                                                          |  | Total carrying
 value at
 June 30, 2010       |        | Quoted prices
 in active
 markets
 (Level 1) |                                                          | Significant
 other
 observable
 inputs
 (Level 2) |  | Significant
 unobservable
 inputs
 (Level 3) |    
|                                                          |  |                                               |        |                                              |                                                          |                                                   |  |                                              |    
|Money market
 funds                                       |  | $                                             | 22,141 |                                              | $                                                        | 22,141                                            |  | $                                            |    |   | $ |  | 
|Trading
 securities                                       |  |                                               | 922    |                                              |                                                          | 922                                               |  |                                              |    |   |   |  | 
|Foreign
 currency hedge                                   |  |                                               | (70    | )                                            |                                                          |                                                  |  |                                              | (70 | ) |   |  | 
|                                                          |  |                                               |        |                                              |                                                          |                                                   |  |                                              |     |   |   |   | 
|Total                                                     |  | $                                             | 22,993 |                                              | $                                                        | 23,063                                            |  | $                                            | (70 | ) | $ |  | 
|                                                          |  |                                               |        |                                              |                                                          |                                                   |  |                                              |     |   |   |   | 

When
available, the Company uses quoted market prices to determine the fair value
    of its assets and liabilities included in Level 1. When quoted market prices
    are unobservable, the Company uses quotes from independent pricing vendors
    based on recent trading activity and other relevant information. The carrying
    value of other financial instruments, including cash, accounts receivable,
    accounts payable, and accrued liabilities approximate fair value due to their
    short maturities.

13

---



Note 9: Share-Based Payments

We recorded
share-based compensation expense for the three months ended September 30, 2010
and 2009 of $947 and $674, respectively, with a related tax benefit of $341 and
$243, respectively. Of these amounts, $7 was recorded as part of discontinued
operations for the three months ended September 30, 2009.

Stock Options

We utilized
the Black-Scholes valuation method to determine the weighted average fair value
of the stock option grants for both fiscal 2011 and 2010 stock option
valuations. The key assumptions for this valuation method include the expected
term of the option, stock price volatility, risk-free interest rate, dividend
yield, exercise price, and forfeiture rate. Many of these assumptions are
judgmental and highly sensitive in the determination of compensation expense.
Under the assumptions indicated below, the weighted-average fair value of stock
option grants for the three months ended September 30, 2010 and 2009 were $2.99
and $3.67, respectively. During the three months ended September 30, 2010 and
2009, we issued an aggregate of 50,000 and 140,000 options, respectively.

The table
below indicates the key assumptions used in the option valuation calculations
for options granted in the periods presented:

|                         |  |                                  |           |      |  |           | 
|------------------------ |  | -------------------------------- | --------- | ---- |  | --------- | 
|                         |  | Three Months Ended September 30, |          
|                         |  |                                  |          
|                         |  | 2010                             |           | 2009 | 
|                         |  |                                  |           |      | 
|Term                     |  |                                  | 4.1 Years |      |  | 5.1 Years | 
|Volatility               |  |                                  | 45.7%     |      |  | 59.8%     | 
|Dividend
 yield          |  |                                  | 0.0%      |      |  | 0.0%      | 
|Risk-free
 interest rate |  |                                  | 1.1%      |      |  | 2.5%      | 
|Forfeiture
 rate         |  |                                  | 0.0%      |      |  | 10.8%     | 

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 September 30, 2010 and 2009, an aggregate of 31,000 and 268,000
shares of restricted stock units were issued at a weighted average grant price
of $7.98 and $5.38, 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.

Note 10: Receivables

At September
30, 2010 and June 30, 2010, receivables were as follows:

|                                 |  |                     |        |               |   |        |  
|-------------------------------- |  | ------------------- | ------ | ------------- | - | ------ | -
|                                 |  | September 30,
 2010 |        | June 30, 2010 |  
|                                 |  |                     |        |               |  
|Trade                            |  | $                   | 25,194 |               | $ | 21,314 |  
|Other                            |  |                     | 246    |               |   | 609    |  
|                                 |  |                     |        |               |   |        |  
|                                 |  |                     | 25,440 |               |   | 21,923 |  
|Allowance
 for doubtful accounts |  |                     | (2,083 | )             |   | (1,975 | )
|                                 |  |                     |        |               |   |        |  
|                                 |  | $                   | 23,357 |               | $ | 19,948 |  
|                                 |  |                     |        |               |   |        |  

