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, 2006
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.

o  YES   x  NO

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.

Large accelerated filer o Accelerated filer x Non-accelerated filer 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.

18,107,076 shares of Common Stock, $.10 Par Value, at June 19, 2006

EXPLANATORY NOTE

Zygo Corporation (“ZYGO,” “we,” “us,” “our,” or “Company”) has restated our previously issued consolidated financial statements for fiscal years 2005, 2004, and 2003 and our interim consolidated financial statements for the first and second quarters of fiscal 2006 (“Restatement”), because of inadvertent accounting errors in the consolidation of our intercompany revenues from certain of our foreign operations for those periods. Further information on the adjustments can be found in Note 2, “Restatement of Financial Statements,” to the accompanying consolidated financial statements

This Quarterly Report on Form 10-Q (“Form 10-Q”) for the quarterly period ended March 31, 2006 reflects restatements of the Company’s consolidated statements of operations for the three- and nine-month periods ended March 31, 2005 and cash flows for the nine-month period ended March 31, 2005 and the notes related thereto. For a more detailed description of the Restatement, see Note 2, “Restatement of Financial Statements,” to the accompanying consolidated financial statements and the section entitled “Restatement” in Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in this Form 10-Q.

The Company has not amended and does not intend to amend its previously filed Quarterly Reports on Form 10-Q for the periods affected by the Restatement prior to June 30, 2005. For this reason, the consolidated financial statements and related financial information for the affected periods contained in such reports should no longer be relied upon.

2

FORWARD LOOKING STATEMENTS

All statements other than statements of historical fact included in this Form 10-Q Quarterly Report regarding our financial position, business strategy, plans, anticipated growth rates, and objectives of management for future operations (as well as these factors as they may apply to our customers, suppliers, and others with whom we have critical business relationships) are forward-looking statements. Forward-looking statements are intended to provide management’s current expectations or plans for the future operating and financial performance based upon information currently available and assumptions currently believed to be valid. Forward-looking statements can be identified by the use of words such as “anticipate,” “believe,” “estimate,” “expect,” “intend,” “plans,” “strategy,” “project,” and other words of similar meaning in connection with a discussion of future operating or financial performance. Actual results could differ materially from those contemplated by the forward-looking statements as a result of certain factors. Among the important factors that could cause actual events to differ materially from those in the forward-looking statements are fluctuations in capital spending of our customers, fluctuations in net sales to our major customer, manufacturing and supplier risks, dependence on and timing of new product development, rapid technological and market change, risks in international operations, dependence on proprietary technology and key personnel, length of the sales cycle, environmental regulations, and stock price fluctuations. Further information on potential factors that could affect our business is described in our reports on file with the Securities and Exchange Commission, including our Form 10-K, as amended, for the fiscal year ended June 30, 2005.

3

PART I - Financial Information

Item 1. Financial Statements

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

	Three Months Ended March 31,						Nine Months Ended March 31,
	2006			2005			2006			2005
				(Restated)						(Restated)
Net sales
Products	$	37,861		$	27,975		$	106,226		$	87,018
Development services		5,187			5,442			14,759			9,614
		43,048			33,417			120,985			96,632
Cost of goods sold
Products		22,940			16,769			63,577			52,979
Development services		3,661			3,745			10,616			6,766
		26,601			20,514			74,193			59,745
Gross profit		16,447			12,903			46,792			36,887
Selling, general, and administrative expenses		7,982			5,498			22,509			16,880
Research, development, and engineering expenses		3,939			3,809			10,907			10,689
Operating profit		4,526			3,596			13,376			9,318
Other income
Interest income		646			189			1,502			543
Miscellaneous income (expense), net		(10	)		(134	)		169			32
Total other income		636			55			1,671			575
Earnings from continuing operations before income taxes and minority interest		5,162			3,651			15,047			9,893
Income tax expense		(961	)		(1,103	)		(4,463	)		(3,288	)
Minority interest		(104	)		(287	)		(614	)		(673	)
Earnings from continuing operations		4,097			2,261			9,970			5,932
Discontinued TeraOptix operations, net of tax		—			(100	)		—			(210	)
Charges and adjustments on the disposal of TeraOptix, net of tax		—			11			—			(107	)
Loss from discontinued operations		—			(89	)		—			(317	)
Net earnings	$	4,097		$	2,172		$	9,970		$	5,615
Basic - Earnings (loss) per share:
Continuing operations	$	0.23		$	0.12		$	0.55		$	0.33
Discontinued operations		—			—			—			(0.02	)
Net earnings	$	0.23		$	0.12		$	0.55		$	0.31
Diluted - Earnings (loss) per share:
Continuing operations	$	0.22		$	0.12		$	0.54		$	0.33
Discontinued operations		—			—			—			(0.02	)
Net earnings	$	0.22		$	0.12		$	0.54		$	0.31
Weighted average shares outstanding:
Basic shares		18,069			17,974			18,037			17,942
Diluted shares		18,475			18,226			18,318			18,140

See accompanying notes to consolidated financial statements.

4

CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(Thousands of dollars, except share amounts)

	March 31, 2006			June 30, 2005
Assets
Current assets:
Cash and cash equivalents	$	16,939		$	20,949
Marketable securities		23,331			17,242
Receivables, net of allowance for doubtful accounts of $650 and $663, respectively		26,201			28,124
Inventories		37,318			33,727
Prepaid expenses		1,325			2,126
Deferred income taxes		9,549			8,895
Total current assets		114,663			111,063
Marketable securities		22,815			18,711
Property, plant, and equipment, net		31,567			31,420
Deferred income taxes		18,868			22,333
Intangible assets, net		5,787			5,638
Other assets		798			1,017
Total assets	$	194,498		$	190,182
Liabilities and Stockholders’ Equity
Current liabilities:
Payables	$	12,308		$	13,510
Accrued progress payments		14,516			21,713
Accrued salaries and wages		6,507			6,220
Other accrued liabilities		4,040			4,731
Income taxes payable		1,971			1,510
Total current liabilities		39,342			47,684
Other long-term liabilities		104			96
Minority interest		1,242			1,249
Commitments and contingencies
Stockholders’ equity:
Common Stock, $.10 par value per share:
40,000,000 shares authorized;
18,540,963 shares issued (18,423,026 at June 30, 2005);
18,093,758 shares outstanding (17,975,821 at June 30, 2005)		1,854			1,842
Additional paid-in capital		144,800			142,111
Retained earnings		12,537			2,567
Accumulated other comprehensive income (loss):
Currency translation effects		(116	)		(112	)
Net unrealized gain on marketable securities		22			32
		159,097			146,440
Less treasury stock, at cost (447,205 shares)		5,287			5,287
Total stockholders’ equity		153,810			141,153
Total liabilities and stockholders’ equity	$	194,498		$	190,182

See accompanying notes to consolidated financial statements.

