|                                  
|----------------------------------
|UNITED STATES                     
|SECURITIES AND EXCHANGE COMMISSION
|Washington,
 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 March 31, 2011
|                                               |                                                                                          
|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.

17,765,361 shares of Common Stock, $.10 Par
Value, at May 2, 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 customers; 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
business acquisitions, including the acquisition of substantially all the
assets of ASML US, Inc.s Richmond, California facility and integration of the
businesses and employees; the risk related to the Companys recent changes to
senior management; and the risks associated with the recovery from the recent
earthquake, tsunami and nuclear disaster in Japan and its impact on our
customers, suppliers, and operations.

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

---



PART I - Financial Information

Item 1. Financial Statements

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

|                                                                                                   |  |                               |        |                              |   |        |   |      |         |   |   |         |  
|-------------------------------------------------------------------------------------------------- |  | ----------------------------- | ------ | ---------------------------- | - | ------ | - | ---- | ------- | - | - | ------- | -
|                                                                                                   |  | Three Months Ended
 March 31, |        | Nine Months Ended
 March 31, |  
|                                                                                                   |  |                               |        |                              |  
|                                                                                                   |  | 2011                          |        | 2010                         |   | 2011   |   | 2010 |        
|                                                                                                   |  |                               |        |                              |   |        |   |      |        
|Net revenues                                                                                       |  | $                             | 40,235 |                              | $ | 25,439 |   | $    | 107,440 |   | $ | 72,845  |  
|Cost of goods sold                                                                                 |  |                               | 21,371 |                              |   | 13,962 |   |      | 57,479  |   |   | 43,241  |  
|                                                                                                   |  |                               |        |                              |   |        |   |      |         |   |   |         |  
|Gross profit                                                                                       |  |                               | 18,864 |                              |   | 11,477 |   |      | 49,961  |   |   | 29,604  |  
|                                                                                                   |  |                               |        |                              |   |        |   |      |         |   |   |         |  
|Selling, general, and administrative
 expenses                                                     |  |                               | 9,418  |                              |   | 7,972  |   |      | 24,886  |   |   | 23,113  |  
|Research, development, and engineering
 expenses                                                   |  |                               | 3,739  |                              |   | 3,546  |   |      | 10,872  |   |   | 11,089  |  
|Impairment of goodwill                                                                             |  |                               |       |                              |   | 2,003  |   |      |        |   |   | 2,003   |  
|                                                                                                   |  |                               |        |                              |   |        |   |      |         |   |   |         |  
|Operating profit (loss)                                                                            |  |                               | 5,707  |                              |   | (2,044 | ) |      | 14,203  |   |   | (6,601  | )
|                                                                                                   |  |                               |        |                              |   |        |   |      |         |   |   |         |  
|Other income (expense)                                                                             |  |                               |        |                              |   |        |   |      |         |   |   |         |  
|Gain on acquisition                                                                                |  |                               |       |                              |   |       |   |      | 1,289   |   |   |        |  
|Miscellaneous income (expense), net                                                                |  |                               | (153   | )                            |   | (96    | ) |      | 71      |   |   | 62      |  
|                                                                                                   |  |                               |        |                              |   |        |   |      |         |   |   |         |  
|Total other income (expense)                                                                       |  |                               | (153   | )                            |   | (96    | ) |      | 1,360   |   |   | 62      |  
|                                                                                                   |  |                               |        |                              |   |        |   |      |         |   |   |         |  
|Earnings (loss) from continuing operations
 before income taxes, including noncontrolling interest |  |                               | 5,554  |                              |   | (2,140 | ) |      | 15,563  |   |   | (6,539  | )
|Income tax expense                                                                                 |  |                               | (720   | )                            |   | (131   | ) |      | (1,474  | ) |   | (505    | )
|                                                                                                   |  |                               |        |                              |   |        |   |      |         |   |   |         |  
|Net earnings (loss) from continuing
 operations                                                    |  |                               | 4,834  |                              |   | (2,271 | ) |      | 14,089  |   |   | (7,044  | )
|                                                                                                   |  |                               |        |                              |   |        |   |      |         |   |   |         |  
|Net earnings (loss) from discontinued
 operations, net of tax                                      |  |                               |       |                              |   | (193   | ) |      | 91      |   |   | (2,667  | )
|                                                                                                   |  |                               |        |                              |   |        |   |      |         |   |   |         |  
|Net earnings (loss) including
 noncontrolling interest                                             |  |                               | 4,834  |                              |   | (2,464 | ) |      | 14,180  |   |   | (9,711  | )
|Less: Net earnings attributable to
 noncontrolling interest                                        |  |                               | 361    |                              |   | 232    |   |      | 1,205   |   |   | 677     |  
|                                                                                                   |  |                               |        |                              |   |        |   |      |         |   |   |         |  
|Net earnings (loss) attributable to Zygo
 Corporation                                              |  | $                             | 4,473  |                              | $ | (2,696 | ) | $    | 12,975  |   | $ | (10,388 | )
|                                                                                                   |  |                               |        |                              |   |        |   |      |         |   |   |         |  
|                                                                                                   |  |                               |        |                              |   |        |   |      |         |   |   |         |  
|Basic - Earnings (loss) per share
 attributable to Zygo Corporation                                |  |                               |        |                              |   |        |   |      |         |   |   |         |  
|Continuing operations                                                                              |  | $                             | 0.25   |                              | $ | (0.15  | ) | $    | 0.73    |   | $ | (0.45   | )
|Discontinued operations                                                                            |  |                               |       |                              |   | (0.01  | ) | $    | 0.01    |   |   | (0.16   | )
|                                                                                                   |  |                               |        |                              |   |        |   |      |         |   |   |         |  
|Net earnings (loss) per share                                                                      |  | $                             | 0.25   |                              | $ | (0.16  | ) | $    | 0.74    |   | $ | (0.61   | )
|                                                                                                   |  |                               |        |                              |   |        |   |      |         |   |   |         |  
|                                                                                                   |  |                               |        |                              |   |        |   |      |         |   |   |         |  
|Diluted - Earnings (loss) per share
 attributable to Zygo Corporation                              |  |                               |        |                              |   |        |   |      |         |   |   |         |  
|Continuing operations                                                                              |  | $                             | 0.24   |                              | $ | (0.15  | ) | $    | 0.71    |   | $ | (0.45   | )
|Discontinued operations                                                                            |  |                               |       |                              |   | (0.01  | ) |      | 0.01    |   |   | (0.16   | )
|                                                                                                   |  |                               |        |                              |   |        |   |      |         |   |   |         |  
|Net earnings (loss) per share                                                                      |  | $                             | 0.24   |                              | $ | (0.16  | ) | $    | 0.72    |   | $ | (0.61   | )
|                                                                                                   |  |                               |        |                              |   |        |   |      |         |   |   |         |  
|                                                                                                   |  |                               |        |                              |   |        |   |      |         |   |   |         |  
|Weighted average shares outstanding                                                                |  |                               |        |                              |   |        |   |      |         |   |   |         |  
|Basic shares                                                                                       |  |                               | 17,693 |                              |   | 17,342 |   |      | 17,600  |   |   | 17,091  |  
|                                                                                                   |  |                               |        |                              |   |        |   |      |         |   |   |         |  
|Diluted shares                                                                                     |  |                               | 18,304 |                              |   | 17,342 |   |      | 18,056  |   |   | 17,091  |  
|                                                                                                   |  |                               |        |                              |   |        |   |      |         |   |   |         |  
|                                                                                                   |  |                               |        |                              |   |        |   |      |         |   |   |         |  
|Amounts Attributable to Zygo Corporation                                                           |  |                               |        |                              |   |        |   |      |         |   |   |         |  
|Net earnings (loss) from continuing
 operations attributable to Zygo Corporation                   |  | $                             | 4,473  |                              | $ | (2,503 | ) | $    | 12,884  |   | $ | (7,721  | )
|Discontinued operations, net of tax                                                                |  |                               |       |                              |   | (193   | ) |      | 91      |   |   | (2,667  | )
|                                                                                                   |  |                               |        |                              |   |        |   |      |         |   |   |         |  
|Net earnings (loss) attributable to Zygo
 Corporation                                              |  | $                             | 4,473  |                              | $ | (2,696 | ) | $    | 12,975  |   | $ | (10,388 | )
|                                                                                                   |  |                               |        |                              |   |        |   |      |         |   |   |         |  

See accompanying notes to condensed
consolidated financial statements.