14

---



Note 11: Inventories

Inventories
are stated at the lower of cost (determined on a first-in, first-out basis) or
market. At September 30, 2010 and June 30, 2010, inventories were as follows:

|                                      |  |                     |        |                 |   |        | 
|------------------------------------- |  | ------------------- | ------ | --------------- | - | ------ | 
|                                      |  | September 30,
 2010 |        | June
 30,
 2010 |  
|                                      |  |                     |        |                 |  
|Raw materials and
 manufactured parts |  | $                   | 12,993 |                 | $ | 12,682 | 
|Work in process                       |  |                     | 8,823  |                 |   | 9,322  | 
|Finished goods                        |  |                     | 3,246  |                 |   | 3,216  | 
|                                      |  |                     |        |                 |   |        | 
|                                      |  | $                   | 25,062 |                 | $ | 25,220 | 
|                                      |  |                     |        |                 |   |        | 

Note 12: Property, Plant, and Equipment

Property,
plant, and equipment are stated at cost. Maintenance and repairs are charged to
expense as incurred. Management evaluates, on an ongoing basis, the carrying
value of our property, plant, and equipment and makes adjustments when
impairments are identified. Depreciation is based on the estimated useful lives
of the various classes of assets and is computed using the straight-line
method. At September 30, 2010 and June 30, 2010, property, plant, and equipment
were as follows:

|                                            |  |                     |         |                 |   |                                 |   |  |       | 
|------------------------------------------- |  | ------------------- | ------- | --------------- | - | ------------------------------- | - |  | ----- | 
|                                            |  | September 30,
 2010 |         | June
 30,
 2010 |   | Estimated
 Useful Life
 (Years) |  
|                                            |  |                     |         |                 |   |                                 |  
|Land                                        |  | $                   | 615     |                 | $ | 615                             |   |  |      | 
|Building and improvements                   |  |                     | 17,502  |                 |   | 17,390                          |   |  | 15-40 | 
|Machinery, equipment, and
 office furniture |  |                     | 56,240  |                 |   | 56,136                          |   |  | 3-8   | 
|Leasehold improvements                      |  |                     | 1,021   |                 |   | 1,002                           |   |  | 1-5   | 
|Construction in progress                    |  |                     | 199     |                 |   | 332                             |   |  |      | 
|                                            |  |                     |         |                 |   |                                 |   |  |       | 
|                                            |  |                     | 75,577  |                 |   | 75,475                          |   |  |       | 
|Accumulated depreciation                    |  |                     | (53,404 | )               |   | (52,446                         | ) |  |       | 
|                                            |  |                     |         |                 |   |                                 |   |  |       | 
|                                            |  | $                   | 22,173  |                 | $ | 23,029                          |   |  |       | 
|                                            |  |                     |         |                 |   |                                 |   |  |       | 

Depreciation
expense was $1,257 and $1,429 for the three months ended September 30, 2010 and
2009, respectively.

Note 13: 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.

As part of a
strategic business partnership with Nanometrics entered into in June 2009, all
related semiconductor systems that were purchased by Nanometrics are being
warranted by us through June 2011. Nanometrics will provide warranty service
and invoice us for incurred expenses. As of September 30, 2010 and 2009, $47
and $182, respectively, of our warranty liability relates to these
semiconductor systems.

15

---



The following
is a reconciliation of the accrued warranty liability, which is included in the
other accrued liabilities in the condensed consolidated balance sheets:

|                                                                      |  |                                  |       |      |   |       |  
|--------------------------------------------------------------------- |  | -------------------------------- | ----- | ---- | - | ----- | -
|                                                                      |  | Three Months Ended September 30, |      
|                                                                      |  |                                  |      
|                                                                      |  | 2010                             |       | 2009 |  
|                                                                      |  |                                  |       |      |  
|Beginning
 balance                                                    |  | $                                | 1,360 |      | $ | 1,614 |  
|Reductions for payments made                                          |  |                                  | (301  | )    |   | (253  | )
|Changes in accruals related to
 pre-existing warranties               |  |                                  | 220   |      |   | (33   | )
|Changes in accruals related to warranties
 made in the current period |  |                                  | 139   |      |   | 216   |  
|                                                                      |  |                                  |       |      |   |       |  
|Ending
 balance                                                       |  | $                                | 1,418 |      | $ | 1,544 |  
|                                                                      |  |                                  |       |      |   |       |  

