UNITED STATESSECURITIES 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, 2008
|------------------------------ | ----------------------

or

[   ]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                                                                          
|(State or other jurisdiction of incorporation or organization)                    
|                                                                                  
|Laurel Brook Road, Middlefield, Connecticut                                       
|(Address of principal executive offices)                                          
|                                                                                  
|(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)

o YESx NO

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

Large accelerated filero
      
      Accelerated filer 
      xNon-accelerated filero (Do
      not check if a smaller reporting company)
      
      Smaller reporting companyo


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

oYESxNO

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.

16,809,561 shares of Common Stock, $.10 Par Value, at November 3, 2008

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(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 been unable to complete such audits, due to an inability to obtain all necessary records and supporting documentation. The registrant intends to file such audited
financial statements as soon as practicable.

FORWARD LOOKING STATEMENTS

All statements other than statements of historical fact included in this Form 10-Q Quarterly Report regarding our financial position, business strategy, plans, anticipated sales, orders, market acceptance, growth rates,
market opportunities, and objectives of management for future operations (as well as these factors as they may apply to our customers, suppliers, and others with whom we have critical business relationships) are forward-looking statements.
Forward-looking statements are intended to provide managements current expectations or plans for the future operating and financial performance based upon information currently available and assumptions currently believed to be valid.
Forward-looking statements can be identified by the use of words such as anticipate, believe, estimate, expect, intend, plans, strategy, project, and
other words of similar meaning in connection with a discussion of future operating or financial performance. Actual results could differ materially from those contemplated by the forward-looking statements as a result of certain factors. Among the
important factors that could cause actual events to differ materially from those in the forward-looking statements are fluctuations in capital spending of our customers; fluctuations in net sales to our major customer; manufacturing and supplier
risks; dependence on timing and market acceptance of new product development; rapid technological and market change; risks in international operations; dependence on proprietary technology and key personnel; length of the sales cycle; environmental
regulations; investment portfolio returns; stock price fluctuations; the risk that expected synergies and cost savings from the contemplated merger of ZYGO and Electro Scientific Industries, Inc. (ESI) may not be realized; the risk that
anticipated growth opportunities may be smaller than anticipated or may not be realized; risks related to integration of ZYGO and ESI; the risk that the closing of the merger between ESI and ZYGO may not occur; unexpected expenses associated with
the proposed merger with ESI; and customer and/or employee losses as a result of the proposed merger.

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 our reports on file with the Securities and Exchange Commission, including our Form 10-K, as amended by
Form 10-K/A, for the fiscal year ended June 30, 2008.

2

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PART I - Financial Information

Item 1. Financial Statements

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

|                                                |  | Three Months Ended
September 30, |       
|----------------------------------------------- |  | -------------------------------- | ------
|                                                |  | 2008                             |       
|                                               
|Net sales                                       |  | $                                | 38,392
|Cost of goods sold                              |  |                                  | 21,581
|Gross profit                                    |  |                                  | 16,811
|                                               
|Selling, general, and administrative expenses   |  |                                  | 9,584 
|Research, development, and engineering expenses |  |                                  | 5,596 
|Provision for doubtful accounts and notes       |  |                                  | 382   
|Operating profit (loss)                         |  |                                  | 1,249 
|                                               
|Other income (expense)                          |  |                                  |       
|Interest income                                 |  |                                  | 369   
|Miscellaneous income (expense)                  |  |                                  | (378  
|Total other income (expense)                    |  |                                  | (9    
|Earnings (loss) before income taxes and         |  |                                  |       
|minority interest                               |  |                                  | 1,240 
|                                               
|Income tax (expense) benefit                    |  |                                  | (461  
|Minority interest                               |  |                                  | (276  
|Net earnings (loss)                             |  | $                                | 503   
|                                               
|                                               
|Basic - Earnings (loss) per share               |  | $                                | 0.03  
|Diluted - Earnings (loss) per share             |  | $                                | 0.03  
|                                               
|Weighted average shares outstanding             |  |                                  |       
|Basic shares                                    |  |                                  | 16,775
|Diluted shares                                  |  |                                  | 17,162

See accompanying notes to condensed consolidated financial statements.

3

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

|                                                                                    |  | September
          30, 2008 |         | June
        30, 2008
|----------------------------------------------------------------------------------- |  | ---------------------------- | ------- | ---------------------
|Assets                                                                              |  |                              |         |                      
|Current assets:                                                                     |  |                              |         |                      
|Cash
        and cash equivalents                                                   |  | $                            | 30,433  |                      
|Marketable
        securities                                                       |  |                              | 19,110  |                      
|Receivables,
        net of allowance for doubtful accounts                         |  |                              |         |                      
|of $468
        and $349, respectively                                              |  |                              | 28,615  |                      
|Inventories                                                                         |  |                              | 40,604  |                      
|Prepaid
        expenses and other                                                  |  |                              | 2,618   |                      
|Income
        tax receivable                                                       |  |                              | 929     |                      
|Deferred
        income taxes                                                       |  |                              | 9,579   |                      
|Total
        current assets                                                        |  |                              | 131,888 |                      
|                                                                                   
|Marketable
        securities                                                       |  |                              | 2,742   |                      
|Property, plant, and equipment,
        net                                         |  |                              | 36,327  |                      
|Deferred
        income taxes                                                       |  |                              | 11,245  |                      
|Intangible assets, net                                                              |  |                              | 8,951   |                      
|Other
        assets                                                                |  |                              | 995     |                      
|Total assets                                                                        |  | $                            | 192,148 |                      
|                                                                                   
|Liabilities
          and Stockholders' Equity                                      |  |                              |         |                      
|Current liabilities:                                                                |  |                              |         |                      
|Accounts
        payable                                                            |  | $                            | 10,095  |                      
|Accrued
        progress payments                                                   |  |                              | 6,277   |                      
|Accrued
        salaries and wages                                                  |  |                              | 3,194   |                      
|Other
        accrued liabilities                                                   |  |                              | 4,431   |                      
|Deferred
        income taxes                                                       |  |                              | 30      |                      
|Total
        current liabilities                                                   |  |                              | 24,027  |                      
|                                                                                   
|Long-term
        income tax payable                                                |  |                              | 1,908   |                      
|Other long-term liabilities                                                         |  |                              | 702     |                      
|Minority
        interest                                                           |  |                              | 2,120   |                      
|Commitments and contingencies                                                       |  |                              |         |                      
|                                                                                   
|Stockholders'
        equity:                                                       |  |                              |         |                      
|Common stock, $0.10
        par value per share:                                    |  |                              |         |                      
|40,000,000
        shares authorized;                                               |  |                              |         |                      
|18,914,778
        shares issued (18,824,670 at June 30, 2008);                     |  |                              |         |                      
|16,810,115
        shares outstanding (16,732,399 at June 30, 2008)                 |  |                              | 1,891   |                      
|Additional
        paid-in capital                                                  |  |                              | 153,976 |                      
|Retained
        earnings                                                           |  |                              | 33,017  |                      
|Accumulated
        other comprehensive income:                                     |  |                              |         |                      
|Currency
        translation effects                                                |  |                              | 14      |                      
|                                                                                    |  |                              | 188,898 |                      
|Less
        treasury stock, at cost, 2,104,663 shares (2,092,271 at June 30, 2008) |  |                              | 25,507  |                      
|Total
        stockholders' equity                                                  |  |                              | 163,391 |                      
|Total
          liabilities and stockholders' equity                                |  | $                            | 192,148 |                      