3

---



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

|                                                                                                                                                   |  |                |         |               |   |         |  
|-------------------------------------------------------------------------------------------------------------------------------------------------- |  | -------------- | ------- | ------------- | - | ------- | -
|                                                                                                                                                   |  | March 31, 2011 |         | June 30, 2010 |  
|                                                                                                                                                   |  |                |         |               |  
|Assets                                                                                                                                             |  |                |         |               |   |         |  
|Current
 assets:                                                                                                                                   |  |                |         |               |   |         |  
|Cash and cash equivalents                                                                                                                          |  | $              | 52,341  |               | $ | 46,536  |  
|Marketable securities                                                                                                                              |  |                | 1,000   |               |   | 1,000   |  
|Receivables, net of allowance for doubtful
 accounts of $1,331 and $1,975, respectively                                                            |  |                | 30,819  |               |   | 19,948  |  
|Inventories                                                                                                                                        |  |                | 27,707  |               |   | 25,220  |  
|Prepaid expenses and other                                                                                                                         |  |                | 1,702   |               |   | 1,643   |  
|Income tax receivable                                                                                                                              |  |                |        |               |   | 1,050   |  
|Current assets of discontinued operations                                                                                                          |  |                |        |               |   | 17      |  
|                                                                                                                                                   |  |                |         |               |   |         |  
|Total current assets                                                                                                                               |  |                | 113,569 |               |   | 95,414  |  
|                                                                                                                                                   |  |                |         |               |   |         |  
|Marketable securities                                                                                                                              |  |                | 1,027   |               |   | 922     |  
|Property, plant, and equipment, net                                                                                                                |  |                | 31,633  |               |   | 23,029  |  
|Intangible assets, net                                                                                                                             |  |                | 5,664   |               |   | 5,387   |  
|Other assets                                                                                                                                       |  |                |        |               |   | 413     |  
|                                                                                                                                                   |  |                |         |               |   |         |  
|Total assets                                                                                                                                       |  | $              | 151,893 |               | $ | 125,165 |  
|                                                                                                                                                   |  |                |         |               |   |         |  
|                                                                                                                                                   |  |                |         |               |   |         |  
|Liabilities and Equity                                                                                                                             |  |                |         |               |   |         |  
|Current liabilities:                                                                                                                               |  |                |         |               |   |         |  
|Accounts payable                                                                                                                                   |  | $              | 8,104   |               | $ | 8,426   |  
|Accrued progress payments and deferred
 revenue                                                                                                    |  |                | 4,561   |               |   | 5,700   |  
|Accrued salaries and wages                                                                                                                         |  |                | 6,727   |               |   | 3,173   |  
|Other accrued liabilities                                                                                                                          |  |                | 6,352   |               |   | 5,191   |  
|Income tax payable                                                                                                                                 |  |                | 1,116   |               |   | 152     |  
|Current liabilities of discontinued
 operations                                                                                                    |  |                | 281     |               |   | 287     |  
|                                                                                                                                                   |  |                |         |               |   |         |  
|Total current liabilities                                                                                                                          |  |                | 27,141  |               |   | 22,929  |  
|                                                                                                                                                   |  |                |         |               |   |         |  
|Other long-term liabilities                                                                                                                        |  |                | 4,667   |               |   | 1,359   |  
|Long-term liabilities of discontinued
 operations                                                                                                  |  |                |        |               |   | 281     |  
|                                                                                                                                                   |  |                |         |               |   |         |  
|Commitments and contingencies                                                                                                                      |  |                |         |               |   |         |  
|                                                                                                                                                   |  |                |         |               |   |         |  
|Equity:                                                                                                                                            |  |                |         |               |   |         |  
|Common stock, $0.10 par value per share:                                                                                                           |  |                |         |               |   |         |  
|40,000,000 shares authorized;
 19,963,381shares issued (19,663,414 at June 30, 2010); 17,744,238 shares
 outstanding (17,480,219 at June 30, 2010) |  |                | 1,996   |               |   | 1,966   |  
|Additional paid-in capital                                                                                                                         |  |                | 167,483 |               |   | 163,052 |  
|Accumulated deficit                                                                                                                                |  |                | (26,869 | )             |   | (39,844 | )
|Accumulated other comprehensive income
 (loss):                                                                                                    |  |                |         |               |   |         |  
|Currency translation effects                                                                                                                       |  |                | 909     |               |   | (728    | )
|Treasury stock, at cost, 2,219,143 shares
 (2,183,195 at June 30, 2010)                                                                            |  |                | (26,329 | )             |   | (26,043 | )
|                                                                                                                                                   |  |                |         |               |   |         |  
|Total stockholders equity - Zygo
 Corporation                                                                                                     |  |                | 117,190 |               |   | 98,403  |  
|Noncontrolling interest                                                                                                                            |  |                | 2,895   |               |   | 2,193   |  
|                                                                                                                                                   |  |                |         |               |   |         |  
|Total equity                                                                                                                                       |  |                | 120,085 |               |   | 100,596 |  
|                                                                                                                                                   |  |                |         |               |   |         |  
|Total liabilities and equity                                                                                                                       |  | $              | 151,893 |               | $ | 125,165 |  
|                                                                                                                                                   |  |                |         |               |   |         |  

See accompanying notes to condensed consolidated
financial statements.

4

---



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

|                                                                                                                   |  |                             |        |      |   |        |  
|------------------------------------------------------------------------------------------------------------------ |  | --------------------------- | ------ | ---- | - | ------ | -
|                                                                                                                   |  | Nine Months Ended March 31, |       
|                                                                                                                   |  |                             |       
|                                                                                                                   |  | 2011                        |        | 2010 |  
|                                                                                                                   |  |                             |        |      |  
|Cash provided by operating activities:                                                                             |  |                             |        |      |   |        |  
|Net earnings (loss) including
 noncontrolling interest                                                             |  | $                           | 14,180 |      | $ | (9,711 | )
|Adjustments to reconcile net earnings
 (loss) to cash provided by operating activities from continuing operations: |  |                             |        |      |   |        |  
|(Earnings) loss from discontinued
 operations                                                                      |  |                             | (91    | )    |   | 2,667  |  
|Depreciation and amortization                                                                                      |  |                             | 4,718  |      |   | 4,618  |  
|Gain on acquisition, net of tax                                                                                    |  |                             | (1,289 | )    |   |       |  
|Deferred income taxes                                                                                              |  |                             | (725   | )    |   | (53    | )
|Impairment of goodwill                                                                                             |  |                             |       |      |   | 2,003  |  
|Provision for doubtful accounts                                                                                    |  |                             | (365   | )    |   | 71     |  
|Compensation cost related to share-based
 payment arrangements                                                     |  |                             | 2,962  |      |   | 1,759  |  
|Excess tax benefits from share-based
 payment arrangements                                                         |  |                             | (28    | )    |   | (10    | )
|Other                                                                                                              |  |                             | (360   | )    |   | (19    | )
|Changes in operating accounts:                                                                                     |  |                             |        |      |   |        |  
|Receivables                                                                                                        |  |                             | (9,903 | )    |   | 1,348  |  
|Inventories                                                                                                        |  |                             | 321    |      |   | 6,046  |  
|Prepaid expenses and other current assets                                                                          |  |                             | 1,471  |      |   | (134   | )
|Accounts payable, accrued expenses, and
 taxes payable                                                             |  |                             | 1,904  |      |   | (752   | )
|                                                                                                                   |  |                             |        |      |   |        |  
|Net cash provided by operating activities
 from continuing operations                                              |  |                             | 12,795 |      |   | 7,833  |  
|                                                                                                                   |  |                             |        |      |   |        |  
|Net cash used for operating activities from
 discontinued operations                                               |  |                             | (263   | )    |   | (1,359 | )
|                                                                                                                   |  |                             |        |      |   |        |  
|Cash provided by (used for) investing
 activities:                                                                 |  |                             |        |      |   |        |  
|Additions to property, plant, and equipment                                                                        |  |                             | (1,025 | )    |   | (1,040 | )
|Purchase of marketable securities                                                                                  |  |                             | (1,998 | )    |   | (1,998 | )
|Additions to intangibles                                                                                           |  |                             | (427   | )    |   | (427   | )
|Acquisitions                                                                                                       |  |                             | (7,142 | )    |   | 11     |  
|Proceeds from the sale and maturity of
 marketable securities                                                      |  |                             | 2,089  |      |   | 5,000  |  
|Proceeds from the sale of other assets                                                                             |  |                             | 62     |      |   | 291    |  
|                                                                                                                   |  |                             |        |      |   |        |  
|Net cash provided by (used for) investing
 activities                                                              |  |                             | (8,441 | )    |   | 1,837  |  
|                                                                                                                   |  |                             |        |      |   |        |  
|Cash provided by financing activities:                                                                             |  |                             |        |      |   |        |  
|Dividend payment to noncontrolling interest                                                                        |  |                             | (823   | )    |   |       |  
|Excess tax benefits from share-based
 payment arrangements                                                         |  |                             | 28     |      |   | 10     |  
|Restricted stock vesting and related tax
 benefits                                                                 |  |                             | (285   | )    |   | (404   | )
|Exercise of employee stock options                                                                                 |  |                             | 1,498  |      |   | 465    |  
|                                                                                                                   |  |                             |        |      |   |        |  
|Net cash provided by financing activities                                                                          |  |                             | 418    |      |   | 71     |  
|                                                                                                                   |  |                             |        |      |   |        |  
|Effect of exchange rate changes on cash and
 cash equivalents                                                      |  |                             | 1,296  |      |   | (214   | )
|                                                                                                                   |  |                             |        |      |   |        |  
|Net increase in cash and cash equivalents                                                                          |  |                             | 5,805  |      |   | 8,168  |  
|Cash and cash equivalents, beginning of
 year                                                                      |  |                             | 46,536 |      |   | 32,723 |  
|                                                                                                                   |  |                             |        |      |   |        |  
|Cash and cash equivalents, end of period                                                                           |  | $                           | 52,341 |      | $ | 40,891 |  
|                                                                                                                   |  |                             |        |      |   |        |  

Supplemental Cash Flow Information

Net cash paid
for income taxes was $361 for the nine months ended March 31, 2011. Net cash
received for income taxes was $469 for the nine months ended March 31, 2010.

See accompanying notes to condensed consolidated
financial statements.

5

---



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 are eliminated from the condensed
consolidated financial statements. The results of operations for the three and
nine months ended March 31, 2011 are not necessarily indicative of the results
to be expected for the full fiscal year.