Note 14: Intangible Assets

Intangible
assets include patents, trademarks, customer relationships and technology, and
a covenant not-to-compete. The cost of patents, trademarks, and customer
relationships and technology is amortized on a straight-line basis over
estimated useful lives ranging from 3-17 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 September
30, 2010, current liabilities include $131 and long-term liabilities include
$97 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 September 30, 2010 and June 30, 2010 were as follows:

|                                       |  |                     |        |                |   |        |  
|-------------------------------------- |  | ------------------- | ------ | -------------- | - | ------ | -
|                                       |  | September 30,
 2010 |        | June 30,
 2010 |  
|                                       |  |                     |        |                |  
|Patents and
 trademarks                |  | $                   | 6,063  |                | $ | 5,882  |  
|Covenant
 not-to-compete               |  |                     | 851    |                |   | 851    |  
|Customer
 relationships and technology |  |                     | 1,540  |                |   | 1,540  |  
|                                       |  |                     |        |                |   |        |  
|                                       |  |                     | 8,454  |                |   | 8,273  |  
|Accumulated
 amortization              |  |                     | (3,120 | )              |   | (2,886 | )
|                                       |  |                     |        |                |   |        |  
|Total                                  |  | $                   | 5,334  |                | $ | 5,387  |  
|                                       |  |                     |        |                |   |        |  

Intangible
amortization expense was $234 and $204 for the three months ended September 30,
2010 and 2009, respectively. This amortization expense related to certain
intangible assets is included in cost of goods sold in the condensed
consolidated statements of operations.

Based on the
carrying amount of the intangible assets as of September 30, 2010, the
estimated future amortization expense is as follows:

|                                  |  |                                        |   |       |  | 
|--------------------------------- |  | -------------------------------------- | - | ----- |  | 
|                                  |  | Estimated Future Amortization
 Expense |  
|                                  |  |                                        |  
|Nine months
 ending June 30, 2011 |  |                                        | $ | 652   |  | 
|Fiscal year
 ending June 30, 2012 |  |                                        |   | 813   |  | 
|Fiscal year
 ending June 30, 2013 |  |                                        |   | 798   |  | 
|Fiscal year
 ending June 30, 2014 |  |                                        |   | 808   |  | 
|Fiscal year
 ending June 30, 2015 |  |                                        |   | 983   |  | 
|Thereafter                        |  |                                        |   | 1,280 |  | 
|                                  |  |                                        |   |       |  | 
|Total                             |  |                                        | $ | 5,334 |  | 
|                                  |  |                                        |   |       |  | 

16

---



Note 15: Segment Information

Zygos
Metrology Solutions division (segment) consists of OEM and in-line products
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 months ended September 30,
2010 and 2009, segment revenues and gross margin are as follows:

|                                    |  |                                  |        |      |   |        |  
|----------------------------------- |  | -------------------------------- | ------ | ---- | - | ------ | -
|                                    |  | Three Months Ended September 30, |       
|                                    |  |                                  |       
|                                    |  | 2010                             |        | 2009 |  
|                                    |  |                                  |        |      |  
|Metrology Solutions                 |  |                                  |        |      |   |        |  
|Net revenues                        |  | $                                | 20,849 |      | $ | 15,977 |  
|Gross margin                        |  | $                                | 11,109 |      | $ | 7,471  |  
|Gross margin as a % of net revenues |  |                                  | 53     | %    |   | 47     | %
|Optical Systems                     |  |                                  |        |      |   |        |  
|Net revenues                        |  | $                                | 10,270 |      | $ | 5,348  |  
|Gross margin                        |  | $                                | 3,094  |      | $ | (297   | )
|Gross margin as a % of net revenues |  |                                  | 30     | %    |   | -6     | %
|                                    |  |                                  |        |      |   |        |  
|Total                               |  |                                  |        |      |   |        |  
|Net revenues                        |  | $                                | 31,119 |      | $ | 21,325 |  
|Gross margin                        |  | $                                | 14,203 |      | $ | 7,174  |  
|Gross margin as a % of net revenues |  |                                  | 46     | %    |   | 34     | %

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 September 30, |       
|            |  |                                   |       
|            |  | 2010                              |        | 2009 |  
|            |  |                                   |        |      |  
|Americas    |  | $                                 | 16,908 |      | $ | 13,285 | 
|Europe      |  |                                   | 3,611  |      |   | 2,317  | 
|Japan       |  |                                   | 5,882  |      |   | 3,829  | 
|Pacific Rim |  |                                   | 4,718  |      |   | 1,894  | 
|            |  |                                   |        |      |   |        | 
|Total       |  | $                                 | 31,119 |      | $ | 21,325 | 
|            |  |                                   |        |      |   |        | 

Note 16: Transactions with Stockholder

Revenues from
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 $3,470 and $989 (11% and 5% of net revenues,
respectively) for the three months ended September 30, 2010 and 2009,
respectively. Selling prices of products sold to Canon are based, generally, on
the terms customarily given to distributors. At September 30, 2010 and June 30,
2010, there were, in the aggregate, $1,433 and $667, respectively, of trade
accounts receivable from Canon.

