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 December 31, 2010

or

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

For the transition period
from _______________________ to _______________________

Commission File Number 0-12944

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

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

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

|                                                                                                                                                                                                                                                                                                                                                                    
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Indicate by check mark
 whether the registrant (1) has filed all reports required to be filed by
 Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
 preceding 12 months (or for such shorter period that the registrant was
 required to file such reports), and (2) has been subject to such filing
 requirements for the past 90 days.       
|x YES o NO                                                                                                                                                                                                                                                                                                                                                          
|                                                                                                                                                                                                                                                                                                                                                                    
|Indicate by check mark
 whether the registrant has submitted electronically and posted on its
 corporate Web site, if any, every Interactive Data File required to be
 submitted and posted pursuant to Rule 405 of Regulation S-T during the
 preceding 12 months (or for such shorter period that the registrant was
 required to submit and post such files). (1)
|o YES o NO                                                                                                                                                                                                                                                                                                                                                          

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

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

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


o YES x NO


APPLICABLE ONLY TO CORPORATE ISSUERS:

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

17,646,841 shares of Common Stock, $.10 Par Value, at February 1, 2011

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

---



FORWARD LOOKING STATEMENTS

All statements other than
statements of historical fact included in this Form 10-Q Quarterly Report
regarding financial performance, condition and operations, and the business
strategy, plans, anticipated revenues, bookings, market acceptance, growth
rates, market opportunities, and objectives of management of the Company for
future operations are forward-looking statements. Forward-looking statements
are intended to provide managements current expectations or plans for the
future operating and financial performance of the Company based upon
information currently available and assumptions currently believed to be valid.
Forward-looking statements can be identified by the use of words such as
anticipate, believe, estimate, expect, intend, plans, strategy,
project, and other words of similar meaning in connection with a discussion
of future operating or financial performance. Actual results could differ
materially from those contemplated by the forward-looking statements as a
result of certain factors. Among the important factors that could cause actual
events to differ materially from those in the forward-looking statements are
fluctuations in capital spending of our customers; fluctuations in net revenues
to our major customer; manufacturing and supplier risks; risks of booking
cancellations, push-outs and de-bookings; dependence on timing and market
acceptance of new product development; rapid technological and market change;
risks in international operations; risks related to the reorganization of our
business; dependence on proprietary technology and key personnel; length of the
revenue cycle; environmental regulations; investment portfolio returns;
fluctuations in our stock price; the risk that anticipated growth opportunities
may be smaller than anticipated or may not be realized; risks related to recent
and announced business acquisitions, including the acquisition of the assets of
ASML US, Incs Richmond, California facility and integration of the businesses
and employees; and the risk related to the Companys recent and announced
changes to senior management.

Any forward-looking
statements included in this Quarterly Report speak only as of the date of this
document. We undertake no obligation to publicly update or revise
forward-looking statements to reflect events or circumstances occurring after
the date of this Form 10-Q. Further information on potential factors that could
affect our business is described in this Form 10-Q and in our reports on file
with the Securities and Exchange Commission, including our Form 10-K for the
fiscal year ended June 30, 2010.

2

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PART I - Financial
Information

Item 1. Financial Statements

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

|                                                                                                   |  |                                   |        |                                 |   |        |   |      |        |   |   |        |  
|-------------------------------------------------------------------------------------------------- |  | --------------------------------- | ------ | ------------------------------- | - | ------ | - | ---- | ------ | - | - | ------ | -
|                                                                                                   |  | Three
 Months Ended
 December 31, |        | Six
 Months Ended
 December 31, |  
|                                                                                                   |  |                                   |        |                                 |  
|                                                                                                   |  | 2010                              |        | 2009                            |   | 2010   |   | 2009 |       
|                                                                                                   |  |                                   |        |                                 |   |        |   |      |       
|Net revenues                                                                                       |  | $                                 | 36,086 |                                 | $ | 26,081 |   | $    | 67,205 |   | $ | 47,406 |  
|Cost of goods sold                                                                                 |  |                                   | 19,192 |                                 |   | 15,128 |   |      | 36,108 |   |   | 29,279 |  
|                                                                                                   |  |                                   |        |                                 |   |        |   |      |        |   |   |        |  
|Gross margin                                                                                       |  |                                   | 16,894 |                                 |   | 10,953 |   |      | 31,097 |   |   | 18,127 |  
|                                                                                                   |  |                                   |        |                                 |   |        |   |      |        |   |   |        |  
|Selling, general, and administrative expenses                                                      |  |                                   | 8,257  |                                 |   | 8,365  |   |      | 15,468 |   |   | 15,141 |  
|Research, development, and engineering expenses                                                    |  |                                   | 3,768  |                                 |   | 3,896  |   |      | 7,133  |   |   | 7,543  |  
|                                                                                                   |  |                                   |        |                                 |   |        |   |      |        |   |   |        |  
|Operating profit (loss)                                                                            |  |                                   | 4,869  |                                 |   | (1,308 | ) |      | 8,496  |   |   | (4,557 | )
|                                                                                                   |  |                                   |        |                                 |   |        |   |      |        |   |   |        |  
|Other income                                                                                       |  |                                   |        |                                 |   |        |   |      |        |   |   |        |  
|Gain on acquisition                                                                                |  |                                   | 1,289  |                                 |   |       |   |      | 1,289  |   |   |       |  
|Miscellaneous income, net                                                                          |  |                                   | 43     |                                 |   | 47     |   |      | 224    |   |   | 158    |  
|                                                                                                   |  |                                   |        |                                 |   |        |   |      |        |   |   |        |  
|Total other income                                                                                 |  |                                   | 1,332  |                                 |   | 47     |   |      | 1,513  |   |   | 158    |  
|                                                                                                   |  |                                   |        |                                 |   |        |   |      |        |   |   |        |  
|Earnings (loss) from continuing operations before income taxes,
 including noncontrolling interest |  |                                   | 6,201  |                                 |   | (1,261 | ) |      | 10,009 |   |   | (4,399 | )
|Income tax benefit (expense)                                                                       |  |                                   | (111   | )                               |   | 308    |   |      | (754   | ) |   | (374   | )
|                                                                                                   |  |                                   |        |                                 |   |        |   |      |        |   |   |        |  
|Net earnings (loss) from continuing operations                                                     |  |                                   | 6,090  |                                 |   | (953   | ) |      | 9,255  |   |   | (4,773 | )
|Net earnings (loss) from discontinued operations, net of tax                                       |  |                                   |       |                                 |   | (639   | ) |      | 91     |   |   | (2,474 | )
|                                                                                                   |  |                                   |        |                                 |   |        |   |      |        |   |   |        |  
|                                                                                                   |  |                                   |        |                                 |   |        |   |      |        |   |   |        |  
|Net earnings (loss) including noncontrolling interest                                              |  |                                   | 6,090  |                                 |   | (1,592 | ) |      | 9,346  |   |   | (7,247 | )
|Less: Net earnings attributable to noncontrolling interest                                         |  |                                   | 316    |                                 |   | 313    |   |      | 844    |   |   | 445    |  
|                                                                                                   |  |                                   |        |                                 |   |        |   |      |        |   |   |        |  
|Net earnings (loss) attributable to Zygo Corporation                                               |  | $                                 | 5,774  |                                 | $ | (1,905 | ) | $    | 8,502  |   | $ | (7,692 | )
|                                                                                                   |  |                                   |        |                                 |   |        |   |      |        |   |   |        |  
|Basic - Earnings (loss) per share attributable to Zygo Corporation                                 |  |                                   |        |                                 |   |        |   |      |        |   |   |        |  
|Continuing operations                                                                              |  | $                                 | 0.33   |                                 | $ | (0.07  | ) | $    | 0.47   |   | $ | (0.31  | )
|Discontinued operations                                                                            |  |                                   |       |                                 |   | (0.04  | ) | $    | 0.01   |   |   | (0.14  | )
|                                                                                                   |  |                                   |        |                                 |   |        |   |      |        |   |   |        |  
|Net earnings (loss) per share                                                                      |  | $                                 | 0.33   |                                 | $ | (0.11  | ) | $    | 0.48   |   | $ | (0.45  | )
|                                                                                                   |  |                                   |        |                                 |   |        |   |      |        |   |   |        |  
|Diluted - Earnings (loss) per share attributable to Zygo Corporation                               |  |                                   |        |                                 |   |        |   |      |        |   |   |        |  
|Continuing operations                                                                              |  | $                                 | 0.32   |                                 | $ | (0.07  | ) | $    | 0.47   |   | $ | (0.31  | )
|Discontinued operations                                                                            |  |                                   |       |                                 |   | (0.04  | ) |      | 0.01   |   |   | (0.14  | )
|                                                                                                   |  |                                   |        |                                 |   |        |   |      |        |   |   |        |  
|Net earnings (loss) per share                                                                      |  | $                                 | 0.32   |                                 | $ | (0.11  | ) | $    | 0.48   |   | $ | (0.45  | )
|                                                                                                   |  |                                   |        |                                 |   |        |   |      |        |   |   |        |  
|                                                                                                   |  |                                   |        |                                 |   |        |   |      |        |   |   |        |  
|Weighted average shares outstanding                                                                |  |                                   |        |                                 |   |        |   |      |        |   |   |        |  
|Basic shares                                                                                       |  |                                   | 17,596 |                                 |   | 16,993 |   |      | 17,554 |   |   | 16,968 |  
|                                                                                                   |  |                                   |        |                                 |   |        |   |      |        |   |   |        |  
|Diluted shares                                                                                     |  |                                   | 17,993 |                                 |   | 16,993 |   |      | 17,862 |   |   | 16,968 |  
|                                                                                                   |  |                                   |        |                                 |   |        |   |      |        |   |   |        |  
|                                                                                                   |  |                                   |        |                                 |   |        |   |      |        |   |   |        |  
|Amounts Attributable to Zygo Corporation                                                           |  |                                   |        |                                 |   |        |   |      |        |   |   |        |  
|Net earnings (loss) from continuing operations attributable to Zygo
 Corporation                   |  | $                                 | 5,774  |                                 | $ | (1,266 | ) | $    | 8,411  |   | $ | (5,218 | )
|Discontinued operations, net of tax                                                                |  |                                   |       |                                 |   | (639   | ) |      | 91     |   |   | (2,474 | )
|                                                                                                   |  |                                   |        |                                 |   |        |   |      |        |   |   |        |  
|Net earnings (loss) attributable to Zygo Corporation                                               |  | $                                 | 5,774  |                                 | $ | (1,905 | ) | $    | 8,502  |   | $ | (7,692 | )
|                                                                                                   |  |                                   |        |                                 |   |        |   |      |        |   |   |        |  

See accompanying notes to condensed consolidated financial
statements.