The condensed
consolidated balance sheet at March 31, 2011, the condensed consolidated
statements of operations for the three and nine months ended March 31, 2011 and
2010, and the condensed consolidated statements of cash flows for the nine
months ended March 31, 2011 and 2010 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 was
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 consolidated 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
consolidated 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
consolidated 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 consolidated 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 nine months ended March 31, 2011 and 2010:

|                                                          |  |                                |   |                               |   |      |   |      |    |  |   |        |  
|--------------------------------------------------------- |  | ------------------------------ | - | ----------------------------- | - | ---- | - | ---- | -- |  | - | ------ | -
|                                                          |  | Three Months Ended 
 March 31, |   | Nine Months Ended 
 March 31, |  
|                                                          |  |                                |   |                               |  
|                                                          |  | 2011                           |   | 2010                          |   | 2011 |   | 2010 |   
|                                                          |  |                                |   |                               |   |      |   |      |   
|Net revenues                                              |  | $                              |  |                               | $ |     |   | $    |   |  | $ | 665    |  
|Non-cash charge                                           |  |                                |  |                               |   |     |   |      |   |  |   | (678   | )
|Other income and (operating expenses)                     |  |                                |  |                               |   | (193 | ) |      | 91 |  |   | (2,654 | )
|                                                          |  |                                |   |                               |   |      |   |      |    |  |   |        |  
|Earnings (loss) from discontinued operations, net of
 tax |  | $                              |  |                               | $ | (193 | ) | $    | 91 |  | $ | (2,667 | )
|                                                          |  |                                |   |                               |   |      |   |      |    |  |   |        |  

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
March 31, 2011 and June 30, 2010:

|                                                 |  |                 |     |                |   |     | 
|------------------------------------------------ |  | --------------- | --- | -------------- | - | --- | 
|                                                 |  | March 31,
 2011 |     | June 30,
 2010 |  
|                                                 |  |                 |     |                |  
|Other assets                                     |  | $               |    |                | $ | 17  | 
|                                                 |  |                 |     |                |   |     | 
|Current
 assets of discontinued operations       |  | $               |    |                | $ | 17  | 
|                                                 |  |                 |     |                |   |     | 
|                                                 |  |                 |     |                |   |     | 
|Accrued expenses and other
 current liabilities  |  | $               | 281 |                | $ | 287 | 
|                                                 |  |                 |     |                |   |     | 
|Current
 liabilities of discontinued operations  |  | $               | 281 |                | $ | 287 | 
|                                                 |  |                 |     |                |   |     | 
|Other long-term liabilities                      |  | $               |    |                | $ | 281 | 
|                                                 |  |                 |     |                |   |     | 
|Long-term
 liabilites of discontinued operations |  | $               |    |                | $ | 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 facility, including a 55,300 square-foot manufacturing
facility. This acquisition expands our optical manufacturing capabilities. The assets
were acquired for $12,475, of which $7,142 was in cash and the balance was
future consideration, net present valued at $5,333 using a discount factor of
14%, based on the level of shipments to ASML over the subsequent three years
beginning January 1, 2011. On the acquisition date, the future consideration
was recorded as a liability 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 into with ASML
that provided for a volume discount. In addition, we hired key management and
employees working at the Richmond facility. These activities resulted in a
newly formed operation known as the Extreme Precision Optics Group (EPOG)
which is included in our Optical Systems Segment.

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. ASC 805 defines the
three elements of a business as Input, Process, and Output. As a result of the
acquisition of substantially all the Richmond facility assets, Zygo acquired
the machinery and equipment utilized in the processes to manufacture product,
the building that houses the entire operation and intellectual property needed
in the process to manufacture the product. The ASML employees hired by Zygo in
connection with the acquisition brought with them the skills, experience and
know-how necessary to provide the operational processes that, when applied to
the acquired assets, represent processes being applied to inputs to create
outputs. Having met all three elements of a business as defined in ASC 805, we
determined that the acquisition of substantially all the assets of ASMLs
Richmond, California facility should be accounted for as a business
acquisition.

The results of
EPOG 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. The fair value exercise is complete with the exception of a final
review of the market analysis of certain equipment acquired in the transaction.
Due to the timing of the transaction, specialized nature of certain equipment
purchased, and the fact that many of the equipment components are custom built
specialty parts, 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 at the date of acquisition:

|                                      |  |                                  |        | 
|------------------------------------- |  | -------------------------------- | ------ | 
|                                      |  | 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 addition to
recording the fair values of the assets acquired and the future consideration
liability, we also recorded a gain on acquisition of $2,014 in the unaudited
condensed consolidated statement of operations in accordance with ASC 805 using
the purchase method of accounting. The gain on acquisition was primarily due to
the difference between market value of the acquired real estate and its book
value and the desire of ASML to sell the assets. 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.

8

---



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 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 determined
by the market approach to be $5,387. Management is still evaluating certain
pieces of equipment and the value assigned to that equipment 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 months ended March 31, 2011, EPOG contributed revenue and net earnings of
$6,279 and $2,096, respectively. During the nine months ended March 31, 2011,
EPOG contributed revenue and net earnings of $8,775 and $2,617, respectively.
Acquisition related expenses of $406 were recognized in administration expense
for the nine months ended March 31, 2011. There were no acquisition related
expenses during the three months ended March 31, 2011.

Proforma
financial information of revenues and net earnings is impractical to provide.
Prior to the acquisition, the Richmond operations were 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 operations 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 March 31, 2011. 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 |  
|                              |  |                          |    |            |   |       |   |   |     |  
|Accumulated amortization      |  |                          | (2 | )          |   | (45   | ) |   | (47 | )
|                              |  |                          |    |            |   |       |   |   |     |  
|Balance at March 31, 2011     |  | $                        | 21 |            | $ | 555   |   | $ | 576 |  
|                              |  |                          |    |            |   |       |   |   |     |  

ZemetricsIn 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 dividing the sum of $1,941 and the
outstanding shareholder notes (including accrued interest) of $856 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 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 three and nine months ended March 31, 2010 were $377 and $457,
respectively, which are included in selling, general and administrative
expenses.

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, net of a full valuation allowance, was
recorded in the opening balance sheet at zero value. 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
included 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 March 31, 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
perform a review our intangible assets for impairment annually.

|                            |  |                          |     |            |   |       |   |   |       |  
|--------------------------- |  | ------------------------ | --- | ---------- | - | ----- | - | - | ----- | -
|                            |  | Customer 
 Relationships |     | Technology |   | Total |  
|                            |  |                          |     |            |   |       |  
|                            |  |                          |     |            |   |       |   |   |       |  
|Balance at January 22, 2010 |  | $                        | 112 |            | $ | 1,428 |   | $ | 1,540 |  
|                            |  |                          |     |            |   |       |   |   |       |  
|Accumulated amortization    |  |                          | (6  | )          |   | (34   | ) |   | (40   | )
|                            |  |                          |     |            |   |       |   |   |       |  
|Balance at March 31, 2010   |  | $                        | 106 |            | $ | 1,394 |   | $ | 1,500 |  
|                            |  |                          |     |            |   |       |   |   |       |  

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 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 $0 and an
operating loss of $2,320 (including the aforementioned $2,003 goodwill
impairment charge), which are included in the consolidated financial statements
for the period ended March 31, 2010. The following unaudited proforma condensed
financial information shows the results of operations for the three and nine
months ended March 31, 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:

|                                           |  |                                      |        |                                     |   |         |  
|------------------------------------------ |  | ------------------------------------ | ------ | ----------------------------------- | - | ------- | -
|                                           |  | Three Months 
 Ended March 31,
 2010 |        | Nine Months 
 Ended March 31,
 2010 |  
|                                           |  |                                      |        |                                     |  
|                                           |  |                                      |        |                                     |   |         |  
|Net revenues                               |  | $                                    | 25,439 |                                     | $ | 72,920  |  
|Net loss attributable to
 Zygo Corporation |  | $                                    | (2,797 | )                                   | $ | (11,132 | )
|                                           |  |                                      |        |                                     |   |         |  
|Loss per share amounts:                    |  |                                      |        |                                     |   |         |  
|Basic and Diluted - Loss per share         |  | $                                    | (0.16  | )                                   | $ | (0.65   | )

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 | )                                |   | (145  | ) |   | (386 | )
|                           |  |           |      |                                  |   |       |   |   |      |  
|Balance at
 March 31, 2011 |  | $         | 49   |                                  | $ | 82    |   | $ | 131  |  
|                           |  |           |      |                                  |   |       |   |   |      |  

|                          |  |           |      |                                  |   |       |   |   |      |  
|------------------------- |  | --------- | ---- | -------------------------------- | - | ----- | - | - | ---- | -
|                          |  | Severance |      | Facility 
 Consolidation 
 Costs |   | Total |  
|                          |  |           |      |                                  |   |       |  
|Balance at June 30, 2009  |  | $         | 262  |                                  | $ | 452   |   | $ | 714  |  
|Restructuring charges     |  |           | 602  |                                  |   |      |   |   | 602  |  
|Payments                  |  |           | (569 | )                                |   | (168  | ) |   | (737 | )
|                          |  |           |      |                                  |   |       |   |   |      |  
|Balance at March 31, 2010 |  | $         | 295  |                                  | $ | 284   |   | $ | 579  |  
|                          |  |           |      |                                  |   |       |   |   |      |  

11

---



Note 5: Earnings Per Share

For the three
and nine months ended March 31, 2011, 399,214 and 963,623 (for the three and
nine months ended March 31, 2010, 2,018,479 and 2,080,015) of the Companys
outstanding stock options and restricted stock awards 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 March 31, |            | Nine Months Ended March 31, | 
|                                                        |  |                              |            |                             | 
|                                                        |  | 2011                         |            | 2010                        |  | 2011       |  | 2010 |           
|                                                        |  |                              |            |                             |  |            |  |      |           
|Basic weighted average shares outstanding               |  |                              | 17,692,761 |                             |  | 17,341,731 |  |      | 17,599,732 |  |  | 17,090,750 | 
|Dilutive effect of stock options and
 restricted shares |  |                              | 611,693    |                             |  |           |  |      | 456,239    |  |  |           | 
|                                                        |  |                              |            |                             |  |            |  |      |            |  |  |            | 
|Diluted weighted average shares outstanding             |  |                              | 18,304,454 |                             |  | 17,341,731 |  |      | 18,055,971 |  |  | 17,090,750 | 
|                                                        |  |                              |            |                             |  |            |  |      |            |  |  |            | 