17

---



Note 17: 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 in
miscellaneous income. 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
September 30, 2010, we had four currency contracts outstanding involving our
Japanese operations with notional amounts aggregating $1,700. These foreign
currency hedges are not considered designated hedging instruments. For the
three months ended September 30, 2010 and 2009, we recognized net unrealized
gains and (losses) of $3 and ($147), respectively, from foreign currency
forward contracts. These unrealized gains and losses are substantially offset
by foreign exchange losses and gains on intercompany balances recorded by our
subsidiary and are recorded in miscellaneous income on our condensed
consolidated statements of operations.

The following
table summarizes the fair value of derivative instruments as of September 30,
2010:

| |                                                   |  |                                
| | ------------------------------------------------- |  | -------------------------------
| | Derivatives not designated as hedging instruments |  | Balance Sheet Location         
| |                                                   |  |                                
|
| | Number of foreign exchange contracts:    4        |  | Other accrued liabilities   $67

Note
18: Income Taxes

|                    |  |                                  |      |             |  |        |   |            |      |   |  |    |  
|------------------- |  | -------------------------------- | ---- | ----------- |  | ------ | - | ---------- | ---- | - |  | -- | -
|                    |  | Three Months ended September 30, |     
|                    |  |                                  |     
|                    |  | 2010                             |      | 2009        | 
|                    |  |                                  |      |             | 
|                    |  | Amount                           |      | Tax 
 Rate% |  | Amount |   | Tax
 Rate% |     
|                    |  |                                  |      |             |  |        |   |            |     
|                    |  |                                  |      |             |  |        |   |            |      |   |  |    |  
|Income tax
 expense |  | $                                | (643 | )           |  | 17     | % | $          | (682 | ) |  | 22 | %

Income tax
expense for the three months ended September 30, 2010 included income taxes in
state and foreign jurisdictions. We continue to maintain a full valuation
allowance on our net deferred tax assets as of September 30, 2010. 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.

In the normal
course of business, we provide for uncertain tax positions and adjust our
unrecognized tax benefits or liabilities accordingly. For the three months
ended September 30, 2010, we did not recognize an additional liability or
realize any benefit for changes in our tax positions. We had no uncertain tax
benefits or liabilities as of September 30, 2010 and June 30, 2010. We are not
aware of any tax positions that would create a material adjustment to the
unrecognized tax benefits during the next twelve months.

The Company
files income tax returns in the U.S. federal jurisdiction and various state and
local jurisdictions and generally remains open to income tax examinations by
relevant tax authorities for tax years beginning with fiscal 2007. The Company
also files in foreign jurisdictions and generally remains open to income tax
examinations for tax years beginning with fiscal 2005.

18

---



Note 19: 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 September 30, 2010, we have a reserve of
$1,360 for potential royalty claims. In the opinion of management, any
settlement of royalty claims in excess of or below the amount recorded is not
expected to have a material effect on our financial condition, results of
operations, 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 20: Subsequent Events

On October 27,
2010, we announced that we entered into an agreement with ASML US, Inc. to
purchase substantially all the assets of their Richmond, California facility.
The purchase price being paid by us is the net book value of the acquired
assets, expected to be between $7-10 million, including current work-in-process
inventory. The acquisition, which is subject to certain closing conditions, is
expected to close by mid-November 2010.

19

---



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.

Net revenues
increased 46% in the quarter ended September 30, 2010, as compared with the
prior year period reflecting a strong increase in demand for our products.
Bookings for the three months ended September 30, 2010 (our first quarter of
fiscal 2011) were $34.0 million, as compared with $29.5 million and $22.7
million for the fourth quarter and first quarter, respectively, of fiscal 2010.
We believe our bookings for the next several quarters are sustainable at or near
first quarter of fiscal 2011 levels. Bookings for our Metrology Solutions
segment accounted for 68% of the bookings received, with the Optical Systems
segment accounting for 32% of bookings in the first fiscal 2011 quarter. In
September 2010, our Metrology Solutions segment received bookings, through our
joint venture in Shanghai, China for $3.5 million for large aperture laser
interferometer systems from leading Chinese optical research and manufacturing
organizations. Our Metrology Solutions segment includes an Instruments product
category and an OEM product category, which consists of lithography products,
display sensor heads, and semiconductor sensor heads. During the quarter our
Optical Systems segment was awarded a $4.1 million continuation contract for
Advanced Helmet Mount Displays from L-3 Communications, Link Simulation and
Training Division in support of two new programs from the United States and
Australian Air Forces. Our Optical Systems segment continues to include our
optical components and electro-optics contract manufacturing products.