See accompanying notes to condensed consolidated financial statements.

4

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

|                                                                       |  | Three
        Months Ended September 30, |       
|---------------------------------------------------------------------- |  | ---------------------------------------- | ------
|                                                                       |  | 2008                                     |       
|                                                                      
|Cash provided by (used for) operating
        activities:              |  |                                          |       
|Net earnings (loss)                                                    |  | $                                        | 503   
|                                                                      
|Adjustments to reconcile net
        earnings (loss) to cash           |  |                                          |       
|provided by (used for) operating
        activities:                   |  |                                          |       
|Depreciation
        and amortization                                  |  |                                          | 2,042 
|Deferred income
        taxes                                          |  |                                          | 207   
|Impairment of
        marketable securities                            |  |                                          | 99    
|Compensation
        cost related to share-based payments arrangements |  |                                          | 1,022 
|Excess tax benefits
        from share-based payment arrangements      |  |                                          | (9    
|Minority interest                                                      |  |                                          | 276   
|Provision for
        doubtful accounts and notes receivable           |  |                                          | 382   
|Other, net                                                             |  |                                          | 140   
|Changes in operating
        accounts:                                 |  |                                          |       
|Receivables                                                            |  |                                          | 1,816 
|Inventories                                                            |  |                                          | (3,342
|Prepaid
        expenses and other current assets                      |  |                                          | (1,090
|Accounts
        payable, accrued expenses, and taxes payable          |  |                                          | 2,068 
|Net cash provided
        by (used for) operating activities           |  |                                          | 4,114 
|Cash provided by investing activities:                                 |  |                                          |       
|Additions to property, plant,
        and equipment                    |  |                                          | (2,046
|Purchase of marketable securities                                      |  |                                          | (5,187
|Additions to intangibles and
        other assets                      |  |                                          | (103  
|Proceeds from the maturity
        of marketable securities            |  |                                          | 7,700 
|Net cash provided
        by investing activities                      |  |                                          | 364   
|Cash provided by (used for) financing
        activities:              |  |                                          |       
|Employee stock purchase                                                |  |                                          | 122   
|Repurchase of common stock                                             |  |                                          | -     
|Exercise of employee stock
        options                             |  |                                          | 177   
|Vesting of restricted stock
        and related tax benefits           |  |                                          | (118  
|Excess tax benefits from share-based
        payment arangements       |  |                                          | 9     
|Net cash provided
        by (used for) financing activities           |  |                                          | 190   
|Effect of exchange rate changes
        on cash and cash equivalents   |  |                                          | (656  
|Net increase in cash and cash equivalents                              |  |                                          | 4,012 
|Cash and cash equivalents, beginning
        of period                 |  |                                          | 26,421
|Cash and cash equivalents, end of
        period                       |  | $                                        | 30,433

Supplemental Cash Flow Information
Income tax payments amounted to $904 and $400 for the three months ended September 30, 2008 and 2007, respectively.

5

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

Note 1: Principles of Consolidation and Presentation

Zygo Corporation is a worldwide supplier of optical metrology instruments, precision optics, and electro-optical design and manufacturing services, serving customers in the semiconductor capital equipment and industrial
markets. The accompanying condensed consolidated financial statements include the accounts of Zygo Corporation and its subsidiaries (ZYGO, we, us, our or the Company). The Company follows
accounting principles generally accepted in the United States of America. 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, 2008 are not necessarily indicative of the results to be expected for the full fiscal year.

The Condensed Consolidated Balance Sheet at September 30, 2008, the Condensed Consolidated Statements of Operations for the three months ended September 30, 2008 and 2007, and the Condensed Consolidated Statements of Cash
Flows for the three months ended September 30, 2008 and 2007 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 by Form 10-K/A, for the year ended June
30, 2008, including items incorporated by reference therein.

On October 16, 2008, we and Electro Scientific Industries, Inc. (ESI) jointly announced the execution of a definitive agreement, providing for the two companies to merge in an all stock transaction, subject to
the prior satisfaction of certain enumerated conditions precedent. Under the terms of the merger agreement, Zygo shareholders will receive 1.0233 shares of ESI stock for each share of ZYGO stock in a transaction designed to be tax-free to ZYGO
shareholders. Upon closing, ESI will issue approximately 18.1 million shares on a diluted basis to complete the transaction resulting in the then ZYGO shareholders owning 40% of the combined company.

