Zygo (ZIGO) 10-Q/A 2006 Q1 Quarterly report (amended)

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q/A
AMENDMENT NO.2

(Mark One)
x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended     September 30, 2005
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 an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

x YES o NO

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.

18,027,136 shares of Common Stock, $.10 Par Value, at November 7, 2005

EXPLANATORY NOTE

Zygo Corporation (“ZYGO,” “we,” “us,” “our,” or “Company”) is restating our previously issued consolidated financial statements for the first quarter 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 Amendment No. 2 on Form 10-Q/A (this “Form 10-Q/A”) to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2005, initially filed with the Securities and Exchange Commission (the “SEC”) on November 9, 2005, and amended on December 23, 2005 (collectively, the “Original Filing”), is being filed pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, to amend the Original Filing to reflect restatements of the Company’s consolidated balance sheet as of September 30, 2005 and the Company’s consolidated statements of operations and cash flows for the three-month periods ended September 30, 2005 and 2004 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/A.

Concurrent with the filing of this Form 10-Q/A, we are filing Amendment No. 2 on Form 10-K/A (the “Form 10-K/A”) to our Annual Report on Form 10-K for the year ended June 30, 2005 to reflect restatement of the Company’s consolidated balance sheets as of June 30, 2005 and 2004 and the Company’s consolidated statements of operations, cash flows, and stockholders’ equity for the years ended June 30, 2005, 2004, and 2003 and the notes related thereto. In addition, we are concurrently filing Amendment No. 1 on Form 10-Q/A for the quarter ended December 31, 2005 to reflect restatement of the Company’s consolidated balance sheet as of December 31, 2005 and the Company’s consolidated statements of operations and cash flows for the three- and six-month periods ended December 31, 2005 and 2004 and the notes related thereto.

For the convenience of the reader, this Form 10-Q/A sets forth the Original Filing in its entirety. However, this Form 10-Q/A amends and restates only Items 1, 2, and 4 of Part I of the Original Filing, in each case, solely as a result of, and to reflect, the Restatement, and no other information in the Original Filing is amended hereby. The foregoing items have not been updated to reflect other events occurring after the Original Filing or to modify or update those disclosures affected by subsequent events. This Form 10-Q/A continues to speak as of the filing date of the Original Filing for the quarterly period ended September 30, 2005. In addition, pursuant to the rules of the SEC, Item 6 of Part II of the Original Filing has been amended to contain currently dated certifications from the Company’s Chief Executive Officer and Chief Financial Officer, as required by Sections 302 and 906 of the Sarbanes-Oxley Act of 2002. The certifications of the Company’s Chief Executive Officer and Chief Financial Officer are attached to this Form 10-Q/A as Exhibits 31.1, 31.2, and 32.1.

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.

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FORWARD LOOKING STATEMENTS

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

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PART I - Financial Information

Item 1. Financial Statements

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

	Three Months Ended September 30,
	2005			2004
	(Restated)			(Restated)
Net sales
Products	$	30,368		$	25,725
Development services		3,961			1,695
		34,329			27,420
Cost of goods sold
Products		18,270			15,179
Development services		2,906			1,297
		21,176			16,476
Gross profit		13,153			10,944
Selling, general, and administrative expenses		6,368			5,659
Research, development, and engineering expenses		3,540			3,208
Operating profit		3,245			2,077
Other income (expense):
Interest income		417			179
Miscellaneous income (expense), net		123			(56	)
Total other income		540			123
Earnings from continuing operations before income taxes and minority interest		3,785			2,200
Income tax expense		(1,442	)		(767	)
Minority interest		(150	)		(116	)
Earnings from continuing operations		2,193			1,317
Discontinued TeraOptix operations, net of tax		—			(61	)
Charges and adjustments on the disposal of TeraOptix, net of tax		—			(4	)
Loss from discontinued operations		—			(65	)
Net earnings	$	2,193		$	1,252
Basic - Earnings per share:
Continuing operations	$	0.12		$	0.07
Discontinued operations		—			—
Net earnings	$	0.12		$	0.07
Diluted - Earnings (loss) per share:
Continuing operations	$	0.12		$	0.07
Discontinued operations		—			—
Net earnings	$	0.12		$	0.07
Weighted average shares outstanding:
Basic shares		18,013			17,923
Diluted shares		18,137			18,115

See accompanying notes to consolidated financial statements.