On October 27,
2010, we announced that we entered into an agreement with ASML US, Inc. to
purchase substantially all the assets of their Richmond, California facility.
With this acquisition, we will considerably expand our optical manufacturing
capabilities, with the addition of high precision optical machining and
polishing equipment, aspheric lens manufacturing and diamond turning assets. We
expect to hire key management and employees of ASML Optics Richmond and will
operate the business in a 60,000 square-foot facility in Richmond, California.
Coupled with our existing leadership position in metrology, large flat optics
production, and electro-optical design and manufacturing, the Richmond
operation is expected to provide highly synergistic capabilities that can immediately
address new applications in semiconductor, defense, and the life-sciences
markets. The purchase price being paid by us is the net book value of the
acquired assets, expected to be between $7-10 million, including current
work-in-process inventory. The acquisition, which is subject to certain closing
conditions, is expected to close by mid-November 2010.

20

---



CRITICAL ACCOUNTING POLICIES, SIGNIFICANT
JUDGMENTS, AND ESTIMATES

The discussion
and analysis of our financial condition and results of operations are based
upon our condensed consolidated financial statements, which have been prepared
in accordance with accounting principles generally accepted in the United
States of America. The preparation of these condensed consolidated financial
statements requires us to make estimates and judgments that affect the reported
amounts of assets, liabilities, revenues, and expenses, and related disclosures
at the date of our condensed consolidated financial statements. On an on-going
basis, management evaluates its estimates and judgments, including those
related to bad debts, inventories, marketable securities, warranty obligations,
income taxes, long-lived assets, and share-based payments. Management bases its
estimates and judgments on historical experience and current market conditions
and on various other factors that are believed to be reasonable under the
circumstances, the results of which form the basis for making judgments about
the carrying values of assets and liabilities that are not readily apparent
from other sources. Actual results may differ from these estimates under
different assumptions or conditions. As discussed in Item 7, Managements
Discussion and Analysis of Financial Condition and Results of Operations of
the Companys Annual Report on Form 10-K for the fiscal year ended June 30,
2010, 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.

In October
2009, the FASB issued authoritative guidance on revenue recognition that became
effective for us on July 1, 2010. 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. The adoption of this new
guidance did 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 became effective for us 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. The adoption of this new
guidance did not have a material impact on our financial statements.

21

---



RESULTS OF OPERATIONS

Net Revenues by Segment

|                           |  |   |             |  |                  |     |        |   |                  |  |  |     |   | 
|-------------------------- |  | - | ----------- |  | ---------------- | --- | ------ | - | ---------------- |  |  | --- | - | 
|                           |  |   | Fiscal 2011 |  | Fiscal 2010      |    
|                           |  |   |             |  |                  |    
|(Dollars in
 millions)     |  |   | Amount      |  | Net
 Revenues
 % |     | Amount |   | Net
 Revenues
 % | 
|                           |  |   |             |  |                  |     |        |   |                  | 
|                           |  |   |             |  |                  |     |        |   |                  |  |  |     |  
|Quarter ended September 30 |  |   |             |  |                  |     |        |   |                  |  |  |     |  
|Metrology Solutions        |  | $ | 20.8        |  |                  | 67  | %      | $ | 16.0             |  |  | 75  | %
|Optical Systems            |  |   | 10.3        |  |                  | 33  | %      |   | 5.3              |  |  | 25  | %
|                           |  |   |             |  |                  |     |        |   |                  |  |  |     |  
|Total                      |  | $ | 31.1        |  |                  | 100 | %      | $ | 21.3             |  |  | 100 | %
|                           |  |   |             |  |                  |     |        |   |                  |  |  |     |  
|                           |  |   |             |  |                  |     |        |   |                  |  |  |     |  

Overall, net
revenues for the three months ended September 30, 2010 increased 46% as
compared with the prior year period, reflecting increases in Metrology
Solutions segment revenues of 30% and in Optical Systems segment revenues of
94%. The increase in Metrology Solutions segment net revenues was primarily due
to volume increases in lithography stage metrology of $3.1 million and
instruments of $2.8 million, partially offset by revenue decreases of $2.7
million in the display and semiconductor product lines that were previously
sold. An increase in bookings from Canon accounted for the majority of the
increase in lithography revenues. The increase in the Optical Systems segment
revenues was primarily due to increases in contract manufacturing and laser
fusion optics of $3.4 million and $1.3 million, respectively. The increase in
contract manufacturing revenues is primarily related to volume increases across
most product lines.