Note 2: Earnings Per Share

Basic and diluted earnings per share are calculated in accordance with Statement of Financial Accounting Standards (SFAS) No. 128, Earnings Per Share. 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. For the three months ended September
30, 2007, 2,640,220 of the Companys Stock Grants were excluded from the calculation of diluted earnings per share. Due to the loss in the first quarter of fiscal 2008, dilutive shares are equal to basic shares for that period.

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,
|-------------------------------- |  | --------------------------------
|                                 |  | 2008                            
|Basic weighted average shares    |  |                                 
|outstanding                      |  | 16,775,150                      
|Dilutive effect of stock options |  |                                 
|and restricted shares            |  | 387,347                         
|Diluted weighted average shares  |  |                                 
|outstanding                      |  | 17,162,497                      

6

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Note 3: Recent Accounting Pronouncements

On July 1, 2008 we adopted the provisions of Statement of Financial Accounting Standards (SFAS) No. 157, "Fair Value Measurements" ("SFAS 157"). SFAS 157 defines fair value, establishes a framework for measuring
fair value in accordance with generally accepted accounting principles, and expands disclosures about fair value measurements. The adoption of the provisions of SFAS 157 is not expected to have a material effect on us. In February 2008, the
Financial Accounting Standards Board (FASB) issued FASB Staff Position FAS 157-1, Application of SFAS No. 157 to SFAS No. 13 and Its Related Interpretative Accounting Pronouncements that Address Leasing Transactions (FSP No.
157-1) and FASB Staff Position FAS 157-2, Effective Date of SFAS No. 157 (FSP No. 157-2). FSP No. 157-1 excludes SFAS No. 13, Accounting for Leases, and its related interpretive accounting pronouncements that address leasing
transactions, with the exception of fair value measurements of assets and liabilities recorded as a result of a lease transaction but measured pursuant to other pronouncements within the scope of SFAS No. 157. FSP No. 157-2 delays the effective date
of SFAS No. 157 for all non-financial assets and non-financial liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually). FSP No. 157-1 and FSP No. 157-2 became
effective for us upon adoption of SFAS No. 157. In October 2008, the FASB issued FASB Staff Position No. 157-3, Determining the Fair Value of a Financial Asset When the Market for That Asset is Not Active (FSP No. 157-3). FSP No. 157-3
clarifies the application of SFAS No. 157 in cases where a market is not active. The Company has considered FSP No. 157-3 in its determination of estimated fair values as of September 30, 2008, and the impact was not material.

On July 1, 2008 we adopted the provisions of SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities (SFAS 159). SFAS 159 permits entities to choose to measure many
financial instruments and certain other items at fair value that are not currently required to be measured at fair value, with unrealized gains and losses related to these financial instruments reported in earnings at each subsequent reporting date.
We have chosen not to measure any other financial instrument or other items at fair value that are not currently required to be measured at fair value.

In April 2008, the FASB issued Staff Position (FSP)
 No. FAS 142-3, Determination of the Useful Life of Intangible Assets.The
final FSP amends  the factors that should be considered in developing renewal
or extension assumptions used to determine the useful life of a recognized intangible
asset under SFAS 142, Goodwill and Other Intangible Assets. The FSP
is effective for  financial statements issued for fiscal years beginning after
December 15, 2008, and interim periods within those fiscal years. We are in the
process of evaluating the impact FSP 142-3 will have on our consolidated financial
statements.

In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities, an amendment of FASB Statement No. 133 (SFAS 161). Statement 161 requires disclosures of
how and why an entity uses derivative instruments, how derivative instruments and related hedged items are accounted for and how derivative instruments and related hedged items affect an entitys financial position, financial performance, and
cash flows. Statement 161 is effective for our fiscal year beginning July 1, 2009. We are in the process of evaluating the impact of SFAS 161 on our consolidated financial statements.

In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements, an amendment of ARB No. 51 (SFAS 160). SFAS 160 requires that the 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
attributable to the parent and to the noncontrolling interest must be clearly identified and presented on the face of the consolidated statement of operations. The provisions of SFAS 160 are effective for our fiscal year beginning July 1, 2009. We
are in the process of evaluating the impact of SFAS 160 on our consolidated financial statements.

In December 2007, the FASB issued SFAS No. 141R, Business Combinations (SFAS 141R). SFAS 141R offers specific guidance on how the acquirer recognizes and measures in its financial statements the
identifiable assets acquired, the liabilities assumed, any noncontrolling interest in the acquirer, and goodwill acquired or any bargain purchase gains. The provisions of SFAS 141R are effective for our fiscal year beginning July 1, 2009. We are in
the process of evaluating the impact of SFAS 141R on our consolidated financial statements.

7

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NOTE 4. Fair Value Measurements

In September 2006, the FASB issued SFAS No. 157, which is effective for fiscal years beginning after November 15, 2007 and for interim periods within those years. This statement defines fair value, establishes a framework
for measuring fair value and expands the related disclosure requirements. This statement applies under other accounting pronouncements that require or permit fair value measurements. The statement indicates, among other things, that a fair value
measurement assumes that the transaction to sell an asset or transfer a liability occurs in the principal market for the asset or liability or, in the absence of a principal market, the most advantageous market for the asset or liability. SFAS No.
157 defines fair value based upon an exit price model.

The Company adopted SFAS No. 157 on July 1, 2008, with the exception of the application of the statement to non-recurring non-financial assets and non-financial liabilities. Non-recurring nonfinancial assets and
nonfinancial liabilities for which the Company has not applied the provisions of SFAS No. 157 include those initially measured at fair value in a business combination.