3

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

|                                                                                        |  |                   |         |                |   |         |  
|--------------------------------------------------------------------------------------- |  | ----------------- | ------- | -------------- | - | ------- | -
|                                                                                        |  | December 31, 2010 |         | June
 30, 2010 |  
|                                                                                        |  |                   |         |                |  
|Assets                                                                                  |  |                   |         |                |   |         |  
|Current assets:                                                                         |  |                   |         |                |   |         |  
|Cash and cash equivalents                                                               |  | $                 | 45,105  |                | $ | 46,536  |  
|Marketable securities                                                                   |  |                   | 1,000   |                |   | 1,000   |  
|Receivables, net of allowance for doubtful accounts of $1,439 and
 $1,975, respectively |  |                   | 28,806  |                |   | 19,948  |  
|Inventories                                                                             |  |                   | 27,221  |                |   | 25,220  |  
|Prepaid expenses and other                                                              |  |                   | 1,815   |                |   | 1,643   |  
|Income tax receivable                                                                   |  |                   |        |                |   | 1,050   |  
|Current assets of discontinued operations                                               |  |                   | 17      |                |   | 17      |  
|                                                                                        |  |                   |         |                |   |         |  
|Total
 current assets                                                                   |  |                   | 103,964 |                |   | 95,414  |  
|                                                                                        |  |                   |         |                |   |         |  
|Marketable securities                                                                   |  |                   | 1,045   |                |   | 922     |  
|Property, plant, and equipment, net                                                     |  |                   | 32,483  |                |   | 23,029  |  
|Intangible assets, net                                                                  |  |                   | 5,781   |                |   | 5,387   |  
|Other assets                                                                            |  |                   |        |                |   | 413     |  
|                                                                                        |  |                   |         |                |   |         |  
|Total assets                                                                            |  | $                 | 143,273 |                | $ | 125,165 |  
|                                                                                        |  |                   |         |                |   |         |  
|                                                                                        |  |                   |         |                |   |         |  
|Liabilities and Equity                                                                  |  |                   |         |                |   |         |  
|Current liabilities:                                                                    |  |                   |         |                |   |         |  
|Accounts payable                                                                        |  | $                 | 7,851   |                | $ | 8,426   |  
|Accrued progress payments and deferred revenue                                          |  |                   | 4,572   |                |   | 5,700   |  
|Accrued salaries and wages                                                              |  |                   | 4,858   |                |   | 3,173   |  
|Other accrued liabilities                                                               |  |                   | 6,305   |                |   | 5,191   |  
|Income tax payable                                                                      |  |                   | 1,008   |                |   | 152     |  
|Current liabilities of discontinued operations                                          |  |                   | 167     |                |   | 287     |  
|                                                                                        |  |                   |         |                |   |         |  
|Total
 current liabilities                                                              |  |                   | 24,761  |                |   | 22,929  |  
|                                                                                        |  |                   |         |                |   |         |  
|Other long-term liabilities                                                             |  |                   | 5,544   |                |   | 1,359   |  
|Long-term liabilities of discontinued operations                                        |  |                   | 198     |                |   | 281     |  
|Commitments and contingencies                                                           |  |                   |        |                |   |        |  
|                                                                                        |  |                   |         |                |   |         |  
|Equity:                                                                                 |  |                   |         |                |   |         |  
|Common stock, $0.10 par value per share:                                                |  |                   |         |                |   |         |  
|40,000,000 shares authorized;                                                           |  |                   |         |                |   |         |  
|19,864,134 shares issued (19,663,414 at June 30, 2010);                                 |  |                   |         |                |   |         |  
|17,644,991 shares outstanding (17,480,219 at June 30, 2010)                             |  |                   | 1,986   |                |   | 1,966   |  
|Additional paid-in capital                                                              |  |                   | 165,654 |                |   | 163,052 |  
|Accumulated deficit                                                                     |  |                   | (31,342 | )              |   | (39,844 | )
|Accumulated other comprehensive income (loss):                                          |  |                   |         |                |   |         |  
|Currency translation effects                                                            |  |                   | 384     |                |   | (728    | )
|Treasury stock, at cost, 2,219,143 shares (2,183,195 at June 30, 2010)                  |  |                   | (26,326 | )              |   | (26,043 | )
|                                                                                        |  |                   |         |                |   |         |  
|Total stockholders equity - Zygo Corporation                                           |  |                   | 110,356 |                |   | 98,403  |  
|Noncontrolling interest                                                                 |  |                   | 2,414   |                |   | 2,193   |  
|                                                                                        |  |                   |         |                |   |         |  
|Total equity                                                                            |  |                   | 112,770 |                |   | 100,596 |  
|                                                                                        |  |                   |         |                |   |         |  
|Total liabilities and equity                                                            |  | $                 | 143,273 |                | $ | 125,165 |  
|                                                                                        |  |                   |         |                |   |         |  

See accompanying notes to condensed consolidated financial statements.

4

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

|                                                                                                                              |  |                                |        |      |   |        |  
|----------------------------------------------------------------------------------------------------------------------------- |  | ------------------------------ | ------ | ---- | - | ------ | -
|                                                                                                                              |  | Six
 Months Ended December 31, |       
|                                                                                                                              |  |                                |       
|                                                                                                                              |  | 2010                           |        | 2009 |  
|                                                                                                                              |  |                                |        |      |  
|Cash provided by (used for) operating activities:                                                                             |  |                                |        |      |   |        |  
|Net earnings (loss) including noncontrolling interest                                                                         |  | $                              | 9,346  |      | $ | (7,247 | )
|Adjustments to reconcile net earnings (loss) to cash provided by (used
 for) operating activities from continuing operations: |  |                                |        |      |   |        |  
|(Earnings) loss from discontinued operations                                                                                  |  |                                | (91    | )    |   | 2,474  |  
|Depreciation and amortization                                                                                                 |  |                                | 3,102  |      |   | 3,121  |  
|Gain on acquisition, net of tax                                                                                               |  |                                | (1,289 | )    |   |       |  
|Deferred income taxes                                                                                                         |  |                                | (725   | )    |   | (61    | )
|Provision for doubtful accounts                                                                                               |  |                                | (257   | )    |   | 227    |  
|Compensation cost related to share-based payment arrangements                                                                 |  |                                | 1,882  |      |   | 1,117  |  
|Excess tax benefits from share-based payment arrangements                                                                     |  |                                | (21    | )    |   |       |  
|Other                                                                                                                         |  |                                | (437   | )    |   | (124   | )
|Changes in operating accounts:                                                                                                |  |                                |        |      |   |        |  
|Receivables                                                                                                                   |  |                                | (7,993 | )    |   | (127   | )
|Inventories                                                                                                                   |  |                                | 665    |      |   | 6,364  |  
|Prepaid expenses and other current assets                                                                                     |  |                                | 1,348  |      |   | (504   | )
|Accounts payable, accrued expenses, and taxes payable                                                                         |  |                                | 587    |      |   | (1,142 | )
|                                                                                                                              |  |                                |        |      |   |        |  
|Net cash provided by operating activities from continuing operations                                                          |  |                                | 6,117  |      |   | 4,098  |  
|                                                                                                                              |  |                                |        |      |   |        |  
|Net cash used for operating activities from discontinued operations                                                           |  |                                | (197   | )    |   | (1,309 | )
|                                                                                                                              |  |                                |        |      |   |        |  
|Cash provided by (used for) investing activities:                                                                             |  |                                |        |      |   |        |  
|Additions to property, plant, and equipment                                                                                   |  |                                | (556   | )    |   | (625   | )
|Purchase of marketable securities                                                                                             |  |                                | (999   | )    |   | (999   | )
|Additions to intangibles                                                                                                      |  |                                | (264   | )    |   | (312   | )
|Acquisitions                                                                                                                  |  |                                | (7,142 | )    |   |       |  
|Proceeds from the sale and maturity of marketable securities                                                                  |  |                                | 1,043  |      |   | 4,000  |  
|Proceeds from the sale of other assets                                                                                        |  |                                | 35     |      |   | 291    |  
|                                                                                                                              |  |                                |        |      |   |        |  
|Net cash (used for) provided by investing activities                                                                          |  |                                | (7,883 | )    |   | 2,355  |  
|                                                                                                                              |  |                                |        |      |   |        |  
|Cash used for financing activities:                                                                                           |  |                                |        |      |   |        |  
|Dividend payment to noncontrolling interest                                                                                   |  |                                | (721   | )    |   |       |  
|Excess tax benefits from share-based payment arrangements                                                                     |  |                                | 21     |      |   |       |  
|Restricted stock vesting and related tax benefits                                                                             |  |                                | (282   | )    |   | (238   | )
|Exercise of employee stock options                                                                                            |  |                                | 739    |      |   | 13     |  
|                                                                                                                              |  |                                |        |      |   |        |  
|Net cash used for financing activities                                                                                        |  |                                | (243   | )    |   | (225   | )
|                                                                                                                              |  |                                |        |      |   |        |  
|Effect of exchange rate changes on cash and cash equivalents                                                                  |  |                                | 775    |      |   | 103    |  
|                                                                                                                              |  |                                |        |      |   |        |  
|Net increase (decrease) in cash and cash equivalents                                                                          |  |                                | (1,431 | )    |   | 5,022  |  
|Cash and cash equivalents, beginning of year                                                                                  |  |                                | 46,536 |      |   | 32,723 |  
|                                                                                                                              |  |                                |        |      |   |        |  
|Cash and cash equivalents, end of period                                                                                      |  | $                              | 45,105 |      | $ | 37,745 |  
|                                                                                                                              |  |                                |        |      |   |        |  

Supplemental Cash Flow Information

Net cash received for income
tax refunds of $261 for the six months ended December 31, 2010. Net cash paid
for income taxes of $418 for the six months ended December 31, 2009.

Dividend declared to
noncontrolling interest but not paid was
$101 for the six months ended December 31, 2010.

See accompanying notes to condensed consolidated financial statements.

5

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

Note 1: Accounting Policies

Basis
of Presentation and Principles of ConsolidationZygo Corporation is a
worldwide supplier of optical metrology instruments, precision optics, and
electro-optical design and manufacturing services, serving customers in the
semiconductor capital equipment and industrial markets. The accompanying
condensed consolidated financial statements include the accounts of Zygo
Corporation and its subsidiaries (Zygo, we, us, our or the Company).
The Company follows accounting principles generally accepted in the United
States of America (US GAAP). Zygos reporting currency is the U.S. dollar.
The functional currency of the majority of our foreign subsidiaries is their
local currency and, as such, amounts included in the consolidated statements of
operations are translated at the weighted-average exchange rates for the
period. Assets and liabilities are translated at period-end exchange rates and
resulting foreign exchange translation adjustments are recorded in the
consolidated balance sheets as a component of accumulated other comprehensive
income (loss). All transactions and accounts with the subsidiaries have been
eliminated from the condensed consolidated financial statements. The results of
operations for the three and six months ended December 31, 2010 are not
necessarily indicative of the results to be expected for the full fiscal year.

The condensed consolidated
balance sheet at December 31, 2010, the condensed consolidated statements of
operations for the three and six months ended December 31, 2010 and 2009, and
the condensed consolidated statements of cash flows for the six months ended
December 31, 2010 and 2009 are unaudited but, in managements opinion, include
all adjustments, consisting only of normal recurring accruals, necessary for a
fair presentation of the results of the interim periods. The accompanying
condensed consolidated financial statements should be read in conjunction with
the consolidated financial statements and notes included in our Annual Report
on Form 10-K for the year ended June 30, 2010, including items incorporated by
reference therein.

Discontinued
OperationsThe Company classifies
operations as discontinued when the operations have either ceased, or are
expected to be disposed of in a sale transaction in the near term, and the
operations and cash flows of all discontinued operations have been eliminated
or will be eliminated upon consummation of the expected sale transaction, and
the Company will not have any significant continuing involvement in the
discontinued operations. Authoritative guidance related to the impairment or
disposal of long-lived assets requires the calculation of estimated fair value
less cost to sell long-lived assets for assets held for sale. The calculation
of estimated fair value less cost to sell includes significant estimates and
assumptions, including, but not limited to: operating projections; discount
rate; excess working capital levels; property values; and the anticipated costs
involved in the selling process. As more fully described in Note 2,
Discontinued Operations, we have discontinued the Singapore IC packaging
operations of our Vision Systems product line, which is included in our
Metrology Solutions segment.

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

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

6

---



ReclassificationsCertain amounts have
been reclassified to conform to current-year presentations related to other
income.

