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, 2009
|                                |                    | 
|                               
|                                | or                 | 

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

For the
transition period from ____________________________________ to
__________________________________


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

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

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

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

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


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). (2)


o YES o NO


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

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

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


| |            
| | -----------
| | o
 YESx
 NO

1

---



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.

16,989,808 shares of Common Stock, $.10 Par
Value, at November 2, 2009

(1) In
connection with its previously disclosed acquisition of the assets of
Solvision, Inc., the registrant was required to file stand-alone audited
financial statements for Solvision, Inc. for each of its last two fiscal years,
within 75 days of such acquisition (or by May 13, 2008). The registrant has
filed such audited financial statements in an 8-K/A with the SEC on December 5,
2008.

(2) 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 our financial performance, condition and operations, and the
business strategy, plans, anticipated sales, orders, market acceptance, growth
rates, market opportunities, and objectives of management of the Company for
future operations are forward-looking statements. Forward-looking statements
are intended to provide managements current expectations or plans for the
future operating and financial performance of the Company based upon
information currently available and assumptions currently believed to be valid.
Forward-looking statements can be identified by the use of words such as
anticipate, believe, estimate, expect, intend, plans, strategy, project,
and other words of similar meaning in connection with a discussion of future
operating or financial performance. Actual results could differ materially from
those contemplated by the forward-looking statements as a result of certain
factors. Among the important factors that could cause actual events to differ
materially from those in the forward-looking statements are fluctuations in
capital spending of our customers; fluctuations in net sales to our major
customer; manufacturing and supplier risks; risks of order cancellations,
push-outs and de-bookings; dependence on timing and market acceptance of new
product development; rapid technological and market change; risks in
international operations; risks related to the reorganization of our business; dependence
on proprietary technology and key personnel; length of the sales 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; and the risk related to the Companys
transition to new 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, as
amended, for the fiscal year ended June 30, 2009.

2

---



PART I - Financial Information

Item 1. Financial Statements

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

|                                                                                                    |  |                                   |        |      |   |        |  
|--------------------------------------------------------------------------------------------------- |  | --------------------------------- | ------ | ---- | - | ------ | -
|                                                                                                    |  | Three Months Ended
 September 30, |       
|                                                                                                    |  |                                   |       
|                                                                                                    |  | 2009                              |        | 2008 |  
|                                                                                                    |  |                                   |        |      |  
|                                                                                                   
|Net sales                                                                                           |  | $                                 | 21,325 |      | $ | 37,493 |  
|Cost of goods sold                                                                                  |  |                                   | 14,151 |      |   | 21,006 |  
|                                                                                                    |  |                                   |        |      |   |        |  
|Gross profit                                                                                        |  |                                   | 7,174  |      |   | 16,487 |  
|                                                                                                    |  |                                   |        |      |   |        |  
|                                                                                                   
|Selling, general, and administrative
 expenses                                                      |  |                                   | 6,555  |      |   | 9,085  |  
|Research, development, and engineering
 expenses                                                    |  |                                   | 3,647  |      |   | 5,306  |  
|Provision for doubtful accounts and notes                                                           |  |                                   | 221    |      |   | 382    |  
|                                                                                                    |  |                                   |        |      |   |        |  
|Operating profit (loss)                                                                             |  |                                   | (3,249 | )    |   | 1,714  |  
|                                                                                                    |  |                                   |        |      |   |        |  
|                                                                                                   
|Other income
 (expense)                                                                             |  |                                   |        |      |   |        |  
|Interest income                                                                                     |  |                                   | 51     |      |   | 369    |  
|Miscellaneous income (expense)                                                                      |  |                                   | 60     |      |   | (444   | )
|                                                                                                    |  |                                   |        |      |   |        |  
|Total other income (expense)                                                                        |  |                                   | 111    |      |   | (75    | )
|                                                                                                    |  |                                   |        |      |   |        |  
|Earnings (loss) from continuing operations
 before income taxes, including non-controlling interest |  |                                   | (3,138 | )    |   | 1,639  |  
|Income tax expense                                                                                  |  |                                   | (682   | )    |   | (531   | )
|                                                                                                    |  |                                   |        |      |   |        |  
|Net earnings (loss) from continuing
 operations                                                     |  |                                   | (3,820 | )    |   | 1,108  |  
|                                                                                                   
|Loss from discontinued operations, net of
 tax of $0                                                |  |                                   | (1,835 | )    |   | (329   | )
|                                                                                                    |  |                                   |        |      |   |        |  
|Net earnings (loss) including
 non-controlling interest                                             |  |                                   | (5,655 | )    |   | 779    |  
|Net earnings attributable to
 non-controlling interest                                              |  |                                   | 132    |      |   | 276    |  
|                                                                                                    |  |                                   |        |      |   |        |  
|Net earnings (loss) attributable to Zygo
 Corporation                                               |  | $                                 | (5,787 | )    | $ | 503    |  
|                                                                                                    |  |                                   |        |      |   |        |  
|Net earnings (loss) from continuing
 operations attributable to Zygo Corporation                    |  | $                                 | (3,952 | )    | $ | 832    |  
|                                                                                                    |  |                                   |        |      |   |        |  
|                                                                                                    |  |                                   |        |      |   |        |  
|Basic and diluted - Earnings (loss) per
 share attributable to Zygo Corporation                     |  |                                   |        |      |   |        |  
|Continuing operations                                                                               |  | $                                 | (0.23  | )    | $ | 0.05   |  
|Discontinued operations                                                                             |  |                                   | (0.11  | )    |   | (0.02  | )
|                                                                                                    |  |                                   |        |      |   |        |  
|Net earnings (loss) per share                                                                       |  | $                                 | (0.34  | )    | $ | 0.03   |  
|                                                                                                    |  |                                   |        |      |   |        |  
|Weighted average shares outstanding                                                                 |  |                                   |        |      |   |        |  
|Basic shares                                                                                        |  |                                   | 16,943 |      |   | 16,775 |  
|                                                                                                    |  |                                   |        |      |   |        |  
|Diluted shares                                                                                      |  |                                   | 16,943 |      |   | 17,162 |  
|                                                                                                    |  |                                   |        |      |   |        |  
|Amounts Attributable to Zygo Corporation                                                            |  |                                   |        |      |   |        |  
|Net earnings (loss) from continuing
 operations attributable to Zygo Corporation                    |  |                                   | (3,952 | )    |   | 832    |  
|Discontinued operations, net of tax of $0                                                           |  |                                   | (1,835 | )    |   | (329   | )
|                                                                                                    |  |                                   |        |      |   |        |  
|Net earnings (loss) attributable to Zygo
 Corporation                                               |  | $                                 | (5,787 | )    | $ | 503    |  
|                                                                                                    |  |                                   |        |      |   |        |  

See accompanying notes to condensed
consolidated financial statements.