5

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

	Nine Months Ended March 31,
	2006			2005
				(Restated)
Cash provided by operating activities:
Net earnings	$	9,970		$	5,615
Adjustments to reconcile net earnings to cash provided by operating activities:
Loss from discontinued operations		—			317
Depreciation and amortization		4,608			4,379
Deferred income taxes		2,811			2,087
Compensation cost related to share-based payments arrangements		1,389			—
Excess tax benefits from share-based payment arrangements		(120	)		—
Minority interest		614			673
Other, net		119			133
Changes in operating accounts:
Receivables		2,094			(1,705	)
Inventories		(3,491	)		(11,903	)
Prepaid expenses		801			(208	)
Accounts payable, accrued expenses, and taxes payable		(8,346	)		6,580
Net cash provided by continuing operations		10,449			5,968
Net cash used for discontinued operations		—			(420	)
Net cash provided by operating activities		10,449			5,548
Cash used for investing activities:
Additions to property, plant, and equipment, net		(4,501	)		(7,718	)
Purchase of marketable securities		(25,408	)		(4,763	)
Additions to intangibles and other assets		(460	)		(868	)
Proceeds from the maturity of marketable securities		15,100			4,325
Net cash used for investing activities		(15,269	)		(9,024	)
Net cash provided by discontinued operations		—			1,918
Net cash used for investing activities		(15,269	)		(7,106	)
Cash provided by financing activities:
Employee stock purchase		492			677
Exercise of employee stock options		820			212
Excess tax benefits from share-based payment arangements		120			—
Dividend payment to minority interest		(622	)		—
Net cash provided by financing activities		810			889
Net decrease in cash and cash equivalents		(4,010	)		(669	)
Cash and cash equivalents, beginning of period		20,949			17,462
Cash and cash equivalents, end of period	$	16,939		$	16,793

See accompanying notes to consolidated financial statements.

6

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

NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation and Presentation

Zygo Corporation is a worldwide developer and supplier of high performance metrology instruments, high precision optics, optical assemblies, and automation for the semiconductor and industrial markets. The accompanying consolidated financial statements include the accounts of Zygo Corporation and its subsidiaries (“ZYGO,” “we,” “us,” “our” or “Company”). All material transactions and accounts with the subsidiaries have been eliminated from the consolidated financial statements. The results of operations for the three and nine months ended March 31, 2006 are not necessarily indicative of the results to be expected for the full fiscal year.

The Consolidated Balance Sheet at March 31, 2006, the Consolidated Statements of Operations for the three and nine months ended March 31, 2006 and 2005, and the Consolidated Statements of Cash Flows for the nine months ended March 31, 2006 and 2005 are unaudited but, in management’s opinion, include all adjustments, consisting only of normal recurring accruals, necessary for a fair presentation of the results of the interim periods. The accompanying consolidated financial statements should be read in conjunction with the consolidated financial statements and notes included in our June 30, 2005 Annual Report on Form 10-K, as amended, including items incorporated by reference therein.

Earnings Per Share

Basic and diluted earnings per share are calculated in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 128, “Earnings Per Share.”

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

	Three Months Ended March 31,				Nine Months Ended March 31,
	2006		2005		2006		2005
Basic weighted average shares outstanding		18,068,637		17,973,834		18,037,323		17,942,028
Dilutive effect of stock options and restricted shares		406,137		252,156		280,753		197,737
Diluted weighted average shares outstanding		18,474,774		18,225,990		18,318,076		18,139,765

Share-Based Payments

In December 2004, the Financial Accounting Standards Board (“FASB”) issued SFAS 123(R), “Share-Based Payment (as amended).” SFAS No. 123(R) eliminates the alternative to use the intrinsic value method of accounting that was provided in SFAS No. 123, which generally resulted in no compensation expense recorded in the financial statements related to the issuance of equity awards to employees and directors. SFAS No. 123(R) requires that the cost resulting from all share-based payment transactions be recognized in the financial statements. SFAS No. 123(R) establishes fair value as the measurement objective in accounting for share-based payment arrangements and requires all companies to apply a fair-value-based measurement method in accounting generally for all share-based payment transactions with employees. SFAS 123(R) does not require the recording of compensation expense in periods prior to the date of adoption.

On July 1, 2005, we adopted SFAS No. 123(R) using a modified prospective method resulting in the recognition of share-based compensation expense for the three and nine months ended March 31, 2006 of $128 and $892, net of related tax expense of $71 and $497, respectively. Under this application, we are required to record compensation expense for all awards granted after the date of adoption and for the unvested portion of previously granted awards that remain outstanding at the date of adoption. In addition, we made changes to our employee stock purchase plan for periods beginning after July 1, 2005, which rendered the plan non-compensatory in accordance with SFAS No. 123(R).

7

Prior to the adoption of SFAS No. 123(R), we applied Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees,” and related interpretations in accounting for our plans. The following table details the effect on net earnings and earnings per share had compensation expense for the employee share-based awards been recorded in the three and nine months ended March 31, 2005 based on the fair value method under SFAS No. 123.

	Three Months Ended March 31, 2005			Nine Months Ended March 31, 2005
		(Restated)			(Restated)
Net earnings, as reported	$	2,172		$	5,615
Deduct: Total stock-based compensation expense determined under fair value based method, net of related tax effects		(474	)		(2,110	)
Pro forma net earnings	$	1,698		$	3,505
Earnings per share:
Basic - as reported	$	0.12		$	0.31
Basic - pro forma	$	0.09		$	0.19
Diluted - as reported	$	0.12		$	0.31
Diluted - pro forma	$	0.09		$	0.19

Share Based Compensation Plans

Zygo has two share-based compensation plans, which are described hereafter. The Zygo Corporation 2002 Equity Incentive Plan (“2002 Plan”) permits the granting of stock options to purchase shares of common stock and the granting of restricted stock up to a total of 1,500,000 shares. The exercise price per share of common stock covered by an option may not be less than the par value per share on the date of grant, and in the case of an incentive stock option, the exercise price may not be less than the market value per share on the date of grant. These options generally vest over a four year period at a rate of 25% each year. Generally, restricted stock awards have 50% of their restrictions lapse after three years and the remaining 50% lapse after four years. The 2002 Plan will expire on August 27, 2012. Pursuant to the terms of the 2002 Plan, the Board of Directors may also amend the 2002 Plan to authorize the grant of other types of equity-based awards, without further action by our stockholders. Options issued to non-employee directors are now issued under this plan. Non-employee directors are granted fully exercisable options to purchase 6,000 shares of common stock on an annual basis and each new non-employee director is granted fully exercisable options to purchase 12,000 shares of common stock on his or her first day of service, in all instances at the market value per share on the date of grant.

The Zygo Corporation Amended and Restated Non-Employee Director Stock Option Plan (“Director Plan”) permits the granting of non-qualified options to purchase a total of 620,000 shares (adjusted for splits) of common stock at prices not less than the market value of the stock on the date of grant. Under the terms of the Director Plan, as amended on September 24, 1999, each new non-employee director (other than a person who was previously an employee of ZYGO or any of our subsidiaries) was granted an option to purchase 8,000 shares of common stock, generally, on his or her first day of service as a non-employee director; and each other non-employee director was granted an option to purchase 3,000 shares of common stock on an annual basis. All options were fully exercisable on the date of grant and had a 10-year term. The Director Plan, as amended, will expire on November 17, 2009. The Company ceased granting options under this plan in fiscal 2003 and does not intend to grant further options under the Director Plan.

8

We use the Black-Scholes option-pricing model to calculate the fair value of share based awards. 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 nine months ended March 31, 2006 and 2005 was $5.41 and $5.86, respectively. The table below indicates the key assumptions used in the option valuation calculations for options granted in the nine months ended March 31, 2006 and 2005 (no options granted in the three months ended March 31, 2006 and 2005), and a discussion of our methodology for developing each of the assumptions used in the valuation model:

	Nine Months Ended March 31,
	2006			2005
Term		4.1 Years			4.5 Years
Volatility		52.9	%		71.0	%
Dividend Yield		0.0	%		0.0	%
Risk-free interest rate		3.9%-4.4	%		3.2%-3.5	%
Forfeiture rate		10.6	%		4.0	%

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

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

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

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

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

The following table summarizes information about our stock options granted under our share-based compensation plans for the nine months ended March 31, 2006. Included in the information below are outstanding options from the Zygo Corporation Amended and Restated Non-Qualified Stock Option Plan which expired in fiscal 2003, to the extent the options remain available for exercise.