Note 6: Comprehensive Income (Loss)

The following
table sets forth Stockholders Equity and Noncontrolling Interest for the nine
months ended March 31, 2011 and 2010:

|                                                          |  |                                   |         |                             |   |               |   |                                   |         |                             |   |               |   |   |       |   |   |         |  
|--------------------------------------------------------- |  | --------------------------------- | ------- | --------------------------- | - | ------------- | - | --------------------------------- | ------- | --------------------------- | - | ------------- | - | - | ----- | - | - | ------- | -
|                                                          |  | Nine
 Months Ended March 31,      |        
|                                                          |  |                                   |        
|                                                          |  | 2011                              |         | 2010                        |  
|                                                          |  |                                   |         |                             |  
|                                                          |  | Stockholders
 Equity
 Zygo Corp. |         | Non-
 Controlling
 Interest |   | Total
 Equity |   | Stockholders
 Equity
 Zygo Corp. |         | Non-
 Controlling
 Interest |   | Total
 Equity |  
|                                                          |  |                                   |         |                             |   |               |   |                                   |         |                             |   |               |  
|Equity, beginning of period                               |  | $                                 | 98,403  |                             | $ | 2,193         |   | $                                 | 100,596 |                             | $ | 98,583        |   | $ | 1,444 |   | $ | 100,027 |  
|Comprehensive income (loss):                              |  |                                   |         |                             |   |               |   |                                   |         |                             |   |               |   |   |       |   |   |         |  
|Net earnings (loss)                                       |  |                                   | 12,975  |                             |   | 1,205         |   |                                   | 14,180  |                             |   | (10,388       | ) |   | 677   |   |   | (9,711  | )
|Foreign currency translation effect                       |  |                                   | 1,637   |                             |   | 320           |   |                                   | 1,957   |                             |   | 399           |   |   | (54   | ) |   | 345     |  
|                                                          |  |                                   |         |                             |   |               |   |                                   |         |                             |   |               |   |   |       |   |   |         |  
|Total other comprehensive income (loss)                   |  |                                   | 14,612  |                             |   | 1,525         |   |                                   | 16,137  |                             |   | (9,989        | ) |   | 623   |   |   | (9,366  | )
|                                                          |  |                                   |         |                             |   |               |   |                                   |         |                             |   |               |   |   |       |   |   |         |  
|Non-cash compensation charges related to stock awards     |  |                                   | 2,962   |                             |   |              |   |                                   | 2,962   |                             |   | 1,824         |   |   |      |   |   | 1,824   |  
|Issuance - Zemetrics acquisition                          |  |                                   |        |                             |   |              |   |                                   |        |                             |   | 3,901         |   |   |      |   |   | 3,901   |  
|Restricted stock vesting and related tax effect           |  |                                   | (285    | )                           |   |              |   |                                   | (285    | )                           |   | (404          | ) |   |      |   |   | (404    | )
|Exercise of employee stock options and related tax effect |  |                                   | 1,498   |                             |   |              |   |                                   | 1,498   |                             |   | 466           |   |   |      |   |   | 466     |  
|Dividends attributable to noncontrolling interests        |  |                                   |        |                             |   | (823          | ) |                                   | (823    | )                           |   |              |   |   |      |   |   |        |  
|                                                          |  |                                   |         |                             |   |               |   |                                   |         |                             |   |               |   |   |       |   |   |         |  
|Equity, end of period                                     |  | $                                 | 117,190 |                             | $ | 2,895         |   | $                                 | 120,085 |                             | $ | 94,381        |   | $ | 2,067 |   | $ | 96,448  |  
|                                                          |  |                                   |         |                             |   |               |   |                                   |         |                             |   |               |   |   |       |   |   |         |  

12

---



Note 7: Marketable Securities

Marketable
securities consisted primarily of corporate and government agency securities
for the nine months of 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 March 31,
2011 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 March 31,
2011 and June 30, 2010 were as follows:

|                                            |  |                 |       |                          |   |                           |  |             |   |  |   |       | 
|------------------------------------------- |  | --------------- | ----- | ------------------------ | - | ------------------------- |  | ----------- | - |  | - | ----- | 
|                                            |  | Amortized
 Cost |       | Gross
 Unrealized
 Gains |   | Gross
 Unrealized
 Losses |  | Fair
 Value |  
|                                            |  |                 |       |                          |   |                           |  |             |  
|                                            |  |                 |       |                          |   |                           |  |             |   |  |   |       | 
|At March 31, 2011
 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 standby 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 following table sets forth the beginning balance at July 1, 2010 and 2009,
gross unrealized gains and losses, contributions, redemptions, and fair value
of trading securities at March 31, 2011 and 2010:

|                             |  |                    |     |                          |   |                           |  |                  |   |                |   |                 |  |   |     |   |   |       | 
|---------------------------- |  | ------------------ | --- | ------------------------ | - | ------------------------- |  | ---------------- | - | -------------- | - | --------------- |  | - | --- | - | - | ----- | 
|                             |  | Beginning
 Balance |     | Gross
 Unrealized
 Gains |   | Gross
 Unrealized
 Losses |  | Contri-
 butions |   | Redemp-
 tions |   | Ending
 Balance | 
|                             |  |                    |     |                          |   |                           |  |                  |   |                |   |                 | 
|March 31,
 2011
 Mutual Fund |  | $                  | 922 |                          | $ | 194                       |  | $                |  |                | $ |                |  | $ | (89 | ) | $ | 1,027 | 
|                             |  |                    |     |                          |   |                           |  |                  |   |                |   |                 |  |   |     |   |   |       | 
|                             |  |                    |     |                          |   |                           |  |                  |   |                |   |                 |  |   |     |   |   |       | 
|March 31, 2010
 Mutual Fund  |  | $                  | 499 |                          | $ | 191                       |  | $                |  |                | $ | 290             |  | $ |    |   | $ | 980   | 
|                             |  |                    |     |                          |   |                           |  |                  |   |                |   |                 |  |   |     |   |   |       | 

Maturities of
investment securities classified as held-to-maturity at March 31, 2011 and June
30, 2010 were as follows:

|                     |  |                 |       |               |   |                 |  |             |       |  |   |       | 
|-------------------- |  | --------------- | ----- | ------------- | - | --------------- |  | ----------- | ----- |  | - | ----- | 
|                     |  | March 31, 2011  |       | 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 March 31, 2011 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 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
tables provide the assets and liabilities carried at fair value measured on a
recurring basis as of March 31, 2011 and June 30, 2010:

Assets and Liabilities Measured at Fair Value:

|                       |  |                                           |        |                                              |   |                                                   |  |                                          |     |   |   |   | 
|---------------------- |  | ----------------------------------------- | ------ | -------------------------------------------- | - | ------------------------------------------------- |  | ---------------------------------------- | --- | - | - | - | 
|                       |  |                                           |        | Fair value measurements at March 31, 2011    |  
|                       |  |                                           |        |                                              |  
|                       |  | Total carrying
 value at
 March 31,
 2011 |        | Quoted prices
 in active
 markets
 (Level 1) |   | Significant
 other
 observable
 inputs
 (Level 2) |  | Significant
 unobservableinputs(Level 3) |    
|                       |  |                                           |        |                                              |   |                                                   |  |                                          |    
|Money market funds     |  | $                                         | 19,930 |                                              | $ | 19,930                                            |  | $                                        |    |   | $ |  | 
|Trading securities     |  |                                           | 1,027  |                                              |   | 1,027                                             |  |                                          |    |   |   |  | 
|Foreign currency hedge |  |                                           | (41    | )                                            |   |                                                  |  |                                          | (41 | ) |   |  | 
|                       |  |                                           |        |                                              |   |                                                   |  |                                          |     |   |   |   | 
|Total                  |  | $                                         | 20,916 |                                              | $ | 20,957                                            |  | $                                        | (41 | ) | $ |  | 
|                       |  |                                           |        |                                              |   |                                                   |  |                                          |     |   |   |   | 

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 March 31, 2011 and
2010 of $1,081 and $654, respectively, with a related tax benefit of $389 and
$235, respectively. We recorded share-based compensation expense for the nine
months ended March 31, 2011 and 2010 of $2,962 and $1,824, respectively, with a
related tax benefit of $1,067 and $657, respectively. For the three and nine
months ended March 31, 2010, $12 and $65, respectively, 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 three months ended March 31, 2011 and 2010 was $8.37 and $4.72,
respectively, and the weighted-average fair value of stock option grants for
the nine months ended March 31, 2011 and 2010 was $5.68 and $4.44,
respectively. During the three months ended March 31, 2011 and 2010, we issued
stock options for an aggregate of 50,000 and 375,000 shares of common stock,
respectively. During the nine months ended March 31, 2011 and 2010, we issued
stock options for an aggregate of 100,000 and 515,000 shares of common stock,
respectively.