3

---



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

|                                                                                                                                                                                             |  |                    |         |               |   |         |  
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------ | ------- | ------------- | - | ------- | -
|                                                                                                                                                                                             |  | September 30, 2009 |         | June
30, 2009 |  
|                                                                                                                                                                                             |  |                    |         |               |  
|Assets                                                                                                                                                                                       |  |                    |         |               |   |         |  
|Current assets:                                                                                                                                                                              |  |                    |         |               |   |         |  
|Cash and cash equivalents                                                                                                                                                                    |  | $                  | 35,721  |               | $ | 32,723  |  
|Marketable securities                                                                                                                                                                        |  |                    | 3,005   |               |   | 4,015   |  
|Receivables, net of allowance for doubtful accounts of $3,305 and
 $2,550, respectively                                                                                                      |  |                    | 19,999  |               |   | 20,874  |  
|Inventories                                                                                                                                                                                  |  |                    | 28,162  |               |   | 30,452  |  
|Prepaid expenses and other                                                                                                                                                                   |  |                    | 1,729   |               |   | 1,527   |  
|Income tax receivable                                                                                                                                                                        |  |                    | 307     |               |   | 1,022   |  
|Current assets of discontinued operations                                                                                                                                                    |  |                    | 25      |               |   | 294     |  
|                                                                                                                                                                                             |  |                    |         |               |   |         |  
|Total current assets                                                                                                                                                                         |  |                    | 88,948  |               |   | 90,907  |  
|                                                                                                                                                                                             |  |                    |         |               |   |         |  
|Marketable securities                                                                                                                                                                        |  |                    | 603     |               |   | 499     |  
|Property, plant, and equipment, net                                                                                                                                                          |  |                    | 26,110  |               |   | 27,325  |  
|Intangible assets, net                                                                                                                                                                       |  |                    | 4,203   |               |   | 4,211   |  
|Other assets                                                                                                                                                                                 |  |                    | 1,013   |               |   | 1,013   |  
|Non-current assets of discontinued operations                                                                                                                                                |  |                    |        |               |   | 144     |  
|                                                                                                                                                                                             |  |                    |         |               |   |         |  
|Total assets                                                                                                                                                                                 |  | $                  | 120,877 |               | $ | 124,099 |  
|                                                                                                                                                                                             |  |                    |         |               |   |         |  
|                                                                                                                                                                                             |  |                    |         |               |   |         |  
|Liabilities and Stockholders Equity                                                                                                                                                         |  |                    |         |               |   |         |  
|Current liabilities:                                                                                                                                                                         |  |                    |         |               |   |         |  
|Accounts payable                                                                                                                                                                             |  | $                  | 5,848   |               | $ | 5,089   |  
|Accrued progress payments and deferred revenue                                                                                                                                               |  |                    | 6,636   |               |   | 5,924   |  
|Accrued salaries and wages                                                                                                                                                                   |  |                    | 3,016   |               |   | 3,508   |  
|Other accrued liabilities                                                                                                                                                                    |  |                    | 5,388   |               |   | 6,313   |  
|Income tax payable                                                                                                                                                                           |  |                    | 615     |               |   |        |  
|Current liabilities of discontinued operations                                                                                                                                               |  |                    | 690     |               |   | 331     |  
|                                                                                                                                                                                             |  |                    |         |               |   |         |  
|Total current liabilities                                                                                                                                                                    |  |                    | 22,193  |               |   | 21,165  |  
|                                                                                                                                                                                             |  |                    |         |               |   |         |  
|Long-term income tax payable                                                                                                                                                                 |  |                    | 1,826   |               |   | 1,826   |  
|Other long-term liabilities                                                                                                                                                                  |  |                    | 1,013   |               |   | 1,081   |  
|Non-current liabilities of discontinued operations                                                                                                                                           |  |                    | 364     |               |   |        |  
|                                                                                                                                                                                            
|Commitments and contingencies                                                                                                                                                                |  |                    |        |               |   |        |  
|                                                                                                                                                                                            
|Stockholders equity:                                                                                                                                                                        |  |                    |         |               |   |         |  
|Common stock, $0.10 par value per share: 40,000,000 shares authorized;
 19,144,935 shares issued (19,044,331 at June 30, 2009); 16,983,500 shares
 outstanding (16,914,978 at June 30, 2009) |  |                    | 1,914   |               |   | 1,904   |  
|Additional paid-in capital                                                                                                                                                                   |  |                    | 156,848 |               |   | 156,176 |  
|Retained earnings                                                                                                                                                                            |  |                    | (39,337 | )             |   | (33,550 | )
|Accumulated other comprehensive income (loss):                                                                                                                                               |  |                    |         |               |   |         |  
|Currency translation
 effects                                                                                                                                                                |  |                    | 268     |               |   | (306    | )
|Treasury stock, at cost, 2,161,435 shares (2,129,353 at June 30, 2009)                                                                                                                       |  |                    | (25,848 | )             |   | (25,641 | )
|                                                                                                                                                                                             |  |                    |         |               |   |         |  
|Total stockholders equity - Zygo Corporation                                                                                                                                                |  |                    | 93,845  |               |   | 98,583  |  
|Non-controlling interest                                                                                                                                                                     |  |                    | 1,636   |               |   | 1,444   |  
|                                                                                                                                                                                             |  |                    |         |               |   |         |  
|Total stockholders equity                                                                                                                                                                   |  |                    | 95,481  |               |   | 100,027 |  
|                                                                                                                                                                                             |  |                    |         |               |   |         |  
|Total liabilities and stockholders equity                                                                                                                                                   |  | $                  | 120,877 |               | $ | 124,099 |  
|                                                                                                                                                                                             |  |                    |         |               |   |         |  

See accompanying notes to condensed consolidated
financial statements.

4

---



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

|                                                          |  |              |        |                            |   |                |        |                   |         |                                               |  |                  |  |                           |         |              |   |         |   |   |        |   |   |         |   |   |       |   |   |         |   |                                                        |        |  
|--------------------------------------------------------- |  | ------------ | ------ | -------------------------- | - | -------------- | ------ | ----------------- | ------- | --------------------------------------------- |  | ---------------- |  | ------------------------- | ------- | ------------ | - | ------- | - | - | ------ | - | - | ------- | - | - | ----- | - | - | ------- | - | ------------------------------------------------------ | ------ | -
|                                                          |  |              |        |                            |   |                |        |                   |         |                                               |  |                  |  |                           |         |              |   |         |   |   |        |   |   |         |   |   |       |   |   |         |   | Comprehensive
Income (Loss)
Attributable
to Zygo Corp. |       
|                                                          |  | Common
Stock |        | Additional
Paid-In
Capital |   | Treasury
Stock |        | Retained
Earnings |         | Accumulated
Other
Comprehensive
Income (Loss) |  | Total
Zygo Corp. |  | Non-
Controlling
Interest |         | Total
Equity |   |        
|                                                          |  |              |        |                            |   |                |        |                   |         |                                               |  |                 
|                                                          |  | Shares       |        | Amount                     |   |                | Shares |                   | Amount  |                                               |  |                  |  |                           |         |             
|                                                          |  |              |        |                            |   |                |        |                   |         |                                               |  |                  |  |                           |         |              |   |         |   |   |        |   |  
|Balance at June 30, 2008                                  |  |              | 16,732 |                            | $ | 1,882          |        | $                 | 152,663 |                                               |  | 2,092            |  | $                         | (25,390 | )            | $ | 32,514  |   | $ | 855    |   | $ | 162,524 |   | $ | 2,266 |   | $ | 164,790 |   |                                                        |        |  
|Comprehensive income (loss):                              |  |              |        |                            |   |                |        |                   |         |                                               |  |                  |  |                           |         |              |   |         |   |   |        |   |   |         |   |   |       |   |   |         |   |                                                        |        |  
|Net earnings                                              |  |              |       |                            |   |               |        |                   |        |                                               |  |                 |  |                           |        |              |   | 503     |   |   |       |   |   | 503     |   |   | 276   |   |   | 779     |   | $                                                      | 503    |  
|Unrealized loss on marketable securities                  |  |              |       |                            |   |               |        |                   |        |                                               |  |                 |  |                           |        |              |   |        |   |   | 39     |   |   | 39      |   |   |      |   |   | 39      |   |                                                        | 39     |  
|Foreign currency translation effect                       |  |              |       |                            |   |               |        |                   |        |                                               |  |                 |  |                           |        |              |   |        |   |   | (1,063 | ) |   | (1,063  | ) |   | (239  | ) |   | (1,302  | ) |                                                        | (1,063 | )
|                                                          |  |              |        |                            |   |                |        |                   |         |                                               |  |                  |  |                           |         |              |   |         |   |   |        |   |   |         |   |   |       |   |   |         |   |                                                        |        |  
|                                                          |  |              |        |                            |   |                |        |                   |         |                                               |  |                  |  |                           |         |              |   |         |   |   |        |   |   |         |   |   |       |   |   |         |   | $                                                      | (521   | )
|                                                          |  |              |        |                            |   |                |        |                   |         |                                               |  |                  |  |                           |         |              |   |         |   |   |        |   |   |         |   |   |       |   |   |         |   |                                                        |        |  
|Non-cash compensation charges related to stock options    |  |              |       |                            |   |               |        |                   | 1,022   |                                               |  |                 |  |                           |        |              |   |        |   |   |       |   |   | 1,022   |   |   |      |   |   | 1,022   |   |                                                        |        |  
|Employee stock purchase                                   |  |              | 13     |                            |   | 2              |        |                   | 121     |                                               |  |                 |  |                           |        |              |   |        |   |   |       |   |   | 123     |   |   |      |   |   | 123     |   |                                                        |        |  
|Restricted stock vesting and related tax effect           |  |              | 40     |                            |   | 5              |        |                   | (5      | )                                             |  | 13               |  |                           | (117    | )            |   |        |   |   |       |   |   | (117    | ) |   |      |   |   | (117    | ) |                                                        |        |  
|Exercise of employee stock options and related tax effect |  |              | 25     |                            |   | 2              |        |                   | 175     |                                               |  |                 |  |                           |        |              |   |        |   |   |       |   |   | 177     |   |   |      |   |   | 177     |   |                                                        |        |  
|                                                          |  |              |        |                            |   |                |        |                   |         |                                               |  |                  |  |                           |         |              |   |         |   |   |        |   |   |         |   |   |       |   |   |         |   |                                                        |        |  
|Balance at September 30, 2008                             |  |              | 16,810 |                            | $ | 1,891          |        | $                 | 153,976 |                                               |  | 2,105            |  | $                         | (25,507 | )            | $ | 33,017  |   | $ | (169   | ) | $ | 163,208 |   | $ | 2,303 |   | $ | 165,511 |   |                                                        |        |  
|                                                          |  |              |        |                            |   |                |        |                   |         |                                               |  |                  |  |                           |         |              |   |         |   |   |        |   |   |         |   |   |       |   |   |         |   |                                                        |        |  
|                                                          |  |              |        |                            |   |                |        |                   |         |                                               |  |                  |  |                           |         |              |   |         |   |   |        |   |   |         |   |   |       |   |   |         |   |                                                        |        |  
|Balance at June 30, 2009                                  |  |              | 16,915 |                            | $ | 1,904          |        | $                 | 156,176 |                                               |  | 2,129            |  | $                         | (25,641 | )            | $ | (33,550 | ) | $ | (306   | ) | $ | 98,583  |   | $ | 1,444 |   | $ | 100,027 |   |                                                        |        |  
|Comprehensive income (loss):                              |  |              |        |                            |   |                |        |                   |         |                                               |  |                  |  |                           |         |              |   |         |   |   |        |   |   |         |   |   |       |   |   |         |   |                                                        |        |  
|Net loss                                                  |  |              |       |                            |   |               |        |                   |        |                                               |  |                 |  |                           |        |              |   | (5,787  | ) |   |       |   |   | (5,787  | ) |   | 132   |   |   | (5,655  | ) | $                                                      | (5,787 | )
|Foreign currency translation effect                       |  |              |       |                            |   |               |        |                   |        |                                               |  |                 |  |                           |        |              |   |        |   |   | 574    |   |   | 574     |   |   | 60    |   |   | 634     |   |                                                        | 574    |  
|                                                          |  |              |        |                            |   |                |        |                   |         |                                               |  |                  |  |                           |         |              |   |         |   |   |        |   |   |         |   |   |       |   |   |         |   |                                                        |        |  
|                                                          |  |              |        |                            |   |                |        |                   |         |                                               |  |                  |  |                           |         |              |   |         |   |   |        |   |   |         |   |   |       |   |   |         |   | $                                                      | (5,213 | )
|                                                          |  |              |        |                            |   |                |        |                   |         |                                               |  |                  |  |                           |         |              |   |         |   |   |        |   |   |         |   |   |       |   |   |         |   |                                                        |        |  
|Non-cash compensation charges related to stock options    |  |              |       |                            |   |               |        |                   | 674     |                                               |  |                 |  |                           |        |              |   |        |   |   |       |   |   | 674     |   |   |      |   |   | 674     |   |                                                        |        |  
|Restricted stock vesting and related tax effect           |  |              | 68     |                            |   | 12             |        |                   | (12     | )                                             |  | 32               |  |                           | (212    | )            |   |        |   |   |       |   |   | (212    | ) |   |      |   |   | (212    | ) |                                                        |        |  
|Exercise of employee stock options and related tax effect |  |              | 1      |                            |   | (2             | )      |                   | 10      |                                               |  |                 |  |                           | 5       |              |   |        |   |   |       |   |   | 13      |   |   |      |   |   | 13      |   |                                                        |        |  
|                                                          |  |              |        |                            |   |                |        |                   |         |                                               |  |                  |  |                           |         |              |   |         |   |   |        |   |   |         |   |   |       |   |   |         |   |                                                        |        |  
|Balance at September 30, 2009                             |  |              | 16,984 |                            | $ | 1,914          |        | $                 | 156,848 |                                               |  | 2,161            |  | $                         | (25,848 | )            | $ | (39,337 | ) | $ | 268    |   | $ | 93,845  |   | $ | 1,636 |   | $ | 95,481  |   |                                                        |        |  
|                                                          |  |              |        |                            |   |                |        |                   |         |                                               |  |                  |  |                           |         |              |   |         |   |   |        |   |   |         |   |   |       |   |   |         |   |                                                        |        |  

