UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549

FORM 10-Q/A

AMENDMENT NO. 1

(Mark One)

|S | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ---------------------------------------------------------------------------------------
|  |                                                                                        

|For the quarterly period ended | September 30, 2005
|------------------------------ | ------------------

|  
|--
|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                                                       | 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)                           | 

|                                                                                  
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|(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.
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|SYES£NO                                                                                                                                                                                                                                                                                                                                                 

|Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).
|---------------------------------------------------------------------------------------------------------------------
|SYES£NO                                                                                                              

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

APPLICABLE ONLY TO CORPORATE ISSUERS:

Indicate the number of shares outstanding of each of the issuers classes of common stock, as of the latest practicable date.

18,036,333 shares
  of Common Stock, $.10 Par Value, at December 21, 2005

1

---

**EXPLANATORY NOTE**
This Form 10-Q/A of Zygo Corporation amends its Quarterly
  Report on Form 10-Q for the quarterly period ended September 30, 2005. Specifically,
  this Form 10-Q/A contains revised Section 302 certifications of the chief executive
  officer and the chief financial officer, as the originally contained Section
  302 certifications inadvertantly referred to the annual report in their headings
  and one certification inadvertantly referred to the annual report in paragraph
  4(c).
FORWARD LOOKING
  STATEMENTS
All statements other than statements of historical fact included in this Form 10-Q Quarterly Report
regarding our financial position, business strategy, plans, anticipated growth rates, and objectives
of management for future operations (as well as these factors as they may apply to our customers,
suppliers, and others with whom we have critical business relationships) are forward-looking statements.
Forward-looking statements are intended to provide managements current expectations or plans
for the future operating and financial performance based upon information currently available and
assumptions currently believed to be valid. Forward-looking statements can be identified by the use
of words such as anticipate, believe, estimate, expect,
intend, plans, strategy, project, and other words
of similar meaning in connection with a discussion of future operating or financial performance.
Actual results could differ materially from those contemplated by the forward-looking statements
as a result of certain factors. Among the important factors that could cause actual events to differ
materially from those in the forward-looking statements are fluctuations in capital spending of our
customers, fluctuations in net sales to our major customer, manufacturing and supplier risks, dependence
on new product development, rapid technological and market change, risks in international operations,
dependence on proprietary technology and key personnel, length of the sales cycle, environmental
regulations, and stock price fluctuations. Further information on potential factors that could affect
our business is described in our reports on file with the Securities and Exchange Commission, including
our Form 10-K for the fiscal year ended June 30, 2005.
2
PART I - Financial Information
Item 1. Financial Statements
CONSOLIDATED STATEMENTS OF OPERATIONS(UNAUDITED)(Thousands, except per share amounts)
Three Months Ended September 30,2005
    
    2004Net salesProducts
    $
    30,621
    
    $
    25,883Development services
    
    3,961
    
    
    1,69534,582
    
    
    27,578Cost of goods soldProducts
    
    18,261
    
    
    15,168Development services
    
    2,906
    
    
    1,29721,167
    
    
    16,465Gross profit
    
    13,415
    
    
    11,113Selling, general, and administrative expenses
    
    6,411
    
    
    5,659Research, development, and engineering expenses
    
    3,540
    
    
    3,208Operating profit
    
    3,464
    
    
    2,246Other income (expense):Interest income
    
    417
    
    
    179Miscellaneous income (expense), net
    
    128
    
    
    (29
    )Total other income
    
    545
    
    
    150Earnings from continuing operations before
                  income taxes and minority interest
    
    4,009
    
    
    2,396Income tax expense
    
    (1,523
    )
    
    (862
    )Minority interest
    
    (150
    )
    
    (122
    )Earnings from continuing operations
    
    2,336
    
    
    1,412Discontinued TeraOptix operations, net of tax
    
    
    
    
    (61
    )Charges and adjustments on the disposal of
       TeraOptix, net of tax
    
    
    
    
    (4
    )Loss from discontinued operations
    
    
    
    
    (65
    )Net earnings
    $
    2,336
    
    $
    1,347Basic - Earnings per share:Continuing operations
    $
    0.13
    
    $
    0.08Discontinued operations
    
    
    
    
    Net earnings
    $
    0.13
    
    $
    0.08Diluted - Earnings (loss) per share:Continuing operations
    $
    0.13
    
    $
    0.08Discontinued operations
    
    
    
    
    (0.01
    )Net earnings
    $
    0.13
    
    $
    0.07Weighted average shares outstanding:Basic shares
    
    18,013
    
    
    17,923Diluted shares
    
    18,137
    
    
    18,115See accompanying notes to consolidated financial statements.
3
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(Thousands of dollars, except share amounts)
September 30, 2005
    
    June 30, 2005AssetsCurrent assets:Cash and cash equivalents
    $
    17,159
    
    $
    20,949Marketable securities
    
    20,775
    
    
    17,242Receivables, net of allowance for doubtful accounts
          of $386 and $663, respectively
    
    25,081
    
    
    28,125Inventories
    
    35,032
    
    
    33,727Prepaid expenses
    
    2,114
    
    
    2,140Deferred income taxes
    
    8,934
    
    
    8,895Total current assets
    
    109,095
    
    
    111,078Marketable securities
    
    20,615
    
    
    18,711Property, plant, and equipment, net
    
    31,459
    
    
    31,420Deferred income taxes
    
    20,304
    
    
    21,476Intangible assets, net
    
    5,714
    
    
    5,638Other assets
    
    987
    
    
    1,017Total assets
    $
    188,174
    
    $
    189,340Liabilities and Stockholders EquityCurrent liabilities:Payables
    $
    11,705
    
    $
    13,510Accrued progress payments
    
    24,693
    
    
    21,846Accrued salaries and wages
    
    3,204
    
    
    6,220Other accrued liabilities
    
    3,254
    
    
    4,738Income taxes payable
    
    1,409
    
    
    1,510Total current liabilities
    
    44,265
    
    
    47,824Other long-term liabilities
    
    94
    
    
    96Minority interest
    
    777
    
    
    1,249Total liabilities
    
    45,136
    
    
    49,169Stockholders equity:Common Stock, $.10 par value per share:40,000,000 shares authorized;18,471,782 shares issued (18,423,026 at June 30, 2005);18,024,577 shares outstanding (17,975,821 at June 30, 2005)
    