SFAS No. 157 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 as follows. 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, 2008:

|                              |  |   |                |   |  |   | Fair value measurements at September 30, 2008
|----------------------------- |  | - | -------------- | - |  | - | ---------------------------------------------
|                              |  |   | Total carrying |   |  |   | Quoted prices
in active                      
|                              |  |   | value at       |   |  |   | markets                                      
|                              |  |   | 30-Sep-08      |   |  |   | (Level 1)                                    
|Trading securities            |  | $ | 489            |   |  | $ | 489                                          
|Available-for-sale securities |  |   | 210            |   |  |   | -                                            
|Foreign currency hedge        |  |   | (36            | ) |  |   | -                                            
|Total                         |  | $ | 663            |   |  | $ | 489                                          

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 investment in Level 3 is an auction-rate security. For the period from July 1, 2008 to September 30, 2008, Level 3 assets were reduced from $270 to $210 as
the result of an other than temporary impairment. There were no other activities in Level 3 fair value measurements during the period.

The carrying value of other financial instruments,
including cash, accounts receivable, accounts payable, and accrued liabilities
approximate fair value due to their short maturities. The remainder of our marketable
 securities at September 30, 2008 are accounted for as held-to-maturity investments
and are recorded at amortized cost of $21,153.

The Company has adopted SFAS No. 159 effective July 1, 2008 and did not elect the fair value option for its financial instruments.

8

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Note 5: Acquisition

On February 28, 2008 we acquired certain assets of Solvision Inc. (Solvision), a Canadian-based company, including the shares of its Singapore subsidiary, for $4,138 in cash (net of cash received) and
recovery of part of a previously issued note receivable that was deemed uncollectable. The final purchase price allocation is subject to adjustment for finalization of the value of the assets acquired. With this acquisition, we entered the market
for in-line inspection of Flip Chip Substrates and Packaged Integrated Circuits. Included in the acquisition is the patented Fast Moiré Interferometer (FMI) technology for rapid 3D inspection. The Consolidated Financial Statements
included the results of operations of Solvision from the date of acquisition. Solvision is included in the Metrology Solutions segment.

The final purchase price allocation of the Solvision asset purchase is subject to the completion of the valuation of the assets acquired and liabilities assumed. In October 2007, we loaned $1,500 to Solvision. In
December 2007, based on Solvisions financial difficulty at the time, we recorded a reserve against the full value of the note receivable of $1,500. Based on the preliminary valuation, $941 of the note receivable was recovered as of
June 30, 2008. In the first quarter of fiscal 2009, the valuation was adjusted and resulted in a further loss of $266 on the portion of the note receivable previously
recovered. The valuation process is expected to be completed by the end of the second quarter of fiscal 2009.

Note 6: Share-Based Payments

We recorded share-based compensation expense for the three months ended September 30, 2008 and 2007 of $1,022 and $735, respectively, with a related tax benefit of $368 and $268, respectively.

Stock Options

We utilized the Black-Scholes valuation method to determine the weighted average fair value of the stock option grants for both fiscal 2009 and 2008 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, 2008 and 2007 were $4.43 and $5.05, respectively. During the three months ended September 30,
2008 and 2007, an aggregate of 137,000 and 105,900 options were issued, 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, |  
|----------------------- |  | -------------------------------- | -
|                        |  | 2008                             |  
|Term                    |  | 4.6 Years                        |  
|Volatility              |  | 45.5                             | %
|Dividend yield          |  | 0.0                              | %
|Risk-free interest rate |  | 2.9                              | %
|Forfeiture rate         |  | 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.

9

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Restricted Stock

Our share-based compensation expense also includes the effects of restricted stock grants and 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, 2008 and 2007, an aggregate of 156,700 and 164,550 restricted stock grants and units were issued at a weighted grant price of $10.68 and $12.35, respectively. Generally, the restrictions on the restricted stock grants and units granted to employees lapse at a rate of 50% after three years and 50% after four years.

|Note 7: Comprehensive Loss               |   |                                  |   |  |   |      |  
|---------------------------------------- | - | -------------------------------- | - |  | - | ---- | -
|                                        
|Total comprehensive loss was as follows: |   |                                  |   |  |   |      |  
|                                         |   | Three Months Ended September 30, |  
|                                         |   | 2008                             |   |  |   | 2007 |  
|Net earnings (loss)                      | $ | 503                              |   |  | $ | (944 | )
|Unrealized gain on marketable            |   |                                  |   |  |   |      |  
|securities, net of tax                   |   | 39                               |   |  |   | -    |  
|Foreign currency translation effect      |   | (1,302                           | ) |  |   | 409  |  
|Comprehensive loss                       | $ | (760                             | ) |  | $ | (535 | )

Note 8: Inventories

Inventories are stated at the lower of cost (determined on a first-in, first-out basis) or market. At September 30, 2008 and June 30, 2008, inventories were as follows:

|                                     | September 30,
    2008 |        | June
    30,
    2008
|------------------------------------ | ---------------------- | ------ | ---------------------
|Raw materials and manufactured parts | $                      | 18,105 |                      
|Work in process                      |                        | 16,720 |                      
|Finished goods                       |                        | 5,779  |                      
|                                     | $                      | 40,604 |                      

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, 2008 and June 30, 2008, property, plant, and equipment were as follows:

|                                           |  |   |                              |   |  |   |                         |   | 
|------------------------------------------ |  | - | ---------------------------- | - |  | - | ----------------------- | - | 
|                                           |  |   | September
     30,
     2008 |   |  |   | June
     30,
     2008 |   | 
|Land                                       |  | $ | 615                          |   |  | $ | 615                     |   | 
|Building and improvements                  |  |   | 17,343                       |   |  |   | 17,270                  |   | 
|Machinery, equipment, and office furniture |  |   | 63,508                       |   |  |   | 62,940                  |   | 
|Leasehold improvements                     |  |   | 911                          |   |  |   | 903                     |   | 
|Construction in progress                   |  |   | 2,482                        |   |  |   | 2,050                   |   | 
|                                           |  |   | 84,859                       |   |  |   | 83,778                  |   | 
|Accumulated depreciation                   |  |   | (48,532                      | ) |  |   | (47,407                 | ) | 
|                                           |  | $ | 36,327                       |   |  | $ | 36,371                  |   | 

Depreciation expense for the three months ended September 30, 2008 and 2007 was $1,843 and $1,674, respectively.