See
accompanying notes to condensed consolidated financial statements.

5

---



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

|                                                                                                                               |  |                                  |        |      |   |        |  
|------------------------------------------------------------------------------------------------------------------------------ |  | -------------------------------- | ------ | ---- | - | ------ | -
|                                                                                                                               |  | Three Months Ended September 30, |       
|                                                                                                                               |  |                                  |       
|                                                                                                                               |  | 2009                             |        | 2008 |  
|                                                                                                                               |  |                                  |        |      |  
|Cash provided by (used for) operating
 activities:                                                                             |  |                                  |        |      |   |        |  
|Net earnings (loss) from continuing operations                                                                                 |  | $                                | (3,952 | )    | $ | 832    |  
|Loss from discontinued operations                                                                                              |  |                                  | (1,835 | )    |   | (329   | )
|Adjustments to reconcile net earnings
 (loss) to cash provided by (used for) operating activities from continuing
 operations: |  |                                  |        |      |   |        |  
|Depreciation and amortization                                                                                                  |  |                                  | 1,638  |      |   | 1,981  |  
|Loss on disposal of assets                                                                                                     |  |                                  | 9      |      |   | (298   | )
|Deferred income taxes                                                                                                          |  |                                  | (63    | )    |   | 207    |  
|Impairment of marketable securities                                                                                            |  |                                  |       |      |   | 99     |  
|Provision for doubtful accounts                                                                                                |  |                                  | 221    |      |   | 632    |  
|Compensation cost related to share-based
 payment arrangements                                                                 |  |                                  | 674    |      |   | 1,012  |  
|Excess tax benefits from share-based
 payment arrangements                                                                     |  |                                  |       |      |   | (9     | )
|Non-controlling interest                                                                                                       |  |                                  | 132    |      |   | 276    |  
|Other                                                                                                                          |  |                                  | (89    | )    |   | 115    |  
|Changes in operating accounts, excluding
 the effect of acquisition:                                                           |  |                                  |        |      |   |        |  
|Receivables                                                                                                                    |  |                                  | 1,026  |      |   | 1,951  |  
|Inventories                                                                                                                    |  |                                  | 2,547  |      |   | (3,159 | )
|Prepaid expenses                                                                                                               |  |                                  | 548    |      |   | (1,090 | )
|Accounts payable, accrued expenses, and
 taxes payable                                                                         |  |                                  | 1,342  |      |   | 1,750  |  
|                                                                                                                               |  |                                  |        |      |   |        |  
|Net cash provided by operating activities
 from continuing operations                                                          |  |                                  | 2,198  |      |   | 3,970  |  
|                                                                                                                               |  |                                  |        |      |   |        |  
|Net cash provided by operating activities
 from discontinued operations                                                        |  |                                  | 65     |      |   | 144    |  
|                                                                                                                               |  |                                  |        |      |   |        |  
|Cash provided by (used for) investing
 activities:                                                                             |  |                                  |        |      |   |        |  
|Additions to property, plant, and equipment                                                                                    |  |                                  | (245   | )    |   | (2,046 | )
|Purchase of marketable securities                                                                                              |  |                                  | (999   | )    |   | (5,187 | )
|Additions to intangibles and other assets                                                                                      |  |                                  | (142   | )    |   | (103   | )
|Proceeds from the sale and maturity of
 marketable securities                                                                  |  |                                  | 2,000  |      |   | 7,700  |  
|Proceeds from the sale of other assets                                                                                         |  |                                  | 1      |      |   |       |  
|                                                                                                                               |  |                                  |        |      |   |        |  
|Net cash provided by investing activities                                                                                      |  |                                  | 615    |      |   | 364    |  
|                                                                                                                               |  |                                  |        |      |   |        |  
|Cash provided by (used for) financing
 activities:                                                                             |  |                                  |        |      |   |        |  
|Employee stock purchase                                                                                                        |  |                                  |       |      |   | 122    |  
|Excess tax benefits from share-based
 payment arrangements                                                                     |  |                                  |       |      |   | 9      |  
|Restricted stock vesting and related tax
 benefits                                                                             |  |                                  | (212   | )    |   | (118   | )
|Exercise of employee stock options                                                                                             |  |                                  | 12     |      |   | 177    |  
|                                                                                                                               |  |                                  |        |      |   |        |  
|Net cash provided by (used for) financing
 activities                                                                          |  |                                  | (200   | )    |   | 190    |  
|                                                                                                                               |  |                                  |        |      |   |        |  
|Effect of exchange rate changes on cash and
 cash equivalents                                                                  |  |                                  | 320    |      |   | (656   | )
|                                                                                                                               |  |                                  |        |      |   |        |  
|Net increase in cash and cash equivalents                                                                                      |  |                                  | 2,998  |      |   | 4,012  |  
|Cash and cash equivalents, beginning of
 year                                                                                  |  |                                  | 32,723 |      |   | 26,421 |  
|                                                                                                                               |  |                                  |        |      |   |        |  
|Cash and cash equivalents, end of period                                                                                       |  | $                                | 35,721 |      | $ | 30,433 |  
|                                                                                                                               |  |                                  |        |      |   |        |  

Supplemental Cash Flow Information

Net income tax
payments (refunds) amounted to ($445) and $904 for the three months ended
September 30, 2009 and 2008, respectively.