    1,847
    
    
    1,842Additional paid-in capital
    
    142,908
    
    
    142,111Retained earnings
    
    6,150
    
    
    3,814Accumulated other comprehensive income (loss):Currency translation effects
    
    (2,608
    )
    
    (2,341
    )Net unrealized gain on marketable securities
    
    28
    
    
    32148,325
    
    
    145,458Less treasury stock, at cost (447,205 shares)
    
    5,287
    
    
    5,287Total stockholders equity
    
    143,038
    
    
    140,171Total liabilities and stockholders equity
    $
    188,174
    
    $
    189,340See accompanying notes to consolidated financial statements.
4
CONSOLIDATED STATEMENTS OF CASH FLOWS(UNAUDITED)(Thousands of dollars)
Three Months Ended September 30,2005
    
    2004Cash provided by operating activities:Net earnings
    $
    2,336
    
    $
    1,347Adjustments to reconcile net earnings to cashprovided by (used for) operating activities:Loss from discontinued operations
    
    
    
    
    65Depreciation and amortization
    
    1,499
    
    
    1,506Deferred income taxes
    
    1,133
    
    
    1,216Compensation cost related to share-based payments arrangements
    
    374
    
    
    Excess tax benefits from share-based payment arrangements
    
    (11
    )
    
    Other, net
    
    14
    
    
    53Changes in operating accounts:Receivables
    
    3,082
    
    
    5,941Inventories
    
    (1,288
    )
    
    (5,129
    )Prepaid expenses
    
    26
    
    
    62Accounts payable, accrued expenses, and taxes payable
    
    (3,826
    )
    
    (2,443
    )Minority interest
    
    150
    
    
    122Net cash provided by continuing operations
    
    3,489
    
    
    2,740Net cash used for discontinued operations
    
    
    
    
    (157
    )Net cash provided by operating activities
    
    3,489
    
    
    2,583Cash used for investing activities:Additions to property, plant, and equipment, net
    
    (1,424
    )
    
    (2,599
    )Purchase of marketable securities
    
    (9,478
    )
    
    (3,515
    )Additions to intangibles and other assets
    
    (209
    )
    
    (247
    )Proceeds from the maturity of marketable securities
    
    4,015
    
    
    1,750Net cash used for investing activities
    
    (7,096
    )
    
    (4,611
    )Cash provided by (used for) financing activities:Employee stock purchase
    
    293
    
    
    328Exercise of employee stock options
    
    135
    
    
    34Excess tax benefits from share-based payment arangements
    
    11
    
    
    Dividend payment to minority interest
    
    (622
    )
    
    Net cash provided by (used for) financing activities
    
    (183
    )
    
    362Net decrease in cash and cash equivalents
    
    (3,790
    )
    
    (1,666
    )Cash and cash equivalents, beginning of period
    
    20,949
    
    
    17,462Cash and cash equivalents, end of period
    $
    17,159
    
    $
    15,796See accompanying notes to consolidated financial statements
5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Dollars in thousands, except for per share amounts)
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation and Presentation
Zygo Corporation is a worldwide developer and supplier of high performance metrology instruments, high
precision optics, optical assemblies, and automation for the semiconductor and industrial markets.
The accompanying consolidated financial statements include the accounts of Zygo Corporation and its
subsidiaries (ZYGO, we, us, our or Company).
All material transactions and accounts with the subsidiaries have been eliminated from the consolidated
financial statements. The results of operations for the three month period ended September 30, 2005
are not necessarily indicative of the results to be expected for the full fiscal year.
The Consolidated Balance Sheet at September 30, 2005, the Consolidated Statements of Operations for
the three months ended September 30, 2005 and 2004, and the Consolidated Statements of Cash Flows
for the three months ended September 30, 2005 and 2004 are unaudited but, in managements opinion,
include all adjustments, consisting only of normal recurring accruals, necessary for a fair presentation
of the results of the interim periods. The accompanying consolidated financial statements should
be read in conjunction with the consolidated financial statements and notes included in our June
30, 2005 Annual Report on Form 10-K, including items incorporated by reference therein.
Earnings Per Share
Basic and diluted earnings per share are calculated in accordance with Statement of Financial Accounting
Standards (SFAS) No. 128, Earnings Per Share.
The following table sets forth the reconciliation of basic weighted average shares outstanding and
diluted weighted average shares outstanding:
Three Months Ended September 30,2005
    
    2004Basic weighted average shares
    outstanding
    
    18,013,229
    
    
    17,923,302Dilutive effect of stock options and
restricted shares
    
    124,149
    
    
    192,172Diluted weighted average shares
outstanding
    
    18,137,378
    
    
    18,115,474Share-Based Payments
In December 2004, the Financial Accounting Standards Board (FASB) issued SFAS 123(R), Share-Based
Payment (as amended). SFAS No. 123(R) eliminates the alternative to use the intrinsic value
method of accounting that was provided in SFAS No. 123, which generally resulted in no compensation
expense recorded in the financial statements related to the issuance of equity awards to employees.
SFAS No. 123(R) requires that the cost resulting from all share-based payment transactions be recognized
in the financial statements. SFAS No. 123(R) establishes fair value as the measurement objective
in accounting for share-based payment arrangements and requires all companies to apply a fair-value-based
measurement method in accounting generally for all share-based payment transactions with employees.
On July 1, 2005,
  we adopted SFAS No. 123(R) using a modified prospective method resulting in
  the recognition of share-based compensation expense of $232, net of related
  tax expense of $142. Prior period amounts have not been restated. Under this
  application, we are required to record compensation expense for all awards granted
  after the date of adoption and for the unvested portion of previously granted
  awards that remain outstanding at the date of adoption. In addition, we made
  changes to our employee stock purchase plan for periods beginning after July
  1, 2005, which rendered the plan non-compensatory in accordance with SFAS No.
  123(R).
6
Prior to the adoption of SFAS No. 123(R), we applied Accounting Principles Board (APB)
Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations
in accounting for our plans. The following table details the effect on net earnings and earnings
per share had compensation expense for the employee share-based awards been recorded in the three
months ended September 30, 2004 based on the fair value method under SFAS No. 123.
Net earnings, as reported
    $
    1,347Deduct: Total stock-based compensation expense determinedunder fair value based method, net of related tax effects
    