Note 2: Discontinued Operations

We discontinued the
Singapore IC packaging operations of our Vision Systems product line in fiscal
2010. In accordance with authoritative guidance, the results of operations for
the aforementioned operations are presented in the Companys condensed
consolidated financial statements as discontinued operations. In addition,
adjustments were made to the carrying value of assets held for sale if the
carrying value exceeded their estimated fair value less cost to sell.

The following table summarizes
the operating results of our discontinued operations for the three and six
months ended December 31, 2010 and 2009:

|                                                          |  |                     |   |                   |   |      |   |      |    |  |   |        |  
|--------------------------------------------------------- |  | ------------------- | - | ----------------- | - | ---- | - | ---- | -- |  | - | ------ | -
|                                                          |  | Three
 Months Ended |   | Six
 Months Ended |  
|                                                          |  | December
 31,       |   | December
 31,     |  
|                                                          |  |                     |   |                   |  
|                                                          |  | 2010                |   | 2009              |   | 2010 |   | 2009 |   
|                                                          |  |                     |   |                   |   |      |   |      |   
|Net revenues                                              |  | $                   |  |                   | $ | 344  |   | $    |   |  | $ | 665    |  
|Non-cash charge                                           |  |                     |  |                   |   |     |   |      |   |  |   | (678   | )
|(Operating expenses) and
 other income                    |  |                     |  |                   |   | (983 | ) |      | 91 |  |   | (2,461 | )
|                                                          |  |                     |   |                   |   |      |   |      |    |  |   |        |  
|Earnings
 (loss) from discontinued operations, net of tax |  | $                   |  |                   | $ | (639 | ) | $    | 91 |  | $ | (2,474 | )
|                                                          |  |                     |   |                   |   |      |   |      |    |  |   |        |  

The following table sets
forth the assets and liabilities of our discontinued operations included in the
condensed consolidated balance sheets of the Company as of December 31, 2010
and June 30, 2010:

|                                                 |  |                  |     |                 |   |     | 
|------------------------------------------------ |  | ---------------- | --- | --------------- | - | --- | 
|                                                 |  | December
31,2010 |     | June
 30,
 2010 |  
|                                                 |  |                  |     |                 |  
|Other assets                                     |  | $                | 17  |                 | $ | 17  | 
|                                                 |  |                  |     |                 |   |     | 
|Current
 assets of discontinued operations       |  | $                | 17  |                 | $ | 17  | 
|                                                 |  |                  |     |                 |   |     | 
|                                                
|Accrued expenses and other
 current liabilities  |  | $                | 167 |                 | $ | 287 | 
|                                                 |  |                  |     |                 |   |     | 
|Current
 liabilities of discontinued operations  |  | $                | 167 |                 | $ | 287 | 
|                                                 |  |                  |     |                 |   |     | 
|Other long-term
 liabilities                     |  | $                | 198 |                 | $ | 281 | 
|                                                 |  |                  |     |                 |   |     | 
|Long-term
 liabilites of discontinued operations |  | $                | 198 |                 | $ | 281 | 
|                                                 |  |                  |     |                 |   |     | 

7

---



Note 3: Acquisitions

Richmond, CaliforniaOn November 12, 2010, we completed a transaction with ASML US,
Inc. (ASML) to purchase substantially all the assets of ASMLs Richmond, California operation, including a
55,300 square-foot manufacturing facility. With this acquisition, we will expand our optical manufacturing capabilities. The
assets were acquired for $12,475 of which $7,142 was in cash and the balance was for a future consideration, net present
valued at $5,333 using a discount factor of 14%, based on the level of shipments to ASML over the next three years beginning
January 1, 2011. On the acquisition date, the consideration was recorded as a liability as shown on our consolidated balance
sheet at December 31, 2010, with $1,127 recorded as a current liability and $4,206 recorded as a long-term liability. The
future consideration represented a supply agreement that was entered in with ASML that provided for a volume discount. In
addition, we hired key management and employees working at the Richmond facility to be integrated into Zygos Optical
Systems Division - Extreme Precision Optics Group.

This transaction met the
conditions of a business combination as defined by Accounting Standards Codification
(ASC) 805 and, as such, is accounted for under ASC 805 using the purchase
method of accounting. The results of the Richmond operations were included in
our condensed consolidated statements of operations from the acquisition date.
Zygo performed a preliminary fair value exercise to allocate the purchase price
to the acquired assets and liabilities at November 12, 2010, which is complete
with the exception of a final review of the market analysis of certain
equipment acquired in the transaction. Due to the specialized nature of certain
equipment purchased, that many of the equipment components are custom built
specialty parts and the timing of the transaction the Company is still in the
process of completing its review of this information. Zygo expects to finalize
the purchase price allocation prior to the end of fiscal 2011. The following
table summarizes the consideration paid for the business and the preliminary
fair values of the assets acquired and liabilities assumed at the date of
acquisition (dollars in thousands):

|                                       |  |                                    |        | 
|-------------------------------------- |  | ---------------------------------- | ------ | 
|                                       |  | Fair
 Value On 
 November 12, 2010 |       
|                                       |  |                                    |       
|Consideration:                        
|Cash                                   |  | $                                  | 7,142  | 
|Future consideration                   |  |                                    | 5,333  | 
|                                       |  |                                    |        | 
|Purchase Price                         |  | $                                  | 12,475 | 
|                                       |  |                                    |        | 
|                                       |  |                                    |        | 
|Assets
 Acquired:                      |  |                                    |        | 
|Inventories                            |  | $                                  | 2,399  | 
|Property and equipment                 |  |                                    | 11,467 | 
|Technology and customer
 relationships |  |                                    | 623    | 
|                                       |  |                                    |        | 
|Total assets                           |  |                                    | 14,489 | 
|                                       |  |                                    |        | 
|Less gain on acquisition               |  |                                    | 2,014  | 
|                                       |  |                                    |        | 
|Purchase Price                         |  | $                                  | 12,475 | 
|                                       |  |                                    |        | 

In recording the fair values
of the assets acquired and the volume discount liability, we also recorded a
gain on acquisition of $2,014 in accordance with ASC 805 using the purchase
method of accounting which was recorded in the unaudited consolidated condensed
statement of operations. In addition, a deferred tax liability of $725 was
recorded in the opening balance sheet, which had the effect of reducing the
gain on acquisition to $1,289. We maintain a full valuation allowance on our
net deferred tax assets. Therefore, we recorded a tax benefit to reduce the
valuation allowance to the net deferred tax asset balance. Prior to recording
the gain, we reassessed whether we had correctly identified all of the assets
acquired and all of the liabilities assumed. Additionally, we also reviewed the
procedures used to measure the amounts of the identifiable assets acquired,
liabilities assumed and consideration transferred.

The purchased inventory was
comprised of raw materials and work in process. The fair value for work in
process was $1,833 and was determined by considering the sales price of
finished units to represent fair value. The fair value for the building and
land was $6,080 and was determined by a valuation specialist using the sales
comparison approach to value the land and a combination of the sales and cost
approach for the building and improvements. The fair value of the equipment was
$5,387 and was determined by the market approach. Management is still
evaluating certain pieces of equipment and the value assigned to those pieces
may change from the preliminary valuation included in the financial statements.
Any change in the valuation of the assets would increase or decrease the amount
of the gain recorded in the statements of operations. Fair value of customer
relationships was determined to be $23 by using the multi-period excess
earnings method. The fair value of technology was $600 and was determined using
the relief from royalty method.

During the three and six
months ended December 31, 2010, Richmond operations contributed revenue and net
earnings of $2,496 and $539, respectively. Acquisition related expenses of $126
and $406 were recognized in administration expense for the three and six months
ended December 31, 2010, respectively.

8

---



Proforma financial
information of revenues and net earnings are impractical to provide. Prior to
the acquisition, the Richmond operation was accounted for as a cost center
within ASML. Therefore, sales were not recorded at the Richmond level within
ASML and separate financial statements for the Richmond operation were not
prepared. While ASML provided financial information sufficient for Zygo to
conclude that the acquisition was not significant under Regulation S-X rule
3-05, ASML did not provide and Zygo does not have access to financial
information for the appropriate periods to present pro forma financial information.

The following disclosure
presents certain information regarding the Companys acquired intangible assets
as of December 31, 2010. All acquired intangible assets were valued by the
income approach and are being amortized over their initial estimated useful
lives of five years for both customer relationships and technology, in both
instances with no estimated residual values. We review our intangible assets
for impairment annually.

|                              |  |                         |    |            |   |       |   |   |     |  
|----------------------------- |  | ----------------------- | -- | ---------- | - | ----- | - | - | --- | -
|                              |  | Customer
 Relationships |    | Technology |   | Total |  
|                              |  |                         |    |            |   |       |  
|                             
|Balance at November 12,
 2010 |  | $                       | 23 |            | $ | 600   |   | $ | 623 |  
|                             
|Amortization expense          |  |                         | (8 | )          |   | (16   | ) |   | (24 | )
|                             
|                              |  |                         |    |            |   |       |   |   |     |  
|Balance at December 31,
 2010 |  | $                       | 15 |            | $ | 584   |   | $ | 599 |  
|                              |  |                         |    |            |   |       |   |   |     |  

Zemetrics


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


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

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

9

---



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

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

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

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

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

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

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

10

---



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

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

Note 4: Restructuring and related costs

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

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

|                              |  |           |      |                                |   |       |   |   |      |  
|----------------------------- |  | --------- | ---- | ------------------------------ | - | ----- | - | - | ---- | -
|                              |  | Severance |      | Facility
 Consolidation
 Costs |   | Total |  
|                              |  |           |      |                                |   |       |  
|Balance at
 June 30, 2010     |  | $         | 290  |                                | $ | 227   |   | $ | 517  |  
|Payments                      |  |           | (241 | )                              |   | (96   | ) |   | (337 | )
|                              |  |           |      |                                |   |       |   |   |      |  
|Balance at
 December 31, 2010 |  | $         | 49   |                                | $ | 131   |   | $ | 180  |  
|                              |  |           |      |                                |   |       |   |   |      |  

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

11

---



Note 5: Earnings Per Share

Basic and
diluted earnings per share are calculated in accordance with US GAAP. For the
three and six months ended December 31, 2010, 1,316,888 and 1,711,206 (for the
three and six months ended December 31, 2009, 1,810,846 and 1,978,312 ) of the
Companys outstanding stock options and restricted stock awards (Stock
Grants) were excluded from the calculation of diluted earnings per share
because they were antidilutive.