See accompanying notes to condensed consolidated
financial statements.

6

---



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

Note 1: Accounting Policies

Basis of Presentation and Principles of Consolidation

Zygo
Corporation is a worldwide supplier of optical metrology instruments, precision
optics, and electro-optical design and manufacturing services, serving customers
in the semiconductor capital equipment and industrial markets. The accompanying
condensed consolidated financial statements include the accounts of Zygo
Corporation and its subsidiaries (ZYGO, we, us, our or the Company).
The Company follows accounting principles generally accepted in the United
States of America (US GAAP). ZYGOs reporting currency is the U.S. dollar.
The functional currency of the majority of our foreign subsidiaries is their
local currency and, as such, amounts included in the consolidated statements of
operations are translated at the weighted-average exchange rates for the
period. Assets and liabilities are translated at period-end exchange rates and
resulting foreign exchange translation adjustments are recorded in the
consolidated balance sheets as a component of accumulated other comprehensive
income (loss). All transactions and accounts with the subsidiaries have been
eliminated from the condensed consolidated financial statements. The results of
operations for the three months ended September 30, 2009 are not necessarily
indicative of the results to be expected for the full fiscal year.

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

Discontinued Operations

The Company
classifies operations as discontinued when the operations have either ceased,
or are expected to be disposed of in a sale transaction in the near term, and
the operations and cash flows of all discontinued operations have been
eliminated or will be eliminated upon 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; 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.

Reclassification

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

Subsequent Events

We evaluated
events occurring between the end of our fiscal quarter, September 30, 2009, and
November 9, 2009 when the condensed consolidated financial statements were
issued.

Adoption of New Accounting Pronouncements

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

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

7

---



Recent Accounting Guidance Not Yet Adopted

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

Note 2: Discontinued Operations

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

The following
table summarizes the operating results of our discontinued operations for the
three months ended September 30, 2009 and 2008:

|                                               |  |                                  |        |      |   |        |  
|---------------------------------------------- |  | -------------------------------- | ------ | ---- | - | ------ | -
|                                               |  | Three Months Ended September 30, |       
|                                               |  |                                  |       
|                                               |  | 2009                             |        | 2008 |  
|                                               |  |                                  |        |      |  
|Net sales                                      |  | $                                | 321    |      | $ | 899    |  
|Non-cash impairment charge                     |  |                                  | (678   | )    |   |       |  
|Operating expenses                             |  |                                  | (1,478 | )    |   | (1,228 | )
|                                               |  |                                  |        |      |   |        |  
|Earnings (loss) before
 income taxes           |  |                                  | (1,835 | )    |   | (329   | )
|Income taxes (expense)
 benefit                |  |                                  |       |      |   |       |  
|                                               |  |                                  |        |      |   |        |  
|Loss from
 discontinued operations, net of tax |  | $                                | (1,835 | )    | $ | (329   | )
|                                               |  |                                  |        |      |   |        |  

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, 2009 and June 30, 2009:

|                                                |  |                     |     |                |   |     | 
|----------------------------------------------- |  | ------------------- | --- | -------------- | - | --- | 
|                                                |  | September 30,
 2009 |     | June 30,
 2009 |  
|                                                |  |                     |     |                |  
|Receivables                                     |  | $                   |    |                | $ | 269 | 
|Other assets                                    |  |                     | 25  |                |   | 25  | 
|                                                |  |                     |     |                |   |     | 
|Current
 assets of discontinued operations      |  | $                   | 25  |                | $ | 294 | 
|                                                |  |                     |     |                |   |     | 
|                                                |  |                     |     |                |   |     | 
|Property, plant, and
 equipment                 |  | $                   |    |                | $ | 144 | 
|                                                |  |                     |     |                |   |     | 
|Non-current
 assets of discontinued operations  |  | $                   |    |                | $ | 144 | 
|                                                |  |                     |     |                |   |     | 
|                                                |  |                     |     |                |   |     | 
|Accounts payable                                |  | $                   | 214 |                | $ | 102 | 
|Accrued expenses and other
 current liabilities |  |                     | 476 |                |   | 229 | 
|                                                |  |                     |     |                |   |     | 
|Current
 liabilities of discontinued operations |  | $                   | 690 |                | $ | 331 | 
|                                                |  |                     |     |                |   |     | 
|                                                |  |                     |     |                |   |     | 
|Other long-term
 liabilities                    |  | $                   | 364 |                | $ |    | 
|                                                |  |                     |     |                |   |     | 
|Non-current
 liabilites of discontinued         |  | $                   | 364 |                | $ |    | 
|                                                |  |                     |     |                |   |     | 

8

---



Note 3: 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. During the three months ended
September 30, 2009, we recorded additional severance charges. During this same
period, restructuring and related charges totaled $84, of which $71 was
included in research, development, and engineering and $13 was included in
selling, general, and administration.

The following
table summarizes the accrual balances and utilization by cost type for the
fiscal 2009 and fiscal 2008 restructuring actions:

|                               |  |           |     |                                                    |   |       |   |   |      |  
|------------------------------ |  | --------- | --- | -------------------------------------------------- | - | ----- | - | - | ---- | -
|                               |  | Severance |     | September 30, 2009
 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  |  
|                               |  |           |     |                                                    |   |       |   |   |      |  

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

Note 4: Earnings Per Share

Basic and
diluted earnings per share are calculated in accordance with U.S. GAAP. For the
three months ended September 30, 2009, 2,071,598 (for the three months ended
September 30, 2008, 1,307,681) 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, |           
|                                                        |  |                                  |           
|                                                        |  | 2009                             |            | 2008 | 
|                                                        |  |                                  |            |      | 
|Basic
 weighted average shares outstanding              |  |                                  | 16,942,509 |      |  | 16,775,150 | 
|Dilutive
 effect of stock options and restricted shares |  |                                  |           |      |  | 387,347    | 
|                                                        |  |                                  |            |      |  |            | 
|Diluted
 weighted average shares outstanding            |  |                                  | 16,942,509 |      |  | 17,162,497 | 
|                                                        |  |                                  |            |      |  |            | 

9

---



Note 5. Fair Value Measurements

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

The following table provides the assets and liabilities carried at fair value measured on a recurring basis
as of September 30, 2009 and 2008:

|                                                                        |  |                                               |      |                                               |   |                                                   |  |                                              |      |   |   |     | 
|----------------------------------------------------------------------- |  | --------------------------------------------- | ---- | --------------------------------------------- | - | ------------------------------------------------- |  | -------------------------------------------- | ---- | - | - | --- | 
|Assets
 and Liabilities Measured at Fair Value:
 (Dollars in thousands) |  |                                               |      | Fair value measurements at September 30, 2009 |  
|                                                                        |  |                                               |      |                                               |  
|                                                                        |  | Total carrying
 value at
 September 30,
 2009 |      | Quoted prices
 in active
 markets
 (Level 1)  |   | Significant
 other
 observable
 inputs
 (Level 2) |  | Significant
 unobservable
 inputs
 (Level 3) |     
|                                                                        |  |                                               |      |                                               |   |                                                   |  |                                              |     
|Trading securities                                                      |  | $                                             | 603  |                                               | $ | 603                                               |  | $                                            |     |   | $ |    | 
|Foreign currency hedge                                                  |  |                                               | (161 | )                                             |   |                                                  |  |                                              | (161 | ) |   |    | 
|                                                                        |  |                                               |      |                                               |   |                                                   |  |                                              |      |   |   |     | 
|Total                                                                   |  | $                                             | 442  |                                               | $ | 603                                               |  | $                                            | (161 | ) | $ |    | 
|                                                                        |  |                                               |      |                                               |   |                                                   |  |                                              |      |   |   |     | 
|                                                                        |  |                                               |      |                                               |   |                                                   |  |                                              |      |   |   |     | 
|Assets
 and Liabilities Measured at Fair Value:
 (Dollars in thousands) |  |                                               |      | Fair value measurements at September 30, 2008 |  
|                                                                        |  |                                               |      |                                               |  
|                                                                        |  | Total carrying
 value at
 September 30,
 2008 |      | Quoted prices
 in active
 markets
 (Level 1)  |   | Significant
 other
 observable
 inputs
 (Level 2) |  | Significant
 unobservable
 inputs
 (Level 3) |     
|                                                                        |  |                                               |      |                                               |   |                                                   |  |                                              |     
|Trading securities                                                      |  | $                                             | 489  |                                               | $ | 489                                               |  | $                                            |     |   | $ |    | 
|Available-for-sale securities                                           |  |                                               | 210  |                                               |   |                                                  |  |                                              |     |   |   | 210 | 
|Foreign currency hedge                                                  |  |                                               | (36  | )                                             |   |                                                  |  |                                              | (36  | ) |   |    | 
|                                                                        |  |                                               |      |                                               |   |                                                   |  |                                              |      |   |   |     | 
|Total                                                                   |  | $                                             | 663  |                                               | $ | 489                                               |  | $                                            | (36  | ) | $ | 210 | 
|                                                                        |  |                                               |      |                                               |   |                                                   |  |                                              |      |   |   |     | 

When available, the Company uses quoted market prices to determine the fair value of its marketable
securities included in Level 1. When quoted market prices are unobservable, the
Company uses quotes from independent pricing 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.