	Number of Options			Weighted Average Exercise Price		Weighted Average Remaining Contractual life		Aggregate Intrinsic Value (in thousands)
Balance, July 1, 2005		2,069,175		$	26.95
Granted		186,000		$	11.80
Exercised		(71,619	)	$	8.92
Forfeited		(87,724	)	$	34.12
Options outstanding, March 31, 2006		2,095,832		$	25.92		6.15	$	8,854
Options exercisable, March 31, 2006		1,586,754		$	31.14		5.55	$	5,435

As of March 31, 2006 there was $2,311 of total unrecognized compensation cost related to stock options. These costs are expected to be recognized over a weighted average period of 2.1 years.

The total intrinsic value of stock options exercised was $544 and the total fair value of stock awards vested was $1,858 during the nine months ended March 31, 2006.

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Cash received from stock option exercises for the nine months ended March 31, 2006 was $639. The income tax benefits from share based arrangements totaled $196, all of which were attributable to stock option exercises.

The following table summarizes information about restricted stock awards granted under share-based compensation plans for the nine months ended March 31, 2006:

	Shares			Weighted Average Grant- Date Fair Value
Non Vested Balance at July 1, 2005		—			$	—
Granted		154,800			$	11.46
Vested		—			$	—
Forfeited		(5,700	)		$	10.40
Non Vested Balance at March 31, 2006		149,100			$	11.50

As of March 31, 2006 there was $1,183 of total unrecognized compensation costs related to restricted stock awards. These costs are expected to be recognized over a weighted average period of 4.0 years.

At March 31, 2006 an aggregate of 541,062 shares remained available for future grants under our share-based compensation plans, which cover stock awards and stock options. The Company issues shares to satisfy stock option exercises and restricted stock awards.

Comprehensive Income

Our total comprehensive income was as follows:

	Three Months Ended March 31,						Nine Months Ended March 31,
	2006			2005			2006			2005
				(Restated)						(Restated)
Net earnings	$	4,097		$	2,172		$	9,970		$	5,615
Unrealized loss on marketable securities, net of tax		(3	)		(5	)		(10	)		(25	)
Foreign currency translation effect		114			(410	)		(4	)		151
Comprehensive income	$	4,208		$	1,757		$	9,956		$	5,741

Inventories

Inventories are stated at the lower of cost (determined on a first-in, first-out basis) or market. At March 31, 2006 and June 30, 2005, inventories were as follows:

	March 31, 2006		June 30, 2005
Raw materials and manufactured parts	$	15,980	$	14,320
Work in process		16,005		15,927
Finished goods		5,333		3,480
	$	37,318	$	33,727

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Property, Plant, and Equipment

Property, plant, and equipment are stated at cost. Maintenance and repairs are charged to expense as incurred. Management evaluates, on an ongoing basis, the carrying value of our property, plant, and equipment and makes adjustments when impairments are identified. Depreciation is based on the estimated useful lives of the various classes of assets and is computed using the straight-line method. At March 31, 2006 and June 30, 2005, property, plant, and equipment were as follows:

	March 31, 2006			June 30, 2005			Estimated Useful Life (Years)
Land	$	615		$	615			—
Building and improvements		16,086			15,759			15–40
Machinery, equipment, and office furniture		48,913			45,501			3–8
Leasehold improvements		770			715			1–5
Construction in progress		2,756			2,997			—
		69,140			65,587
Accumulated depreciation		(37,573	)		(34,167	)
	$	31,567		$	31,420

Depreciation expense for the three months ended March 31, 2006 and 2005 was $1,442 and $1,207, respectively. Depreciation expense for the nine months ended March 31, 2006 and 2005 was $4,243 and $3,964, respectively.

Intangible Assets

Intangible assets include patents, trademarks, and license agreements. The cost of intangible assets is amortized on a straight-line basis over estimated useful lives ranging from 4-20 years. Intangible assets, at cost, at March 31, 2006 and June 30, 2005 were as follows:

	March 31, 2006			June 30, 2005
Patents and trademarks	$	6,817		$	6,556
License agreements		1,350			1,350
		8,167			7,906
Accumulated amortization		(2,380	)		(2,268	)
Total	$	5,787		$	5,638

Intangible amortization expense was $92 and $146 for the three months ended March 31, 2006 and 2005, respectively, and $260 and $370 for the nine months ended March 31, 2006 and 2005, respectively. Amortization expense related to certain intangible assets is included in cost of goods sold in the Consolidated Statements of Operations.

Warranty

A limited warranty is provided on our products for periods ranging from 3 to 12 months and allowances for estimated warranty costs are recorded during the period of sale. The determination of such allowances requires management to make estimates of product return rates and expected costs to repair or replace products under warranty. If actual return rates or repair and replacement costs, or both, differ significantly from management’s estimates, adjustments to the expense may be required.

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

	Nine Months Ended March 31,
	2006			2005
Beginning balance	$	1,395		$	1,486
Reductions for payments made		(937	)		(917	)
Changes in accruals related to pre-existing warranties		326			(40	)
Changes in accruals related to warranties issued in the current period		955			520
Ending balance	$	1,739		$	1,049

Supplemental Cash Flow Information

Income tax payments amounted to $921 and $482 for the nine months ended March 31, 2006 and 2005, respectively.

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NOTE 2: RESTATED FINANCIAL STATEMENTS

We have restated our consolidated financial statements for the third quarter of fiscal 2005 for corrections in the accounting of intercompany transactions from certain of our foreign operations. In addition, certain disclosures in Notes 1, 5, and 6 to the consolidated financial statements contained in this report are being restated to reflect the corrections. The corrections are the result of our failure to identify and eliminate certain intercompany revenues attributed to our Singapore and Taiwan offices, which resulted in our overstating reported revenues, from fiscal 2001 through the second quarter of fiscal 2006. The tax effects on the corrections and other minor adjustments have also been reflected in these restatements.

The impact of the corrections on the consolidated statements of operations is shown in the accompanying tables. Adjustments to the statement of operations for the three and nine months ended March 31, 2005 primarily represent adjustments to sales to correct the overstatement of revenues and failing to properly eliminate intercompany revenues. Income tax expense was adjusted to reflect the income tax effects of the adjustments noted for overstating revenues. In addition, the statements of operations reflect minor adjustments to correct other miscellaneous items identified in the course of the review of the intercompany transactions, none of which were significant individually or in the aggregate.