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

|                         |  |                              |            |                             |  |               |  |      |               |  |  |               | 
|------------------------ |  | ---------------------------- | ---------- | --------------------------- |  | ------------- |  | ---- | ------------- |  |  | ------------- | 
|                         |  | Three Months Ended March 31, |            | Nine Months Ended March 31, | 
|                         |  |                              |            |                             | 
|                         |  | 2011                         |            | 2010                        |  | 2011          |  | 2010 |              
|                         |  |                              |            |                             |  |               |  |      |              
|Term                     |  |                              | 5.13 Years |                             |  | 4.1-5.1 Years |  |      | 4.1-5.1 Years |  |  | 4.1-5.1 Years | 
|Volatility               |  |                              | 57.1%      |                             |  | 45.7%-60.9%   |  |      | 45.7%-57.1%   |  |  | 45.7%-60.9%   | 
|Dividend
 yield          |  |                              | 0.0%       |                             |  | 0.0%          |  |      | 0.0%          |  |  | 0.0%          | 
|Risk-free
 interest rate |  |                              | 2.6%       |                             |  | 2.0%-2.4%     |  |      | 1.1%-2.6%     |  |  | 2.0%-2.5%     | 
|Forfeiture
 rate         |  |                              | 7.9%       |                             |  | 0-10.8%       |  |      | 0-7.9%        |  |  | 0-10.8%       | 

Restricted Stock

Our
share-based compensation expense also includes the effects of the issuance of
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
March 31, 2011 and 2010, an aggregate of 73,500 and 40,000 shares,
respectively, of restricted stock units were issued at a weighted average grant
price of $12.01 and $10.57, respectively. During the nine months ended March
31, 2011 and 2010, an aggregate of 362,500 and 309,000 shares, respectively, of
restricted stock units were issued at a weighted average grant price of $10.75
and $6.06, respectively. Generally, the restrictions on the restricted stock
units granted to employees prior to January 1, 2011 lapse at a rate of 50%
after three years and the remaining 50% after the fourth year. Restrictions on
restricted stock units granted to employees after January 1, 2011 lapse at a
rate of 25% each year.

15

---



Note 10: Receivables

The following
table sets forth the components of accounts receivable at March 31, 2011 and
June 30, 2010:

|                                 |  |                |        |               |   |        |  
|-------------------------------- |  | -------------- | ------ | ------------- | - | ------ | -
|                                 |  | March 31, 2011 |        | June 30, 2010 |  
|                                 |  |                |        |               |  
|Trade                            |  | $              | 31,876 |               | $ | 21,314 |  
|Other                            |  |                | 274    |               |   | 609    |  
|                                 |  |                |        |               |   |        |  
|                                 |  |                | 32,150 |               |   | 21,923 |  
|Allowance
 for doubtful accounts |  |                | (1,331 | )             |   | (1,975 | )
|                                 |  |                |        |               |   |        |  
|                                 |  | $              | 30,819 |               | $ | 19,948 |  
|                                 |  |                |        |               |   |        |  

Note
11: Inventories

Inventories
are stated at the lower of cost (determined on a first-in, first-out basis) or
market. The following table sets forth the components of inventories at March
31, 2011 and June 30, 2010:

|                                      |  |               |        |                |   |        | 
|------------------------------------- |  | ------------- | ------ | -------------- | - | ------ | 
|                                      |  | March 31,2011 |        | June 30,
 2010 |  
|                                      |  |               |        |                |  
|Raw materials and
 manufactured parts |  | $             | 14,117 |                | $ | 12,682 | 
|Work in process                       |  |               | 9,618  |                |   | 9,322  | 
|Finished goods                        |  |               | 3,972  |                |   | 3,216  | 
|                                      |  |               |        |                |   |        | 
|                                      |  | $             | 27,707 |                | $ | 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. The following table sets forth the components of property, plant, and
equipment at March 31, 2011 and June 30, 2010:

|                                            |  |                 |         |                 |   |                                 |   |       |  | 
|------------------------------------------- |  | --------------- | ------- | --------------- | - | ------------------------------- | - | ----- |  | 
|                                            |  | March 31,
 2011 |         | June
 30,
 2010 |   | Estimated
 Useful Life
 (Years) |  
|                                            |  |                 |         |                 |   |                                 |  
|Land and improvements                       |  | $               | 2,936   |                 | $ | 615                             |   |      | 
|Building and improvements                   |  |                 | 21,263  |                 |   | 17,390                          |   | 15-40 | 
|Machinery, equipment, and
 office furniture |  |                 | 61,032  |                 |   | 56,136                          |   | 3-8   | 
|Leasehold improvements                      |  |                 | 1,032   |                 |   | 1,002                           |   | 1-5   | 
|Construction in progress                    |  |                 | 114     |                 |   | 332                             |   |      | 
|                                            |  |                 |         |                 |   |                                 |   |       |  | 
|                                            |  |                 | 86,377  |                 |   | 75,475                          |   |       |  | 
|Accumulated depreciation                    |  |                 | (54,744 | )               |   | (52,446                         | ) |       |  | 
|                                            |  |                 |         |                 |   |                                 |   |       |  | 
|                                            |  | $               | 31,633  |                 | $ | 23,029                          |   |       |  | 
|                                            |  |                 |         |                 |   |                                 |   |       |  | 

Depreciation
expense was $1,342 and $1,283 for the three months ended March 31, 2011 and
2010, respectively. Depreciation expense was $3,951 and $4,040 for the nine
months ended March 31, 2011 and 2010, respectively.

16

---



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 charge us for incurred expenses. As of March 31, 2011 and 2010, $9 and $77,
respectively, of our warranty liability relates to these semiconductor systems.

The following
table sets forth a reconciliation of the accrued warranty liability, included
in other accrued liabilities in the condensed consolidated balance sheets:

|                                                                      |  |                             |       |      |   |       |  
|--------------------------------------------------------------------- |  | --------------------------- | ----- | ---- | - | ----- | -
|                                                                      |  | Nine Months Ended March 31, |      
|                                                                      |  |                             |      
|                                                                      |  | 2011                        |       | 2010 |  
|                                                                      |  |                             |       |      |  
|Beginning balance                                                     |  | $                           | 1,360 |      | $ | 1,614 |  
|Reductions for payments made                                          |  |                             | (788  | )    |   | (688  | )
|Changes in accruals related to
 pre-existing warranties               |  |                             | 362   |      |   | (352  | )
|Changes in accruals related to warranties
 made in the current period |  |                             | 350   |      |   | 988   |  
|                                                                      |  |                             |       |      |   |       |  
|Ending balance                                                        |  | $                           | 1,284 |      | $ | 1,562 |  
|                                                                      |  |                             |       |      |   |       |  

Note 14: Intangible Assets

Intangible
assets include patents and trademarks, customer relationships and technology,
and a covenant not-to-compete. The cost of patents and 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 March 31,
2011, current liabilities include $106 and long-term liabilities include $51
related to the payments under this agreement. We are amortizing the value of
the non-compete over four years on a declining balance method.

The following
table sets forth the components of intangible assets, at cost, as of March 31,
2011 and June 30, 2010:

|                                       |  |                 |        |                |   |        |  
|-------------------------------------- |  | --------------- | ------ | -------------- | - | ------ | -
|                                       |  | March 31,
 2011 |        | June 30,
 2010 |  
|                                       |  |                 |        |                |  
|Patents and
 trademarks                |  | $               | 6,294  |                | $ | 5,882  |  
|Covenant
 not-to-compete               |  |                 | 851    |                |   | 851    |  
|Customer
 relationships and technology |  |                 | 2,163  |                |   | 1,540  |  
|                                       |  |                 |        |                |   |        |  
|                                       |  |                 | 9,308  |                |   | 8,273  |  
|Accumulated
 amortization              |  |                 | (3,644 | )              |   | (2,886 | )
|                                       |  |                 |        |                |   |        |  
|Total                                  |  | $               | 5,664  |                | $ | 5,387  |  
|                                       |  |                 |        |                |   |        |  

Intangible
amortization expense was $275 and $213 for the three months ended March 31, 2011
and 2010, respectively, and was $768 and $563 for the nine months ended March
31, 2011 and 2010, respectively. This amortization expense related to certain
intangible assets is included in cost of goods sold in the condensed
consolidated statements of operations.

17

---



Based on the carrying amount of
the intangible assets as of March 31, 2011, the estimated future amortization
expense is as follows:

|                                   |  |                                        |   |       |  | 
|---------------------------------- |  | -------------------------------------- | - | ----- |  | 
|                                   |  | Estimated Future Amortization
 Expense |  
|                                   |  |                                        |  
|Three months
 ending June 30, 2011 |  |                                        | $ | 259   |  | 
|Fiscal year
 ending June 30, 2012  |  |                                        |   | 902   |  | 
|Fiscal year
 ending June 30, 2013  |  |                                        |   | 783   |  | 
|Fiscal year
 ending June 30, 2014  |  |                                        |   | 564   |  | 
|Fiscal year
 ending June 30, 2015  |  |                                        |   | 535   |  | 
|Thereafter                         |  |                                        |   | 2,621 |  | 
|                                   |  |                                        |   |       |  | 
|Total                              |  |                                        | $ | 5,664 |  | 
|                                   |  |                                        |   |       |  | 

Note 15: Segment and Major Customer
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. The following
table sets forth segment net revenues, gross profit, and gross margins for the
three and nine months ended March 31, 2011 and 2010:

|                    |  |                              |        |                             |   |        |   |      |         |   |   |        |  
|------------------- |  | ---------------------------- | ------ | --------------------------- | - | ------ | - | ---- | ------- | - | - | ------ | -
|                    |  | Three Months Ended March 31, |        | Nine Months Ended March 31, |  
|                    |  |                              |        |                             |  
|                    |  | 2011                         |        | 2010                        |   | 2011   |   | 2010 |        
|                    |  |                              |        |                             |   |        |   |      |        
|Metrology Solutions |  |                              |        |                             |   |        |   |      |         |   |   |        |  
|Net revenues        |  | $                            | 22,506 |                             | $ | 15,178 |   | $    | 66,923  |   | $ | 48,312 |  
|Gross profit        |  | $                            | 12,338 |                             | $ | 7,919  |   | $    | 37,129  |   | $ | 24,256 |  
|Gross margin        |  |                              | 55     | %                           |   | 52     | % |      | 55      | % |   | 50     | %
|Optical Systems     |  |                              |        |                             |   |        |   |      |         |   |   |        |  
|Net revenues        |  | $                            | 17,729 |                             | $ | 10,261 |   | $    | 40,517  |   | $ | 24,533 |  
|Gross profit        |  | $                            | 6,526  |                             | $ | 3,558  |   | $    | 12,832  |   | $ | 5,348  |  
|Gross margin        |  |                              | 37     | %                           |   | 35     | % |      | 32      | % |   | 22     | %
|                    |  |                              |        |                             |   |        |   |      |         |   |   |        |  
|Total               |  |                              |        |                             |   |        |   |      |         |   |   |        |  
|Net revenues        |  | $                            | 40,235 |                             | $ | 25,439 |   | $    | 107,440 |   | $ | 72,845 |  
|Gross profit        |  | $                            | 18,864 |                             | $ | 11,477 |   | $    | 49,961  |   | $ | 29,604 |  
|Gross margin        |  |                              | 47     | %                           |   | 45     | % |      | 47      | % |   | 41     | %

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.