    (1,252
    )Pro forma net earnings
    $
    95Earnings per share:Basic - as reported
    $
    0.08Basic - pro forma
    $
    0.01Diluted - as reported
    $
    0.07Diluted - pro forma
    $
    0.01Share Based Compensation Plans
As of September 30, 2005, we have two share-based compensation plans, which are described below. A
third share-based compensation plan expired in September 2002.
The Zygo Corporation 2002 Equity Incentive Plan permits the granting of restricted stock and stock
options to purchase shares of common stock up to a total of 1,500,000 shares. The exercise price
per share of common stock covered by an option may not be less than the par value per share on the
date of grant, and in the case of an incentive stock option, the exercise price may not be less than
the market value per share on the date of grant. These options generally vest over a four year period
at a rate of 25% each year. The Plan will expire on August 27, 2012. Pursuant to the terms of the
Plan, the Board of Directors may also amend the Plan to authorize the grant of other types of equity-based
awards, without further action by our stockholders. Options issued to non-employee directors are
now issued under this plan. Non-employee directors are granted fully exercisable options to purchase
6,000 shares of common stock on an annual basis and each new non-employee director is granted fully
exercisable options to purchase 12,000 shares of common stock on his/her first day of service, in
all instances at the market value per share on the date of grant.
The Zygo Corporation Amended and Restated Non-Employee Director Stock Option Plan permits the granting
of non-qualified options to purchase a total of 620,000 shares (adjusted for splits) of common stock
at prices not less than the market value of the stock on the date of grant. Under the terms
of the Plan, as amended on September 24, 1999, each new non-employee director (other than a person
who was previously an employee of ZYGO or any of our subsidiaries) was granted an option to purchase
8,000 shares of common stock, generally, on his or her first day of service as a non-employee director;
and each other non-employee director was granted an option to purchase 3,000 shares of common stock
on an annual basis. All options were fully exercisable on the date of grant and had a 10-year term.
The Plan, as amended, will expire on November 17, 2009. The Company does not intend to grant further
options under the Non-Employee Director Stock Option Plan.
The Zygo Corporation Amended and Restated Non-Qualified Stock Option Plan permitted the granting of
non-qualified options to purchase a total of 4,850,000 shares (adjusted for splits) of common stock
at prices not less than the market value of the stock on the date of grant. Options generally became
exercisable at the rate of 25% of the shares each year commencing one year after the date of grant.
The Plan, as amended, expired on September 3, 2002.
7
We use the Black-Scholes
  option-pricing model to calculate the fair value of options. 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 the first quarter of fiscal 2006 stock option grants was $4.75
  and the weighted-average fair value of the first quarter fiscal 2005 stock option
  grants was $5.73. The table below indicates the key assumptions used in the
  option valuation calculations for options granted in the three months ended
  September 30, 2005 and 2004 and a discussion of our methodology for developing
  each of the assumptions used in the valuation model:
Three Months Ended September 30,2005
    
    2004Term
    
    4.1 Years
    
    
    4.5 YearsVolatility
    
    52.9%
    
    
    80.0%Dividend Yield
    
    0.0%
    
    
    0.0%Risk-free interest rate
    
    4.1%
    
    
    3.3%Forfeiture rate
    
    10.6%
    
    
    4.0%Term  - This is the period of time over which the options granted are expected to remain outstanding.
Options granted have a maximum term of ten years. An increase in the expected term will increase
compensation expense.
Volatility- This is a measure of the amount by which a price has fluctuated or is expected to fluctuate. Volatilities
are based on implied volatilities from traded options of ZYGOs shares, historical volatility
of ZYGOs shares, and other factors, such as expected changes in volatility arising from planned
changes in ZYGOs business operations. An increase in the expected volatility will increase
compensation expense.
Risk-Free Interest Rate  - This is the U.S. Treasury rate for the week of the grant having a term equal to the expected
term of the option. An increase in the risk-free interest rate will increase compensation expense.
Dividend Yield  - We did not make any dividend payments during the last five fiscal years and we have no plans
to pay dividends in the foreseeable future. An increase in the dividend yield will decrease compensation
expense.
Forfeiture Rate  - This is the estimated percentage of options granted that are expected to be forfeited or canceled
before becoming fully vested. An increase in the forfeiture rate will decrease compensation expense.
The following table summarizes information about our stock option plans for the three months
ended September 30, 2005.
Number of Options
    
    Weighted
      Average 
      Exercise Price
    
    Weighted 
      Average
      Remaining
      Contractual life
    
    Aggregate
      Intrinsic Value
      (in thousands)Balance, July 1, 2005
    
    2,069,175
    
    $
    26.95Granted
    
    120,000
    
    $
    10.40Excercised
    
    (14,013
    )
    $
    7.52Forfeited
    
    (17,563
    )
    $
    49.13Options outstanding, end of quarter
    
    2,157,599
    
    $
    25.97
    
    $
    6.40
    
    $
    7,900Option exercisable, end of quarter
    
    1,592,383
    
    $
    31.02
    
    $
    6.10
    
    $
    5,085As of September 30, 2005 there was $2,651 of total unrecognized compensation cost related to stock
options. These costs are expected to be recognized over a weighted average period of 1.6 years.
The total intrinsic value of stock options exercised was $89 and the total fair value of stock awards
vested was $761 during the three months ended September 30, 2005.
8
Cash received from stock option exercises for the three months ended September 30, 2005 was $105. The
income tax benefits from share based arrangements totaled $32, all of which were attributable to
stock option exercises.
The following table summarizes information about restricted stock awards for the three months ended
September 30, 2005:
Shares
    
    Weighted 
      Average Grant- 
      Date Fair ValueNon Vested Balance at July 1, 2005
    
    
    $
    Granted
    129,800
    
    $
    10.40Vested
    
    
    $
    Forfeited
    
    
    $
    Non Vested Balance at September 30, 2005
    129,800
    
    $
    10.40These restricted stock awards were issued under the 2002 Equity Incentive Plan and 50% of the restrictions
lapse after three years and the remaining 50% lapse after four years.
As of September 30, 2005 there was $1,151 of total unrecognized compensation costs related to restricted
stock awards. These costs are expected to be recognized over a weighted average period of 4.0 years.
At September 30, 2005 an aggregate of 599,012 shares remained available for future grants under our
stock plans, which cover stock awards and stock options. We issue shares to satisfy stock option
exercises and restricted stock awards.
Comprehensive Income
Our total comprehensive income was as follows:
Three Months Ended September 30,2005
    