12

The following table presents the effect of the Restatement on the consolidated statement of operations for the three months ended March 31, 2005:

	As previously reported			Adjustments			As restated
Net sales
Products	$	28,245		$	(270	)	$	27,975
Development services		5,442			—			5,442
		33,687			(270	)		33,417
Cost of goods sold
Products		16,812			(43	)		16,769
Development services		3,745			—			3,745
		20,557			(43	)		20,514
Gross profit		13,130			(227	)		12,903
Selling, general, and administrative expenses		5,498			—			5,498
Research, development and engineering expenses		3,809			—			3,809
Operating profit		3,823			(227	)		3,596
Other income (expense)
Interest income		189			—			189
Miscellaneous expense, net		(133	)		(1	)		(134	)
Total other income		56			(1	)		55
Earnings from continuing operations before income taxes and minority interest		3,879			(228	)		3,651
Income tax expense		(1,217	)		114			(1,103	)
Minority interest		(287	)		—			(287	)
Earnings from continuing operations		2,375			(114	)		2,261
Discontinued TeraOptix operations, net of tax		(100	)		—			(100	)
Charges related to the disposal of TeraOptix, net of tax		11			—			11
Loss from discontinued operations		(89	)		—			(89	)
Net earnings	$	2,286		$	(114	)	$	2,172
Basic - Earnings (loss) per share:
Continuing operations	$	0.13		$	(0.01	)	$	0.12
Discontinued operations		—			—			—
Net earnings	$	0.13		$	(0.01	)	$	0.12
Diluted - Earnings (loss) per share:
Continuing operations	$	0.13		$	(0.01	)	$	0.12
Discontinued operations		—			—			—
Net earnings	$	0.13		$	(0.01	)	$	0.12
Weighted average number of shares:
Basic		17,974			17,974			17,974
Diluted		18,226			18,226			18,226

13

The following table presents the effect of the Restatement on the consolidated statement of operations for the nine months ended March 31, 2005:

	As previously reported			Adjustments			As restated
Net sales
Products	$	87,658		$	(640	)	$	87,018
Development services		9,614			—			9,614
		97,272			(640	)		96,632
Cost of goods sold
Products		53,005			(26	)		52,979
Development services		6,766			—			6,766
		59,771			(26	)		59,745
Gross profit		37,501			(614	)		36,887
Selling, general, and administrative expenses		16,880			—			16,880
Research, development and engineering expenses		10,689			—			10,689
Operating profit		9,932			(614	)		9,318
Other income
Interest income		543			—			543
Miscellaneous income, net		81			(49	)		32
Total other income		624			(49	)		575
Earnings from continuing operations before income taxes and minority interest		10,556			(663	)		9,893
Income tax expense		(3,621	)		333			(3,288	)
Minority interest		(684	)		11			(673	)
Earnings from continuing operations		6,251			(319	)		5,932
Discontinued TeraOptix operations, net of tax		(210	)		—			(210	)
Charges related to the disposal of TeraOptix, net of tax		(107	)		—			(107	)
Loss from discontinued operations		(317	)		—			(317	)
Net earnings	$	5,934		$	(319	)	$	5,615
Basic - Earnings (loss) per share:
Continuing operations	$	0.35		$	(0.02	)	$	0.33
Discontinued operations		(0.02	)		—			(0.02	)
Net earnings	$	0.33		$	(0.02	)	$	0.31
Diluted - Earnings (loss) per share:
Continuing operations	$	0.35		$	(0.02	)	$	0.33
Discontinued operations		(0.02	)		—			(0.02	)
Net earnings	$	0.33		$	(0.02	)	$	0.31
Weighted average number of shares:
Basic		17,942			17,942			17,942
Diluted		18,140			18,140			18,140

14

NOTE 3: RECENT ACCOUNTING PRONOUNCEMENTS

In May 2005, the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections,” which primarily changes the requirements for the accounting for and reporting of a change in accounting principle for all voluntary changes or when an accounting pronouncement does not include specific transition provisions. This applies to any future accounting changes beginning in fiscal 2007.

In November 2005, the FASB issued FASB Staff Positions (“FSP”) SFAS 115-1 and SFAS 124-1, “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments.” FSP SFAS 115-1 and SFAS 124-1 address the determination as to when an investment is considered impaired, whether that impairment is other than temporary, and the measurement of an impairment loss. They also include accounting considerations subsequent to the recognition of an other-than-temporary impairment and require certain disclosures about unrealized losses that have not been recognized as other-than-temporary impairments. We will be adopting FSP SFAS 115-1 and SFAS 124-1 beginning in fiscal 2007 and expect the effect on our consolidated financial statements to be immaterial.

In February 2006, the FASB issued SFAS No. 155, “Accounting for Certain Hybrid Financial Instruments - an amendment of FASB Statements No. 133 and 140” which is effective for fiscal years beginning after September 15, 2006. The statement was issued to clarify the application of FASB Statement No. 133 to beneficial interests in securitized financial assets and to improve the consistency of accounting for similar financial instruments, regardless of the form of the instruments. Currently, we do not invest in hybrid instruments or securitized financial assets and would expect any effect on our consolidated financial statements in the future to be immaterial.

NOTE 4: DIVESTITURES AND DISCONTINUED OPERATIONS

In September 2002, we committed to a planned disposition of our TeraOptix business unit (“TeraOptix”). We discontinued all operations by January 2003. The sale of the facility was completed in March 2005 for $1,918, net of selling expenses.

The results and loss on disposal of the TeraOptix business unit have been presented as separate line items in the accompanying Consolidated Statements of Operations as “Discontinued TeraOptix operations, net of tax,” for all periods presented. The components of cash flow from discontinued operations are as follows:

	For the nine months ended March 31, 2005
Cash flow from operating activities from discontinued operations:
Loss from discontinued operations	$	(317	)
Loss on sale and impairment of assets		94
Deferred income taxes		(178	)
Other, net		(19	)
Net cash used for operating activities from discontinued operations		(420	)
Net cash provided by investing activities		1,918
Net cash provided by discontinued operations	$	1,498

There was no cash flow impact from discontinued operations in fiscal 2006.

15

NOTE 5: SEGMENT INFORMATION

We operate in two principal business segments globally: Semiconductor and Industrial. The segment data is presented below in a manner consistent with management’s internal measurement of the business.

	Three Months Ended March 31,						Nine Months Ended March 31,
	2006			2005			2006			2005
				(Restated)						(Restated)
Semiconductor
Sales	$	25,534		$	18,463		$	68,182		$	52,722
Gross profit		10,731			7,023			27,242			20,495
Gross profit as a % of sales		42	%		38	%		40	%		39	%
Industrial
Sales	$	17,514		$	14,954		$	52,803		$	43,910
Gross profit		5,716			5,880			19,550			16,392
Gross profit as a % of sales		33	%		39	%		37	%		37	%
Total
Sales	$	43,048		$	33,417		$	120,985		$	96,632
Gross profit		16,447			12,903			46,792			36,887
Gross profit as a % of sales		38	%		39	%		39	%		38	%

ZYGO’s Metrology, which includes development services, Optical Systems Solutions, and Precision Positioning Systems (“PPS”) product lines are sold into its two business segments. Supplementary sales and gross profit data by product line is as follows:

	Three Months Ended March 31,						Nine Months Ended March 31,
	2006			2005			2006			2005
				(Restated)						(Restated)
Metrology
Sales	$	19,862		$	17,511		$	60,168		$	43,996
Gross profit		8,379			8,227			26,705			20,035
Gross profit as a % of sales		42	%		47	%		44	%		46	%
Optical Systems Solutions
Sales	$	11,482		$	9,202		$	30,047		$	26,525
Gross profit		2,681			1,707			6,212			4,839
Gross profit as a % of sales		23	%		19	%		21	%		18	%
PPS
Sales	$	11,704		$	6,704		$	30,770		$	26,111
Gross profit		5,387			2,969			13,875			12,013
Gross profit as a % of sales		46	%		44	%		45	%		46	%
Total
Sales	$	43,048		$	33,417		$	120,985		$	96,632
Gross profit		16,447			12,903			46,792			36,887
Gross profit as a % of sales		38	%		39	%		39	%		38	%

Substantially all of our operating expenses, assets, and depreciation and amortization are U.S. based. Sales by geographic area were as follows:

	Three Months Ended March 31,				Nine Months Ended March 31,
	2006		2005		2006		2005
			(Restated)				(Restated)
Domestic	$	14,400	$	12,742	$	41,385	$	32,774
Europe		2,966		4,217		10,606		11,719
Japan		22,156		14,929		55,698		44,379
Pacific Rim		3,526		1,529		13,296		7,760
Total	$	43,048	$	33,417	$	120,985	$	96,632

Separate financial information by segment for total assets, capital expenditures, and depreciation and amortization is not available and is not evaluated by the chief operating decision-maker.