10

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Note 10: Intangible Assets

Intangible assets include patents and trademarks. The cost of intangible assets is amortized on a straight-line basis over estimated useful lives ranging from 5-17 years. Intangible assets, at cost, at September 30, 2008 and June 30, 2008 were as follows:

|                                      |  |   | September 30, |   |  |   | June 30, |  
|------------------------------------- |  | - | ------------- | - |  | - | -------- | -
|                                      |  |   | 2008          |   |  |   | 2008     |  
|Patents and trademarks                |  | $ | 8,167         |   |  | $ | 8,106    |  
|Customer relationships and technology |  | $ | 2,838         |   |  | $ | 3,311    |  
|                                      |  | $ | 11,005        |   |  | $ | 11,417   |  
|Accumulated amortization              |  |   | (2,054        | ) |  |   | (1,895   | )
|Total                                 |  | $ | 8,951         |   |  | $ | 9,522    |  

Intangible amortization expense was $185 and $85 for the three months ended September 30, 2008 and 2007, respectively. This amortization expense related to certain intangible assets is included in Cost of goods sold in the Condensed Consolidated Statements of Operations.

Note 11: Warranty

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

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

|                                            |  | Three Months Ended September 30, |      
|------------------------------------------- |  | -------------------------------- | -----
|                                            |  |                                  | 2008 
|Beginning Balance                           |  | $                                | 1,263
|Reductions for payments made                |  |                                  | (287 
|Changes in accruals related to pre-existing |  |                                  |      
|warranties                                  |  |                                  | 182  
|Changes in accruals related to warranties   |  |                                  |      
|made in the current period                  |  |                                  | 379  
|Ending Balance                              |  | $                                | 1,537

11

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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, 2008 and 2007, segment sales and gross profit are as follows:

|                             |  |   | Three Months Ended
September 30, |  
|---------------------------- |  | - | -------------------------------- | -
|                             |  |   | 2008                             |  
|Metrology Solutions          |  |   |                                  |  
|Sales                        |  | $ | 27,737                           |  
|Gross profit                 |  | $ | 13,571                           |  
|Gross profit as a % of sales |  |   | 49                               | %
|Optical Systems              |  |   |                                  |  
|Sales                        |  | $ | 10,655                           |  
|Gross profit                 |  | $ | 3,240                            |  
|Gross profit as a % of sales |  |   | 30                               | %
|                            
|Total                        |  |   |                                  |  
|Sales                        |  | $ | 38,392                           |  
|Gross profit                 |  | $ | 16,811                           |  
|Gross profit as a % of sales |  |   | 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.

Sales by geographic area were as follows:

|            |  |   | Three Months Ended September 30,
|----------- |  | - | --------------------------------
|            |  |   | 2008                            
|           
|Americas    |  | $ | 16,954                          
|Europe      |  |   | 4,282                           
|Japan       |  |   | 9,658                           
|Pacific Rim |  |   | 7,498                           
|Total       |  | $ | 38,392                          

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 $7,207 (19% of
net sales, respectively) for the three months ended September 30, 2008, as compared with $5,564 (18% of net sales), for the comparable prior year period. Selling prices of products sold to Canon are based, generally, on the terms customarily
given to distributors. At September 30, 2008 and June 30, 2008, there were, in the aggregate, $2,112 and $3,032, respectively, of trade accounts receivable from Canon.

12

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Note 14: Hedging Activities

We enter into foreign currency forward contracts to reduce the impact of adverse fluctuations on earnings associated with foreign currency exchange rate changes. We do not enter into any derivative transactions for speculative purposes. These contracts are not designated as cash flow, fair value, or net investment hedges under SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended, and therefore, are marked-to-market with changes in fair value recorded in the Condensed 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, 2008, we had twelve currency contracts outstanding involving our Japanese and German operations with notional amounts aggregating $5,200. For the three months ended September 30, 2008 and 2007, we recognized net unrealized losses of $36 and $583, respectively, from foreign currency forward contracts. These unrealized losses are substantially offset by foreign exchange gains on intercompany balances recorded by our subsidiary. Any net gains and losses, after such offsets, are included in other income (expense) in the Condensed Consolidated Statements of Operations.

|Note 15: Income Taxes        |  |        |                                           |   |   |          |      |        |   |     |  |          |  
|---------------------------- |  | ------ | ----------------------------------------- | - | - | -------- | ---- | ------ | - | --- |  | -------- | -
|                            
|                             |  |        | Three Months Ended September
         30, |  
|                             |  |        | 2008                                      |   |   |          | 2007 |       
|                             |  |        |                                           |   |   | Tax Rate |      |        |   |     |  | Tax Rate |  
|                             |  | Amount |                                           |   | % |          |      | Amount |   | %   | 
|                            
|Income tax (expense) benefit |  | $      | (461                                      | ) |   | 37       | %    |        | $ | 361 |  | 36       | %

We adopted the provisions of FASB Interpretation
    No. 48, Accounting for Uncertainty in Income Taxes, on July 1,
    2007. As a result of this adoption, we recognized a liability for unrecognized
    income tax benefits of $1,535, an increase in income tax receivables of $616,
    and a charge of approximately $919 to the July 1, 2007 retained earnings
    balance. As of the adoption date, we had gross tax-affected unrecognized
    tax benefits of $1,784, of which $1,168, if recognized, would affect the
    effective tax rate. Due to our net operating loss carryforwards, 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, 2008, we did not recognize
    an additional liability for uncertain tax positions. The total liability
    for uncertain tax liabilities was $1,872 at September 30, 2008 and June 30,
    2008. We are not aware of any tax positions that would create a significant
    adjustment to the unrecognized tax benefits during October 1, 2008 through
    September 30, 2009.