10

---



Note 6: Share-Based Payments

We recorded share-based compensation expense for the three months ended September 30, 2009 and 2008 of
$674 and $1,022, respectively, with a related tax benefit of $243 and $368,
respectively. Of these amounts, $7 and $9 were recorded as part of discontinued
operations for the three months ended September 30, 2009 and 2008.

Stock Options

We utilized the Black-Scholes valuation method to determine the weighted average fair value of
the stock option grants for both fiscal 2010 and 2009 stock option valuations.
The key assumptions for this valuation method include the expected term of the
option, stock price volatility, risk-free interest rate, dividend yield,
exercise price, and forfeiture rate. Many of these assumptions are judgmental
and highly sensitive in the determination of compensation expense. Under the
assumptions indicated below, the weighted-average fair value of stock option
grants for the three months ended September 30, 2009 and 2008 were $3.67 and
$4.43, respectively. During the three months ended September 30, 2009 and 2008,
we issued an aggregate of 140,000 and 137,000 options, respectively.

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

|                        |  |                                  |   |            |  
|----------------------- |  | -------------------------------- | - | ---------- | -
|                        |  | Three Months Ended September 30, |  
|                        |  |                                  |  
|                        |  | 2009                             |   | 2008       |  
|                        |  |                                  |   |            |  
|Term                    |  | 5.1
 Years                       |   | 4.6
 Years |  
|Volatility              |  | 59.8                             | % | 45.5       | %
|Dividend yield          |  | 0.0                              | % | 0.0        | %
|Risk-free interest rate |  | 2.5                              | % | 2.9        | %
|Forfeiture rate         |  | 10.8                             | % | 9.5        | %

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

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

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

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

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

Restricted Stock

Our share-based compensation expense also includes the effects of 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, 2009 and 2008, an aggregate of 268,000 and 156,700
shares of restricted stock units were issued at a weighted average grant price
of $5.38 and $10.68, respectively. Generally, the restrictions on the
restricted stock and restricted stock units granted to employees lapse at a
rate of 50% after three years and the remaining 50% after the fourth year.

11

---



Note 7: Receivables

At September
30, 2009 and June 30, 2009, receivables were as follows:

|                                                       |  |                     |        |               |   |        |  
|------------------------------------------------------ |  | ------------------- | ------ | ------------- | - | ------ | -
|                                                       |  | September 30,
 2009 |        | June 30, 2009 |  
|                                                       |  |                     |        |               |  
|Trade                                                  |  | $                   | 19,093 |               | $ | 19,601 |  
|Receivable from Nanometrics for sale of certain assets |  |                     | 3,349  |               |   | 3,392  |  
|Other                                                  |  |                     | 331    |               |   | 431    |  
|                                                       |  |                     |        |               |   |        |  
|                                                       |  |                     | 22,773 |               |   | 23,424 |  
|Allowance for doubtful accounts                        |  |                     | (2,774 | )             |   | (2,550 | )
|                                                       |  |                     |        |               |   |        |  
|                                                       |  | $                   | 19,999 |               | $ | 20,874 |  
|                                                       |  |                     |        |               |   |        |  

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

Note 8: Inventories

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

|                                     |  |                     |        |               |   |        | 
|------------------------------------ |  | ------------------- | ------ | ------------- | - | ------ | 
|                                     |  | September 30,
 2009 |        | June 30, 2009 |  
|                                     |  |                     |        |               |  
|Raw materials and manufactured parts |  | $                   | 15,409 |               | $ | 15,214 | 
|Work in process                      |  |                     | 9,489  |               |   | 11,313 | 
|Finished goods                       |  |                     | 3,264  |               |   | 3,925  | 
|                                     |  |                     |        |               |   |        | 
|                                     |  | $                   | 28,162 |               | $ | 30,452 | 
|                                     |  |                     |        |               |   |        | 

12

---



Note 9: Property, Plant, and Equipment

Property,
plant, and equipment are stated at cost. Maintenance and repairs are charged to
expense as incurred. Management evaluates, on an ongoing basis, the carrying
value of our property, plant, and equipment and makes adjustments when
impairments are identified. Depreciation is based on the estimated useful lives
of the various classes of assets and is computed using the straight-line
method. At September 30, 2009 and June 30, 2009, property, plant, and equipment
were as follows:

|                                            |  |                     |         |                |   |                                |   |  |       | 
|------------------------------------------- |  | ------------------- | ------- | -------------- | - | ------------------------------ | - |  | ----- | 
|                                            |  | September 30,
 2009 |         | June 30,
 2009 |   | Estimated Useful Life
 (Years) |  
|                                            |  |                     |         |                |   |                                |  
|Land                                        |  | $                   | 615     |                | $ | 615                            |   |  |      | 
|Building and improvements                   |  |                     | 17,390  |                |   | 17,390                         |   |  | 15-40 | 
|Machinery, equipment, and
 office furniture |  |                     | 56,356  |                |   | 55,938                         |   |  | 3-8   | 
|Leasehold improvements                      |  |                     | 1,003   |                |   | 908                            |   |  | 1-5   | 
|Construction in progress                    |  |                     | 361     |                |   | 570                            |   |  |      | 
|                                            |  |                     |         |                |   |                                |   |  |       | 
|                                            |  |                     | 75,725  |                |   | 75,421                         |   |  |       | 
|Accumulated depreciation                    |  |                     | (49,615 | )              |   | (48,096                        | ) |  |       | 
|                                            |  |                     |         |                |   |                                |   |  |       | 
|                                            |  | $                   | 26,110  |                | $ | 27,325                         |   |  |       | 
|                                            |  |                     |         |                |   |                                |   |  |       | 

Depreciation
expense was $1,429 and $1,819 for the three months ended September 30, 2009 and
2008, respectively.

Note 10: Intangible Assets

Intangible
assets include patents, trademarks, customer relationships and technology, and
a covenant not-to-compete. The cost of patents, trademarks, customer
relationships and technology is amortized on a straight-line basis over
estimated useful lives ranging from 5-17 years. We entered into a non-compete
agreement with a former officer and director of the Company effective February
28, 2009. The agreement calls for payments over a four year period of declining
amounts totaling $878, which includes $27 of imputed interest. As of September
30, 2009, current liabilities include $181 and long-term liabilities include
$229 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, 2009 and June 30, 2009 were as follows:

|                          |  |                     |        |                |   |        |  
|------------------------- |  | ------------------- | ------ | -------------- | - | ------ | -
|                          |  | September 30,
 2009 |        | June 30,
 2009 |  
|                          |  |                     |        |                |  
|Patents and
 trademarks   |  | $                   | 5,664  |                | $ | 5,586  |  
|Covenant
 not-to-compete  |  |                     | 851    |                |   | 851    |  
|                          |  |                     |        |                |   |        |  
|                          |  |                     | 6,515  |                |   | 6,437  |  
|Accumulated
 amortization |  |                     | (2,312 | )              |   | (2,226 | )
|                          |  |                     |        |                |   |        |  
|Total                     |  | $                   | 4,203  |                | $ | 4,211  |  
|                          |  |                     |        |                |   |        |  

Intangible
amortization expense was $204 and $148 for the three months ended September 30,
2009 and 2008, respectively. This amortization expense related to certain
intangible assets is included in Cost of goods sold in the Condensed
Consolidated Statements of Operations.