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NOTE 6: RELATED PARTY TRANSACTIONS AND MAJOR CUSTOMER

Sales to Canon Inc., one of our significant stockholders, and Canon Sales Co., Inc., a distributor of certain of our products in Japan and a subsidiary of Canon Inc., amounted to $16,403 (38% of net sales) and $44,385 (37% of net sales) for the three months and nine months ended March 31, 2006, as compared with $12,839 (38% of net sales) and $38,189 (40% of net sales) for the comparable prior year periods. These sales include revenues generated from the development agreements referenced below. Selling prices of products sold to Canon Inc. and Canon Sales Co., Inc. are based, generally, on the terms customarily given to distributors. Revenues generated from the development agreements are recorded on a cost-plus basis. At March 31, 2006 and June 30, 2005, there were, in the aggregate, $5,141 and $3,951, respectively, of trade accounts receivable from Canon Inc. and Canon Sales Co., Inc.

In September 2002, we entered into a contract with Canon Inc. related to the development of certain interferometers. In March 2004, we signed a preliminary agreement to begin further add-on work; the definitive agreement for this additional work was signed in December 2004. In February 2005, we entered into two additional agreements with Canon Inc. related to the development of prototype production tools and accessories. During the three and nine months ended March 31, 2006, we recognized revenue in the semiconductor segment of $5,187 and $14,759, respectively, for these contracts compared with $5,442 and $9,615, respectively, for the comparable prior year periods. In addition, Canon Inc. paid us progress payments in accordance with the terms of the development contract. The total progress payments related to the development contract remaining at March 31, 2006 were $5,149 and $11,287 at June 30, 2005.

NOTE 7: HEDGING ACTIVITIES

During the third quarter of fiscal 2005, we began entering into foreign currency forward contracts to reduce the impact of adverse fluctuations on earnings associated with foreign currency exchange rate changes. We do not enter into any derivative transactions for speculative purposes. These contracts are not designated as cash flow, fair value, or net investment hedges under SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” as amended, and therefore, are marked-to-market with changes in fair value recorded in the Statement of Operations. These contracts are entered into for periods consistent with the currency transaction exposures, generally three to six months. Any gains and losses on the fair value of these contracts would largely offset corresponding losses and gains on the underlying transactions.

As of March 31, 2006, we had six foreign currency forward contracts (yen) outstanding aggregating to $5,700. For the three months ended March 31, 2006, we recognized a gain from foreign currency forward contracts of $14. For the nine months ended March 31, 2006, we recognized a net loss of $2. These gains and losses are included in other income in the Consolidated Statements of Operations. These gains and losses are substantially offset by foreign exchange losses and gains on intercompany balances recorded by our subsidiaries. We did not enter into any derivative instruments to hedge foreign currency exposure prior to the third quarter of fiscal 2005.

NOTE 8: INCOME TAXES

Income tax expense for both the three and nine months ended March 31, 2006 was favorably impacted by the Company’s redetermination of deductions attributable to foreign trading income, also referred to as an Extraterritorial Income Exclusion (“EIE”), related to the current fiscal year and to fiscal 2004. The impact of the EIE reduced the effective tax rate for the three months ended March 31, 2006 to 19% from 30% in the prior year period. The tax rate for the nine months ended March 31, 2006 decreased to 30% from 33% in the comparable prior year period. The EIE had the effect of lowering the estimated annual effective tax rate for the first nine months of fiscal 2006 from 38% to 35%. An additional EIE, which was related to fiscal 2004, further reduced the tax rate from 35% to 30%. Income tax expense for the nine months ended March 31, 2006 was also affected by increased income in foreign jurisdictions, which operate in higher tax jurisdictions and an increase in tax upon additional monies repatriated from these foreign operations, which were partially offset by the release of tax reserves in a foreign jurisdiction that occurred in the second quarter.

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

RESULTS OF OPERATIONS

Introduction

Zygo Corporation designs, develops, and manufactures ultra-high precision measurement solutions and optical components and systems. ZYGO’s measurement solutions are designed to improve quality, increase productivity, and decrease the overall cost of manufacturing and product development for high-technology manufacturing processes. The Company’s optical component and systems products provide high-end solutions for laser fusion research, imaging systems, and measurement system components. We conduct the majority of our manufacturing in our 153,500 square foot facility in Middlefield, Connecticut.

We serve the semiconductor and industrial markets through our three core product lines: metrology, optical systems solutions, and precision positioning systems. Our semiconductor product offerings include OEM solutions and major technology development projects for the semiconductor capital equipment industry and direct supplied in-line automated yield improvement systems for both flat panel displays and advanced semiconductor packaging manufacturing. Our industrial market products serve the automotive, consumer electronics, defense/aerospace, and all markets other than semiconductor. Industrial market products include optical components, optical systems and measurement-based process control systems for defense, aerospace, and medical device customers and measurement-based process control and yield-enhancement systems for automotive and consumer electronics customers.

Our development services have produced a significant amount of our revenue over the past two years. In September 2002, we entered into a contract with Canon Inc. related to the development of certain interferometers. In March 2004, we signed a preliminary agreement to begin further add-on work; the definitive agreement for this additional work was signed in December 2004. In February 2005, we entered into two additional agreements with Canon Inc. related to the development of prototype production tools and accessories. During the three and nine months ended March 31, 2006, we recognized $5.2 million and $14.8 million, respectively, of revenue from these development services contracts as compared with $5.4 million and $9.6 million, respectively, in the prior year comparable periods. The development services contracts that were signed in fiscal 2005 were cost plus contracts. We currently expect the remaining revenues on those contracts to be approximately $7.5 million which should be recognized over the next three to four quarters. To the extent that total actual costs on the contracts may be less than currently anticipated, the resulting development services revenue could be less than the currently estimated value of the contract. Additionally, our period over period comparable sales in the future could be adversely affected if we do not expand our overall business sufficiently to offset the decline in development services revenue.

We achieved an order level for the third quarter of fiscal 2006 of $45.3 million as compared with $50.3 million for the second quarter of fiscal 2006 and $37.7 million for the third quarter of fiscal 2005. This order flow increased backlog at March 31, 2006 to $79.3 million. Orders in the semiconductor segment of $30.4 million increased $4.3 million, or 16%, as compared with the second quarter of fiscal 2006; and increased $6.8 million, or 29%, as compared with the third quarter of fiscal 2005. We continue to receive orders from the flat panel market of the semiconductor segment and expect orders from that market to continue for the immediate future. We also experienced an increase in lithography orders over the prior year period, which continued a strengthening in that market area over the last nine months. Orders in the industrial segment of $14.9 million decreased by $9.3 million, or 38%, as compared with the second quarter of fiscal 2006 but increased by $0.8 million, or 6%, as compared with the third quarter of fiscal 2005. The decrease in industrial orders from the second quarter of fiscal 2006 was primarily due to the large government orders received in the second quarter which were not expected to be repeated in this quarter.