    2004Net earnings
    $
    2,336
    
    $
    1,347Unrealized loss on marketable 
    securities, net of tax
    
    (4
    )
    
    (12
    )Foreign currency translation 
    effect
    
    (267
    )
    
    (202
    )Comprehensive income
    $
    2,065
    
    $
    1,133Inventories
Inventories are stated at the lower of cost (determined on a first-in, first-out basis) or market.
At September 30, 2005 and June 30, 2005, inventories were as follows:
September 30,
      2005
    
    June 30,
      2005Raw materials and manufactured parts
    $
    14,447
    
    $
    14,320Work in process
    
    16,941
    
    
    15,927Finished goods
    
    3,644
    
    
    3,480$
    35,032
    
    $
    33,727
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, 2005 and June 30, 2005, property, plant, and equipment were as follows:
September 30,
      2005
    
    June 30,
      2005
    
    Estimated
      Useful Life
      (Years)Land
    $
    615
    
    $
    615
    
    Building and improvements
    
    15,730
    
    
    15,759
    
    1540Machinery, equipment, and office furniture
    
    47,676
    
    
    45,501
    
    38Leasehold improvements
    
    712
    
    
    715
    
    15Construction in progress
    
    2,175
    
    
    2,997
    
    66,908
    
    
    65,587Accumulated depreciation
    
    (35,449
    )
    
    (34,167
    )$
    31,459
    
    $
    31,420Depreciation expense for the three months ended September 30, 2005 and 2004 was $1,370 and $1,377,
respectively.
Intangible Assets
Intangible assets include patents, trademarks, and license agreements. The cost of intangible assets
is amortized on a straight-line basis over estimated useful lives ranging from 4-20 years. Intangible
assets, at cost, at September 30, 2005 and June 30, 2005 were as follows:
September 30,
      2005
    
    June 30,
      2005Patents and Trademarks
    $
    6,740
    
    $
    6,556License Agreements
    
    1,350
    
    
    1,3508,090
    
    
    7,906Accumulated amortization
    
    (2,376
    )
    
    (2,268
    )Total
    $
    5,714
    
    $
    5,638Intangible amortization expense was $107 and $113 for the three months ended September 30, 2005 and
2004, respectively. Amortization expense related to certain intangible assets is included in cost
of goods sold in the Consolidated Statements of Operations.
Warranty
A limited warranty is provided on our products for periods ranging from 3 to 12 months and allowances
for estimated warranty costs are recorded during the period of sale. The determination of such allowances
requires management to make estimates of product return rates and expected costs to repair or replace
products under warranty. If actual return rates or repair and replacement costs, or both, differ
significantly from managements estimates, adjustments to the expense may be required.
The following is a reconciliation of the beginning and ending balances of our accrued warranty liability,
which is included in the Other accrued liabilities line item in the Consolidated Balance
Sheets:
Three Months Ended September 30,2005
    
    2004Beginning balance
    $
    1,396
    
    $
    1,486Reductions for payments made
    
    (277
    )
    
    (525
    )Changes in accruals related to warranties issued in
     the current period
    
    262
    
    
    194Changes in accruals related to pre-existing
     warranties
    
    109
    
    
    7Ending balance
    $
    1,490
    
    $
    1,162
10
Supplemental Cash Flow InformationThere were no interest payments on debt for the three months ended September 30, 2005 and 2004. Income
tax payments amounted to $392 and $199 for the three months ended September 30, 2005 and 2004, respectively.
NOTE 2: RECENT ACCOUNTING PRONOUNCEMENTS
In December 2004, the FASB issued SFAS No. 123(R), Share Based Payment (as amended). This
statement requires companies to measure and recognize compensation expense for all share-based payments
based on their fair value. The standard becomes effective for interim or annual periods beginning
after June 15, 2005. We adopted SFAS No. 123(R) in the first quarter of fiscal 2006 using the modified
prospective method. SFAS No. 123(R) primarily resulted in a change in our method of measuring and
recognizing the fair value of our share-based grants, estimating forfeitures for all unvested awards,
and accounting for awards to retirement eligible employees. In addition, changes made to our employee
share purchase plan for periods beginning July 1, 2005 render the plan non-compensatory in accordance
with SFAS No. 123(R).
The FASB issued SFAS No. 153, Exchanges of Nonmonetary Assets, that amends Opinion 29 to
eliminate the exception for nonmonetary exchanges of similar productive assets and replaces it with
a general exception for exchanges of nonmonetary assets that do not have commercial substance. The
adoption of SFAS No. 153 in this quarter did not have a material effect on our financial position
or results of operations.
The FASB issued SFAS No. 154, Accounting Changes and Error Corrections, which primarily
changes the requirements for the accounting for and reporting of a change in accounting principle
for all voluntary changes or when an accounting pronouncement does not include specific transition
provisions. This applies to accounting changes made after July 1, 2006.
NOTE 3: DIVESTITURES AND DISCONTINUED OPERATIONS
In September 2002, we committed to a planned disposition of our TeraOptix business unit (TeraOptix).
We discontinued all operations by January 2003. The sale of the facility was completed in March 2005
for $1,918, net of selling expenses.
The results and loss on disposal of the TeraOptix business unit have been presented as separate line
items in the accompanying Consolidated Statements of Operations as Discontinued TeraOptix operations,
net of tax, for all periods presented. The components of cash flow from discontinued operations
are as follows:
For the three
      months ended
      September 30,
      2004Cash flow from operating activities from discontinued operations:Loss from discontinued operations
    $
    (65
    )Deferred income taxes
    
    (36
    )Other, net
    
    (56
    )Net cash used for operating activities from discontinued operations
    
    (157
    )Net cash used by discontinued operations
    $
    (157
    )There was no cash flow impact from discontinued operations in fiscal 2006.
11
NOTE 4: SEGMENT INFORMATION
We operate in two principal business segments globally: Semiconductor and Industrial. The segment data
is presented below in a manner consistent with managements internal measurement of the business.
Three Months Ended September 30,2005
    