13

---



Note 11: Warranty

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

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

|                                                                      |  |                                  |       |      |   |      
|--------------------------------------------------------------------- |  | -------------------------------- | ----- | ---- | - | -----
|                                                                      |  | Three Months Ended September 30, |      
|                                                                      |  |                                  |      
|                                                                      |  | 2009                             |       | 2008 |  
|                                                                      |  |                                  |       |      |  
|Beginning balance                                                     |  | $                                | 1,614 |      | $ | 1,263
|Reductions for payments made                                          |  |                                  | (253  | )    |   | (287 
|Changes in accruals related to pre-existing warranties                |  |                                  | (33   | )    |   | 182  
|Changes in accruals related to warranties
 made in the current period |  |                                  | 216   |      |   | 379  
|                                                                      |  |                                  |       |      |   |      
|Ending balance                                                        |  | $                                | 1,544 |      | $ | 1,537
|                                                                      |  |                                  |       |      |   |      

Note 12: 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, 2009 and 2008,
segment sales and gross profit are as follows:

|                             |  |                                  |        |      |   |       
|---------------------------- |  | -------------------------------- | ------ | ---- | - | ------
|                             |  | Three Months Ended September 30, |       
|                             |  |                                  |       
|                             |  | 2009                             |        | 2008 |  
|                             |  |                                  |        |      |  
|Metrology Solutions          |  |                                  |        |      |   |       
|Sales                        |  | $                                | 15,977 |      | $ | 26,838
|Gross profit                 |  | $                                | 7,471  |      | $ | 13,247
|Gross profit as a % of sales |  |                                  | 47     | %    |   | 49    
|Optical Systems              |  |                                  |        |      |   |       
|Sales                        |  | $                                | 5,348  |      | $ | 10,655
|Gross profit                 |  | ($                               | 297    | )    | $ | 3,240 
|Gross profit as a % of sales |  |                                  | -6     | %    |   | 30    
|                             |  |                                  |        |      |   |       
|Total                        |  |                                  |        |      |   |       
|Sales                        |  | $                                | 21,325 |      | $ | 37,493
|Gross profit                 |  | $                                | 7,174  |      | $ | 16,487
|Gross profit as a % of sales |  |                                  | 34     | %    |   | 44    

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.

14

---



Sales by
geographic area were as follows:

|            |  |                                  |        |      |   |       
|----------- |  | -------------------------------- | ------ | ---- | - | ------
|            |  | Three Months Ended September 30,
|            |  |                                 
|            |  | 2009                             |        | 2008
|            |  |                                  |        |     
|Americas    |  | $                                | 13,285 |      | $ | 16,954
|Europe      |  |                                  | 2,317  |      |   | 4,282 
|Japan       |  |                                  | 3,829  |      |   | 9,658 
|Pacific Rim |  |                                  | 1,894  |      |   | 6,599 
|            |  |                                  |        |      |   |       
|Total       |  | $                                | 21,325 |      | $ | 37,493
|            |  |                                  |        |      |   |       

Note 13: Transactions with Stockholder

Sales to Canon
Inc., a stockholder, and Canon Sales Co., Inc., a distributor of certain of our
products in Japan and a subsidiary of Canon Inc. (collectively referred to as
Canon), amounted to $989 and $7,207 (5% and 19% of net sales, respectively)
for the three months ended September 30, 2009 and 2008, respectively. Selling
prices of products sold to Canon are based, generally, on the terms customarily
given to distributors. At September 30, 2009 and June 30, 2009, there were, in
the aggregate, $258 and $592, respectively, of trade accounts receivable from
Canon.

Note 14: Derivatives and Hedging Activities

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

As of
September 30, 2009, we had six currency contracts outstanding involving our
Japanese and German operations with notional amounts aggregating $2,470. These
foreign currency hedges are not considered designated hedging instruments. For
the three months ended September 30, 2009 and 2008, we recognized net
unrealized losses of $147 and $36, respectively, from foreign currency forward
contracts. These unrealized losses are substantially offset by foreign exchange
gains on intercompany balances recorded by our subsidiary and are recorded in
Miscellaneous income (expense) on our Condensed Consolidated Statements of
Operations.

The following
table summarizes the fair value of derivative instruments as of September 30,
2009:

|                                                  |                        |                        | 
|------------------------------------------------- | ---------------------- | ---------------------- | 
|Derivitives not designated as hedging instruments |                        | Balance Sheet Location | 
|                                                  |                        |                        | 
|                                                  |                       
|Foreign
 exchange contracts                       | Accrued
 expenses $161

15

---



Note 15: Income Taxes

|                    |  |                                  |      |             |    |        |   |             |   |    |  
|------------------- |  | -------------------------------- | ---- | ----------- | -- | ------ | - | ----------- | - | -- | -
|                    |  | Three Months ended September 30, |     
|                    |  |                                  |     
|                    |  | 2009                             |      | 2008        |   
|                    |  |                                  |      |             |   
|                    |  | Amount                           |      | Tax
 Rate % |    | Amount |   | Tax
 Rate % |  
|                    |  |                                  |      |             |    |        |   |             |  
|                   
|Income tax
 expense |  | $                                | (682 | )           | 16 | %      | $ | (531        | ) | 37 | %

Income tax
expense for the three months ended September 30, 2009 included income taxes in
state and foreign jurisdictions. We recorded no net deferred tax benefit for
the operating loss incurred in this period, creating the situation where we
have income tax expense in a loss period. We continue to maintain a valuation
allowance on all of our net deferred tax assets totaling $41,175 at September
30, 2009. In future periods, the valuation allowance could be reduced based
upon sufficient evidence indicating that it is more likely than not that a
portion of the deferred tax assets will be realized.

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

We are subject
to U.S. federal income tax as well as income tax in multiple state and foreign
jurisdictions. Because of our significant NOL and credit carry-forwards, we
remain subject to U.S. federal income tax audit adjustments for years after
June 30, 2001. We are no longer subject to state and foreign income tax audit
or tax adjustments for years prior to June 30, 2005. We are currently under an
income tax audit by the IRS for domestic taxes for the period ended June 30,
2007.

Note 16: Commitments and Contingencies

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

Note 17: Subsequent Events

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

On October 21,
2009, we announced that our Chief Executive Officer, J. Bruce Robinson, 67,
will be retiring after leading the Company for over ten years. Mr. Robinson
will transition from his current role as CEO and director into a non-director
consulting position for us. The transition is expected to occur during the
second half of our current fiscal year. The Board of Directors identified a
number of strategic initiatives for Mr. Robinson to be involved with during his
transition, and the Company entered into an Agreement with Mr. Robinson that
includes payments for the successful achievement of these initiatives.
Incentive payments under the Agreement could aggregate up to $300, with an
additional $106 of consulting payments during each of the four years of the
consultancy.

16

---



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

OVERVIEW

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

Orders for the
three months ended September 30, 2009 (our first quarter of fiscal 2010) were
$22.7 million, as compared with $14.8 million and $28.8 million for the fourth
quarter and first quarter, respectively, of fiscal 2009. Orders for our
Metrology Solutions segment accounted for 68% of the orders received, with the
Optical Systems segment accounting for 32% of orders. The increase in orders from
the fourth quarter of fiscal 2009 is due to increases in the Metrology
Solutions segment of $5.1 million and of $2.8 million in the Optical Systems
segment. The increase in Metrology Solutions segment orders was primarily for
our instruments products and extended over a number of different industries.
The $6.1 million decline in orders from the same period of the prior year
occurred primarily in the Metrology Solutions segment, which experienced
reduced orders across all product lines except for Vision Systems, which
increased by $1.4 million. Within the Optics Systems segment, orders increased
by $1.2 million compared with the three months ended September 30, 2008,
primarily due to an increase in orders of laser fusion optics of $2.0 million
and contract manufacturing of $0.8 million, partially offset by a declines in
orders in precision optics of $1.6 million. Our Metrology Solutions segment now
includes an OEM product category, which consists of lithography products,
display sensor heads, and semiconductor sensor heads. Our Optical Systems
segment continues to include our optical components and electro-optics contract
manufacturing products.

In October
2009, we announced a strategic business relationship with Toho Technology
Corporation (Toho) of Nagoya, Japan, pursuant to which Toho will have the
exclusive right to certain technology in the manufacturing and distribution of
products to the large substrate Flat Panel Display (FPD) market. Leveraging
Tohos strength in manufacturing and design, proximity to the Asian market, and
significant presence in the FPD market, allows us to accelerate the deployment
of our technology and sale of sensor heads, while enhancing customer
application and service support.

In September
2009, we discontinued the Singapore IC packaging operations related to our
Vision Systems business due to continuing operating losses and net cash
outflows. The results of operations for the aforementioned operations are
presented in the Companys Condensed Consolidated Financial Statements as
discontinued operations.