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

|                                                       |  |                                  |            |                                |  |            |  |      |            |  |  |            | 
|------------------------------------------------------ |  | -------------------------------- | ---------- | ------------------------------ |  | ---------- |  | ---- | ---------- |  |  | ---------- | 
|                                                       |  | Three
 Months Ended December 31, |            | Six
 Months Ended December 31, | 
|                                                       |  |                                  |            |                                | 
|                                                       |  | 2010                             |            | 2009                           |  | 2010       |  | 2009 |           
|                                                       |  |                                  |            |                                |  |            |  |      |           
|Basic weighted average shares outstanding              |  |                                  | 17,596,321 |                                |  | 16,993,467 |  |      | 17,554,229 |  |  | 16,967,988 | 
|Dilutive effect of stock options and restricted shares |  |                                  | 396,348    |                                |  |           |  |      | 307,966    |  |  |           | 
|                                                       |  |                                  |            |                                |  |            |  |      |            |  |  |            | 
|Diluted weighted average shares outstanding            |  |                                  | 17,992,669 |                                |  | 16,993,467 |  |      | 17,862,195 |  |  | 16,967,988 | 
|                                                       |  |                                  |            |                                |  |            |  |      |            |  |  |            | 

Note 6: Comprehensive Income (Loss)

Our
Stockholders Equity and Noncontrolling Interest for the six months ended
December 31, 2010 and 2009 is as follows:

|                                                          |  |                                 |         |                           |   |             |   |                                 |         |                           |   |             |   |   |       |   |   |         |  
|--------------------------------------------------------- |  | ------------------------------- | ------- | ------------------------- | - | ----------- | - | ------------------------------- | ------- | ------------------------- | - | ----------- | - | - | ----- | - | - | ------- | -
|                                                          |  | Six
 Months Ended December 31,  |        
|                                                          |  |                                 |        
|                                                          |  | 2010                            |         | 2009                      |  
|                                                          |  |                                 |         |                           |  
|                                                          |  | Stockholders
 EquityZygo Corp. |         | Non-
 ControllingInterest |   | TotalEquity |   | Stockholders
 EquityZygo Corp. |         | Non-
 ControllingInterest |   | TotalEquity |  
|                                                          |  |                                 |         |                           |   |             |   |                                 |         |                           |   |             |  
|Equity, beginning of period                               |  | $                               | 98,403  |                           | $ | 2,193       |   | $                               | 100,596 |                           | $ | 98,583      |   | $ | 1,444 |   | $ | 100,027 |  
|Comprehensive income (loss):                              |  |                                 |         |                           |   |             |   |                                 |         |                           |   |             |   |   |       |   |   |         |  
|Net earnings (loss)                                       |  |                                 | 8,502   |                           |   | 844         |   |                                 | 9,346   |                           |   | (7,692      | ) |   | 445   |   |   | (7,247  | )
|Foreign currency translation effect                       |  |                                 | 1,112   |                           |   | 199         |   |                                 | 1,311   |                           |   | 612         |   |   | (239  | ) |   | 373     |  
|                                                          |  |                                 |         |                           |   |             |   |                                 |         |                           |   |             |   |   |       |   |   |         |  
|Total other comprehensive income (loss)                   |  |                                 | 9,614   |                           |   | 1,043       |   |                                 | 10,657  |                           |   | (7,080      | ) |   | 206   |   |   | (6,874  | )
|                                                          |  |                                 |         |                           |   |             |   |                                 |         |                           |   |             |   |   |       |   |   |         |  
|Non-cash compensation charges related to stock awards     |  |                                 | 1,882   |                           |   |            |   |                                 | 1,882   |                           |   | 1,171       |   |   |      |   |   | 1,171   |  
|Restricted stock vesting and related tax effect           |  |                                 | (282    | )                         |   |            |   |                                 | (282    | )                         |   | (238        | ) |   |      |   |   | (238    | )
|Exercise of employee stock options and related tax effect |  |                                 | 739     |                           |   |            |   |                                 | 739     |                           |   | 13          |   |   |      |   |   | 13      |  
|Dividends attributable to noncontrolling interests        |  |                                 |        |                           |   | (822        | ) |                                 | (822    | )                         |   |            |   |   |      |   |   |        |  
|                                                          |  |                                 |         |                           |   |             |   |                                 |         |                           |   |             |   |   |       |   |   |         |  
|Equity, end of period                                     |  | $                               | 110,356 |                           | $ | 2,414       |   | $                               | 112,770 |                           | $ | 92,449      |   | $ | 1,650 |   | $ | 94,099  |  
|                                                          |  |                                 |         |                           |   |             |   |                                 |         |                           |   |             |   |   |       |   |   |         |  

12

---



Note 7: Marketable Securities

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

At December
31, 2010 and June 30, 2010, the held-to maturity securities consisted of a
government treasury bill. We have both the intent and the ability to hold the
government treasury bill to maturity. The amortized cost, gross unrealized
gains and losses, and fair value of held-to-maturity securities at December 31,
2010 and June 30, 2010 were as follows:

|                                               |  |                 |       |                            |   |                             |  |             |   |  |   |       | 
|---------------------------------------------- |  | --------------- | ----- | -------------------------- | - | --------------------------- |  | ----------- | - |  | - | ----- | 
|                                               |  | Amortized
 Cost |       | Gross 
 Unrealized 
 Gains |   | Gross 
 Unrealized 
 Losses |  | Fair
 Value |  
|                                               |  |                 |       |                            |   |                             |  |             |  
|At December 31, 2010
 Government treasury bill |  | $               | 1,000 |                            | $ |                            |  | $           |  |  | $ | 1,000 | 
|                                               |  |                 |       |                            |   |                             |  |             |   |  |   |       | 
|                                               |  |                 |       |                            |   |                             |  |             |   |  |   |       | 
|At June 30,
 2010
 Government treasury bill    |  | $               | 1,000 |                            | $ |                            |  | $           |  |  | $ | 1,000 | 
|                                               |  |                 |       |                            |   |                             |  |             |   |  |   |       | 

The government
treasury bill is being held in an account designated as loan collateral to
cover our outstanding letters of credit.

Trading
securities consist of a mutual fund investment corresponding to elections made
in our deferred compensation program. In December 2010, we began quarterly
distributions in accordance with the deferred compensation program agreement.
The cost, gross unrealized gains and losses, redemptions, and fair value of
trading securities at December 31, 2010 and 2009 were as follows:

|                                   |  |                     |     |                            |   |                           |  |               |   |                 |   |     |   |   |       | 
|---------------------------------- |  | ------------------- | --- | -------------------------- | - | ------------------------- |  | ------------- | - | --------------- | - | --- | - | - | ----- | 
|                                   |  | Beginning 
 Balance |     | Gross 
 Unrealized 
 Gains |   | Gross
 Unrealized
 Losses |  | Redemp-
 tion |   | Ending
 Balance |  
|                                   |  |                     |     |                            |   |                           |  |               |   |                 |  
|At December 31, 2010
 Mutual fund  |  | $                   | 922 |                            | $ | 166                       |  | $             |  |                 | $ | (43 | ) | $ | 1,045 | 
|                                   |  |                     |     |                            |   |                           |  |               |   |                 |   |     |   |   |       | 
|                                   |  |                     |     |                            |   |                           |  |               |   |                 |   |     |   |   |       | 
|At December
 31, 2009
 Mutual Fund |  | $                   | 499 |                            | $ | 128                       |  | $             |  |                 | $ |    |   | $ | 627   | 
|                                   |  |                     |     |                            |   |                           |  |               |   |                 |   |     |   |   |       | 

Maturities of
investment securities classified as held-to-maturity at December 31, 2010 and
June 30, 2010 were as follows:

|                     |  |                   |       |               |   |                 |  |             |       |  |   |       | 
|-------------------- |  | ----------------- | ----- | ------------- | - | --------------- |  | ----------- | ----- |  | - | ----- | 
|                     |  | December 31, 2010 |       | June 30, 2010 |  
|                     |  |                   |       |               |  
|                     |  | Amortized
 Cost   |       | Fair
 Value   |   | Amortized
 Cost |  | Fair
 Value |      
|                     |  |                   |       |               |   |                 |  |             |      
|Due within
 one year |  | $                 | 1,000 |               | $ | 1,000           |  | $           | 1,000 |  | $ | 1,000 | 
|                     |  |                   |       |               |   |                 |  |             |       |  |   |       | 

There were no
securities in a continuous unrealized loss position at December 31, 2010 and
June 30, 2010.

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

13

---



Note 8. Fair Value
Measurements

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

The following
table provides the assets and liabilities carried at fair value measured on a
recurring basis as of December 31, 2010 and June 30, 2010:

|                                               |  |                                                |        |                                                 |   |                                                       |  |                                                |     |   |   |   | 
|---------------------------------------------- |  | ---------------------------------------------- | ------ | ----------------------------------------------- | - | ----------------------------------------------------- |  | ---------------------------------------------- | --- | - | - | - | 
|Assets and Liabilities Measured at Fair Value: |  |                                                |        |                                                 |   |                                                       |  |                                                |     |  
|                                               |  |                                                |        |                                                 |   |                                                       |  |                                                |     |   |   |   | 
|                                               |  |                                                |        | Fair
 value measurements at December 31, 2010   |  
|                                               |  |                                                |        |                                                 |  
|                                               |  | Total
 carrying
 value at 
 December 31,
 2010 |        | Quoted
 prices
 in active
 markets
 (Level 1)   |   | Significant
 
 other
 observable
 inputs
 (Level 2)   |  | Significant
 unobservable
 inputs
 (Level 3)   |    
|                                               |  |                                                |        |                                                 |   |                                                       |  |                                                |    
|Money market funds                             |  | $                                              | 11,930 |                                                 | $ | 11,930                                                |  | $                                              |    |   | $ |  | 
|Trading securities                             |  |                                                | 1,045  |                                                 |   | 1,045                                                 |  |                                                |    |   |   |  | 
|Foreign currency hedge                         |  |                                                | (97    | )                                               |   |                                                      |  |                                                | (97 | ) |   |  | 
|                                               |  |                                                |        |                                                 |   |                                                       |  |                                                |     |   |   |   | 
|Total                                          |  | $                                              | 12,878 |                                                 | $ | 12,975                                                |  | $                                              | (97 | ) | $ |  | 
|                                               |  |                                                |        |                                                 |   |                                                       |  |                                                |     |   |   |   | 
|                                               |  |                                                |        |                                                 |   |                                                       |  |                                                |     |   |   |   | 
|Assets and Liabilities Measured at Fair Value: |  |                                                |        |                                                 |   |                                                       |  |                                                |     |  
|                                               |  |                                                |        |                                                 |   |                                                       |  |                                                |     |   |   |   | 
|                                               |  |                                                |        | Fair
 value measurements at June 30, 2010       |  
|                                               |  |                                                |        |                                                 |  
|                                               |  | Total
 carrying value at
 June 30, 2010        |        | Quoted
 prices 
 in active 
 markets
 (Level 1) |   | Significant
 
 other 
 observable 
 inputs
 (Level 2) |  | Significant
 
 unobservable
 inputs
 (Level 3) |    
|                                               |  |                                                |        |                                                 |   |                                                       |  |                                                |    
|Money market funds                             |  | $                                              | 22,141 |                                                 | $ | 22,141                                                |  | $                                              |    |   | $ |  | 
|Trading securities                             |  |                                                | 922    |                                                 |   | 922                                                   |  |                                                |    |   |   |  | 
|Foreign currency hedge                         |  |                                                | (70    | )                                               |   |                                                      |  |                                                | (70 | ) |   |  | 
|                                               |  |                                                |        |                                                 |   |                                                       |  |                                                |     |   |   |   | 
|Total                                          |  | $                                              | 22,993 |                                                 | $ | 23,063                                                |  | $                                              | (70 | ) | $ |  | 
|                                               |  |                                                |        |                                                 |   |                                                       |  |                                                |     |   |   |   | 

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

14

---



Note 9: Share-Based Payments

We recorded
share-based compensation expense for the three months ended December 31, 2010
and 2009 of $935 and $496, respectively, with a related tax benefit of $336 and
$179, respectively. We recorded share-based compensation expense for the six
months ended December 31, 2010 and 2009 of $1,882 and $1,170, respectively,
with a related tax benefit of $677 and $421, respectively. For the three months
ended December 31, 2009, $46 was recorded as part of discontinued operations.
For the six months ended December 31, 2009, $54 was recorded as part of
discontinued operations.