    2004SemiconductorSales
    $
    18,689
    
    $
    16,002Gross profit
    
    7,403
    
    
    6,563Gross profit as a % of sales
    
    40
    %
    
    41
    %IndustrialSales
    $
    15,893
    
    $
    11,576Gross profit
    
    6,012
    
    
    4,550Gross profit as a % of sales
    
    38
    %
    
    39
    %TotalSales
    $
    34,582
    
    $
    27,578Gross profit
    
    13,415
    
    
    11,113Gross profit as a % of sales
    
    39
    %
    
    40
    %Separate financial information by segment for total assets, capital expenditures, and depreciation
and amortization is not available and is not evaluated by the chief operating decision-maker.
ZYGOs, Metrology, Optical Systems Solutions, and Precision Positioning Systems (PPS)
product lines are sold into its two business segments. Supplementary sales and gross profit data
by product line is as follows:
Three Months Ended September 30,2005
    
    2004MetrologySales
    $
    16,510
    
    $
    10,766Gross profit
    
    7,629
    
    
    4,581Gross profit as a % of sales
    
    46
    %
    
    43
    %Optical Systems SolutionsSales
    $
    9,496
    
    $
    6,631Gross profit
    
    1,740
    
    
    1,399Gross profit as a % of sales
    
    18
    %
    
    21
    %PPSSales
    $
    8,576
    
    $
    10,181Gross profit
    
    4,046
    
    
    5,133Gross profit as a % of sales
    
    47
    %
    
    50
    %TotalSales
    $
    34,582
    
    $
    27,578Gross profit
    
    13,415
    
    
    11,113Gross profit as a % of sales
    
    39
    %
    
    40
    %12
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 30,2005
    
    2004Domestic
    $
    13,010
    
    $
    8,044Europe
    
    2,781
    
    
    2,648Japan
    
    14,162
    
    
    14,057Pacific Rim
    
    4,629
    
    
    2,829Total
    $
    34,582
    
    $
    27,578NOTE 5: RELATED PARTY TRANSACTIONS AND MAJOR CUSTOMER
Sales to Canon Inc., one of our significant stockholders, and Canon Sales Co., Inc., a distributor
of certain of our products in Japan and a subsidiary of Canon Inc., amounted to $12,353 (36% of net
sales) for the three months ended September 30, 2005, as compared with $12,592 (46% of net sales)
for the comparable prior year period. These sales include revenues generated from the development
agreements referenced below. Selling prices of products sold to Canon Inc. and Canon Sales Co., Inc.
are based, generally, on the terms customarily given to distributors. Revenues generated from the
development agreements are recorded on a cost-plus basis. At September 30, 2005 and June 30, 2005,
there were, in the aggregate, $4,689 and $3,951, respectively, of trade accounts receivable from
Canon Inc. and Canon Sales Co., Inc.
In September 2002, we entered into a contract with Canon Inc. related to the development of certain
interferometers. In March 2004, we signed a preliminary agreement to begin further add-on work; the
definitive agreement for this additional work was signed in December 2004. In February 2005, we entered
into two additional agreements with Canon Inc. related to the development of prototype production
tools and accessories. During the three months ended September 30, 2005 and September 30, 2004, we
recognized revenue in the semiconductor segment of $3,961and $1,695, respectively, for these contracts.
In addition, Canon Inc. paid us progress payments in accordance with the terms of the developmental
contract. The total progress payments related to the developmental contract remaining at September
30, 2005 were $13,238.
NOTE 6: HEDGING ACTIVITIES
During the third quarter of fiscal 2005, we began entering into foreign currency forward contracts
to reduce the impact of adverse fluctuations on earnings associated with foreign currency exchange
rate changes. We do not enter into any derivative transactions for speculative purposes. These contracts
are not designated as cash flow, fair value, or net investment hedges under SFAS No. 133, Accounting
for Derivative Instruments and Hedging Activities, as amended, and therefore, are marked-to-market
with changes in fair value recorded in the Statement of Operations. These contracts are entered into
for periods consistent with the currency transaction exposures, generally three to six months. Any
gains and losses on the fair value of these contracts would largely offset corresponding losses and
gains on the underlying transactions.
As of September 30, 2005, we had four foreign currency forward contracts (Yen) outstanding of $2,718.
Net gains recognized from foreign currency forward contracts for the first quarter of fiscal 2006
was $82, and are included in other income in the consolidated statements of operations. These gains
are substantially offset by foreign exchange losses on intercompany balances recorded by our subsidiaries.
We did not enter into any derivative instruments to hedge foreign currency exposure prior to the
third quarter of fiscal 2005.
13
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
RESULTS OF OPERATIONS
Introduction
Zygo Corporation designs, develops, and manufactures ultra-high precision measurement solutions and
optical components and systems. ZYGOs measurement solutions are designed to improve quality,
increase productivity, and decrease the overall cost of manufacturing and product development for
high-technology manufacturing processes. The Companys optical component and systems products
provide high-end solutions for laser fusion research, imaging systems, and measurement system components.
We conduct the majority of our manufacturing in our 153,500 square foot facility in Middlefield,
Connecticut.
We serve the semiconductor and industrial markets through our three core product lines, metrology,
optical systems solutions, and precision positioning systems. Our semiconductor product offerings
include OEM solutions and major technology development projects for the semiconductor capital equipment
industry and direct supplied in-line automated yield improvement systems for both flat panel displays
and advanced semiconductor packaging manufacturing. Our industrial market products serve the automotive,
consumer electronics, defense/aerospace, and all markets other than semiconductor. Industrial market
products include optical components, optical systems and measurement-based process control systems
for defense, aerospace, and medical device customers and measurement-based process control and yield-enhancement
systems for automotive and consumer electronics customers.
We also perform development services, which have produced a significant amount of our revenue over
the past two years. In September 2002, we entered into a contract with Canon Inc. related to the
development of certain interferometers. In March 2004, we signed a preliminary agreement to begin
further add-on work; the definitive agreement for this additional work was signed in December 2004.
In February 2005, we entered into two additional agreements with Canon Inc. related to the development
of prototype production tools and accessories. In the first quarter of fiscal 2006, we recognized
$4.0 million of revenue from these developmental services contracts as compared with $1.7 million
in the prior year comparable quarter. The development services contracts that were signed in fiscal
2005 were cost plus contracts and were expected to represent approximately $41.0 million in additional
revenue through fiscal 2007. To date, a total of $18.2 million of this revenue has been recognized.
To the extent that total actual costs on the contracts may be less than originally anticipated, the
resulting development services revenue could be less than the original estimated value of the contract.
Additionally, our period over period comparable sales, in the future could be adversely affected
if we do not continue to provide these development services at similar levels.
We achieved an order level for the first quarter of fiscal 2006 of $38.6 million as compared with $34.1
million for the first quarter of fiscal 2005. This order flow increased backlog at September 30,
2005 to $70.6 million. Orders for the first quarter of our fiscal year are normally lower than the
remaining quarters in our fiscal year. Orders in the semiconductor segment of $20.0 million decreased
$0.6 million, or 3%, as compared with the fourth quarter of fiscal 2005;however, increased $9.0 million,
or 82%, as compared with the first quarter of fiscal 2005. We continue to receive orders from the
flat panel market of the semiconductor segment and expect orders to continue for the immediate future.
We also experienced an increase in lithography orders over the prior year period, which continued
a strengthening in that market area over the last six months. Orders in the industrial segment of
$18.6 million decreased by $3.3 million, or 15%, as compared with the fourth quarter of fiscal 2005
and $4.5 million, or 19%, as compared with the first quarter of fiscal 2005.
Beginning in the first quarter of fiscal 2006, we were required to record the expense of share-based
payment transactions. Under the method adopted, we were not required to restate the prior year financial
statements or include in the current year any expenses related to stock option grants vested as of
June 30, 2005. In the quarter ended September 30, 2005, $0.4 million of share-based payment
compensation expense was included in operating income. Operating income included share-based payment
compensation expense of $0.1 million in cost of goods sold, $0.2 million in selling, general, and
administrative expenses (SG&A), and $0.1 million in research, development, and engineering
expenses (RD&E). Share-based compensation expense reduced our diluted earnings per
share by $0.01. The share-based compensation expense is estimated to be approximately $0.8 million
in the second quarter of fiscal 2006 and $0.4 million in each of the third and fourth quarters of
fiscal 2006. These estimates include the expected compensation expense related to current outstanding
stock options and restricted shares and to future issuances of stock options which are presently known to us.
14
Continuing OperationsWe recorded earnings from continuing operations for the first quarter of fiscal 2006 of $2.3 million,
or $0.13 per diluted share, as compared with earnings of $1.4 million, or $0.08 per diluted share,
for the first quarter of fiscal 2005.
Net sales by segment are as follows:
Net Sales By Segment(In millions)
    Three Months EndedSeptember 30,
      2005
    