We are subject to U.S. federal income tax as well as income tax in multiple state and foreign jurisdictions. We are no longer subject to U.S. federal income tax audit or tax adjustments for years prior to June 30, 1997. We are no longer subject to state and foreign income tax audit or tax adjustments for years prior to June 30, 2000 and June 30, 2003, respectively. We are currently not under income tax audit in any jurisdiction.

13

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

OVERVIEW

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

On October 16, 2008, we and Electro Scientific Industries, Inc. (ESI) jointly announced the execution of a definitive agreement, providing for the two companies to merge in an all stock transaction, subject to
the prior satisfaction of certain enumerated conditions precedent. This contemplated merger would combine jointly two photonics-based technology leaders, possessing complementary technologies and strong brand namesESI is a leading provider of
world-class photonic microengineering solutions, while Zygo is a leader in the field of high-precision metrology solutions and optical systems. Among other things, this combination creates new growth opportunities, increases the scale of the
combined companies, and mitigates business cyclicality through market segment diversification. Under the terms of the merger agreement, ZYGO shareholders will receive 1.0233 shares of ESI stock for each share of ZYGO stock in a transaction designed
to be tax-free to ZYGO shareholders. Upon closing, ESI will issue approximately 18.1 million shares on a diluted basis to complete the transaction resulting in the then Zygo shareholders owning 40% of the combined company.

We have $21.9 million in our marketable securities portfolio as of September 30, 2008, of which $2.7 million is classified as long-term. The credit losses taken by major financial institutions and the reduction in
the federal funds rate may have an effect on the valuation of the portfolio and our future interest income. We monitor the valuation of the individual securities in our portfolio and, if any security is deemed to have an other-than-temporary
impairment, we will take a charge for the impairment amount. Our portfolio contains one auction rate security for principal of $0.6 million for which we have recorded an impairment charge of $0.4 million, of which $0.1 million was in
this quarter. We recorded no other impairment charges on our portfolio. On securities classified as available-for-sale, which consists of a mutual fund tied to our deferred compensation plan, we recorded a mark-to market charge of $0.2 million
in the current quarter.

Orders for the three months ended September 30, 2008 were $28.8 million, as compared with $36.5 million for the comparable prior year period. Orders from the companys Metrology Solutions segment accounted for
79% of the orders received, with the Optical Systems segment contributing the remaining 21%. The $7.7 million decline in orders from the prior quarter occurred primarily in the Optical Systems segment which experienced a push out of orders from
one of its ophthalmology customers, which we understand was primarily related to the effect of the current economy on elective eye surgery. Within the Metrology Solutions segment, the semiconductor equipment orders decreased year over year as
capital spending in this market continues to deteriorate. We expect this decline in capital spending to adversely affect our sales and orders for at least the next several quarters.

14

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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, 2008, as amended by Form 10-K/A,
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.

As discussed below and in Note 4 to the Condensed Consolidated Financial Statements, we adopted the provisions of Financial Accounting Standards Board (FASB) Statement of Financial Accounting Standards No. 157, "Fair Value
Measurements" ("SFAS 157") (with the exception of the application of the statement to non-recurring non-financial assets and non-financial liabilities). SFAS 157 defines fair value, establishes a framework for measuring fair value in accordance with
generally accepted accounting principles, and expands disclosures about fair value measurements. The provisions of SFAS 157 were effective for our fiscal year beginning July 1, 2008. The adoption of the provisions of SFAS 157 did not have a material
effect on us.

15

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RESULTS OF OPERATIONS Net Sales


|                           |  |   | Fiscal 2009 |  |           |   | Fiscal 2008 |  
|-------------------------- |  | - | ----------- |  | --------- | - | ----------- | -
|                           |  |   |             |  | Net Sales |   |             |  
|(Dollars in millions)      |  |   | Amount      |  | %         |   |             |  
|Quarter ended September 30 |  |   |             |  |           |   |             |  
|Metrology Solutions        |  | $ | 27.7        |  | 72        | % |             | $
|Optical Systems            |  |   | 10.7        |  | 28        | % |             |  
|Total                      |  | $ | 38.4        |  | 100       | % |             | $

Overall, net sales for the three months ended September 30, 2008 increased 21% as compared with the prior year period, reflecting increases in the Metrology Solutions segment sales of 39%, partially offset by a decrease in Optical Systems segment sales of 9%. The increase in Metrology Solutions segment sales was primarily due to volume increases in display solutions of $3.6 million, vision systems of $1.9 million, instruments of $1.3 million, and semiconductor products of $1.1 million. The vision systems business was acquired in the third quarter of fiscal 2008. The decrease in the Optical Systems segment was primarilydue to decreases in contract manufacturing sales related to medical equipment. Total sales to Canon represented 19% of total sales in the three months ended September 30, 2008, as compared with 18% in the comparable prior year period. Despite an increase in lithography sales from Canon for the t





hree months ended September 30, 2008 to $4.2 million from $3.1 million in the comparable prior year period, we expect future Canon lithography sales to decline over the remainder of the year.

Sales in U.S. dollars for the three months ended September 30, 2008 were approximately 77% of total net sales, with the remaining 23% 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.

|                           |  |   | Fiscal 2009 |  |          |   | Fiscal 2008 |  
|-------------------------- |  | - | ----------- |  | -------- | - | ----------- | -
|                           |  |   |             |  | Gross    |   |             |  
|(Dollars in millions)      |  |   | Amount      |  | Profit % |   |             |  
|Quarter ended September 30 |  |   |             |  |          |   |             |  
|Metrology Solutions        |  | $ | 13.6        |  | 49       | % |             | $
|Optical Systems            |  |   | 3.2         |  | 30       | % |             |  
|Total                      |  | $ | 16.8        |  | 44       | % |             | $

Gross profit as a percentage of net sales for the three months ended September 30, 2008 was 44% which represents an increase of nine percentage points as compared with the prior year period. Within the Metrology Solutions segment, the increase in gross profit as a percentage of net sales for the three months of fiscal 2009 as compared with fiscal 2008 is due to a combination of product mix and cost containment measures. Higher margin products, including display and vision systems, represented a larger percentage of our Metrology sales. Actions taken in fiscal 2008 to right-size the factory for current production levels also increased our gross profit percentage by four percentage points in the Metrology division. Within the Optical Systems segment, the increase in gross profit as a percentage of net sales for the three months ended September 30, 2008 as compared with the same period in the prior year primarily due to product mix of higher margin shipments. The first quar





ter of fiscal 2008 also included the initial production run of the helmet mounted display units that resulted in zero margin due to cost over-runs on the initial units.