Stock Options

We utilized
the Black-Scholes valuation method to determine the weighted average fair value
of the stock option grants for both fiscal 2011 and 2010 stock option
valuations. The key assumptions for this valuation method include the expected
term of the option, stock price volatility, risk-free interest rate, dividend
yield, exercise price, and forfeiture rate. Many of these assumptions are
judgmental and highly sensitive in the determination of compensation expense.
Under the assumptions indicated below, the weighted-average fair value of stock
option grants for the six months ended December 31, 2010 and 2009 were $2.99
and $3.67, respectively. During the six months ended December 31, 2010 and
2009, we issued stock options for an aggregate of 50,000 and 140,000 shares of
common stock, respectively. During the three months ended December 31, 2010 and
2009, there were no stock grants issued.

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

| |                         |  |                                |  |            | 
| | ----------------------- |  | ------------------------------ |  | ---------- | 
| |                         |  | Six
 Months Ended December 31, | 
| |                         |  |                                | 
| |                         |  | 2010                           |  | 2009       | 
| |                         |  |                                |  |            | 
| | Term                    |  | 4.1 Years                      |  | 5.1
 Years | 
| | Volatility              |  | 45.7%                          |  | 59.8%      | 
| | Dividend yield          |  | 0.0%                           |  | 0.0%       | 
| | Risk-free interest rate |  | 1.1%                           |  | 2.5%       | 
| | Forfeiture rate         |  | 0.0%                           |  | 10.8%      | 

Restricted Stock

Our
share-based compensation expense also includes the effects of the issuance of
restricted stock and restricted stock units. The compensation expense related
to restricted stock awards is determined based on the market price of our stock
at the date of grant applied to the total number of shares that are anticipated
to fully vest, which is then amortized over the expected term. During the three
months ended December 31, 2010 and 2009, an aggregate of 258,000 and 1,000
shares, respectively, of restricted stock units were issued at a weighted average
grant price of $10.67 and $7.18, respectively. During the six months ended
December 31, 2010 and 2009, an aggregate of 289,000 and 269,000 shares,
respectively, of restricted stock units were issued at a weighted average grant
price of $10.38 and $5.39, respectively. Generally, the restrictions on the
restricted stock and restricted stock units granted to employees lapse at a
rate of 50% after three years and the remaining 50% after the fourth year.

Note 10: Receivables

At December
31, 2010 and June 30, 2010, receivables were as follows:

|                                 |  |                     |        |                |   |        |  
|-------------------------------- |  | ------------------- | ------ | -------------- | - | ------ | -
|                                 |  | December
 31,
 2010 |        | June
 30, 2010 |  
|                                 |  |                     |        |                |  
|Trade                            |  | $                   | 29,857 |                | $ | 21,314 |  
|Other                            |  |                     | 388    |                |   | 609    |  
|                                 |  |                     |        |                |   |        |  
|                                 |  |                     | 30,245 |                |   | 21,923 |  
|Allowance for doubtful
 accounts |  |                     | (1,439 | )              |   | (1,975 | )
|                                 |  |                     |        |                |   |        |  
|                                 |  | $                   | 28,806 |                | $ | 19,948 |  
|                                 |  |                     |        |                |   |        |  

15

---



Note 11: Inventories

Inventories
are stated at the lower of cost (determined on a first-in, first-out basis) or
market. At December 31, 2010 and June 30, 2010, inventories were as follows:

|                                      |  |                     |        |                 |   |        | 
|------------------------------------- |  | ------------------- | ------ | --------------- | - | ------ | 
|                                      |  | December
 31,
 2010 |        | June
 30,
 2010 |  
|                                      |  |                     |        |                 |  
|Raw materials and
 manufactured parts |  | $                   | 13,486 |                 | $ | 12,682 | 
|Work in process                       |  |                     | 10,250 |                 |   | 9,322  | 
|Finished goods                        |  |                     | 3,485  |                 |   | 3,216  | 
|                                      |  |                     |        |                 |   |        | 
|                                      |  | $                   | 27,221 |                 | $ | 25,220 | 
|                                      |  |                     |        |                 |   |        | 

Note 12: Property, Plant, and Equipment

Property,
plant, and equipment are stated at cost. Maintenance and repairs are charged to
expense as incurred. Management evaluates, on an ongoing basis, the carrying
value of our property, plant, and equipment and makes adjustments when
impairments are identified. Depreciation is based on the estimated useful lives
of the various classes of assets and is computed using the straight-line
method. At December 31, 2010 and June 30, 2010, property, plant, and equipment
were as follows:

|                                            |  |                     |         |               |   |                                 |   |       | 
|------------------------------------------- |  | ------------------- | ------- | ------------- | - | ------------------------------- | - | ----- | 
|                                            |  | December
 31,
 2010 |         | June
 30,2010 |   | Estimated
 Useful Life
 (Years) |  
|                                            |  |                     |         |               |   |                                 |  
|Land                                        |  | $                   | 1,696   |               | $ | 615                             |   |      | 
|Building and improvements                   |  |                     | 22,494  |               |   | 17,390                          |   | 15-40 | 
|Machinery, equipment, and
 office furniture |  |                     | 61,594  |               |   | 56,136                          |   | 3-8   | 
|Leasehold improvements                      |  |                     | 1,028   |               |   | 1,002                           |   | 1-5   | 
|Construction in progress                    |  |                     | 82      |               |   | 332                             |   |      | 
|                                            |  |                     |         |               |   |                                 |   |       | 
|                                            |  |                     | 86,894  |               |   | 75,475                          |   |       | 
|Accumulated depreciation                    |  |                     | (54,411 | )             |   | (52,446                         | ) |       | 
|                                            |  |                     |         |               |   |                                 |   |       | 
|                                            |  | $                   | 32,483  |               | $ | 23,029                          |   |       | 
|                                            |  |                     |         |               |   |                                 |   |       | 

Depreciation
expense was $1,352 and $1,328 for the three months ended December 31, 2010 and
2009, respectively. Depreciation
expense was $2,609 and $2,757 for the six months ended December 31, 2010 and
2009, respectively.

Note 13: Warranty

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

As part of a
strategic business partnership with Nanometrics entered into in June 2009, all
related semiconductor systems that were purchased by Nanometrics are being
warranted by us through June 2011. Nanometrics will provide warranty service
and invoice us for incurred expenses. As of December 31, 2010 and 2009, $9 and
$182, respectively, of our warranty liability relates to these semiconductor
systems.

16

---



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

|                                                                     |  |                                |       |      |   |       |  
|-------------------------------------------------------------------- |  | ------------------------------ | ----- | ---- | - | ----- | -
|                                                                     |  | Six
 Months Ended December 31, |      
|                                                                     |  |                                |      
|                                                                     |  | 2010                           |       | 2009 |  
|                                                                     |  |                                |       |      |  
|Beginning balance                                                    |  | $                              | 1,360 |      | $ | 1,614 |  
|Reductions for payments made                                         |  |                                | (565  | )    |   | (453  | )
|Changes in accruals related to pre-existing warranties               |  |                                | 216   |      |   | (195  | )
|Changes in accruals related to warranties made in the current period |  |                                | 250   |      |   | 418   |  
|                                                                     |  |                                |       |      |   |       |  
|Ending balance                                                       |  | $                              | 1,261 |      | $ | 1,384 |  
|                                                                     |  |                                |       |      |   |       |  

Note 14: Intangible Assets

Intangible
assets include patents, trademarks, customer relationships and technology, and
a covenant not-to-compete. The cost of patents, trademarks, and customer relationships
and technology is amortized on a straight-line basis over estimated useful
lives ranging from 3-17 years. We entered into a non-compete agreement with a
former officer and director of the Company effective February 28, 2009. The
agreement calls for payments over a four year period of declining amounts
totaling $878, which includes $27 of imputed interest. As of December 31, 2010,
current liabilities include $119 and long-term liabilities include $67 related
to the payments under this agreement. We are amortizing the value of the
non-compete over four years on a declining balance method.

Intangible
assets, at cost, at December 31, 2010 and June 30, 2010 were as follows:

|                                       |  |                     |        |                 |   |        |  
|-------------------------------------- |  | ------------------- | ------ | --------------- | - | ------ | -
|                                       |  | December
 31,
 2010 |        | June
 30,
 2010 |  
|                                       |  |                     |        |                 |  
|Patents and trademarks                 |  | $                   | 6,146  |                 | $ | 5,882  |  
|Covenant not-to-compete                |  |                     | 851    |                 |   | 851    |  
|Customer relationships and
 technology |  |                     | 2,163  |                 |   | 1,540  |  
|                                       |  |                     |        |                 |   |        |  
|                                       |  |                     | 9,160  |                 |   | 8,273  |  
|Accumulated amortization               |  |                     | (3,379 | )               |   | (2,886 | )
|                                       |  |                     |        |                 |   |        |  
|Total                                  |  | $                   | 5,781  |                 | $ | 5,387  |  
|                                       |  |                     |        |                 |   |        |  

Intangible
amortization expense was $493 and $350 for the six months ended December 31,
2010 and 2009, respectively. This amortization expense related to certain
intangible assets is included in cost of goods sold in the condensed
consolidated statements of operations.

Based on the
carrying amount of the intangible assets as of December 31, 2010, the estimated
future amortization expense is as follows:

|                                  |  |                                         |   |       |  | 
|--------------------------------- |  | --------------------------------------- | - | ----- |  | 
|                                  |  | Estimated
 Future Amortization
 Expense |  
|                                  |  |                                         |  
|Six months ending June 30,
 2011  |  |                                         | $ | 494   |  | 
|Fiscal year ending June
 30, 2012 |  |                                         |   | 942   |  | 
|Fiscal year ending June
 30, 2013 |  |                                         |   | 927   |  | 
|Fiscal year ending June
 30, 2014 |  |                                         |   | 933   |  | 
|Fiscal year ending June
 30, 2015 |  |                                         |   | 1,107 |  | 
|Thereafter                        |  |                                         |   | 1,378 |  | 
|                                  |  |                                         |   |       |  | 
|Total                             |  |                                         | $ | 5,781 |  | 
|                                  |  |                                         |   |       |  | 

17

---



Note 15: Segment Information

Zygos
Metrology Solutions division (segment) consists of OEM and in-line products
primarily for the semiconductor and industrial markets. The Optical Systems
division (segment) consists of components and opto-mechanical assemblies
primarily for the medical, defense, and aerospace industries, which are
included in the industrial market. For the three and six months ended December
31, 2010 and 2009, segment revenues and gross margin are as follows:

|                                    |  |                                  |        |                                |   |        |   |      |        |   |   |        |  
|----------------------------------- |  | -------------------------------- | ------ | ------------------------------ | - | ------ | - | ---- | ------ | - | - | ------ | -
|                                    |  | Three
 Months Ended December 31, |        | Six
 Months Ended December 31, |  
|                                    |  |                                  |        |                                |  
|                                    |  | 2010                             |        | 2009                           |   | 2010   |   | 2009 |       
|                                    |  |                                  |        |                                |   |        |   |      |       
|Metrology Solutions                 |  |                                  |        |                                |   |        |   |      |        |   |   |        |  
|Net revenues                        |  | $                                | 23,568 |                                | $ | 17,157 |   | $    | 44,417 |   | $ | 33,134 |  
|Gross margin                        |  | $                                | 13,681 |                                | $ | 8,865  |   | $    | 24,791 |   | $ | 16,342 |  
|Gross margin as a % of net revenues |  |                                  | 58     | %                              |   | 52     | % |      | 56     | % |   | 49     | %
|                                    |  |                                  |        |                                |   |        |   |      |        |   |   |        |  
|Optical Systems                     |  |                                  |        |                                |   |        |   |      |        |   |   |        |  
|Net revenues                        |  | $                                | 12,518 |                                | $ | 8,924  |   | $    | 22,788 |   | $ | 14,272 |  
|Gross margin                        |  | $                                | 3,213  |                                | $ | 2,088  |   | $    | 6,306  |   | $ | 1,785  |  
|Gross margin as a % of net revenues |  |                                  | 26     | %                              |   | 23     | % |      | 28     | % |   | 13     | %
|                                    |  |                                  |        |                                |   |        |   |      |        |   |   |        |  
|Total                               |  |                                  |        |                                |   |        |   |      |        |   |   |        |  
|Net revenues                        |  | $                                | 36,086 |                                | $ | 26,081 |   | $    | 67,205 |   | $ | 47,406 |  
|Gross margin                        |  | $                                | 16,894 |                                | $ | 10,953 |   | $    | 31,097 |   | $ | 18,127 |  
|Gross margin as a % of net revenues |  |                                  | 47     | %                              |   | 42     | % |      | 46     | % |   | 38     | %