    Net Sales
      %
    
    September, 30,
      2004
    
    Net Sales
    %Semiconductor
    $
    14.7
    
    
    42
    %
    $
    14.3
    
    
    52
    %Development Services
    
    4.0
    
    
    12
    %
    
    1.7
    
    
    6
    %Total Semiconductor
    
    18.7
    
    
    54
    %
    
    16.0
    
    
    58
    %Total Industrial
    
    15.9
    
    
    46
    %
    
    11.6
    
    
    42
    %Total
    $
    34.6
    
    
    100
    %
    $
    27.6
    
    
    100
    %Gross Profit By Segment(In millions)
    Three Months EndedSeptember 30,
      2005
    
    Gross Profit
      %
    
    September, 30,
      2004
    
    Gross Profit
      %Semiconductor
    $
    6.3
    
    
    43
    %
    $
    6.2
    
    
    43
    %Development Services
    
    1.1
    
    
    28
    %
    
    0.4
    
    
    24
    %Total Semiconductor
    
    7.4
    
    
    40
    %
    
    6.6
    
    
    41
    %Total Industrial
    
    6.0
    
    
    38
    %
    
    4.5
    
    
    39
    %Total
    $
    13.4
    
    
    39
    %
    $
    11.1
    
    
    40
    %Net sales for the first quarter of fiscal 2006 increased $7.0 million, or 25%, to $34.6 million. For
the first quarter of fiscal 2006, net sales in the semiconductor segment were $18.7 million, or 54%,
of total net sales, as compared with $16.0 million, or 58%, of total net sales, in the comparable
prior year period, primarily due to an increase in metrology revenues related to development services
of $2.3 million and flat panel revenues of $0.8 million. The increase in semiconductor sales was
partially offset by a decline in PPS product sales due to a reduction in orders received in the third
and fourth quarters of fiscal 2005 as compared with orders received in the same period of the prior
year. Net sales in the industrial segment were $15.9 million, or 46% of total net sales, as compared
with the $11.6 million, or 42% of total net sales, in the comparable prior year period. The increase
of $4.3 million was primarily due to an increase in optical systems solutions sales of medical devices
of $2.3 million and next generation introductions of existing metrology products of $1.8 million.
Sales in U.S. dollars for the first quarter of fiscal 2006 were $29.7 million, or 86%, of total net
sales for the period. For our sales which are based in foreign currency, we are exposed to foreign
exchange fluctuations from the time customers are invoiced in foreign currency until collection occurs.
Significant changes in the values of foreign currencies relative to the value of the U.S. dollar
can impact the sales of our products in export markets, as would changes in the general economic
conditions in those markets. Management believes the percentage of sales in foreign currencies may
increase in the current year due to an increase in sales denominated in yen to Japanese customers.
In the absence of a substantial increase in sales orders in currency other than U.S. dollars, we
believe a 10% appreciation or depreciation of the U.S. dollar against the euro and yen would have
an immaterial impact on our consolidated financial position and results of operations.
Gross profit for the first quarter of fiscal 2006 totaled $13.4 million, an increase of $2.3 million,
or 21%, from $11.1 million in the first quarter of fiscal 2005. Gross profit as a percentage of sales
for the first quarters of fiscal 2006 and 2005 were 39% and 40%, respectively. The decrease in gross
profit as a percentage of sales in the first quarter of fiscal 2006 was primarily due to a change
in product mix, whereby a greater percentage of sales in the first quarter of fiscal 2006 were generated
from traditionally low
15
margin products and services, including development services. The products and services generating
the lower margins, including development services, certain optics, and opto-mechanical assemblies,
accounted for 27% of sales in the first quarter of fiscal 2006 as compared with 14% in the prior
year period.
SG&A in the first quarter of fiscal 2006 amounted to $6.4 million, an increase of $0.7 million,
or 12%, from $5.7 million in the first quarter of fiscal 2005. As a percentage of net sales, SG&A
for the first quarter of fiscal 2006 and fiscal 2005 was 18% and 21%, respectively. The increase
in SG&A as a percentage of sales was due to increasing our presence in the Pacific Rim with the
opening of new offices within the last year in Korea, Taiwan, and mainland China to support anticipated
future growth. Additionally, $0.2 million was attributable to share-based compensation expense.
RD&E for the first quarter of fiscal 2006 totaled $3.5 million, an increase of $0.3 million, or
9%, from $3.2 million in the first quarter of fiscal 2005. This increase was primarily due to costs
associated with our semiconductor initiatives in the flat panel display and process control areas
and $0.1 million in share-based compensation expense.
The income tax expense from operations in the first quarter of fiscal 2006 totaled $1.5 million, or
38% of pre-tax earnings, which compares with an income tax expense of $0.9 million, or 36% of pre-tax
earnings, in the first quarter of fiscal 2005. The increase in the effective tax rate is primarily
due to increased income in foreign operations, which operate in higher tax jurisdictions, and an
increase in tax upon additional monies repatriated from these foreign operations.
RELATED PARTY TRANSACTIONS
In September 2002, we entered into a contract with Canon Inc. related to the development of certain
interferometers. In March 2004, we signed a preliminary agreement to begin further add-on work; the
definitive agreement for this additional work was signed in December 2004. In February 2005, we entered
into two additional agreements with Canon Inc. related to the development of prototype production
tools and accessories. During the three months ended September 30, 2005 and September 30, 2004, we
recognized revenue in the semiconductor segment of $4.0 million and $1.7 million, respectively, from
these contracts.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 2005, working capital was $64.8 million, an increase of $1.5 million from $63.3 million
at June 30, 2005. We maintained cash, cash equivalents, and marketable securities at September
30, 2005 totaling $58.5 million, an increase of $1.6 million, from $56.9 million at June 30, 2005.
Major fluctuations in working capital included decreases in accrued liabilities of $4.5 million,
due to the timing of several payments, and $1.8 million in accounts payable, and an increase in inventory
of $1.3 million, partially offset by a $3.0 million decrease in accounts receivables due to several
large customer payments and an increase in progress payments from customers of $2.8 million. There
were no borrowings outstanding under our $3.0 million bank line of credit at September 30, 2005.