In response to
the decline in sales and orders, we have taken and continue to take various
actions to mitigate the effects on our company of the downturn in the global
economy, including reductions in work force, pay reductions, unpaid furloughs,
suspension of our matching 401-K program, and a reduction in director fees.
Further restructuring actions and related charges continue to be reviewed, as
appropriate.

17

---



CRITICAL ACCOUNTING POLICIES, SIGNIFICANT
JUDGMENTS, AND ESTIMATES

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

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

18

---



RESULTS OF OPERATIONS

|                           |                     |  |             |        |             |              |   |        |      |              |     |   | 
|-------------------------- | ------------------- |  | ----------- | ------ | ----------- | ------------ | - | ------ | ---- | ------------ | --- | - | 
|Net Sales                  |                     |  |             |        |             |             
|                           |                     |  |             |        |             |             
|                           |                     |  | Fiscal 2010 |        | Fiscal 2009 |             
|                           |                     |  |             |        |             |             
|(Dollars in
 millions)     |                     |  |             | Amount |             | Net Sales
 % |   | Amount |      | Net Sales
 % |    
|                           |                     |  |             |        |             |              |   |        |      |              |    
|Quarter ended September 30 |                     |  |             |        |             |              |   |        |      |              |     |  
|                           | Metrology Solutions |  | $           | 16.0   |             | 75           | % | $      | 26.8 |              | 71  | %
|                           | Optical Systems     |  |             | 5.3    |             | 25           | % |        | 10.7 |              | 29  | %
|                           |                     |  |             |        |             |              |   |        |      |              |     |  
|                           | Total               |  | $           | 21.3   |             | 100          | % | $      | 37.5 |              | 100 | %
|                           |                     |  |             |        |             |              |   |        |      |              |     |  

Overall, net
sales for the three months ended September 30, 2009 decreased 43% as compared
with the prior year period, reflecting decreases in Metrology Solutions segment
sales of 40% and in Optical Systems segment sales of 50%. The decrease in
Metrology Solutions segment net sales was primarily due to volume decreases in
lithography of $4.6 million, instruments of $4.0 million, and display solutions
of $3.9 million, partially offset by sales increases in semiconductor solutions
of $1.2 million and vision systems of $0.4 million. These volume decreases, in
large measure, are due to a reduction in orders that appears to be tied
directly to the general global economic downturn, most notably in the
semiconductor industry. A decrease in orders from Canon accounted for the
majority of the decrease in lithography sales. The decrease in the Optical
Systems segment sales was primarily due to decreases in contract manufacturing
and precision optics of $3.9 million and $1.3 million, respectively. The
decrease in contract manufacturing sales is primarily related to reductions in
shipments to multiple customers based on their respective inventory needs.

Sales in U.S.
dollars for the three months ended September 30, 2009 and 2008 were
approximately 67% and 77% of total net sales, respectively, with the remaining
33% and 23%, respectively, being in Euro or Yen. For our sales which are based
in foreign currency, we are exposed to foreign exchange fluctuations from the
time customers are invoiced in foreign currency until collection occurs.
Significant changes in the values of foreign currencies relative to the value
of the U.S. dollar, or in the general economic conditions in our export
markets, could materially impact the sales of our products in these markets and
our Condensed Consolidated Financial Position and Results of Operations.

|                            |                      |  |   |             |   |                 |   |        |      |                 |    |   | 
|--------------------------- | -------------------- |  | - | ----------- | - | --------------- | - | ------ | ---- | --------------- | -- | - | 
|Gross Profit by Segment     |                      |  |   |             |   |                 |   |        |      |                 |    |  
|                            |                      |  |   |             |   |                 |   |        |      |                 |    |  
|                            |                      |  |   | Fiscal 2010 |   | Fiscal 2009     |  
|                            |                      |  |   |             |   |                 |  
|(Dollars in millions)       |                      |  |   | Amount      |   | Gross
 Profit % |   | Amount |      | Gross
 Profit % |   
|                            |                      |  |   |             |   |                 |   |        |      |                 |   
|Quarter
 ended September 30 |                      |  |   |             |   |                 |   |        |      |                 |    |  
|                            | Metrology
 Solutions |  | $ | 7.5         |   | 47              | % | $      | 13.3 |                 | 49 | %
|                            | Optical
 Systems     |  |   | (0.3        | ) | -6              | % |        | 3.2  |                 | 30 | %
|                            |                      |  |   |             |   |                 |   |        |      |                 |   
|                            | Total                |  | $ | 7.2         |   | 34              | % | $      | 16.5 |                 | 44 | %
|                            |                      |  |   |             |   |                 |   |        |      |                 |   

Gross profit
as a percentage of net sales for the three months ended September 30, 2009 was
34%, which represents a decrease of ten percentage points from the comparable
prior year period. Within the Metrology Solutions segment, the slight decrease
in gross profit as a percentage of net sales for the three months ended
September 30, 2009 as compared with the prior year period was primarily due to
unabsorbed factory costs due to lower net sales. Within the Optical Systems
segment, the decrease in gross profit as a percentage of net sales for the
three months ended September 30, 2009 as compared with the prior year period
was primarily due to unabsorbed costs due to lower net sales and production
issues related to certain optics resulting in increased manufacturing costs and
delayed shipments. Production issues were substantially resolved during the
quarter. During the first quarter of fiscal 2010, we continued to take actions
to reduce costs in both segments in light of the decline in orders, including
pay reductions and unpaid furloughs.

19

---



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

|                            |  |             |     |             |  |        |   |            |     |  |  |    |  
|--------------------------- |  | ----------- | --- | ----------- |  | ------ | - | ---------- | --- |  |  | -- | -
|                            |  | Fiscal 2010 |     | Fiscal 2009 | 
|                            |  |             |     |             | 
|(Dollars
 in millions)      |  | Amount      |     | % of Sales  |  | Amount |   | % of Sales |    
|                            |  |             |     |             |  |        |   |            |    
|                            |  |             |     |             |  |        |   |            |     |  |  |    |  
|Quarter
 ended September 30 |  | $           | 6.6 |             |  | 31     | % | $          | 9.1 |  |  | 24 | %

SG&A expenses decreased
in the three months ended September 30, 2009 by $2.5 million from the
comparable prior year period, primarily due a reduction in personnel-related
expenses of $1.1 million and the elimination of costs related to semiconductor products
of $0.5 million in conjunction with the transaction with Nanometrics in June
2009. Other cost reductions included decreases in travel of $0.4 million as
part of our expense management and in legal costs of $0.3 million.

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

|                            |  |             |     |             |  |        |   |            |     |  |  |    |  
|--------------------------- |  | ----------- | --- | ----------- |  | ------ | - | ---------- | --- |  |  | -- | -
|                            |  | Fiscal 2010 |     | Fiscal 2009 | 
|                            |  |             |     |             | 
|(Dollars
 in millions)      |  | Amount      |     | % of Sales  |  | Amount |   | % of Sales |    
|                            |  |             |     |             |  |        |   |            |    
|                            |  |             |     |             |  |        |   |            |     |  |  |    |  
|Quarter
 ended September 30 |  | $           | 3.6 |             |  | 17     | % | $          | 5.3 |  |  | 14 | %

RD&E for the three
months ended September 30, 2009 decreased by $1.7 million, as compared with the
prior year period. The decrease in RD&E was primarily due to the
elimination of costs related to the semiconductor product line in June 2009.

Provision for Doubtful Accounts and Notes

|                            |  |             |     |             |  |        |   |            |     |  |  |   |  
|--------------------------- |  | ----------- | --- | ----------- |  | ------ | - | ---------- | --- |  |  | - | -
|                            |  | Fiscal 2010 |     | Fiscal 2009 | 
|                            |  |             |     |             | 
|(Dollars
 in millions)      |  | Amount      |     | % of Sales  |  | Amount |   | % of Sales |    
|                            |  |             |     |             |  |        |   |            |    
|                            |  |             |     |             |  |        |   |            |     |  |  |   |  
|Quarter
 ended September 30 |  | $           | 0.2 |             |  | 1      | % | $          | 0.4 |  |  | 1 | %

Provision for doubtful
accounts and notes for the three months ended September 30, 2009 decreased by
$0.2 million as compared with the prior year period but remained at 1% as a
percentage of sales.

Other Income (Expense)

|                            |  |             |     |             |  |        |   |            |      |   |  |   |  
|--------------------------- |  | ----------- | --- | ----------- |  | ------ | - | ---------- | ---- | - |  | - | -
|                            |  | Fiscal 2010 |     | Fiscal 2009 | 
|                            |  |             |     |             | 
|(Dollars
 in millions)      |  | Amount      |     | % of Sales  |  | Amount |   | % of Sales |     
|                            |  |             |     |             |  |        |   |            |     
|                            |  |             |     |             |  |        |   |            |      |   |  |   |  
|Quarter
 ended September 30 |  | $           | 0.1 |             |  | 1      | % | $          | (0.1 | ) |  | 0 | %

Other income (expense) for
the three months ended September 30, 2009 increased by $0.2 million as compared
with the prior year period, primarily due to an increase in investment income.