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

Revenues by
geographic area were as follows:

|            |  |                                  |        |                                |   |        |  |      |        |  |   |        | 
|----------- |  | -------------------------------- | ------ | ------------------------------ | - | ------ |  | ---- | ------ |  | - | ------ | 
|            |  | Three
 Months Ended December 31, |        | Six
 Months Ended December 31, |  
|            |  |                                  |        |                                |  
|            |  | 2010                             |        | 2009                           |   | 2010   |  | 2009 |       
|            |  |                                  |        |                                |   |        |  |      |       
|Americas    |  | $                                | 19,571 |                                | $ | 12,932 |  | $    | 36,480 |  | $ | 26,216 | 
|Europe      |  |                                  | 4,766  |                                |   | 3,780  |  |      | 8,376  |  |   | 6,097  | 
|Japan       |  |                                  | 7,911  |                                |   | 3,421  |  |      | 13,793 |  |   | 7,249  | 
|Pacific Rim |  |                                  | 3,838  |                                |   | 5,948  |  |      | 8,556  |  |   | 7,844  | 
|            |  |                                  |        |                                |   |        |  |      |        |  |   |        | 
|Total       |  | $                                | 36,086 |                                | $ | 26,081 |  | $    | 67,205 |  | $ | 47,406 | 
|            |  |                                  |        |                                |   |        |  |      |        |  |   |        | 

Note 16: Transactions with Stockholder

Revenues from
Canon Inc., a stockholder, and Canon Sales Co., Inc., a distributor of certain
of our products in Japan and a subsidiary of Canon Inc. (collectively referred
to as Canon), amounted to $3,482 and $2,031 (10% and 8% of net revenues,
respectively) for the three months ended December 31, 2010 and 2009,
respectively. For the six months ended December 31, 2010 and 2009, sales to
Canon amounted to $6,953 and $3,020 (10% and 6% of net revenues, respectively).
Selling prices of products sold to Canon are based, generally, on the terms
customarily given to distributors. At December 31, 2010 and June 30, 2010,
there were, in the aggregate, $900 and $667, respectively, of trade accounts
receivable from Canon.

18

---



Note 17: Derivatives and Hedging Activities

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

As of December 31, 2010, we had seven
currency contracts outstanding involving our Japanese operations with notional
amounts aggregating $3,200. These foreign currency hedges are not considered
designated hedging instruments. For the three months ended December 31, 2010
and 2009, we recognized net unrealized losses of $29 and unrealized gains of
$160, respectively, from foreign currency forward contracts. For the six months
ended December 31, 2010 and 2009, we recognized net unrealized losses of $26
and unrealized gains of $13, respectively, from foreign currency forward
contracts. These unrealized gains and losses are substantially offset by
foreign exchange losses and gains on intercompany balances recorded by our
subsidiary and are recorded in miscellaneous income on our condensed
consolidated statements of operations.

The following
table summarizes the fair value of derivative instruments as of December 31,
2010:

|                                                  |  |                              
|------------------------------------------------- |  | -----------------------------
|Derivatives not designated as hedging instruments |  | Balance Sheet Location       
|                                                  |  |                              
|                                                  |  |                              
|Number of foreign exchange contracts:    7        |  | Other accrued liabilities $97

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

|                                                  |  |                                 
|------------------------------------------------- |  | --------------------------------
|Derivatives not designated as hedging instruments |  | Balance Sheet Location          
|                                                  |  |                                 
|                                                  |  |                                 
|Number of foreign exchange contracts:    6        |  | Prepaid
 expenses            $11
|                                                  |  | Other accrued liabilities $12   

Note 18: Income Taxes

|                             |  |                                  |      |                                |  |        |   |            |     |        |  |            |   |        |      |            |  |   |   |   |      |   |  |   |  
|---------------------------- |  | -------------------------------- | ---- | ------------------------------ |  | ------ | - | ---------- | --- | ------ |  | ---------- | - | ------ | ---- | ---------- |  | - | - | - | ---- | - |  | - | -
|                             |  | Three
 Months ended December 31, |      | Six
 Months ended December 31, | 
|                             |  |                                  |      |                                | 
|                             |  | 2010                             |      | 2009                           |  | 2010   |   | 2009       |    
|                             |  |                                  |      |                                |  |        |   |            |    
|                             |  | Amount                           |      | Tax Rate %                     |  | Amount |   | Tax Rate % |     | Amount |  | Tax Rate % |   | Amount |      | Tax Rate % | 
|                             |  |                                  |      |                                |  |        |   |            |     |        |  |            |   |        |      |            | 
|                             |  |                                  |      |                                |  |        |   |            |     |        |  |            |   |        |      |            |  |   |   |   |      |   |  |   |  
|Income tax benefit (expense) |  | $                                | (111 | )                              |  | 2      | % | $          | 308 |        |  | 24         | % | $      | (754 | )          |  | 8 | % | $ | (374 | ) |  | 9 | %

Income tax
expense for the three and six months ended December 31, 2010 included income
taxes in state and foreign jurisdictions. For the first three months ended
December 31, 2010, we also recognized $725 of tax benefit from the adjustment
of valuation allowances on our deferred assets associated with the Richmond
asset purchase from ASML. The accounting guidance required that any deferred
liability realized tangent to the transaction reduce the gain and be reported
net of the gain; yet, the matching reduction in gross deferred assets from the
adjustment to the valuation allowance is recorded in the income tax provision
as a current benefit. While reported in two separate places in the financial
statements, the reduction of the gain realized and associated tax benefit are
equal and offsetting on a net basis. We continue to maintain a full valuation
allowance on our net deferred tax assets as of December 31, 2010. In future
periods, the valuation allowance could be reduced based upon sufficient evidence
indicating that it is more likely than not that a portion of the deferred tax
assets will be realized.

In the normal course of business, we provide
for uncertain tax positions and adjust our unrecognized tax benefits or
liabilities accordingly. For the three and six months ended December 31, 2010,
we did not recognize an additional liability or realize any benefit for changes
in our tax positions. We had no uncertain tax benefits or liabilities as of
December 31, 2010 and June 30, 2010. We are not aware of any tax positions that
would create a material adjustment to the unrecognized tax benefits during the
next twelve months.

19

---



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

Note 19: Commitments
and Contingencies

From time to
time we are subject to certain legal proceedings and claims that arise in the
normal course of our business. At December 31, 2010, we have a reserve of
$1,400 for potential royalty claims. In the opinion of management, any
settlement of royalty claims in excess of or below the amount recorded is not
expected to have a material effect on our financial condition, results of
operations, or liquidity.

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

20

---



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, 55,300 square foot facility in Richmond,
California, and our 39,780 square foot facility in Tucson, Arizona.

On November
12, 2010, we completed a transaction with ASML US, Inc. (ASML) to purchase
substantially all the assets of ASMLs Richmond, California operation,
including a 55,300 square-foot manufacturing facility. The assets were acquired
for $7,142 in cash and future consideration, net present valued at $5.3
million, based on the level of shipments to ASML over the next three years
beginning January 1, 2011. In addition, we hired key management and employees
working at the Richmond facility to be integrated into Zygos Optical Systems
Division - Extreme Precision Optics Group. With this acquisition, we will
considerably expand our optical manufacturing capabilities. Coupled with our
existing leadership position in metrology, large flat optics production, and
electro-optical design and manufacturing, the Richmond operation is expected to
provide highly synergistic capabilities that can immediately address new
applications in semiconductor, defense, and the life-sciences markets.

The fair value
of the assets acquired was greater than the purchase price, resulting in a gain
on acquisition of $2.0 million which was recorded in other income. In addition,
a deferred tax liability of $0.7 million was recorded in the opening balance
sheet, which had the effect of reducing the gain on acquisition to $1.3
million. The fair value of the assets was determined based on managements
review of the value of the assets at the time of their acquisition. The
equipment acquired is specialized in nature and, in some cases, was designed
and fabricated internally at ASML, making the valuation of the equipment
difficult. Management is still evaluating certain pieces of equipment and the
value assigned to those pieces may change from the preliminary valuation
included in the financial statements. Any change in the valuation of the assets
would increase or decrease the amount of the gain recorded in the statements of
operations.

Bookings for the three
months ended December 31, 2010 (our second quarter of fiscal 2011) were $46.4
million, as compared with $34.0 million for the first quarter of fiscal 2011.
Bookings for our Metrology Solutions segment accounted for 61% of the bookings
in the second quarter of fiscal 2011, with the Optical Systems segment
accounting for 39% of bookings, reflecting the inclusion of $11.3 million of
bookings for the newly-acquired Richmond operation. Our Metrology Solutions
segment bookings increased 23%, or $5.3 million, over the first fiscal quarter
of 2011 and 72%, or $11.9 million, over the prior year quarter. Our Optical
Systems segment bookings, excluding the Richmond operation, decreased 46%, or
$5.5 million from the prior year quarter and 39%, or $4.2 million, from the
first quarter. The reduction in bookings from the first quarter of fiscal 2011
was primarily due to the receipt in Quarter 1 of fiscal 2011 of a $3.0 million
helmet display order and, to a lesser extent, a slowdown in orders from our
life sciences customers. The acquisition of the Richmond assets and the
subsequent bookings from this operation will help to offset any long-term
effects of reduced bookings in certain of our existing life sciences customers.

21

---



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, share-based payments and accruals for health insurance.
Management bases its estimates and judgments on historical experience and
current market conditions and on various other factors that are believed to be
reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying values of assets and liabilities that are
not readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions. As discussed in Item 7,
Managements Discussion and Analysis of Financial Condition and Results of
Operations of the Companys Annual Report on Form 10-K for the fiscal year
ended June 30, 2010, management considers the Companys policies on revenue
recognition and allowance for doubtful accounts; inventory valuation; other
than temporary impairment of marketable securities; share-based compensation;
warranty costs; accounting for income taxes; valuation of long-lived assets;
and accruals for health insurance to be critical accounting policies due to the
estimates, assumptions, and application of judgment involved in each.

In October
2009, the FASB issued authoritative guidance on revenue recognition that became
effective for us on July 1, 2010. Under the new guidance on arrangements
that include software elements, tangible products that have software components
that are essential to the functionality of the tangible product will no longer
be within the scope of the software revenue recognition guidance, and
software-enabled products will now be subject to other relevant revenue
recognition guidance. Additionally, the FASB issued authoritative guidance on
revenue arrangements with multiple deliverables that are outside the scope of
the software revenue recognition guidance. Under the new guidance, when vendor
specific objective evidence or third party evidence for deliverables in an
arrangement cannot be determined, a best estimate of the selling price is
required to separate deliverables and allocate arrangement consideration using
the relative selling price method. The new guidance includes new disclosure
requirements on how the application of the relative selling price method
affects the timing and amount of revenue recognition. The adoption of this new
guidance did not have a material impact on our financial statements.