Revenues in
U.S. dollars for the three months ended September 30, 2010 and 2009 were
approximately 79% and 67% of total net revenues, respectively, with the
remaining 21% and 33%, respectively, being in Euro, Yen, or Yuan. 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 financial position and
results of operations.

Gross Margin by Segment

|                           |  |   |             |  |                 |    |        |   |                 |   |  |    |   | 
|-------------------------- |  | - | ----------- |  | --------------- | -- | ------ | - | --------------- | - |  | -- | - | 
|                           |  |   | Fiscal 2011 |  | Fiscal 2010     |   
|                           |  |   |             |  |                 |   
|(Dollars in millions)      |  |   | Amount      |  | Gross
 Margin % |    | Amount |   | Gross
 Margin % |  
|                           |  |   |             |  |                 |    |        |   |                 |  
|                           |  |   |             |  |                 |    |        |   |                 |   |  |    |  
|Quarter ended September 30 |  |   |             |  |                 |    |        |   |                 |   |  |    |  
|Metrology Solutions        |  | $ | 11.1        |  |                 | 53 | %      | $ | 7.5             |   |  | 47 | %
|Optical Systems            |  |   | 3.1         |  |                 | 30 | %      |   | (0.3            | ) |  | -6 | %
|                           |  |   |             |  |                 |    |        |   |                 |   |  |    |  
|Total                      |  | $ | 14.2        |  |                 | 46 | %      | $ | 7.2             |   |  | 34 | %
|                           |  |   |             |  |                 |    |        |   |                 |   |  |    |  

Gross margin
as a percentage of net revenues for the three months ended September 30, 2010
was 46%, which represents an increase of twelve percentage points from the
comparable prior year period. Within the Metrology Solutions segment, the
increase in gross margin as a percentage of net revenues for the three months
ended September 30, 2010 as compared with the prior year period was primarily
due to improved absorption of factory costs and, to a lesser extent, a change
in product mix towards higher margin products. Within the Optical Systems
segment, the increase in gross margin as a percentage of net revenues for the
three months ended September 30, 2010, as compared with the prior year period,
was primarily due to overall increased volume which led to a favorable mix of
higher margin products, improved absorption of factory costs and the resolution
of production issues related to certain optics that resulted in increased
manufacturing costs and delayed shipments during the comparable prior year
period.

22

---



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


|                           |  |   |             |  |               |    |        |   |                |  |  |    |   | 
|-------------------------- |  | - | ----------- |  | ------------- | -- | ------ | - | -------------- |  |  | -- | - | 
|                           |  |   | Fiscal 2011 |  | Fiscal
 2010  |   
|                           |  |   |             |  |               |   
|(Dollars in millions)      |  |   | Amount      |  | % of Revenues |    | Amount |   | %
 of Revenues | 
|                           |  |   |             |  |               |    |        |   |                | 
|                           |  |   |             |  |               |    |        |   |                |  |  |    |   | 
|Quarter ended September 30 |  | $ | 7.2         |  |               | 23 | %      | $ | 6.8            |  |  | 32 | %

SG&A
expenses increased in the three months ended September 30, 2010 by $0.4 million
from the comparable prior year period, primarily due to an increase in employee
related expenses, including the restoration of certain compensation costs of
$0.9 million, partially offset by savings related to the sale of our display
business of $0.5 million.

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


|                           |  |   |             |  |               |    |        |   |                |  |  |    |   | 
|-------------------------- |  | - | ----------- |  | ------------- | -- | ------ | - | -------------- |  |  | -- | - | 
|                           |  |   | Fiscal 2011 |  | Fiscal
 2010  |   
|                           |  |   |             |  |               |   
|(Dollars in millions)      |  |   | Amount      |  | % of Revenues |    | Amount |   | %
 of Revenues | 
|                           |  |   |             |  |               |    |        |   |                | 
|                           |  |   |             |  |               |    |        |   |                |  |  |    |   | 
|Quarter ended September 30 |  | $ | 3.4         |  |               | 11 | %      | $ | 3.6            |  |  | 17 | %

RD&E for the three months
ended September 30, 2010 decreased by $0.2 million, as compared with the prior
year period. The decrease in RD&E occurred primarily in the Metrology
Solutions segment related to cost cutting measures of $0.5 million partially
offset by incorporating RD&E of $0.3 million from the acquisition of
Zemetrics.