Acquisitions of property, plant, and equipment were $1.4 million during the first quarter ended September
30, 2005. Management believes that cash generated from operations, together with the liquidity provided
by existing cash balances, will be sufficient to satisfy our liquidity requirements for the next
12 months.
CRITICAL ACCOUNTING POLICIES, SIGNIFICANT JUDGMENTS, AND ESTIMATES
The discussion and analysis of our financial condition and results of operations are based upon our
consolidated financial statements, which have been prepared in accordance with accounting principles
generally accepted in the United States of America. The preparation of these consolidated financial
statements requires us to make estimates and judgments that affect the reported amounts of assets,
liabilities, revenues, and expenses, and related disclosures at the date of our consolidated financial
statements. On an on-going basis, management evaluates its estimates and judgments, including those
related to bad debts, inventories, warranty obligations, income taxes, and long-lived assets. Management
bases its estimates and judgments on historical experience and current market conditions and on various
other factors that are believed to be reasonable under the circumstances, the results of which form
the basis for making judgments about the carrying values of assets and liabilities that are not readily
apparent from other sources. Actual results may differ from these estimates under different assumptions
or conditions. We consider certain accounting policies related to revenue recognition and allowance
for doubtful accounts, inventory valuation, warranty costs, accounting for income taxes, and valuation
of long-lived assets to be critical policies due to the estimates and judgments involved in each.
16
Share-Based PaymentsIn December 2004, FASB issued SFAS 123(R), Share-Based Payment (as amended). SFAS
No. 123(R) eliminates the alternative to use the intrinsic value method of accounting that was provided
in SFAS No. 123, which generally resulted in no compensation expense recorded in the financial statements
related to the issuance of equity awards to employees. SFAS No. 123(R) requires that the cost resulting
from all share-based payment transactions be recognized in the financial statements. SFAS No. 123(R)
establishes fair value as the measurement objective in accounting for share-based payment arrangements
and requires all companies to apply a fair-value-based measurement method in accounting for generally
all share-based payment transactions with employees. This method includes estimates and judgments
pertaining to term, volatility, risk-free interest rates, dividend yields and forfeiture rates.
Revenue Recognition and Allowance for Doubtful AccountsWe recognize revenue based on guidance provided in SEC Staff Accounting Bulletin (SAB)
No. 104, Revenue Recognition and in accordance with the Emerging Issues Task Force (EITF)
Issue No. 00-21, Revenue Arrangements with Multiple Deliverables. We recognize revenue
when persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered,
our price is fixed or determinable, and collectibility is reasonably assured. We recognize revenue
on our standard products when title passes to the customer upon shipment. While our standard products
generally require installation, the installation is considered a perfunctory performance obligation.
Standard products do not have customer acceptance criteria. Generally, software is a component of
our standard product and, as such, is not separately recognized as revenue. We have standard rights
of return that we account for as a warranty provision under SFAS No. 5, Accounting for Contingencies. We
do not have any price protection agreements or other post shipment obligations. For custom equipment
where customer acceptance is part of the sales agreement, revenue is recognized when the customer
has accepted the product. In cases where custom equipment does not have customer acceptance as part
of the sales agreement, we recognize revenue upon shipment as long as the system meets the specifications
as agreed upon with the customer. Certain transactions have multiple deliverables, with the deliverables
clearly defined. To the extent that the secondary deliverables are other than perfunctory, we recognize
the revenue on each deliverable, if separable, or on the completion of all deliverables, if not separable,
all in a manner consistent with SAB No. 104 and EITF 00-21. Standalone software products are recognized
as revenue when they are shipped. Revenue generated from development contracts are recorded on a
cost-plus basis in the period services are rendered.
We maintain an allowance for doubtful accounts based on a continuous review of customer accounts, payment
patterns, and specific collection issues. We perform on-going credit evaluations of our customers
and do not require collateral from our customers. For many of our international customers, we require
an irrevocable letter of credit to be issued by the customer before a shipment is made. If the financial
condition of our customers were to deteriorate, resulting in an impairment of their ability to make
payments, additional allowances would be required.
Inventory ValuationInventories are valued at the lower of cost or market, cost being determined on a first-in, first-out
basis. Management evaluates the need to record adjustments for impairment of inventory on a monthly
basis. Our policy is to assess the valuation of all inventories, including raw materials, work-in-process,
and finished goods. Obsolete inventory or inventory in excess of managements estimated future
usage is written down to estimated market value, if less than its cost. Contracts with fixed prices
are evaluated to determine if estimated total costs will exceed revenues. A loss provision is recorded
when the judgment is made that actual costs incurred plus estimated costs remaining to be incurred
will exceed total revenues from the contract. Inherent in the estimates of market value are managements
estimates related to current economic trends, future demand for our products, and technological obsolescence.
Significant management judgments must be made when providing for obsolete and excess inventory and
losses on contracts. If actual market conditions are different than those projected by management,
additional inventory write-downs and loss accruals may be required.
Warranty CostsWe provide for the estimated cost of product warranties at the time revenue is recognized. We consider
historical warranty costs actually incurred and specifically identified circumstances to establish
the warranty liability. The warranty liability is reviewed on a quarterly basis. Should actual costs
or revised estimated costs differ from managements prior estimates, revisions to the estimated