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

	September 30, 2005			June 30, 2005
	(Restated)
Assets
Current assets:
Cash and cash equivalents	$	17,159		$	20,949
Marketable securities		20,775			17,242
Receivables, net of allowance for doubtful accounts of $386 and $663, respectively		25,080			28,124
Inventories		35,032			33,727
Prepaid expenses		2,100			2,126
Deferred income taxes		8,934			8,895
Total current assets		109,080			111,063
Marketable securities		20,615			18,711
Property, plant, and equipment, net		31,459			31,420
Deferred income taxes		21,242			22,333
Intangible assets, net		5,714			5,638
Other assets		987			1,017
Total assets	$	189,097		$	190,182
Liabilities and Stockholders’ Equity
Current liabilities:
Payables	$	11,705		$	13,510
Accrued progress payments		24,621			21,713
Accrued salaries and wages		3,204			6,220
Other accrued liabilities		3,204			4,731
Income taxes payable		1,409			1,510
Total current liabilities		44,143			47,684
Other long-term liabilities		94			96
Minority interest		777			1,249
Total liabilities		45,014			49,029
Stockholders’ equity:
Common Stock, $.10 par value per share:
40,000,000 shares authorized; 18,471,782 shares issued (18,423,026 at June 30, 2005); 18,024,577 shares outstanding (17,975,821 at June 30, 2005)		1,847			1,842
Additional paid-in capital		142,908			142,111
Retained earnings		4,760			2,567
Accumulated other comprehensive income (loss):
Currency translation effects		(173	)		(112	)
Net unrealized gain on marketable securities		28			32
		149,370			146,440
Less treasury stock, at cost (447,205 shares)		5,287			5,287
Total stockholders’ equity		144,083			141,153
Total liabilities and stockholders’ equity	$	189,097		$	190,182

See accompanying notes to consolidated financial statements.

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

	Three Months Ended September 30,
	2005			2004
	(Restated)			(Restated)
Cash provided by operating activities:
Net earnings	$	2,193		$	1,252
Adjustments to reconcile net earnings to cash provided by (used for) operating activities:
Loss from discontinued operations		—			65
Depreciation and amortization		1,499			1,506
Deferred income taxes		1,052			1,121
Compensation cost related to share-based payments arrangements		374			—
Excess tax benefits from share-based payment arrangements		(11	)		—
Other, net		14			53
Changes in operating accounts:
Receivables		3,082			5,941
Inventories		(1,288	)		(5,129	)
Prepaid expenses		26			62
Accounts payable, accrued expenses, and taxes payable		(3,602	)		(2,247	)
Minority interest		150			116
Net cash provided by continuing operations		3,489			2,740
Net cash used for discontinued operations		—			(157	)
Net cash provided by operating activities		3,489			2,583
Cash used for investing activities:
Additions to property, plant, and equipment, net		(1,424	)		(2,599	)
Purchase of marketable securities		(9,478	)		(3,515	)
Additions to intangibles and other assets		(209	)		(247	)
Proceeds from the maturity of marketable securities		4,015			1,750
Net cash used for investing activities		(7,096	)		(4,611	)
Cash provided by (used for) financing activities:
Employee stock purchase		293			328
Exercise of employee stock options		135			34
Excess tax benefits from share-based payment arangements		11			—
Dividend payment to minority interest		(622	)		—
Net cash provided by (used for) financing activities		(183	)		362
Net decrease in cash and cash equivalents		(3,790	)		(1,666	)
Cash and cash equivalents, beginning of period		20,949			17,462
Cash and cash equivalents, end of period	$	17,159		$	15,796

See accompanying notes to consolidated financial statements

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

NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation and Presentation

Zygo Corporation is a worldwide developer and supplier of high performance metrology instruments, high precision optics, optical assemblies, and automation for the semiconductor and industrial markets. The accompanying consolidated financial statements include the accounts of Zygo Corporation and its subsidiaries (“ZYGO,” “we,” “us,” “our” or “Company”). All material transactions and accounts with the subsidiaries have been eliminated from the consolidated financial statements. The results of operations for the three month period ended September 30, 2005 are not necessarily indicative of the results to be expected for the full fiscal year.

The Consolidated Balance Sheet at September 30, 2005, the Consolidated Statements of Operations for the three months ended September 30, 2005 and 2004, and the Consolidated Statements of Cash Flows for the three months ended September 30, 2005 and 2004 are unaudited but, in management’s opinion, include all adjustments, consisting only of normal recurring accruals, necessary for a fair presentation of the results of the interim periods. The accompanying consolidated financial statements should be read in conjunction with the consolidated financial statements and notes included in our June 30, 2005 Annual Report on Form 10-K/A, Amendment No. 2, including items incorporated by reference therein.