Beginning in the first quarter of fiscal 2006, we are required to record the expense of share-based payment transactions. Under the modified prospective method, we were not required to restate the prior year financial statements or include in the current year any expenses related to stock option grants vested as of June 30, 2005. In the quarter ended March 31, 2006, operating income was reduced by $0.2 million for share-based payment compensation expense, which reduced our quarterly diluted earnings per share by $0.01. For the nine months ended March 31, 2006, operating income was reduced by $1.4 million for share-based payment compensation expense, which reduced our nine month diluted earnings per share by $0.05. The share-based compensation expense related to current outstanding stock options and restricted shares and to future issuances of stock options which are presently known to us is estimated to be approximately $0.4 million in the fourth quarter of fiscal 2006.

Restatement

We have restated our consolidated financial statements for the third quarter of fiscal 2005 for corrections in the accounting of intercompany transactions from certain of our foreign operations. The corrections are the result of our failure to identify and eliminate certain intercompany revenues attributed to our Singapore and Taiwan offices, which resulted in our overstating reported revenues, from fiscal 2001 through the second quarter of fiscal 2006. The tax effects on the

18

corrections and other minor adjustments have also been reflected in these restatements.

The restated financial statements do not affect our business outlook for future fiscal periods, nor impact our cash position or future cash flows from operations. The impact of the corrections on the consolidated balance sheets and consolidated financial statements of operations is shown in note 2 to our consolidated financial statements included in this Form 10-Q/A.

Net Sales

	Fiscal 2006					Fiscal 2005
(In millions)	Amount		Net Sales %			Amount		Net Sales %
						(Restated)		(Restated)
Quarter ended March 31
Semiconductor	$	20.3		47	%	$	13.0	39	%
Development Services		5.2		12	%		5.4	16	%
Total Semiconductor		25.5		59	%		18.4	55	%
Total Industrial		17.5		41	%		15.0	45	%
Total	$	43.0		100	%	$	33.4	100	%
Nine months ended March 31
Semiconductor	$	53.4		44	%	$	43.1	45	%
Development Services		14.8		12	%		9.6	10	%
Total Semiconductor		68.2		56	%		52.7	55	%
Total Industrial		52.8		44	%		43.9	45	%
Total	$	121.0		100	%	$	96.6	100	%

Net sales in the semiconductor segment increased 39% in the third quarter of fiscal 2006 as compared with the prior year. This increase was due primarily to an increase in lithography sales of $4.9 million and flat panel sales of $0.9 million. For the nine month period ended March 31, 2006, the semiconductor segment increased 29% as compared with the prior year period due to an increase in development services of $5.2 million, lithography sales $3.9 million, and flat panel sales of $2.7 million.

Net sales in the industrial segment increased by 17% in the third quarter of fiscal 2006 as compared with the prior year period primarily due to increased volume related to contract manufacturing and optical systems shipments. For the nine month period ended March 31, 2006, the industrial segment net sales increased 20% as compared with the prior year period due to increased volume related to contract manufacturing and optical systems assemblies of $5.4 million.

Sales in U.S. dollars for the three and nine months of fiscal 2006 were $34.3 million, or 80%, and $99.2, or 82%, respectively, of total net sales for the periods. For our sales which are based in foreign currency, we are exposed to foreign exchange fluctuations from the time customers are invoiced in foreign currency until collection occurs. Significant changes in the values of foreign currencies relative to the value of the U.S. dollar can impact the sales of our products in export markets, as would changes in the general economic conditions in those markets. Management believes the percentage of sales in foreign currencies may increase in the current year due to an increase in sales denominated in yen to Japanese customers. In the absence of a substantial increase in sales orders in currency other than U.S. dollars, we believe a 10% appreciation or depreciation of the U.S. dollar against the euro and yen would have an immaterial impact on our consolidated financial position and results of operations.

19

Gross Profit by Segment

	Fiscal 2006					Fiscal 2005
(In millions)	Amount		Gross Profit %			Amount		Gross Profit %
							(Restated)		(Restated)
Quarter ended March 31
Semiconductor	$	9.2		45	%	$	5.4		42	%
Developmental services		1.5		29	%		1.6		30	%
Total Semiconductor		10.7		42	%		7.0		38	%
Total Industrial		5.7		33	%		5.9		39	%
Total	$	16.4		38	%	$	12.9		39	%
Nine months ended March 31
Semiconductor	$	23.0		43	%	$	17.7		41	%
Developmental services		4.2		28	%		2.8		29	%
Total Semiconductor		27.2		40	%		20.5		39	%
Total Industrial		19.6		37	%		16.4		37	%
Total	$	46.8		39	%	$	36.9		38	%

Gross profit as a percentage of sales for the three and nine months of fiscal 2006 remained flat as compared to prior year periods primarily due to decreases in the industrial segment margins being offset by increases in the semiconductor segment margins. Industrial segment margins decreased due in part to manufacturing interruptions within the optical systems group. The overall semiconductor segment margins stayed relatively stable despite a decrease in development services margins. Margins on semiconductor product sales increased primarily due to improved factory performance but were also negatively impacted by two development tools that carried lower than planned margins. General factory costs, including warranty, factory efficiency costs, and inventory related costs, were lower than in the prior year.

Selling, General, and Administrative Expenses (“SG&A”)

	Fiscal 2006				Fiscal 2005
(In millions)	Amount		% of Sales		Amount		% of Sales
Quarter ended March 31	$	8.0	19	%	$	5.5	16	%
Nine months ended March 31	$	22.5	19	%	$	16.9	17	%

The third quarter increase in SG&A was primarily due to increased employee expenses, including management incentives of $1.3 million, increased selling expenses related to new market initiatives of $0.8 million, primarily related to the new offices in Korea, Taiwan, and mainland China, and share-based compensation expense of $0.1 million. For the nine months ended March 31, 2006, the increase in SG&A was due to increased employee expenses, including management incentives of $3.5 million, costs associated with increasing our presence in the Pacific Rim with the opening of new offices within the last year in Korea, Taiwan, and mainland China of $1.2 million, share-based compensation expense of $0.9 million, and increased selling and general expenses related to new initiatives in our west coast operations of $0.4 million.

20

Research, Development, and Engineering Expenses (“RD&E”)

	Fiscal 2006				Fiscal 2005
(In millions)	Amount		% of Sales		Amount		% of Sales
Quarter ended March 31	$	3.9	9	%	$	3.8	11	%
Nine months ended March 31	$	10.9	9	%	$	10.7	11	%

Their was a small increase in RD&E for the third quarter and first nine months of fiscal 2006 as compared with the prior year periods. In the third quarter of fiscal 2006 the increase in RD&E expenses was primarily due to the opening of our Oregon engineering and product development office earlier in the year. For the first nine months of fiscal 2006, RD&E expenses increased as compared with the prior year period due to the Oregon office. Additionally, RD&E expenses for the year were reduced by a reimbursement from a customer of $0.7 million for research costs incurred. Current year initiatives are focused in the semiconductor segment, most notably in the display and packaging markets, and include the opening of our Oregon office as mentioned above. Share-based compensation expense included in RD&E for the first nine months of fiscal 2006 was $0.2 million.