warranty liability would be required.

17
Accounting for Income TaxesDeferred income tax assets and liabilities are recognized for the future tax consequences attributable
to differences between the consolidated financial statement carrying amounts of existing assets and
liabilities and their respective income tax bases, and operating loss and tax credit carryforwards.
SFAS No. 109, Accounting for Income Taxes, requires the establishment of a valuation
allowance to reflect the likelihood of the realization of deferred tax assets. We record a valuation
allowance to reduce our deferred tax assets to an estimated realizable amount based on historical
and forecasted results. While management has considered future taxable income and ongoing prudent
and feasible tax planning strategies in assessing the need for the valuation allowance, in the event
management were to determine that Zygo would be able to realize its deferred tax assets in the future
in excess of its net recorded amount, an adjustment to the valuation allowance would increase income
in the period such determination was made. Likewise, should management determine that Zygo would
not be able to realize all or part of its net deferred tax asset in the future, an adjustment to
the valuation allowance would be charged to income in the period such determination was made. Our
effective tax rate may vary from period to period, generally based on changes in estimated taxable
income or loss, changes to the valuation allowance, changes to federal, state or foreign tax laws,
and deductibility of certain costs and expenses by jurisdiction.
Valuation of Long-Lived AssetsIn accordance with SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets,
the carrying value of intangible assets and other long-lived assets is reviewed on a regular basis
for the existence of facts or circumstances, both internally and externally, that may suggest impairment.
Some factors we consider important, which could trigger the impairment review, include a significant
decrease in the market value of an asset, a significant change in the extent or manner in which an
asset is used, a significant adverse change in the business climate that could affect the value of
an asset, an accumulation of costs for an asset in excess of the amount originally expected, a current
period operating or cash flow loss combined with a history of operating or cash flow losses or a
projection that demonstrates continuing losses, and a current expectation that, more likely than
not, a long-lived asset will be disposed of significantly before the end of its estimated useful life.
If such circumstances exist, we evaluate the carrying value of long-lived assets to determine if impairment
exists based upon estimated undiscounted future cash flows over the remaining useful life of the
assets and comparing that value with the carrying value of the assets. If the carrying value of the
assets is greater than the estimated future cash flows, the assets are written down to the estimated
fair value. We determine the estimated fair value of the assets based on a current market value of
the assets. If a current market value is not readily available, a projected discounted cash flow
method is applied using a discount rate determined by management to be commensurate with the risk
inherent in the current business model. Our cash flow estimates are based upon managements
best estimates, using appropriate and customary assumptions and projections at the time.
Health InsuranceWe are self-insured for the majority of our group health insurance. We rely on claims experience in
determining an adequate liability for claims incurred, but not reported. To the extent actual claims
exceed estimates, we may be required to record additional expense. A one percent change in actual
claims would have an annual impact of approximately $25,000 on our financial condition and results
of operations.
Off-Balance Sheet ArrangementsWe 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.

18
RISK FACTORS THAT MAY IMPACT FUTURE RESULTS
Risk factors that may impact future results include those disclosed in our Form 10-K for the year ended
June 30, 2005.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
There have been no material changes that have occurred in our quantitative and qualitative market risk
disclosures during the first three months of fiscal 2006. In the third quarter of fiscal 2005, we
began hedging certain intercompany transactions by entering into forward contracts to reduce the
impact of adverse fluctuations on earnings associated with foreign currency exchange rate changes.
We do not enter into any derivative transactions for speculative purposes. These contracts are entered
into for periods consistent with the currency transaction exposures, generally three to six months.
Generally, any gains and losses on the fair value of these contracts are expected to be largely offset
by gains and losses on the underlying transactions.
For discussion of our exposure to market risk, refer to Item 7a., Quantitative and Qualitative
Disclosures about Market Risk, presented in our Annual Report filed with the Securities and
Exchange Commission on Form 10-K for the year ended June 30, 2005.
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 evaluated with the participation of our Chief Executive Officer and Chief Financial
Officer the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e)
of the Securities Exchange Act of 1934, as amended, or the Exchange Act) as of September
30, 2005. On the basis of this review and subject to the foregoing, our management, including our
Chief Executive Officer and Chief Financial Officer, concluded that our disclosure controls and procedures
are effective in ensuring that the information required to be disclosed by us in reports that we
file under the Exchange Act is recorded, processed, summarized and reported within the time periods
specified in the rules and forms of the SEC and to ensure that information required to be disclosed
in the reports filed or submitted under the Exchange Act is accumulated and communicated to our management,
including our Chief Executive Officer and Chief Financial Officer, 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.
19
PART II - Other Information
Item 6.
    Exhibits(a)
    Exhibits:10.1
    Zygo Restricted Stock
      Agreement*10.2
    Zygo Stock Option
      Agreement*31.1
    Certification of Chief
      Executive Officer under Rule 13a-14(a)31.2
    Certification of Chief
      Financial Officer under Rule 13a-14(a)32.1
    Certification of Chief
      Executive Officer and Chief Financial Officer* Exhibits were filed with the Form 10-Q as originally
  filed on November 9, 2005.
20
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 RobinsonPresident, Chairman, and Chief Executive Officer/s/ Walter A. ShephardWalter A. ShephardVice President, Finance, Chief Financial Officer, and TreasurerDate:December
      23, 200521