Income Tax Benefit (Expense)

|                            |  |             |      |             |  |        |   |           |      |   |  |    |  
|--------------------------- |  | ----------- | ---- | ----------- |  | ------ | - | --------- | ---- | - |  | -- | -
|                            |  | Fiscal 2010 |      | Fiscal 2009 | 
|                            |  |             |      |             | 
|(Dollars
 in millions)      |  | Amount      |      | Tax Rate%   |  | Amount |   | Tax Rate% |     
|                            |  |             |      |             |  |        |   |           |     
|                            |  |             |      |             |  |        |   |           |      |   |  |    |  
|Quarter
 ended September 30 |  | $           | (0.7 | )           |  | 16     | % | $         | (0.5 | ) |  | 32 | %

Income tax expense for the
three months ended September 30, 2009 included income taxes in state and
foreign jurisdictions, which could not be offset by current and prior net
operating losses. We continue to maintain a valuation allowance on all of our
net deferred tax assets totaling $41.2 million at September 30, 2009. In future
periods, the valuation allowance could be reduced based upon sufficient
evidence indicating that it is more likely than not that a portion of the deferred
tax assets will be realized.

20

---



TRANSACTIONS WITH STOCKHOLDER

Sales to Canon Inc., a
stockholder, and Canon Sales Co., Inc., a distributor of certain of our
products in Japan and a subsidiary of Canon Inc. (collectively referred to as
Canon), amounted to $1.0 million and $7.2 million (5% and 19% of net sales,
respectively) for the three months ended September 30, 2009 and 2008,
respectively. Selling prices of products sold to Canon are based, generally, on
the terms customarily given to distributors. At September 30, 2009 and June 30,
2009, there were, in the aggregate, $0.2 million and $0.6 million,
respectively, of trade accounts receivable from Canon.

LIQUIDITY AND CAPITAL RESOURCES

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

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

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

At September 30, 2009, cash
and marketable securities were $38.7 million, an increase of $2.0 million from
$36.7 million at June 30, 2009. Our marketable securities consist of corporate
bonds ($2.0 million), a government security ($1.0 million), and a mutual fund
of $0.6 million. One additional investment in an auction rate security is
valued at zero. We believe there are no additional impairments in our investments
for the three months ended September 30, 2009.

We hold two corporate bonds,
one invested in the financial services sector and one in the retail sector. The
individual bonds have a value at maturity of $1.0 million each. We have the
ability and intent to hold all the securities to maturity, the last maturity of
which is on December 1, 2009.

The cash equivalents balance
in our money market account, which is invested primarily in U.S. government
securities, is $18.0 million as of September 30, 2009. We do not believe there
is any risk to liquidity in the money market account, nor are there currently
any limits on redemptions.

We have $5.3 million of
gross accounts receivable related to our display customers which are overdue.
Of this amount, $1.7 million has been reserved for. We have agreed to payment
terms with several display customers and are in negotiations with other
customers. Although we believe such amounts are collectible, our liquidity will
be affected by the timing of the receipt of such payments. We have not
experienced significant delays in payments from non-display customers.

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

21

---



Cash Flow from Operating Activities

|                                                                              |  |                                  |     |      |   |     | 
|----------------------------------------------------------------------------- |  | -------------------------------- | --- | ---- | - | --- | 
|                                                                              |  | Three Months Ended September 30, |    
|                                                                              |  |                                  |    
|                                                                              |  | 2009                             |     | 2008 |  
|                                                                              |  |                                  |     |      |  
|Net cash
 flows provided by operating activities from continuing operations   |  | $                                | 2.2 |      | $ | 4.0 | 
|Net cash
 flows provided by operating activities from discontinued operations |  | $                                | 0.1 |      | $ | 0.1 | 

Cash flows from operating
activities from continuing operations for the first three months of fiscal 2010
decreased by $1.8 million as compared with the prior year period. This was
primarily due to a negative change in net income from continuing operations of
$4.8 million, offset by the positive change in inventory related cash flows of
$5.7 million. The change in inventory related cash flows is primarily a result
of decreasing inventory levels in the three months ended September 30, 2009 as
we continue to manage inventory levels down to our current order rate

Cash Flow from Investing Activities

|                                                 |  |                                  |     |      |   |     | 
|------------------------------------------------ |  | -------------------------------- | --- | ---- | - | --- | 
|                                                 |  | Three Months Ended September 30, |    
|                                                 |  |                                  |    
|                                                 |  | 2009                             |     | 2008 |  
|                                                 |  |                                  |     |      |  
|Net cash
 flows provided by investing activities |  | $                                | 0.6 |      | $ | 0.4 | 

Cash flows provided by
investing activities for the first three months of fiscal 2010 increased by
$0.2 million as compared with the prior year period. This increase was
primarily related to a decrease in fixed asset additions of $1.8 million,
partially offset by a decrease in net purchases and proceeds from marketable
securities of $1.5 million.

Cash Flow from Financing Activities

|                                                            |  |                                  |      |      |   |     | 
|----------------------------------------------------------- |  | -------------------------------- | ---- | ---- | - | --- | 
|                                                            |  | Three Months Ended September 30, |     
|                                                            |  |                                  |     
|                                                            |  | 2009                             |      | 2008 |  
|                                                            |  |                                  |      |      |  
|Net cash
 flows provided by (used for) financing activities |  | $                                | (0.2 | )    | $ | 0.2 | 

Cash flows used for
financing activities in the three months ended September 30, 2009 decreased by $0.4
million as compared with the prior year period. For the three months ended
September 30, 2009, minimal exercises of employee stock options occurred.

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

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

22

---



Item 4. Controls and Procedures

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

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

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

PART II - Other Information

Item 1A. Risk Factors

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

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

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

We are in the process of a significant
management change which may impact our ability to execute our business strategy
in the near term.

In October 2009, our Chief
Executive Officer announced his impending retirement and the Board of Directors
initiated a search for his successor. The market for senior managers who are
qualified for the chief executive office of a public company is intensely
competitive, and successful recruitment and development of executive talent is
key to the Companys competitive position. While our current Chief Executive
Officer will remain with the Company during the search and transition period,
our business may be disrupted during that time. As a result of the transition,
the attention of senior management and the Board of Directors may be diverted from
the Companys business and current and potential customers may delay or forego
commitments or decisions regarding orders for products and services
Furthermore, if we are not able to attract and retain a qualified new Chief
Executive Officer, our ability to execute our business strategy could be
adversely affected.

23

---



Potential changes in
U.S. Tax Law could materially affect our future results.

In May 2009,
President Obama and the U.S. Treasury Department proposed changing certain of
the U.S. tax rules for U.S. corporations doing business outside the United
States. The proposed changes include limiting the ability of U.S. corporations
to deduct expenses attributable to offshore earnings, modifying the foreign tax
credit rules and further restricting the ability of U.S. corporations to
transfer funds between foreign subsidiaries without triggering U.S. income tax.
Although the scope of the proposed changes remains unclear and the likelihood
of enactment is uncertain, it is possible that these or other changes in the
U.S. tax laws could increase our effective tax rate and adversely affect our
after-tax profitability.

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, 2009 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, 2009
 -July 31, 2009            |  |                                       | 96     |                               |  | 4.79                                                                                     |  |                                                                                                            |  |  | $ | 5.0 | 
|August 1, 2009 - August
 31, 2009       |  |                                       | 31,829 |                               |  | 6.62                                                                                     |  |                                                                                                            |  |  | $ | 5.0 | 
|September 1, 2009 -
 September 30, 2009 |  |                                       |       |                               |  |                                                                                         |  |                                                                                                            |  |  | $ | 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,
 2009, there were no repurchases of common stock in the open market. The share
 repurchases have been effected pursuant to plans in conformity with Rule
 10b5-1 under the Securities Exchange Act of 1934. This rule allows public
 companies to adopt written, pre-arranged stock trading plans when they do not
 have material, non-public information in their possession. The adoption of
 this stock trading plan allows us to repurchase our shares during periods
 when we otherwise might be prevented from doing so under insider trading laws
 or because of self-imposed trading blackout periods.
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | (2) | Shares were
 repurchased from certain of our employees in satisfaction of withholding tax
 obligations arising from the vesting of their restricted stock.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           

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                                            

24

---



SIGNATURE

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

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

Date: November 9, 2009

25

---



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                                            

---