Other Income


|                           |  |   |             |  |                |   |        |   |                 |  |  |   |   | 
|-------------------------- |  | - | ----------- |  | -------------- | - | ------ | - | --------------- |  |  | - | - | 
|                           |  |   | Fiscal 2011 |  | Fiscal
 2010   |  
|                           |  |   |             |  |                |  
|(Dollars in millions)      |  |   | Amount      |  | % of
 Revenues |   | Amount |   | %
 of
 Revenues | 
|                           |  |   |             |  |                |   |        |   |                 | 
|                           |  |   |             |  |                |   |        |   |                 |  |  |   |   | 
|Quarter ended September 30 |  | $ | 0.2         |  |                | 1 | %      | $ | 0.1             |  |  | 1 | %

Other income for the three
months ended September 30, 2010 increased by $0.1 million as compared with the
prior year period, primarily due to realized and unrealized foreign currency
gains.

Income Tax
Expense


|                           |  |   |             |   |              |    |        |   |              |   |  |    |   | 
|-------------------------- |  | - | ----------- | - | ------------ | -- | ------ | - | ------------ | - |  | -- | - | 
|                           |  |   | Fiscal 2011 |   | Fiscal
 2010 |   
|                           |  |   |             |   |              |   
|(Dollars in millions)      |  |   | Amount      |   | Tax Rate
 %  |    | Amount |   | Tax
 Rate
 % |  
|                           |  |   |             |   |              |    |        |   |              |  
|                           |  |   |             |   |              |    |        |   |              |   |  |    |   | 
|Quarter ended September 30 |  | $ | (0.6        | ) |              | 17 | %      | $ | (0.7         | ) |  | 22 | %

Income tax expense for the
three months ended September 30, 2010 and 2009 included income taxes in state
and foreign jurisdictions. There was no United States federal income tax
expenses for the three months ended September 30, 2010 or income tax benefit in
fiscal 2010 due to valuation allowances on deferred tax assets, including net
operating loss carryforwards in the United States. We continue to maintain a
valuation allowance on all of our net deferred tax assets at September 30,
2010. 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.

Earnings
(Loss) from Discontinued Operations, net of tax


|                           |  |   |             |  |                |   |        |   |                 |   |  |   |   | 
|-------------------------- |  | - | ----------- |  | -------------- | - | ------ | - | --------------- | - |  | - | - | 
|                           |  |   | Fiscal 2011 |  | Fiscal
 2010   |  
|                           |  |   |             |  |                |  
|(Dollars in millions)      |  |   | Amount      |  | % of
 Revenues |   | Amount |   | %
 of
 Revenues |  
|                           |  |   |             |  |                |   |        |   |                 |  
|                           |  |   |             |  |                |   |        |   |                 |   |  |   |   | 
|Quarter ended September 30 |  | $ | 0.1         |  |                | 0 | %      | $ | (1.8            | ) |  | 8 | %

The loss from
discontinued operations for the three months ended September 30, 2009 of $1.8
million was due to severance and other closure costs, primarily related to the
closure of our Singapore IC packaging operations of our Vision Systems product
line.

23

---



TRANSACTIONS WITH STOCKHOLDER

Revenues from
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 $3.5 million and $1.0 million (11% and 5% of net
revenues, respectively) for the three months ended September 30, 2010 and 2009,
respectively. Selling prices of products sold to Canon are based, generally, on
the terms customarily given to distributors. At September 30, 2010 and June 30,
2010, there were, in the aggregate, $1.4 million and $0.7 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, and the
availability of bank lines of credit.

At September
30, 2010, cash and marketable securities were $49.7 million, an increase of
$2.2 million from $47.5 million at June 30, 2010. Our marketable securities
consist of $1.0 million in a United States Treasury Bill as security for bank
guarantees and standby letters of credit. These letters of credit are used
primarily overseas to cover certain warranty periods and are generally valued
at 10% of the associated contract value. As of September 30, 2010, a negligible
amount of standby letters of credit are outstanding. These letters of credit
are expected to expire at varying dates through January 2012. The cash
equivalents balance in our money market account, which is invested primarily in
U.S. government securities, is $21.9 million as of September 30, 2010. We do
not believe there is any risk to liquidity in the money market account, nor are
there currently any limits on redemptions.

Cash flows
from operating activities from continuing operations for the first three months
ended September 30, 2010 remained flat as compared with the prior year period.
The positive change in net earnings from continuing operations was largely
offset by the change in receivables and inventory related cash flows.

Cash flows
provided by investing activities for the first three months ended September 30,
2010 decreased by $1.0 million as compared with the prior year period. This
decrease was primarily related to a decrease in proceeds from marketable
securities.

Cash flows
used for financing activities in the first three months ended September 30,
2010 decreased by $0.7 million as compared with the prior year period. For the
three months ended September 30, 2010, there was a dividend payment of $0.7
million to a noncontrolling interest.