The following
table sets forth revenues by geographic area:

|            |  |                              |        |                             |   |        |  |      |         |  |   |        | 
|----------- |  | ---------------------------- | ------ | --------------------------- | - | ------ |  | ---- | ------- |  | - | ------ | 
|            |  | Three Months Ended March 31, |        | Nine Months Ended March 31, |  
|            |  |                              |        |                             |  
|            |  | 2011                         |        | 2010                        |   | 2011   |  | 2010 |        
|            |  |                              |        |                             |   |        |  |      |        
|Americas    |  | $                            | 21,497 |                             | $ | 13,997 |  | $    | 57,977  |  | $ | 40,213 | 
|Europe      |  |                              | 4,973  |                             |   | 3,773  |  |      | 13,349  |  |   | 9,870  | 
|Japan       |  |                              | 9,472  |                             |   | 5,442  |  |      | 23,265  |  |   | 12,692 | 
|Pacific Rim |  |                              | 4,293  |                             |   | 2,227  |  |      | 12,849  |  |   | 10,070 | 
|            |  |                              |        |                             |   |        |  |      |         |  |   |        | 
|Total       |  | $                            | 40,235 |                             | $ | 25,439 |  | $    | 107,440 |  | $ | 72,845 | 
|            |  |                              |        |                             |   |        |  |      |         |  |   |        | 

Revenues from
two customers accounted for 27% of the revenues for the three months ended
March 31, 2011. Revenues from one of these customers also accounted for 12% of
the revenues for the three months ended March 31, 2010. Revenues from
these customers were included in both of our segments. See Note 16.

18

---



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 $6,434 and $3,067 (16% and 12% of net revenues,
respectively) for the three months ended March 31, 2011 and 2010, respectively.
For the nine months ended March 31, 2011 and 2010, sales to Canon amounted to
$13,387 and $6,087 (12% and 8% of net revenues, respectively). Selling prices
of products sold to Canon are based, generally, on the terms customarily given
to distributors. At March 31, 2011 and June 30, 2010, there were, in the
aggregate, $3,505 and $667, respectively, of trade accounts receivable from
Canon.

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. These contracts 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 March
31, 2011, we had ten currency contracts outstanding involving our Japanese and
German operations with notional amounts aggregating $4,760. These foreign
currency hedges are not considered designated hedging instruments. For the
three months ended March 31, 2011 and 2010, we recognized net unrealized gains
of $56 and $31, respectively, from foreign currency forward contracts. For the
nine months ended March 31, 2011 and 2010, we recognized net unrealized gains
of $30 and $43, 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 March 31, 2011
and 2010:

|                                                  |                                        |                        |  |                            |    
|------------------------------------------------- | -------------------------------------- | ---------------------- |  | -------------------------- | ---
|Derivatives not designated as hedging instruments |                                        | Balance Sheet Location
|                                                  |                                        |                       
|                                                  |                                        |                        |  |                            |    
|March 31, 2011                                    | Number of foreign
 exchange contracts: | 10                     |  | Other
 accrued liabilities | $40
|                                                  |                                        |                        |  |                            |    
|March 31, 2010                                    | Number of
 foreign exchange contracts: | 6                      |  | Prepaid
 Expenses          | $29

19

---



Note 18: Income Taxes

|                   |  |                              |      |                             |  |        |   |           |      |        |  |           |   |        |        |            |  |   |   |   |      |   |  |   |  
|------------------ |  | ---------------------------- | ---- | --------------------------- |  | ------ | - | --------- | ---- | ------ |  | --------- | - | ------ | ------ | ---------- |  | - | - | - | ---- | - |  | - | -
|                   |  | Three Months ended March 31, |      | Nine Months ended March 31, | 
|                   |  |                              |      |                             | 
|                   |  | 2011                         |      | 2010                        |  | 2011   |   | 2010      |     
|                   |  |                              |      |                             |  |        |   |           |     
|                   |  |                              |      |                             |  |        |   |           |      |        |  |           |   |        |        |            | 
|                   |  | Amount                       |      | TaxRate %                   |  | Amount |   | TaxRate % |      | Amount |  | TaxRate % |   | Amount |        | Tax
Rate % | 
|                   |  |                              |      |                             |  |        |   |           |      |        |  |           |   |        |        |            | 
|                   |  |                              |      |                             |  |        |   |           |      |        |  |           |   |        |        |            |  |   |   |   |      |   |  |   |  
|Income tax expense |  | $                            | (720 | )                           |  | 13     | % | $         | (131 | )      |  | 6         | % | $      | (1,474 | )          |  | 9 | % | $ | (505 | ) |  | 8 | %

Income tax
expense for the three and nine months ended March 31, 2011 included income
taxes in state and foreign jurisdictions. The nine months ended March 31, 2011
included $725 of tax benefit from the adjustment of valuation allowances on our
deferred assets associated with the gain on acquisition. We continue to
maintain a full valuation allowance on our net deferred tax assets as of March
31, 2011. We recorded no increase in net deferred tax benefit for the domestic
operating loss incurred in the period. 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. Income tax expense for the three and nine months ended March 31, 2010
included income taxes in state and foreign jurisdictions.

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 nine
months ended March 31, 2011, we did not recognize additional liability or
realize any benefit for changes in our tax positions. We had no uncertain tax
benefits or liabilities as of March 31, 2011 and June 30, 2010. We are not
aware of any tax positions that would create a material adjustment to the
unrecognized tax benefits during the next twelve months.

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

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 March 31, 2011, we had a reserve of $1,400
for a potential royalty claim, which was settled and paid in the subsequent
period.

We are aware
of certain levels of environmental 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 a reserve for the exposure related to the environmental
contamination when and if 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.

We have
assessed the impact on our business resulting from the recent earthquake,
tsunami and nuclear disaster in Japan and do not anticipate that these events
will have a material impact on the Companys consolidated financial statements
or continuing operations. Our activities in Japan resumed full operation
shortly after the events. Indications at this time are that shipments both into
Japan and from our Japanese operation will not be seriously affected. In
addition, to date, our supply chain has been unaffected by the events in Japan.

Bookings of
$41.7 million for the third quarter of fiscal 2011 increased 53% over the prior
year quarter. Bookings decreased 10% from the second quarter of fiscal 2011,
which included more than $7.1 million in bookings received in connection with
the Richmond, California acquisition. Bookings for the Metrology Solutions
Division accounted for 58% of the bookings received and the Optical Systems
Division contributed the remaining 42%. Backlog rose to $60.5 million at March
31, 2011. During the third quarter of fiscal 2011, the Optical Systems Division
was awarded a $3.0 million continuation order for meter class laser fusion
amplifiers from Commissariat à lénergie atomique (CEA). The order is part of
a seven year contract that started in 2007 in support of the Laser Mégajoule
Program in France, to which Zygo is a critical supplier of products and
technology.

During the
second quarter of fiscal 2011, 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 $7.1 million 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 former ASML Richmond facility and formed our
Extreme Precision Optics Group (EPOG), which is included in our Optical
Systems segment. With this acquisition, we have considerably expanded our
optical manufacturing capabilities. Combined with our existing leadership
position in metrology, large flat optics production and electro-optical design
and manufacturing, EPOG 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 Richmond 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. Management
is still evaluating certain pieces of the equipment, and the value assigned to
that equipment 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.

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 ongoing
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 guidance on arrangements that
include software elements, tangible products that have software components that
are essential to the functionality of the tangible product are no longer within
the scope of the software revenue recognition guidance, and software-enabled
products are now 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 that 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 guidance includes disclosure requirements on how the
application of the relative selling price method affects the timing and amount
of revenue recognition. The adoption of this 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. This 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 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 March 31     |                     |  |             |       |                  |  |        |   |                   |      |  |  |    
|                           |                     |  |             |       |                  |  |        |   |                   |      |  |  |     |  
|                           | Metrology Solutions |  | $           | 22.5  |                  |  | 56     | % | $                 | 15.2 |  |  | 60  | %
|                           | Optical Systems     |  |             | 17.7  |                  |  | 44     | % |                   | 10.2 |  |  | 40  | %
|                           |                     |  |             |       |                  |  |        |   |                   |      |  |  |     |  
|                           | Total               |  | $           | 40.2  |                  |  | 100    | % | $                 | 25.4 |  |  | 100 | %
|                           |                     |  |             |       |                  |  |        |   |                   |      |  |  |     |  
|                           |                     |  |             |       |                  |  |        |   |                   |      |  |  |     |  
|Nine months ended March 31 |                     |  |             |       |                  |  |        |   |                   |      |  |  |    
|                           |                     |  |             |       |                  |  |        |   |                   |      |  |  |     |  
|                           | Metrology Solutions |  | $           | 66.9  |                  |  | 62     | % | $                 | 48.3 |  |  | 66  | %
|                           | Optical Systems     |  |             | 40.5  |                  |  | 38     | % |                   | 24.5 |  |  | 34  | %
|                           |                     |  |             |       |                  |  |        |   |                   |      |  |  |     |  
|                           | Total               |  | $           | 107.4 |                  |  | 100    | % | $                 | 72.8 |  |  | 100 | %
|                           |                     |  |             |       |                  |  |        |   |                   |      |  |  |     |  

Overall, net
revenues for the three months ended March 31, 2011 increased 58% compared with
the prior year period, reflecting increases in Metrology Solutions segment
revenues of 48% and in Optical Systems segment revenues of 74%. The increase in
Metrology Solutions segment net revenues was primarily due to volume increases
in lithography stage metrology of $4.0 million and instruments of $2.5 million.
The increase in the Optical Systems segment revenues was primarily due to the
addition $6.3 million of revenue from EPOG.