Earnings Per Share

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

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

	Three Months Ended September 30,
	2005		2004
Basic weighted average shares outstanding		18,013,229		17,923,302
Dilutive effect of stock options and restricted shares		124,149		192,172
Diluted weighted average shares outstanding		18,137,378		18,115,474

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. SFAS No. 123(R) requires that the cost resulting from all share-based payment transactions be recognized in the financial statements. SFAS No. 123(R) establishes fair value as the measurement objective in accounting for share-based payment arrangements and requires all companies to apply a fair-value-based measurement method in accounting generally for all share-based payment transactions with employees.

On July 1, 2005, we adopted SFAS No. 123(R) using a modified prospective method resulting in the recognition of share-based compensation expense of $232, net of related tax expense of $142. Prior period amounts have not been restated. Under this application, we are required to record compensation expense for all awards granted after the date of adoption and for the unvested portion of previously granted awards that remain outstanding at the date of adoption. In addition, we made changes to our employee stock purchase plan for periods beginning after July 1, 2005, which rendered the plan non-compensatory in accordance with SFAS No. 123(R).

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Prior to the adoption of SFAS No. 123(R), we applied Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees,” and related interpretations in accounting for our plans. The following table details the effect on net earnings and earnings per share had compensation expense for the employee share-based awards been recorded in the three months ended September 30, 2004 based on the fair value method under SFAS No. 123.

Net earnings, as reported (Restated)	$	1,252
Deduct: Total stock-based compensation expense determined under fair value based method, net of related tax effects		(1,252	)
Pro forma net earnings	$	—
Earnings per share:
Basic - as reported (Restated)	$	0.07
Basic - pro forma	$	—
Diluted - as reported (Restated)	$	0.07
Diluted - pro forma	$	—

Share Based Compensation Plans
As of September 30, 2005, we have two share-based compensation plans, which are described below. A third share-based compensation plan expired in September 2002.

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

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

The Zygo Corporation Amended and Restated Non-Qualified Stock Option Plan permitted the granting of non-qualified options to purchase a total of 4,850,000 shares (adjusted for splits) of common stock at prices not less than the market value of the stock on the date of grant. Options generally became exercisable at the rate of 25% of the shares each year commencing one year after the date of grant. The Plan, as amended, expired on September 3, 2002.

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We use the Black-Scholes option-pricing model to calculate the fair value of options. The key assumptions for this valuation method include the expected term of the option, stock price volatility, risk-free interest rate, dividend yield, exercise price, and forfeiture rate. Many of these assumptions are judgmental and highly sensitive in the determination of compensation expense. Under the assumptions indicated below, the weighted-average fair value of the first quarter of fiscal 2006 stock option grants was $4.75 and the weighted-average fair value of the first quarter fiscal 2005 stock option grants was $5.73. The table below indicates the key assumptions used in the option valuation calculations for options granted in the three months ended September 30, 2005 and 2004 and a discussion of our methodology for developing each of the assumptions used in the valuation model:

	Three Months Ended September 30,
	2005			2004
Term		4.1 Years			4.5 Years
Volatility		52.9	%		80.0	%
Dividend Yield		0.0	%		0.0	%
Risk-free interest rate		4.1	%		3.3	%
Forfeiture rate		10.6	%		4.0	%

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

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

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

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

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

The following table summarizes information about our stock option plans for the three months ended September 30, 2005.

	Number of Options			Weighted Average Exercise Price		Weighted Average Remaining Contractual life		Aggregate Intrinsic Value (in thousands)
Balance, July 1, 2005		2,069,175		$	26.95
Granted		120,000		$	10.40
Excercised		(14,013	)	$	7.52
Forfeited		(17,563	)	$	49.13
Options outstanding, end of quarter		2,157,599		$	25.97	$	6.40	$	7,900
Option exercisable, end of quarter		1,592,383		$	31.02	$	6.10	$	5,085

As of September 30, 2005 there was $2,651 of total unrecognized compensation cost related to stock options. These costs are expected to be recognized over a weighted average period of 1.6 years.

The total intrinsic value of stock options exercised was $89 and the total fair value of stock awards vested was $761 during the three months ended September 30, 2005.

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Cash received from stock option exercises for the three months ended September 30, 2005 was $105. The income tax benefits from share based arrangements totaled $32, all of which were attributable to stock option exercises.