In June 2009,
the FASB issued authoritative guidance on the consolidation of variable
interest entities which became effective for us on July 1, 2010. The new
guidance requires revised evaluations of whether entities represent variable
interest entities, ongoing assessments of power over such entities, and
additional disclosures for variable interests. The adoption of this new
guidance did not have a material impact on our financial statements.

22

---



RESULTS OF OPERATIONS

Net Revenues
by Segment

|                             |  |   |             |  |                |     |        |   |                |  |  |     |   | 
|---------------------------- |  | - | ----------- |  | -------------- | --- | ------ | - | -------------- |  |  | --- | - | 
|                             |  |   | Fiscal 2011 |  | Fiscal
2010    |    
|                             |  |   |             |  |                |    
|(Dollars in millions)        |  |   | Amount      |  | Net
Revenues
% |     | Amount |   | Net
Revenues
% | 
|                             |  |   |             |  |                |     |        |   |                | 
|                             |  |   |             |  |                |     |        |   |                |  |  |     |  
|Quarter ended December 31    |  |   |             |  |                |     |        |   |                |  |  |     |  
|Metrology Solutions          |  | $ | 23.6        |  |                | 65  | %      | $ | 17.2           |  |  | 66  | %
|Optical Systems              |  |   | 12.5        |  |                | 35  | %      |   | 8.9            |  |  | 34  | %
|                             |  |   |             |  |                |     |        |   |                |  |  |     |  
|Total                        |  | $ | 36.1        |  |                | 100 | %      | $ | 26.1           |  |  | 100 | %
|                             |  |   |             |  |                |     |        |   |                |  |  |     |  
|                             |  |   |             |  |                |     |        |   |                |  |  |     |  
|Six months ended December
31 |  |   |             |  |                |     |        |   |                |  |  |     |  
|Metrology Solutions          |  | $ | 44.4        |  |                | 66  | %      | $ | 33.1           |  |  | 70  | %
|Optical Systems              |  |   | 22.8        |  |                | 34  | %      |   | 14.3           |  |  | 30  | %
|                             |  |   |             |  |                |     |        |   |                |  |  |     |  
|Total                        |  | $ | 67.2        |  |                | 100 | %      | $ | 47.4           |  |  | 100 | %
|                             |  |   |             |  |                |     |        |   |                |  |  |     |  

Overall, net
revenues for the three months ended December 31, 2010 increased 38% as compared
with the prior year period, reflecting increases in Metrology Solutions segment
revenues of 37% and in Optical Systems segment revenues of 40%. The increase in
Metrology Solutions segment net revenues was primarily due to volume increases
in lithography stage metrology of $4.0 million, instruments of $2.6 million,
and OEM heads of $1.0 million, partially offset by revenue decreases of $1.2
million in the display and semiconductor product lines which we sold in fiscal
2010. Shipments to both of our major lithography stage customers accounted for
the majority of the increase in lithography stage revenues. The increase in the
Optical Systems segment revenues was primarily due to the addition of Extreme
Precision Optics (Richmond, California) of $2.5 million, which was purchased in
November 2010, and contract manufacturing of $0.8 million. The increase in
contract manufacturing revenues is primarily related to volume increases in the
helmet mounted display and multiple objective lenses that constitute gene
sequencers, partially offset by decreases in the dental and eye surgery product
lines.

Net revenues
for the six months ended December 31, 2010 increased 42% as compared with the
prior year period, reflecting increases in Metrology Solutions segment revenues
of 34% and in Optical Systems segment revenues of 59%. The increase in Metrology
Solutions segment net revenues was primarily due to volume increases in
lithography stage metrology of $7.1 million, instruments of $5.6 million, and
OEM heads of $2.2 million, partially offset by revenue decreases of $3.8
million in the display and semiconductor product lines which we sold in fiscal
2010. Shipments to both of our major lithography stage customers accounted for
the majority of the increase in lithography stage revenues. The increase in the
Optical Systems segment revenues was primarily due to increases in contract
manufacturing of $4.2 million and the addition of Extreme Precision Optics
(Richmond, California) of $2.5 million. The increase in contract manufacturing
revenues is primarily related to volume increases in the helmet mounted display
and multiple objective lenses that constitute gene sequencers, partially offset
by decreases in the dental and eye surgery product lines during the second
quarter.

Revenues in
U.S. dollars for the three months ended December 31, 2010 and 2009 were
approximately 71% and 73% of total net revenues, respectively, with the
remaining 29% and 27%, respectively, being in Euro, Yen, or Yuan. Revenues in
U.S. dollars for the six months ended December 31, 2010 and 2009 were
approximately 72% and 70% of total net revenues, respectively, with the
remaining 28% and 30%, respectively, being in Euro, Yen, or Yuan. For our
revenues which are based in foreign currency, we are exposed to foreign
exchange fluctuations from the time customers are invoiced in foreign currency
until collection occurs. Significant changes in the values of foreign
currencies relative to the value of the U.S. dollar, or in the general economic
conditions in our export markets, could materially impact the revenues of our
products in these markets and our condensed consolidated financial position and
results of operations.

23

---



Gross Margin by Segment

|                             |  |   |             |  |                |    |        |   |                |  |  |    |   | 
|---------------------------- |  | - | ----------- |  | -------------- | -- | ------ | - | -------------- |  |  | -- | - | 
|                             |  |   | Fiscal 2011 |  | Fiscal
2010    |   
|                             |  |   |             |  |                |   
|(Dollars in millions)        |  |   | Amount      |  | Gross
Margin % |    | Amount |   | Gross
Margin % | 
|                             |  |   |             |  |                |    |        |   |                | 
|                             |  |   |             |  |                |    |        |   |                |  |  |    |  
|Quarter ended December 31    |  |   |             |  |                |    |        |   |                |  |  |    |  
|Metrology Solutions          |  | $ | 13.7        |  |                | 58 | %      | $ | 8.9            |  |  | 52 | %
|Optical Systems              |  |   | 3.2         |  |                | 26 | %      |   | 2.1            |  |  | 23 | %
|                             |  |   |             |  |                |    |        |   |                |  |  |    |  
|Total                        |  | $ | 16.9        |  |                | 47 | %      | $ | 11.0           |  |  | 42 | %
|                             |  |   |             |  |                |    |        |   |                |  |  |    |  
|                             |  |   |             |  |                |    |        |   |                |  |  |    |  
|Six months ended December
31 |  |   |             |  |                |    |        |   |                |  |  |    |  
|Metrology Solutions          |  | $ | 24.8        |  |                | 56 | %      | $ | 16.3           |  |  | 49 | %
|Optical Systems              |  |   | 6.3         |  |                | 28 | %      |   | 1.8            |  |  | 13 | %
|                             |  |   |             |  |                |    |        |   |                |  |  |    |  
|Total                        |  | $ | 31.1        |  |                | 46 | %      | $ | 18.1           |  |  | 38 | %
|                             |  |   |             |  |                |    |        |   |                |  |  |    |  

Gross margin
as a percentage of net revenues for the three months ended December 31, 2010
was 47%, which represents an increase of five percentage points from the
comparable prior year period. Revenues from the newly acquired Extreme
Precision Optics reduced overall gross margins by 1.7%, in part due to the
valuation of work-in-process inventory acquired in the acquisition and shipped
in the quarter. Within the Metrology Solutions segment, the increase in gross
margin as a percentage of net revenues for the three months ended December 31,
2010 as compared with the prior year period was primarily due to a change in
product mix towards higher margin products. Within the Optical Systems segment,
the increase in gross margin as a percentage of net revenues for the three
months ended December 31, 2010 as compared with the prior year period was
primarily due to overall increased volume which led to improved absorption of
factory costs, a favorable change in product mix towards higher margin products
and the resolution of production issues related to certain optics that resulted
in increased manufacturing costs in the prior year.

Gross margin
as a percentage of net revenues for the six months ended December 31, 2010 was
46%, which represents an increase of eight percentage points from the
comparable prior year period. Within the Metrology Solutions segment, the
increase in gross margin as a percentage of net revenues for the six months
ended December 31, 2010 as compared with the prior year period was primarily
due to a change in product mix towards higher margin products and, to a lesser
extent, improved absorption of factory costs. Within the Optical Systems
segment, the increase in gross margin as a percentage of net revenues for the
six months ended December 31, 2010 as compared with the prior year period was primarily
due to overall increased volume which led to improved absorption of factory
costs, a favorable change in product mix towards higher margin products and the
resolution of production issues related to certain optics that resulted in
increased manufacturing costs in the prior year.

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


|                             |  |   |             |  |               |    |        |   |               |  |  |    |   | 
|---------------------------- |  | - | ----------- |  | ------------- | -- | ------ | - | ------------- |  |  | -- | - | 
|                             |  |   | Fiscal
2011 |  | Fiscal
2010   |   
|                             |  |   |             |  |               |   
|(Dollars in millions)        |  |   | Amount      |  | % of
Revenues |    | Amount |   | %
of Revenues | 
|                             |  |   |             |  |               |    |        |   |               | 
|                             |  |   |             |  |               |    |        |   |               |  |  |    |  
|Quarter ended December 31    |  | $ | 8.3         |  |               | 23 | %      | $ | 8.4           |  |  | 32 | %
|Six months ended December
31 |  | $ | 15.5        |  |               | 23 | %      | $ | 15.1          |  |  | 32 | %

SG&A
expenses decreased in the three months ended December 31, 2010 by $0.1 million
from the comparable prior year period, primarily due to a decrease in
sales-related expenses related to the divested display product line. The
decrease was partially offset by an increase in employee compensation expenses,
which included restoration of the temporary pay-cuts and performance based
programs and Richmond acquisition costs.

SG&A
expenses increased in the six months ended December 31, 2010 by $0.4 million
from the comparable prior year period, primarily due to employee compensation
expenses, which included restoration of the temporary pay-cuts and
performance-based programs and Richmond acquisition costs. The increase was
partially offset by a decrease in sales-related expenses of the divested
display product line. The decrease in the SG&A as a percentage of revenue
in all periods is due to managements efforts to control expenses over a
significant increase in revenue base.