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. 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
future market volatility, however, cannot be predicted.

24

---



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 three
months ended September 30, 2010. 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 for the year ended June 30, 2010, filed with the
Securities and Exchange Commission (the 2010 Annual Report).

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.

We identified a material weakness on May 10, 2010
related to inadequate controls regarding our accounting for unusual or complex
transactions and, subsequently, concluded that our internal control over
financial reporting was not effective at June 30, 2010. We began the process
    of implementing additional controls in our financial reporting process in
    the fourth quarter of fiscal 2010, including adding control processes to
    aid in identifying transactions that might have unusual or complex accounting
issues, a process to enhance our analysis of accounting for unusual or complex
transactions as they arise in accordance with accounting principles generally
accepted in the United States of America, and have added external accounting
resources to review our accounting for unusual or complex transactions.
However, certain controls designed and implemented to address the identified
material weakness in the period-end financial reporting process have not had
    a sufficient period of time to operate for our management to conclude that
they are operating effectively at September 30, 2010.

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.

25

---



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 2010 Annual Report, which
could materially affect our business, financial condition, or future results.
The risks described in our 2010 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.

Acquisitions may entail certain operational and financial
risks.


Our growth strategy includes expanding our products
and services, and we may seek acquisitions or make internal investments to
strategically expand our business. We regularly review potential acquisitions
of businesses, technologies, or products complementary to our business and
periodically engage in discussions regarding such possible acquisitions.
Acquisitions involve numerous risks, including some or all of the following:
substantial cash expenditures and capital investments; potentially dilutive
issuance of equity securities; incurrence of debt and contingent liabilities;
amortization of certain intangible assets; difficulties in assimilating the
operations and products of the acquired companies; diverting our managements
attention away from other business concerns; risks of entering markets in which
we have limited or no direct experience; the inability to manage the growth
expected for various acquisitions; potential loss of key employees of the
acquired companies in the process of integrating personnel with disparate
business backgrounds; and combining different corporate cultures.


We cannot assure you that any
acquisition, including the acquisition of the assets of ASMLs Richmond, California
facility, if consummated, will result in long-term benefits to us or that our
management will be able to effectively manage the acquired businesses. We may
also incorrectly judge the value or worth of an acquired company or business or
of a line of business to which we devote internal resources and funding. We
have in the past disposed or divested ourselves of several companies or lines
of business that previously were acquired by us or in which we internally
invested, at a significant net loss to us.

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

The following table provides information about our
purchases during the quarter ended September 30, 2010 of equity securities that
are registered by us pursuant to Section 12 of the Exchange Act.

|                                        |  |                                       |        |                               |   |                                                                                           |  |                                                                                                            |   |  |   |     | 
|--------------------------------------- |  | ------------------------------------- | ------ | ----------------------------- | - | ----------------------------------------------------------------------------------------- |  | ---------------------------------------------------------------------------------------------------------- | - |  | - | --- | 
|Period                                  |  | Total number of
 shares purchased (2) |        | Average price
 paid per share |   | Total number of
 shares purchased as
 part of publicly 
 announced
 plans or programs (1) |  | Approximate dollar
 value of shares that
 may yet be purchased
 under the plans or
 programs (in millions) |  
|                                        |  |                                       |        |                               |   |                                                                                           |  |                                                                                                            |  
|                                        |  |                                       |        |                               |   |                                                                                           |  |                                                                                                            |  
|July 1, 2010 -
 July 31, 2010           |  |                                       |       |                               |   |                                                                                          |  |                                                                                                            |  |  | $ | 5.0 | 
|August 1, 2010 -
 August 31, 2010       |  |                                       | 32,140 |                               | $ | 7.49                                                                                      |  |                                                                                                            |  |  | $ | 5.0 | 
|September 1,
 2010 - September 30, 2010 |  |                                       |       |                               |   |                                                                                          |  |                                                                                                            |  |  | $ | 5.0 | 

| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (1) | 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 September 30, 2010, 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.
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | (2) | All shares were repurchased from certain of our
 employees in satisfaction of withholding tax obligations arising from the
 vesting of their restricted stock.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       

26

---



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                                            

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                             | 
| | Chairman, President, and Chief Executive Officer
| |                                                  |  |  | 
| | /s/ Michael M. Vehlies                           |  |  | 
| |                                                  |  |  | 
| | Michael M. Vehlies                               | 
| | Corporate Controller,                            | 
| | (principal financial officer)                   
| |                                                  |  |  | 
| | Date: November 9, 2010                          

27

---



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                                            

---