Income Tax Expense

	Fiscal 2006				Fiscal 2005
(In millions)	Amount		Tax Rate %		Amount		Tax Rate %
					(Restated)		(Restated)
Quarter ended March 31	$	1.0	19	%	$	1.1	30	%
Nine months ended March 31	$	4.5	30	%	$	3.3	33	%

Income tax expense for both the three and nine months ended March 31, 2006 was favorably impacted by the Company’s redetermination of deductions attributable to foreign trading income, also referred to as an Extraterritorial Income Exclusion (“EIE”), related to the current fiscal year and to fiscal 2004. The impact of the EIE reduced the effective tax rate for the three months ended March 31, 2006 to 19% from 30% in the prior year period. The tax rate for the nine months ended March 31, 2006 decreased to 30% from 33% in the comparable prior year period. The EIE had the effect of lowering the estimated annual effective tax rate for the first nine months of fiscal 2006 from 38% to 35%. An additional EIE, which was related to fiscal 2004, further reduced the tax rate from 35% to 30%. Income tax expense for the nine months ended March 31, 2006 was also affected by increased income in foreign jurisdictions, which operate in higher tax jurisdictions and an increase in tax upon additional monies repatriated from these foreign operations, which were partially offset by the release of tax reserves in a foreign jurisdiction that occurred in the second quarter.

RELATED PARTY TRANSACTIONS

Sales to Canon Inc., one of our significant stockholders, and Canon Sales Co., Inc., a distributor of certain of our products in Japan and a subsidiary of Canon Inc., amounted to $16.4 million (38% of net sales) and $44.4 million (37% of net sales) for the third quarter and nine months ended March 31, 2006, as compared with $12.8 million (38% of net sales) and $38.2 million (40% of net sales) for the comparable prior year periods. These sales include revenues generated from the development agreements referenced below. Selling prices of products sold to Canon Inc. and Canon Sales Co., Inc. are based, generally, on the terms customarily given to distributors. Revenues generated from the development agreements are recorded on a cost-plus basis. At March 31, 2006 and June 30, 2005, there were, in the aggregate, $5.1 million and $4.0 million, respectively, of trade accounts receivable from Canon Inc. and Canon Sales Co., Inc.

In September 2002, we entered into a contract with Canon Inc. related to the development of certain interferometers. In March 2004, we signed a preliminary agreement to begin further add-on work; the definitive agreement for this additional work was signed in December 2004. In February 2005, we entered into two additional agreements with Canon Inc. related to the development of prototype production tools and accessories. During the three and nine month ended March 31, 2006, we recognized revenue in the semiconductor segment of $5.2 million and $14.8 million, respectively, from these contracts as compared with $5.4 million and $9.6 million, respectively, for the comparable prior year periods. According to the terms of the agreements, we also receive progress payments during the course of the contract. As of March 31, 2006 and June 30, 2005, we received $5.1 million and $11.3 million, respectively, of progress payments in excess of services performed.

21

LIQUIDITY AND CAPITAL RESOURCES

At March 31, 2006, working capital was $75.3 million, an increase of $11.9 million from $63.4 million at June 30, 2005. We maintained cash, cash equivalents, and marketable securities at March 31, 2006 totaling $63.1 million, an increase of $6.2 million, from $56.9 million at June 30, 2005. Cash flow from operations contributed $10.4 million in the nine months ended March 31, 2006, with the benefit derived primarily from our results of operations of $10.0 million, which included non-cash expenses of $9.4 million, along with a decrease in our receivables of $2.1 million. Offsetting these incoming cash flows were an increase in inventories of $3.5 million and a decrease in accounts payable, accrued expenses, and taxes payable of $8.3 million.

Acquisitions of property, plant, and equipment totaled $1.5 million and $4.5 during the three and nine months ended March 31, 2006. Management believes that cash generated from operations, together with the liquidity provided by existing cash balances, will be sufficient to satisfy our liquidity requirements for the next 12 months.

CRITICAL ACCOUNTING POLICIES, SIGNIFICANT JUDGMENTS, AND ESTIMATES

The discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues, and expenses, and related disclosures at the date of our consolidated financial statements. On an on-going basis, management evaluates its estimates and judgments, including those related to bad debts, inventories, warranty obligations, income taxes, long-lived assets, and share-based payments. Management bases its estimates and judgments on historical experience and current market conditions and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. We consider certain accounting policies related to revenue recognition and allowance for doubtful accounts, inventory valuation, warranty costs, accounting for income taxes, valuation of long-lived assets, and valuation of share-based payments to be critical policies due to the estimates and judgments involved in each.

Revenue Recognition and Allowance for Doubtful Accounts

We recognize revenue based on guidance provided in SEC Staff Accounting Bulletin (“SAB”) No. 104, “Revenue Recognition” and in accordance with the Emerging Issues Task Force (“EITF”) Issue No. 00-21, “Revenue Arrangements with Multiple Deliverables.” We recognize revenue when persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, our price is fixed or determinable, and collectibility is reasonably assured. We recognize revenue on our standard products when title passes to the customer upon shipment. While our standard products generally require installation, the installation is considered a perfunctory performance obligation. Standard products do not have customer acceptance criteria. Generally, software is a component of our standard product and, as such, is not separately recognized as revenue. We have standard rights of return that we account for as a warranty provision under SFAS No. 5, “Accounting for Contingencies.” We do not have any price protection agreements or other post shipment obligations. For custom equipment where customer acceptance is part of the sales agreement, revenue is recognized when the customer has accepted the product. In cases where custom equipment does not have customer acceptance as part of the sales agreement, we recognize revenue upon shipment as long as the system meets the specifications as agreed upon with the customer. Certain transactions have multiple deliverables, with the deliverables clearly defined. To the extent that the secondary deliverables are other than perfunctory, we recognize the revenue on each deliverable, if separable, or on the completion of all deliverables, if not separable, all in a manner consistent with SAB No. 104 and EITF 00-21. Standalone software products are recognized as revenue when they are shipped. Revenue generated from development contracts are recorded on a cost-plus basis in the period services are rendered.

We maintain an allowance for doubtful accounts based on a continuous review of customer accounts, payment patterns, and specific collection issues. We perform on-going credit evaluations of our customers and do not require collateral from our customers. For many of our international customers, we require an irrevocable letter of credit to be issued by the customer before a shipment is made. If the financial condition of our customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances would be required.

Inventory Valuation

Inventories are valued at the lower of cost or market, cost being determined on a first-in, first-out basis. Management evaluates the need to record adjustments for impairment of inventory on a monthly basis. Our policy is to assess the valuation of all inventories, including raw materials, work-in-process, and finished goods. Obsolete inventory or inventory in excess of management’s estimated future usage is written down to estimated market value, if less than its cost. Contracts with fixed prices are evaluated to determine if estimated total costs will exceed revenues. A loss provision is recorded when the judgment is made that actual costs incurred plus estimated costs remaining to be incurred will exceed total revenues from the contract. Inherent in

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the estimates of market value are management’s estimates related to current economic trends, future demand for our products, and technological obsolescence. Significant management judgments must be made when providing for obsolete and excess inventory and losses on contracts. If actual market conditions are different than those projected by management, additional inventory write-downs and loss accruals may be required.

Warranty Costs

We provide for the estimated cost of product warranties at the time revenue is recognized. We consider historical warranty costs actually incurred and specifically identified circumstances to establish the warranty liability. The warranty liability is reviewed on a quarterly basis. Should actual costs or revised estimated costs differ from management’s prior estimates, revisions to the estimated warranty liability would be required.