16

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Selling, General, and Administrative Expenses ("SG&A")

|                           |  |        | Fiscal 2009 |            |    |   | Fiscal 2008 |       
|-------------------------- |  | ------ | ----------- | ---------- | -- | - | ----------- | ------
|(Dollars in millions)      |  | Amount |             | % of Sales |    |   |             | Amount
|                          
|Quarter ended September 30 |  | $      | 9.6         |            | 25 | % |             | $     

SG&A expenses increased in the three months ended September 30, 2008 by $2.2 million from the comparable prior year period, primarily due to the inclusion of $1.1 million of vision systems expenses in the current quarter. We acquired the assets of the vision systems unit in February 2008 so there were no comparable expenses in the prior year. Excluding vision systems expenses, administration expenses increased $0.6 million and selling expenses increased $0.4 million. The increase in administration expenses is primarily due to costs associated with the contemplated merger with ESI of $0.4. The increase in selling expenses is primarily related to commissions of $0.3 million and employee costs of $0.1 million.

Research, Development, and Engineering
Expenses ("RD&E")

|                           |  |        | Fiscal 2009 |            |    |   | Fiscal 2008 |       
|-------------------------- |  | ------ | ----------- | ---------- | -- | - | ----------- | ------
|(Dollars in millions)      |  | Amount |             | % of Sales |    |   |             | Amount
|                          
|Quarter ended September 30 |  | $      | 5.6         |            | 15 | % |             | $     

RD&E for the three months ended September 30, 2008 remained relatively stable between periods. The inclusion of vision systems increased our RD&E costs by $0.8 million. This increase was offset by a reduction in RD&E in our lithography group of a similar amount. The reduction in lithography RD&E is related to the slowdown in capital spending in the semiconductor market. RD&E spending in the three months ended September 30, 2008 was concentrated on our semiconductor initiatives and core instruments products.

Provision for Doubtful Accounts and
Notes

|                           |  |        | Fiscal 2009 |            |     |   | Fiscal 2008 |       
|-------------------------- |  | ------ | ----------- | ---------- | --- | - | ----------- | ------
|(Dollars in millions)      |  | Amount |             | % of Sales |     |   |             | Amount
|                          
|Quarter ended September 30 |  | $      | 0.4         |            | 0.0 | % |             | $     

Provision for doubtful accounts and notes for the three months ended September 30, 2008 increased by $0.4 million as compared with the prior year period, primarily due to the aforementioned change in the purchase allocation relating to the Solvision asset acquisition in February 2008.

Other Income (Expense)

|                           |  |   | Fiscal 2009 |  |            | Fiscal 2008 |  
|-------------------------- |  | - | ----------- |  | ---------- | ----------- | -
|(Dollars in millions)      |  |   | Amount      |  | % of Sales |             |  
|Quarter ended September 30 |  | $ | -           |  | -          |             | $

Other income for the three months ended September 30, 2008 decreased by $1.0 million from the comparable prior year period due in part to decreased interest income of $0.4 million, unrealized and realized losses of $0.3 million on foreign currency transactions, an unrealized loss of $0.2 million for a mark-to-market charge recorded on an investment related to the Companys deferred compensation program, and a $0.1 million impairment charge on an auction rate security. The mark-to-market charge is offset by a reduction in SG&A for the same amount.

Income Tax Benefit (Expense)

|                           |  |   |             |   |  |          |             |  |   |        |  |          |  
|-------------------------- |  | - | ----------- | - |  | -------- | ----------- |  | - | ------ |  | -------- | -
|                           |  |   | Fiscal 2009 |   |  |          | Fiscal 2008 | 
|                           |  |   |             |   |  | Tax Rate |             |  |   |        |  | Tax Rate |  
|(Dollars in millions)      |  |   | Amount      |   |  | %        |             |  |   | Amount |  | %        |  
|                          
|Quarter ended September 30 |  | $ | (0.5        | ) |  | 37       | %           |  | $ | 0.4    |  | 36       | %

The income tax rate for the three months ended September 30, 2008 remained relatively the same as the comparable prior year period.

17

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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 $7.2 million
(19% of net sales, respectively) for the three months ended September 30, 2008, respectively, as compared with $5.6 million (18% of net sales) for the comparable prior year period. Selling prices of products sold to Canon are based, generally,
on the terms customarily given to distributors. At September 30, 2008 and June 30, 2008, there were, in the aggregate, $2.1 million and $3.0 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, common stock repurchases, and the adequacy of available bank lines of credit.

Recent distress in the financial markets, including extreme volatility in security prices, severely diminished liquidity and credit availability, rating downgrades of certain investments, and declining valuations of others,
has had an adverse impact on financial market activities. We have assessed the implications of these factors on our current business and determined that there has not been a significant impact to our financial positions, results of operations, or
liquidity during the first three months of fiscal 2009.

At September 30, 2008, cash and marketable securities
were $52.2 million, an increase of $1.2 million from $51.0 million
at June 30, 2008. Our marketable securities consist of corporate bonds ($21.2
million), mutual fund ($0.5 million), and an auction rate security ($0.2
million). The credit losses taken by major financial institutions and the reduction
in the Federal Reserve rate may have an effect on the valuation of the portfolio
 and our  future interest income.