24

---



|                                                          |  |   |              |  |                |    |        |   |               |  |  |    |   | 
|--------------------------------------------------------- |  | - | ------------ |  | -------------- | -- | ------ | - | ------------- |  |  | -- | - | 
|Research, Development, and
 Engineering Expenses (RD&E)
|                                                          |  |   | Fiscal
 2011 |  | Fiscal 2010    |   
|                                                          |  |   |              |  |                |   
|(Dollars in millions)                                     |  |   | Amount       |  | % of
 Revenues |    | Amount |   | % of Revenues | 
|                                                          |  |   |              |  |                |    |        |   |               | 
|                                                          |  |   |              |  |                |    |        |   |               |  |  |    |   | 
|Quarter ended
 December 31                                |  | $ | 3.8          |  |                | 10 | %      | $ | 3.9           |  |  | 15 | %
|Six months ended
 December 31                             |  | $ | 7.1          |  |                | 11 | %      | $ | 7.5           |  |  | 16 | %

RD&E for the three and six months ended December
31, 2010 decreased by $0.1 million and $0.4 million, respectively, as compared
with the prior year period. The decrease in RD&E occurred primarily in the
Metrology Solutions segment related to Display R&D cost savings. This
decrease was partially offset by RD&E expense for the three and six months
ended December 31, 2010 related to Zemetrics products which we acquired in the
third quarter of fiscal 2010. Therefore, there are no corresponding expenses in
the comparable prior year periods.

|                              |  |   |              |  |                |   |        |   |                |  |  |   |   | 
|----------------------------- |  | - | ------------ |  | -------------- | - | ------ | - | -------------- |  |  | - | - | 
|Other Income                 
|                              |  |   | Fiscal
 2011 |  | Fiscal 2010    |  
|                              |  |   |              |  |                |  
|(Dollars in millions)         |  |   | Amount       |  | % of
 Revenues |   | Amount |   | % of
 Revenues | 
|                              |  |   |              |  |                |   |        |   |                | 
|                              |  |   |              |  |                |   |        |   |                |  |  |   |   | 
|Quarter ended
 December 31    |  | $ | 1.3          |  |                | 4 | %      | $ |               |  |  | 0 | %
|Six months ended
 December 31 |  | $ | 1.5          |  |                | 2 | %      | $ | 0.2            |  |  | 1 | %

Other income for the three and six months ended
December 31, 2010 increased by $1.3 million as compared with the prior year
periods, primarily due to the purchase gain on the acquisition of the Richmond,
California assets of ASML.

|                             |  |   |              |   |              |   |        |   |             |   |  |    |   | 
|---------------------------- |  | - | ------------ | - | ------------ | - | ------ | - | ----------- | - |  | -- | - | 
|Income Tax Benefit (Expense)
|                             |  |   | Fiscal
 2011 |   | Fiscal 2010  |  
|                             |  |   |              |   |              |  
|(Dollars in millions)        |  |   | Amount       |   | Tax
 Rate
 % |   | Amount |   | Tax Rate
 % |  
|                             |  |   |              |   |              |   |        |   |             |  
|                             |  |   |              |   |              |   |        |   |             |   |  |    |   | 
|Quarter ended December 31    |  | $ | (0.1         | ) |              | 2 | %      | $ | 0.3         |   |  | 24 | %
|Six months ended December 31 |  | $ | (0.8         | ) |              | 8 | %      | $ | (0.4        | ) |  | 9  | %

Income tax benefit (expense) for the three and six months
ended December 31, 2010 and 2009 included income taxes in state and foreign
jurisdictions. Other than the adjustment associated with the valuation
allowances on assets purchased in the ASML Richmond transaction as described
above, there was no additional United States federal income tax expenses for
the three and six months ended December 31, 2010 or income tax benefit in fiscal 2010
due to valuation allowances on deferred tax assets, including net operating
loss carry-forwards in the United States. We continue to maintain a valuation
allowance on all of our net deferred tax assets at December 31, 2010. In future
periods, the valuation allowance could be reduced based upon sufficient
evidence indicating that it is more likely than not that a portion of the
deferred tax assets will be realized.

|                                                          |  |   |              |  |                |   |        |   |                |   |  |   |   | 
|--------------------------------------------------------- |  | - | ------------ |  | -------------- | - | ------ | - | -------------- | - |  | - | - | 
|Earnings (Loss) from Discontinued
 Operations, net of tax | 
|                                                          |  |   | Fiscal
 2011 |  | Fiscal 2010    |  
|                                                          |  |   |              |  |                |  
|(Dollars in millions)                                     |  |   | Amount       |  | % of
 Revenues |   | Amount |   | % of
 Revenues |  
|                                                          |  |   |              |  |                |   |        |   |                |  
|                                                          |  |   |              |  |                |   |        |   |                |   |  |   |   | 
|Quarter ended
 December 31                                |  | $ |             |  |                | 0 | %      | $ | (0.6           | ) |  | 2 | %
|Six Months ended
 December 31                             |  | $ | 0.1          |  |                | 0 | %      | $ | (2.5           | ) |  | 5 | %

The loss from discontinued operations for the three
and six months ended December 31, 2009 of $0.6 and $2.5 million, respectively,
was due to severance and other closure costs, primarily related to the closure
of our Singapore IC packaging operations of our Vision Systems product line.

25

---



TRANSACTIONS
WITH STOCKHOLDER

Revenues from Canon Inc., a stockholder, and Canon
Sales Co., Inc., a distributor of certain of our products in Japan and a
subsidiary of Canon Inc. (collectively referred to as Canon), amounted to
$3.5 million and $2.0 million (10% and 8% of net revenues, respectively) for
the three months ended December 31, 2010 and 2009, respectively. Revenues from
Canon Inc. amounted to $7.0 million and $3.0 million (10% and 6% of net
revenues, respectively) for the six months ended December 31, 2010 and 2009,
respectively. Selling prices of products sold to Canon are based, generally, on
the terms customarily given to distributors. At December 31, 2010 and June 30,
2010, there were, in the aggregate, $0.9 million and $0.7 million,
respectively, of trade accounts receivable from Canon.

LIQUIDITY AND CAPITAL RESOURCES

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

At December 31, 2010, cash and marketable securities
were $46.1 million, a decrease of $1.4 million from $47.5 million at
June 30, 2010. Our marketable securities consist of $1.0 million in a
United States Treasury Bill as security for bank guarantees and standby letters
of credit. These letters of credit are used primarily overseas to cover certain
warranty periods or to cover future product shipments. As of December 31, 2010,
$0.4 million of standby letters of credit were outstanding. These letters of
credit are expected to expire at varying dates through January 2012. The cash
equivalents balance in our money market account, which is invested primarily in
U.S. government securities, was $11.9 million as of December 31, 2010. We do
not believe there is any risk to liquidity in the money market account, nor are
there currently any limits on redemptions.

Cash flows from operating activities from continuing operations for the six
months ended December 31, 2010 of $6.1 million was primarily due to an
increase in net earnings, excluding non-cash items, partially offset by an
increase in receivables.

Cash flows provided by investing activities for the
six months ended December 31, 2010 decreased by $10.2 million as compared with
the prior year period. This decrease was primarily related to the purchase of
ASMLs Richmond, California assets for $7.1 million and a decrease in proceeds
from marketable securities.

Cash flows used for financing activities in the six
months ended December 31, 2010 remained flat as compared with the prior year
period. For the six months ended December 31, 2010, there was a dividend
payment of $0.7 million to a noncontrolling interest partially offset by an
increase in proceeds from stock option exercises.

We currently have no debt or lines of credit. In the
future, if the need for debt or credit lines arose there is no assurance that
we would be able to secure such financing. We believe we have sufficient
operating flexibility and cash reserves to maintain adequate amounts of
liquidity and to meet our future liquidity requirements for at least the next
twelve months.

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.

26

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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 December 31, 2010. Our exposure to market risk is presented in
Item 7a., Quantitative and Qualitative Disclosures about Market Risk, of our
Annual Report on Form 10-K for the year ended June 30, 2010, filed with the
Securities and Exchange Commission (the 2010 Annual Report).

Item 4. Controls and Procedures

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

We identified a material weakness on May 10, 2010
related to inadequate controls regarding our accounting for unusual or complex
transactions and, subsequently, concluded that our internal control over
financial reporting was not effective at June 30, 2010. We began the process of
implementing additional controls in our financial reporting process in the
fourth quarter of fiscal 2010 and first quarter of fiscal 2011, including
adding control processes to aid in identifying transactions that might have
unusual or complex accounting issues, a process to enhance our analysis of
accounting for unusual or complex transactions as they arise in accordance with
accounting principles generally accepted in the United States of America, and
have added external accounting resources to review our accounting for unusual
or complex transactions. However, certain controls designed and implemented to
address the identified material weakness in the period-end financial reporting
process have not had a sufficient period of time to operate for our management
to conclude that they are operating effectively at December 31, 2010.

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

27

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PART II - Other
Information

Item 1A. Risk Factors

In addition to the information set forth below and
elsewhere in this report, the reader should carefully consider the factors
discussed in Part I, Item 1A. Risk Factors in our 2010 Annual Report, which
could materially affect our business, financial condition, or future results.
The risks described in our 2010 Annual Report are not the only risks facing our
Company. Additional risks and uncertainties not currently known to us or that
we currently deem to be immaterial also may materially adversely affect our
business, financial condition, and/or operating results.

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

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

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

The following table provides information about our
purchases during the quarter ended December 31, 2010 of equity securities that
are registered by us pursuant to Section 12 of the Exchange Act.

|                                      |  |                                       |       |                               |   |                                                                                           |  |                                                                                                            |   |  |   |     | 
|------------------------------------- |  | ------------------------------------- | ----- | ----------------------------- | - | ----------------------------------------------------------------------------------------- |  | ---------------------------------------------------------------------------------------------------------- | - |  | - | --- | 
|Period                                |  | Total number of
 shares purchased (1) |       | Average price
 paid per share |   | Total number of
 shares purchased as
 part of publicly 
 announced
 plans or programs (2) |  | Approximate dollar
 value of shares that
 may yet be purchased
 under the plans or
 programs (in millions) |  
|                                      |  |                                       |       |                               |   |                                                                                           |  |                                                                                                            |  
|                                      |  |                                       |       |                               |   |                                                                                           |  |                                                                                                            |   |  |   |     | 
|October 1, 2010
 - October 31, 2010   |  |                                       | 1,116 |                               | $ | 10.17                                                                                     |  |                                                                                                            |  |  | $ | 5.0 | 
|November 1, 2010
 - November 31, 2010 |  |                                       | 1,573 |                               | $ | 11.07                                                                                     |  |                                                                                                            |  |  | $ | 5.0 | 
|December 1, 2010
 - December 31, 2010 |  |                                       | 1,024 |                               | $ | 12.25                                                                                     |  |                                                                                                            |  |  | $ | 5.0 | 

| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (1) | All shares were repurchased from certain of our
 employees in satisfaction of withholding tax obligations arising from the
 vesting of their restricted stock.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | (2) | In August 2007, our Board of Directors authorized
 the repurchase of up to $25.0 million of our outstanding common stock. During
 the three months ended December 31, 2010, there were no repurchases of common
 stock in the open market. The share repurchases have been effected pursuant
 to plans in conformity with Rule 10b5-1 under the Securities Exchange Act of
 1934. This rule allows public companies to adopt written, pre-arranged stock
 trading plans when they do not have material, non-public information in their
 possession. The adoption of this stock trading plan allows us to repurchase
 our shares during periods when we otherwise might be prevented from doing so
 under insider trading laws or because of self-imposed trading blackout
 periods.

28

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Item 6. Exhibits

|    |                                                                            |                                                                                                                                                                     
|--- | -------------------------------------------------------------------------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(a) | Exhibits:                                                                 
|    |                                                                            |                                                                                                                                                                     
|    | 10.1                                                                       | Asset Purchase Agreement, dated as of October 27,
 2010, by and among Zygo Corporation, Zygo Richmond Corporation, and ASML, US,
 Inc. +                            
|    |                                                                            |                                                                                                                                                                     
|    | 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                                             
|    |                                                                            |                                                                                                                                                                     
|    | + Confidential treatment has been requested for
 portions of this exhibit.

SIGNATURE

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

| |                                                 
| | ------------------------------------------------
| | Zygo Corporation                                
| |                                                 
| | (Registrant)                                    
| |                                                 
| | /s/ Chris L. Koliopoulos                        
| |                                                 
| | Chris L. Koliopoulos                            
| | Chairman, President, and Chief Executive Officer
| |                                                 
| | /s/ Michael M. Vehlies                          
| |                                                 
| | Michael M. Vehlies                              
| | Corporate Controller,                           
| | (principal financial officer)                   
| |                                                 
| | Date: February 9, 2011                          

29

---



EXHIBIT INDEX

|                                                                           |                                                                                                                                                                     
|-------------------------------------------------------------------------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.1                                                                       | Asset Purchase Agreement, dated as of October 27,
 2010, by and among Zygo Corporation, Zygo Richmond Corporation, and ASML, US,
 Inc. +                            
|                                                                           |                                                                                                                                                                     
|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                                             
|                                                                           |                                                                                                                                                                     
|+ Confidential treatment has been requested for
 portions of this exhibit.

---