Net revenues
for the nine months ended March 31, 2011 increased 48% compared with the prior
year period, reflecting increases in Metrology Solutions segment revenues of
39% and in Optical Systems segment revenues of 65%. The increase in Metrology
Solutions segment net revenues was primarily due to volume increases in
lithography stage metrology of $11.1 million, instruments of $8.1 million, and
OEM heads of $2.5 million, partially offset by revenue decreases of $3.1
million in the display and semiconductor product lines which were sold in
fiscal 2010. The increase in the Optical Systems segment revenues was primarily
due to additional revenues of $8.8 million from EPOG and an increase in
contract manufacturing of $4.5 million. The increase in contract manufacturing
was 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 and
third quarters.

Revenues from
major customers accounted for 27% of the revenues for the three months ended
March 31, 2011. Revenues from one of these major customers also accounted for
12% of the revenues for the three months ended March 31, 2010.
Revenues from these customers were included in both of our segments.

Revenues in
U.S. dollars for the three months ended March 31, 2011 and 2010 were
approximately 80% and 71% of total net revenues, respectively. The remaining
20% and 29%, respectively, were in Euro, Yen, or Yuan. Revenues in U.S. dollars
for the nine months ended March 31, 2011 and 2010 were approximately 75% and
71% of total net revenues, respectively, and the remaining 25% and 29%,
respectively, were in Euro, Yen, or Yuan. Revenues based in foreign currency
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 March 31     |                     |  |             |      |               |  |        |   |               |      |  |  |   
|                           | Metrology Solutions |  | $           | 12.4 |               |  | 55     | % | $             | 7.9  |  |  | 52 | %
|                           | Optical Systems     |  |             | 6.5  |               |  | 37     | % |               | 3.6  |  |  | 35 | %
|                           |                     |  |             |      |               |  |        |   |               |      |  |  |    |  
|                           | Total               |  | $           | 18.9 |               |  | 47     | % | $             | 11.5 |  |  | 45 | %
|                           |                     |  |             |      |               |  |        |   |               |      |  |  |    |  
|                           |                     |  |             |      |               |  |        |   |               |      |  |  |    |  
|Nine months ended March 31 |                     |  |             |      |               |  |        |   |               |      |  |  |   
|                           | Metrology Solutions |  | $           | 37.1 |               |  | 55     | % | $             | 24.3 |  |  | 50 | %
|                           | Optical Systems     |  |             | 12.9 |               |  | 32     | % |               | 5.3  |  |  | 22 | %
|                           |                     |  |             |      |               |  |        |   |               |      |  |  |    |  
|                           | Total               |  | $           | 50.0 |               |  | 47     | % | $             | 29.6 |  |  | 41 | %
|                           |                     |  |             |      |               |  |        |   |               |      |  |  |    |  

Gross margin
for the three months ended March 31, 2011 was 47%, which represents an increase
of two percentage points from the comparable prior year period. Within the
Metrology Solutions segment, the increase in gross margin for the three months
ended March 31, 2011 compared with the prior year period was primarily due to
increased volume as compared with the prior year on a similar overhead cost
base. Within the Optical Systems segment, the increase in gross margin for the
three months ended March 31, 2011 compared with the prior year period was
primarily due to overall increased volume which led to improved absorption of
factory costs combined with a favorable change in product mix towards higher
margin products.

Gross margin
for the nine months ended March 31, 2011 was 47%, which represents an increase
of six percentage points from the comparable prior year period. Within the
Metrology Solutions segment, the increase in gross margin for the nine months
ended March 31, 2011 compared with the prior year period was primarily due to
an improved absorption of factory costs as a result of increased volume. Within
the Optical Systems segment, the increase in gross margin for the nine months
ended March 31, 2011 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 March 31     |  | $ | 9.4         |  |               | 23 | %      | $ | 8.0           |  |  | 31 | %
|Nine months ended March 31 |  | $ | 24.9        |  |               | 23 | %      | $ | 23.1          |  |  | 32 | %

SG&A
expenses increased in the three months ended March 31, 2011 by $1.4 million
from the comparable prior year period. Excluding prior year charges related to
the Companys evaluation of an unsolicited offer to purchase the outstanding
stock of the Company, Zemetrics acquisition costs, and the search costs for a
new chief executive officer, the increase would be $2.6 million. The increase
is primarily due to an increase in employee compensation expenses, which
included restoration of the temporary pay-cuts and performance based programs.

SG&A
expenses increased in the nine months ended March 31, 2011 by $1.8 million from
the comparable prior year period. Excluding prior year charges related to the
Companys evaluation of an unsolicited offer to purchase the outstanding stock
of the Company, Zemetrics acquisition costs, the retirement of our former chief
executive officer, the search costs for a new chief executive officer, and
severance charges, the increase would be $4.4 million. The increase is
primarily due to employee compensation expenses, which included restoration of
the temporary pay-cuts and performance-based programs. The decrease in SG&A
as a percentage of revenue in all periods is due to managements efforts to
control expenses over a significant increase in the 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 March 31     |  | $ | 3.7         |  |               | 9  | %      | $ | 3.5           |  |  | 14 | %
|Nine months
 ended March 31 |  | $ | 10.9        |  |               | 10 | %      | $ | 11.1          |  |  | 15 | %

RD&E for the three months
ended March 31, 2011 increased by $0.2 million compared with the prior year
period. The increase in RD&E occurred primarily in the Optical Systems
segment related to the addition of EPOG. RD&E for the nine months ended
March 31, 2011 decreased by $0.2 million as compared with the prior year
period. The decrease in RD&E for the nine months ended March 31, 2011 was
primarily related to reduced expenses related to the display systems business
partially offset by increases due to the addition of EPOG and increased R&D
costs related to the additional capacity from our acquisition of Zemetrics.

Impairment of Goodwill

|                            |  |   |             |  |               |   |        |   |               |  |  |   |   | 
|--------------------------- |  | - | ----------- |  | ------------- | - | ------ | - | ------------- |  |  | - | - | 
|                            |  |   | Fiscal 2011 |  | Fiscal 2010   |  
|                            |  |   |             |  |               |  
|(Dollars in
 millions)      |  |   | Amount      |  | % of Revenues |   | Amount |   | % of Revenues | 
|                            |  |   |             |  |               |   |        |   |               | 
|                            |  |   |             |  |               |   |        |   |               |  |  |   |   | 
|Quarter
 ended March 31     |  | $ |            |  |               | 0 | %      | $ | 2.0           |  |  | 8 | %
|Nine months
 ended March 31 |  | $ |            |  |               | 0 | %      | $ | 2.0           |  |  | 3 | %

The Company recorded an
impairment charge related to Zemetrics of $2.0 million during the three months
ended on March 31, 2010 relating to acquired goodwill 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 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 that 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.

Other Income (Expense)

|                            |  |   |             |   |                |   |        |   |                |   |  |   |   | 
|--------------------------- |  | - | ----------- | - | -------------- | - | ------ | - | -------------- | - |  | - | - | 
|                            |  |   | Fiscal 2011 |   | Fiscal 2010    |  
|                            |  |   |             |   |                |  
|(Dollars in
 millions)      |  |   | Amount      |   | % of
 Revenues |   | Amount |   | % of
 Revenues |  
|                            |  |   |             |   |                |   |        |   |                |  
|                            |  |   |             |   |                |   |        |   |                |   |  |   |   | 
|Quarter
 ended March 31     |  | $ | (0.2        | ) |                | 0 | %      | $ | (0.1           | ) |  | 0 | %
|Nine months
 ended March 31 |  | $ | 1.4         |   |                | 1 | %      | $ | 0.1            |   |  | 0 | %

Other income (expense) for
the nine months ended March 31, 2011 increased by $1.3 million over the prior
year balance, primarily due to the purchase gain on the acquisition of
substantially all the assets of ASMLs Richmond, California facility.

25

---



Income
Tax Expense

|                            |  |   |             |   |             |    |        |   |             |   |  |   |   | 
|--------------------------- |  | - | ----------- | - | ----------- | -- | ------ | - | ----------- | - |  | - | - | 
|                            |  |   | Fiscal 2011 |   | Fiscal 2010 |   
|                            |  |   |             |   |             |   
|(Dollars in
 millions)      |  |   | Amount      |   | Tax Rate
 % |    | Amount |   | Tax Rate
 % |  
|                            |  |   |             |   |             |    |        |   |             |  
|                            |  |   |             |   |             |    |        |   |             |   |  |   |   | 
|Quarter
 ended March 31     |  | $ | (0.7        | ) |             | 13 | %      | $ | (0.1        | ) |  | 6 | %
|Nine months
 ended March 31 |  | $ | (1.5        | ) |             | 9  | %      | $ | (0.5        | ) |  | 8 | %

Income tax expense for the
three and nine months ended March 31, 2011 included income taxes in state and
foreign jurisdictions. There was no United States federal income tax expense
due to valuation allowances established in prior periods on deferred tax
assets, including net operating loss carry-forwards in the United States.
Income tax expense for the nine months ended March 31, 2011 includes a tax
benefit of $0.7 million relating to the gain on acquisition of substantially
all the assets of ASMLs Richmond, California facility recorded in the second
quarter.