Accounting for Income Taxes

Deferred income tax assets and liabilities are recognized for the future tax consequences attributable to differences between the consolidated financial statement carrying amounts of existing assets and liabilities and their respective income tax bases, and operating loss and tax credit carryforwards. SFAS No. 109, “Accounting for Income Taxes,” requires the establishment of a valuation allowance to reflect the likelihood of the realization of deferred tax assets. We record a valuation allowance to reduce our deferred tax assets to an estimated realizable amount based on historical and forecasted results. While management has considered future taxable income and ongoing prudent and feasible tax planning strategies in assessing the need for the valuation allowance, in the event management were to determine that ZYGO would be able to realize its deferred tax assets in the future in excess of its net recorded amount, an adjustment to the valuation allowance would increase income in the period such determination was made. Likewise, should management determine that ZYGO would not be able to realize all or part of its net deferred tax asset in the future, an adjustment to the valuation allowance would be charged to income in the period such determination was made. Our effective tax rate may vary from period to period, generally based on changes in estimated taxable income or loss for domestic and foreign locations, changes to the valuation allowance, changes to federal, state or foreign tax laws, and deductibility of certain costs and expenses by jurisdiction.

Valuation of Long-Lived Assets

In accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” the carrying value of intangible assets and other long-lived assets is reviewed on a regular basis for the existence of facts or circumstances, both internally and externally, that may suggest impairment. Some factors we consider important, which could trigger the impairment review, include a significant decrease in the market value of an asset, a significant change in the extent or manner in which an asset is used, a significant adverse change in the business climate that could affect the value of an asset, an accumulation of costs for an asset in excess of the amount originally expected, a current period operating or cash flow loss combined with a history of operating or cash flow losses or a projection that demonstrates continuing losses, and a current expectation that, more likely than not, a long-lived asset will be disposed of significantly before the end of its estimated useful life.

If such circumstances exist, we evaluate the carrying value of long-lived assets to determine if impairment exists based upon estimated undiscounted future cash flows over the remaining useful life of the assets and comparing that value with the carrying value of the assets. If the carrying value of the assets is greater than the estimated future cash flows, the assets are written down to the estimated fair value. We determine the estimated fair value of the assets based on a current market value of the assets. If a current market value is not readily available, a projected discounted cash flow method is applied using a discount rate determined by management to be commensurate with the risk inherent in the current business model. Our cash flow estimates are based upon management’s best estimates, using appropriate and customary assumptions and projections at the time.

Share-Based Payments

In December 2004, FASB issued SFAS No. 123(R), “Share-Based Payment (as amended).” SFAS No. 123(R) eliminates the alternative to use the intrinsic value method of accounting that was provided in SFAS No. 123, which generally resulted in no compensation expense recorded in the financial statements related to the issuance of equity awards to employees. SFAS No. 123(R) requires that the cost resulting from all share-based payment transactions be recognized in the financial statements. SFAS No. 123(R) establishes fair value as the measurement objective in accounting for share-based payment arrangements and requires all companies to apply a fair-value-based measurement method in accounting for generally all share-based payment transactions with employees. This method includes estimates and judgments pertaining to term, volatility, risk-free interest rates, dividend yields and forfeiture rates.

Health Insurance

We are self-insured for the majority of our group health insurance. We rely on claims experience in determining an adequate liability for claims incurred, but not reported. To the extent actual claims exceed estimates; we may be required to record additional expense. A one percent change in actual claims would have an annual impact of approximately $25,000 on our financial condition and results of operations.

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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.

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RISK FACTORS THAT MAY IMPACT FUTURE RESULTS

Risk factors that may impact future results include those disclosed in our Form 10-K, as amended, for the year ended June 30, 2005.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

There have been no material changes that have occurred in our quantitative and qualitative market risk disclosures during the first nine months of fiscal 2006. In the third quarter of fiscal 2005, we began hedging certain intercompany transactions by entering into forward contracts to reduce the impact of adverse fluctuations on earnings associated with foreign currency exchange rate changes. We do not enter into any derivative transactions for speculative purposes. These contracts are entered into for periods consistent with the currency transaction exposures, generally three to six months. Generally, any gains and losses on the fair value of these contracts are expected to be largely offset by losses and gains on the underlying transactions.

For discussion of our exposure to market risk, refer to Item 7a., “Quantitative and Qualitative Disclosures about Market Risk”, presented in our Annual Report on Form 10-K, as amended, for the year ended June 30, 2005 filed with the Securities and Exchange Commission.

Item 4. Controls and Procedures

As previously disclosed in a Current Report on Form 8-K which we filed on March 29, 2006 and as described in our Explanatory Note to this Form 10-Q and note 2 to our accompanying consolidated financial statements included herein, in connection with conducting an internal review of our tax return, we determined that inadvertent accounting errors were made in the consolidation of our intercompany revenues from certain of our foreign operations. The errors are the result of our failure to identify and eliminate certain intercompany revenues attributed to our Singapore and Taiwan offices, which resulted in our overstating reported revenues, from fiscal 2001 through the second quarter of fiscal 2006. Based on the impact of the aforementioned accounting errors, we determined to restate our financial statements as of June 30, 2005 and 2004 and for each of the years in the three-year period ended June 30, 2005, as well as interim financial statements for the quarters ended September 30, 2005 and December 31, 2005. Our restated consolidated financial statements for fiscal years 2005, 2004, and 2003 included in Form 10-K/A also include disclosure of restated quarterly results for 2005 and 2004.

Management has determined that the internal control deficiency that resulted in the aforementioned accounting errors is a material weakness, as defined by the Public Company Accounting Oversight Board’s Auditing Standard No. 2. We have determined that the material weakness was that we did not maintain adequate controls and procedures to ensure that intercompany accounts were properly reconciled and intercompany transactions were properly identified and eliminated in the consolidation process. The Public Company Accounting Oversight Board has defined a material weakness as “a significant deficiency, or combination of significant deficiencies, that results in more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected.”

In designing 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.

In response to this material weakness, management performed additional analyses and other post-closing procedures to ensure our consolidated financial statements included in this Form 10-Q were prepared in accordance with generally accepted accounting principles. During the period from April to May 2006, we implemented remedial measures to address the identified material weakness. We improved procedures related to the recording and reporting of our intercompany transactions, including dedicating additional resources to our consolidation process and the procedures and controls surrounding the consolidation process, and increased review and approval controls by senior financial personnel over the personnel that perform the consolidation. These improved procedures included ensuring that the inter-company activity is properly identified and eliminated in consolidation.

Accordingly, management, including our Chief Executive Officer and Chief Financial Officer, believes the consolidated financial statements included in this report fairly present, in all material respects, our financial condition, results of operations and cash flows for the periods presented.

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PART II - Other Information
Item 6.	Exhibits
(a)	Exhibits:
	31.1	Certification of Chief Executive Officer under Rule 13a-14(a)
	31.2	Certification of Chief Financial Officer under Rule 13a-14(a)
	32.1	Certification of Chief Executive Officer and Chief Financial Officer

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SIGNATURE

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

Zygo Corporation

(Registrant)

/s/ J. Bruce Robinson

J. Bruce Robinson

President, Chairman, and Chief Executive Officer

/s/ Walter A. Shephard

Walter A. Shephard

Vice President, Finance, Chief Financial Officer, and Treasurer

Date: June 26, 2006

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