The composition of our marketable securities by industry sector is as follows: 44% Finance, 16% Utilities, 9% Retail, 5% Real Estate, 4% Healthcare, 2% Consumer Goods, and 20% Other. Although invested heavily in the finance
sector, we intend to hold all the securities to maturity. We believe there are no impairments in our investments other than those already taken.

The cash equivalents balance in our money market account of $16.7 million as of September 30, 2008 is invested in U.S. government securities. We do not believe there is any risk to liquidity in the money market account,
nor are there currently any limits on redemptions.

While the impact of continued market volatility cannot be predicted, 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.

|Cash Flow from Operating Activities                        |  |                                  |      |  |   |      |  
|---------------------------------------------------------- |  | -------------------------------- | ---- |  | - | ---- | -
|                                                           |  | Three Months Ended September 30, |     
|                                                           |  |                                  | 2008 |  |   | 2007 |  
|Net cash flows provided by (used for) operating activities |  | $                                | 4.1  |  | $ | (1.6 | )

Cash flow from operating activities for the first three months of fiscal 2009 increased by $5.7 million as compared with the prior year period. This was primarily due to a positive change in net income of $1.4
million and an increase in accounts payable, accrued expenses, and taxes payable of $6.5 million. These increases in cash flow from operating activities were offset in part by the negative change in inventory related cash flows of $3.3
million, as a result of increasing inventory levels in the three months ended September 30, 2008 as compared with essentially flat inventory levels in the comparable prior year period. To date, we have not experienced any significant adverse change
in the payment cycles from our customers generally.

18

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|Cash Flow from Investing Activities             |  |                                  |      |  |   |     
|----------------------------------------------- |  | -------------------------------- | ---- |  | - | ----
|                                                |  | Three Months Ended September 30,
|                                                |  |                                  | 2008 |  |   | 2007
|Net cash flows provided by investing activities |  | $                                | 0.4  |  | $ | 7.6 

Cash flows provided by investing activities for the first three months of fiscal 2009 decreased by $7.2 million as compared with the prior year period. This change was primarily related to a net $6.9 million
decrease in proceeds from the maturity of marketable securities.

|Cash Flow from Financing Activities                        |  |                                  |      |  |   |      |  
|---------------------------------------------------------- |  | -------------------------------- | ---- |  | - | ---- | -
|                                                           |  | Three Months Ended September 30, |     
|                                                           |  |                                  | 2008 |  |   | 2007 |  
|Net cash flows provided by (used for) financing activities |  | $                                | 0.2  |  | $ | (4.5 | )

Cash flows used for financing activities in the three months ended September 30, 2008 decreased by $4.7 million as compared with the prior year period. This decrease was primarily related to the repurchase of common
stock during the three month period ended September 30, 2007 of $4.9 million.

There were no borrowings outstanding under our $3.0 million bank line of credit agreement during the first quarter of fiscal 2009. The line of credit agreement expires in November 2008 and we are currently evaluating
the need to renew the agreement for another year. The agreement contains certain financial covenants which, among others, relate to debt service and consolidated debt ratios. We are currently in compliance with all covenants and believe we have no
restriction to access the line of credit.

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, 2008 except for the ongoing financial crisis which is impacting
us through order pushouts 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 by Form 10-K/A, for the
year ended June 30, 2008, filed with the Securities and Exchange Commission (the 2008 Annual Report).

Item 4. Controls and Procedures

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

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

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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 other information set forth in this report, the reader should carefully consider the factors discussed in Part I, "Item 1A. Risk Factors" in our 2008 Annual Report, which could materially affect our business, financial condition, or future results. The risks described in our 2008 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.

On October 16, 2008, we and Electro Scientific Industries, Inc. jointly announced the execution of a definitive agreement providing for the two companies to merge in an all stock transaction, subject to the prior satisfaction of certain enumerated conditions precedent. This contemplated merger introduces risk factors such as the risk that expected synergies and cost savings from the merger may not be realized; the risk that anticipated growth opportunities may be smaller than anticipated or may not be realized; risks related to integration of ZYGO and ESI; the risk that the closing of the merger between ESI and ZYGO may not occur; unexpected expenses associated with the proposed merger with ESI; and customer and/or employee losses as a result of the proposed merger.

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, 2008 of equity securities that are registered by us pursuant to Section 12 of the Exchange Act.

|                                       |  |                  |  |    |   |  |   |                |  | Total number of       |  |   | Approximate dollar    
|-------------------------------------- |  | ---------------- |  | -- | - |  | - | -------------- |  | --------------------- |  | - | ----------------------
|                                       |  |                  |  |    |   |  |   |                |  | shares purchased as   |  |   | value of shares that  
|                                       |  |                  |  |    |   |  |   |                |  | part of publicly      |  |   | may yet be purchased  
|                                       |  | Total number of  |  |    |   |  |   | Average price  |  | announced             |  |   | under the plans or    
|Period                                 |  | shares purchased |  |    |   |  |   | paid per share |  | plans or programs (1) |  |   | programs (in millions)
|                                      
|July 1, 2008 - July 31, 2008           |  | 118              |  | (2 | ) |  | $ | 10.81          |  | -                     |  | $ | 5.0                   
|August 1, 2008 - August 31, 2008       |  | 12,274           |  | (2 | ) |  | $ | 9.59           |  | -                     |  | $ | 5.0                   
|September 1, 2008 - September 30, 2008 |  | 443              |  | (2 | ) |  | $ | 12.58          |  | -                     |  | $ | 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, 2008, 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|   

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Item 6. Exhibits

|(a) | Exhibits:
|--- | ---------
|   
|    | 31.1     
|   
|    | 31.2     
|   
|    | 32.1     
|   
|    | 32.2     
|   

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 RobinsonJ. Bruce RobinsonChairman and Chief Executive Officer /s/ Walter A. ShephardWalter A. ShephardVice President, Finance, Chief Financial Officer, andTreasurer


Date: November 10, 2008

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EXHIBIT INDEX

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

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