There was income tax expense
for the three and nine months ended March 31, 2010 despite a loss from
continuing operations. The income tax expense was related to income taxes in
state and foreign jurisdictions. There was no tax benefit related to net
operating loss carryforwards due to the valuation allowance established on the
deferred tax assets.

We continue to maintain a
valuation allowance on all of our net deferred tax assets at March 31, 2011. 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 March 31     |  | $ |            |  |                | 0 | %      | $ | (0.2           | ) |  | 1 | %
|Nine Months
 ended March 31 |  | $ | 0.1         |  |                | 0 | %      | $ | (2.7           | ) |  | 4 | %

The loss from discontinued
operations for the three and nine months ended March 31, 2010 of $0.2 and $2.7
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.

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 $6.4 million and $3.1 million (16% and 12% of net
revenues, respectively) for the three months ended March 31, 2011 and 2010,
respectively. Revenues from Canon Inc. amounted to $13.4 million and $6.1
million (12% and 8% of net revenues, respectively) for the nine months ended
March 31, 2011 and 2010, respectively. Selling prices of products sold to Canon
are based, generally, on the terms customarily given to distributors. At March
31, 2011 and June 30, 2010, there were, in the aggregate, $3.5 million and $0.7
million, respectively, of trade accounts receivable from Canon.

26

---



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 March 31, 2011, cash and
marketable securities were $53.3 million, an increase of $5.8 million from
$47.5 million at June 30, 2010. Our marketable securities consist of $1.0
million in a United States Treasury Bill as loan collateral to cover our
outstanding 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 March 31, 2011, $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 $19.9 million as
of March 31, 2011. 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 provided by
operating activities from continuing operations for the nine months ended March
31, 2011 of $12.8 million was primarily due to an increase in net earnings,
excluding non-cash items, partially offset by an increase in accounts
receivable. Accounts receivable increased $9.9 million from June 30, 2010 and
$2.2 million from December 31, 2010 due to timing of increased shipments in the
quarter and the increase in international shipments to customers in countries
with traditionally longer payment terms. DSO (Days Sales Outstanding) on
accounts receivable increased to 64 days at March 31, 2011 from 55 days at June
30, 2010 but was lower than DSO of 66 days at December 31, 2010.

Cash flows used for investing
activities for the nine months ended March 31, 2011 increased by $10.3 million
compared with the prior year period. This increase was primarily related to the
purchase of substantially all of ASMLs Richmond, California facility assets
for $7.1 million and a decrease in proceeds from the sale and maturity of
marketable securities.

Cash flows provided by financing
activities in the nine months ended March 31, 2011 remained essentially flat
compared with the prior year period. For the nine months ended March 31, 2011,
there were dividend payments of $0.8 million to noncontrolling interests
partially offset by an increase in proceeds from stock option exercise.

We currently have no lines of
credit. In the future, if the need for debt or credit lines arises 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.

27

---



OFF-BALANCE SHEET ARRANGEMENTS

We have not created, and are
not party to, any special-purpose or off-balance sheet entities for the purpose
of raising capital, incurring debt, or operating parts of our business that are
not consolidated into our financial statements. We have not guaranteed any
obligations of a third party.

Item 3. Quantitative and Qualitative Disclosures about Market
Risk

There have been no material
changes in our quantitative and qualitative market risk disclosures during the
three months ended March 31, 2011. 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.

On May 14, 2010, we reported
that we had identified a material weakness in our internal controls over
financial reporting, which is an integrated component of our disclosure
controls and procedures, related to inadequate controls regarding our
accounting for unusual or complex transactions. In light of this material
weakness, we concluded that our disclosure controls and procedures were not
effective as of such date and subsequently concluded that our internal control
over financial reporting was not effective at June 30, 2010.

We developed and implemented
additional controls and new procedures in our financial reporting process in
the fourth quarter of fiscal 2010 and first six months of fiscal 2011,
including adding control processes to aid in identifying transactions that
might include unusual or complex accounting issues as well as 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. During the third quarter of fiscal 2011 we were able to
complete our implementation of activities of controls and procedures that were
designed to remediate the material weakness. These activities have been
incorporated into our internal control structure and were in place as of March
31, 2011 and will be sustained going forward such that the control deficiency
that led to the material weakness has been remediated as of March 31, 2011 and
therefore the material weakness no longer exists as of March 31, 2011.

The controls and remedial
actions that were implemented include the following:

| |   |                                                                                                                                                                                                                                
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Utilization of external
 accounting resources to review our accounting for unusual or complex
 transactions.                                                                                                                   
| |  | Implementation of clear
 procedures and sustainable processes for researching, reviewing assumptions
 used in estimates and calculations, reviewing the work, assumptions, and
 calculations used by outside service providers.
| |  | Implementation of controls
 to review potential impact of an unusual item on existing assets or
 liabilities.                                                                                                                  
| |  | Implementation of controls
 to review proper presentation and disclosure in the financial statements as
 it relates to unusual or complex transactions.                                                                        

Our management, with the
participation of our Chief Executive Officer and Chief Financial Officer,
carried out an evaluation, as of the end of the period covered by this report,
of the effectiveness of our disclosure controls and procedures (as such term
    is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange
    Act of 1934, as amended (the Exchange Act)), including controls
    and procedures implemented to address the material weakness described above.
    Based upon their evaluation, the Chief Executive Officer and Chief Financial
    Officer concluded that, as of the end of such period, that the material weakness
    no longer exists and our disclosure controls and procedures were effective
    in recording, processing, summarizing and reporting within the time periods
    specified in the Securities and Exchange Commissions rules and forms information required to be disclosed by us in
    the reports that we file or submit under the Exchange Act and were effective
    in ensuring that information required to be disclosed by us in the reports
    that we file or submit under the Exchange Act is accumulated and communicated
    to our management, including the Chief Executive Officer and Chief Financial
    Officer, as appropriate to allow timely decisions regarding required disclosure.

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

28

---



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.

We could suffer significant business interruptions.Our customers,
suppliers, and operations may be vulnerable to interruption by natural
disasters such as earthquakes, tsunamis, typhoons, or floods, or other
disasters such as fires, explosions, acts of terrorism or war, disease or
failures of our management information or other systems. If a business
interruption occurs, our business could be materially and adversely affected.
On March 11, 2011, an earthquake occurred near the northeastern coast of Japan
creating a tsunami that caused extensive damage. While we do not anticipate
that these events will have a material impact on the Companys consolidated
financial statements or continuing operations we cannot predict the long-term
consequences of the disasters on our operations.

Acquisitions may entail certain operational and financial
risks.Our growth strategy
includes expanding our offering of 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 provide assurance
that any acquisition, including the acquisition of substantially all 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 of several
companies or lines of business that previously were acquired by us or in which
we internally invested, at a significant net loss.

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

The following table provides
information about our purchases during the quarter ended March 31, 2011 of
equity securities that are registered by us pursuant to Section 12 of the
Securities Exchange Act of 1934.

|                                      |  |                                   |   |                               |  |                                                                                        |  |                                                                                                          |   |  |   |     | 
|------------------------------------- |  | --------------------------------- | - | ----------------------------- |  | -------------------------------------------------------------------------------------- |  | -------------------------------------------------------------------------------------------------------- | - |  | - | --- | 
|Period                                |  | Total number of
 shares purchased |   | Average price
 paid per share |  | Total number ofshares purchased as
 part of publicly
 announced
 plans or programs (1) |  | Approximate dollarvalue of shares that
 may yet be purchased
 under the plans or
 programs (in millions) |  
|                                      |  |                                   |   |                               |  |                                                                                        |  |                                                                                                          |  
|                                      |  |                                   |   |                               |  |                                                                                        |  |                                                                                                          |   |  |   |     | 
|January 1, 2011 - January
 31, 2011   |  |                                   |  |                               |  | n/a                                                                                    |  |                                                                                                          |  |  | $ | 5.0 | 
|February 1, 2011 - February
 28, 2011 |  |                                   |  |                               |  | n/a                                                                                    |  |                                                                                                          |  |  | $ | 5.0 | 
|March 1, 2011 - March 31,
 2011       |  |                                   |  |                               |  | n/a                                                                                    |  |                                                                                                          |  |  | $ | 5.0 | 

| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (1) | In August 2007, our Board
 of Directors authorized the repurchase of up to $25.0 million of our
 outstanding common stock. During the three months ended March 31, 2011, 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.

29

---



Item 6. Exhibits

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

SIGNATURE

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

| |                                                   | 
| | ------------------------------------------------- | 
| | Zygo
 Corporation                                 | 
| |                                                   | 
| | (Registrant)                                      | 
| |                                                   | 
| | /s/ Chris L. Koliopoulos                          | 
| |                                                   | 
| | Chris L. Koliopoulos                              | 
| | Chairman, President, and
 Chief Executive Officer | 
| |                                                   | 
| | /s/ John P. Jordan                                | 
| |                                                   | 
| | John P. Jordan                                    | 
| | Vice President and Chief
 Financial Officer       | 

Date: May 10, 2011

30

---



EXHIBIT INDEX

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

---