The following table summarizes information about restricted stock awards for the three months ended September 30, 2005:

	Shares		Weighted Average Grant- Date Fair Value
Non Vested Balance at July 1, 2005		—	$	—
Granted		129,800	$	10.40
Vested		—	$	—
Forfeited		—	$	—
Non Vested Balance at September 30, 2005		129,800	$	10.40

These restricted stock awards were issued under the 2002 Equity Incentive Plan and 50% of the restrictions lapse after three years and the remaining 50% lapse after four years.

As of September 30, 2005 there was $1,151 of total unrecognized compensation costs related to restricted stock awards. These costs are expected to be recognized over a weighted average period of 4.0 years.

At September 30, 2005 an aggregate of 599,012 shares remained available for future grants under our stock plans, which cover stock awards and stock options. We issue shares to satisfy stock option exercises and restricted stock awards.

Comprehensive Income

Our total comprehensive income was as follows:

	Three Months Ended September 30,
	2005			2004
	(Restated)			(Restated)
Net earnings	$	2,193		$	1,252
Unrealized loss on marketable securities, net of tax		(4	)		(12	)
Foreign currency translation effect		(61	)		75
Comprehensive income	$	2,128		$	1,315

Inventories

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

	September 30, 2005		June 30, 2005
Raw materials and manufactured parts	$	14,447	$	14,320
Work in process		16,941		15,927
Finished goods		3,644		3,480
	$	35,032	$	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 September 30, 2005 and June 30, 2005, property, plant, and equipment were as follows:

	September 30, 2005			June 30, 2005			Estimated Useful Life (Years)
Land	$	615		$	615			—
Building and improvements		15,730			15,759			15–40
Machinery, equipment, and office furniture		47,676			45,501			3–8
Leasehold improvements		712			715			1–5
Construction in progress		2,175			2,997			—
		66,908			65,587
Accumulated depreciation		(35,449	)		(34,167	)
	$	31,459		$	31,420

Depreciation expense for the three months ended September 30, 2005 and 2004 was $1,370 and $1,377, respectively.

Intangible Assets

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

	September 30, 2005			June 30, 2005
Patents and Trademarks	$	6,740		$	6,556
License Agreements		1,350			1,350
		8,090			7,906
Accumulated amortization		(2,376	)		(2,268	)
Total	$	5,714		$	5,638

Intangible amortization expense was $107 and $113 for the three months ended September 30, 2005 and 2004, respectively. Amortization expense related to certain intangible assets is included in cost of goods sold in the Consolidated Statements of Operations.

Warranty

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

The following is a reconciliation of the beginning and ending balances of our accrued warranty liability, which is included in the “Other accrued liabilities” line item in the Consolidated Balance Sheets:

	Three Months Ended September 30,
	2005			2004
Beginning balance	$	1,396		$	1,486
Reductions for payments made		(277	)		(525	)
Changes in accruals related to warranties issued in the current period		262			194
Changes in accruals related to pre-existing warranties		109			7
Ending balance	$	1,490		$	1,162

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Supplemental Cash Flow Information

There were no interest payments on debt for the three months ended September 30, 2005 and 2004. Income tax payments amounted to $392 and $199 for the three months ended September 30, 2005 and 2004, respectively.

NOTE 2: RESTATEMENT OF FINANCIAL STATEMENTS

We are restating our consolidated financial statements for the first quarter of fiscal 2006 to account 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 have been 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 balance sheet and consolidated statements of operations is shown in the accompanying tables. Adjustments to the statement of operations for the three months ended September 30, 2005 and 2004 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 individually significant. Balance sheet adjustments for September 30, 2005 primarily represent adjustments to retained earnings and currency translation effects to correct the balance sheet for overstating revenues and failing to properly eliminate intercompany revenues resulting in an improper entry to currency translation effects. In addition, deferred taxes were adjusted to reflect the income tax effects of the adjustments noted for overstating revenues. The balance sheet also reflects 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.

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The following table presents the effect of the Restatement on the consolidated statement of operations for the first quarter of fiscal 2006:

	As previously reported			Adjustments			As Restated
Net sales
Products	$	30,621		$	(253	)	$	30,368
Development services		3,961			—			3,961
		34,582			(253	)		34,329
Cost of goods sold
Products		18,261			9			18,270
Development services		2,906			—			2,906
		21,167			9			21,176
Gross profit		13,415			(262	)		13,153
Selling, general, and administrative expenses		6,411			(43	)		6,368
Research, development and engineering expenses		3,540			—			3,540
Operating profit		3,464			(219	)		3,245
Other income (expense):
Interest income		417			—			417
Miscellaneous income (expense), net		128			(5	)		123
Total other income (expense)		545			(5	)		540
Earnings from continuing operations before income taxes and minority interest		4,009			(224	)		3,785
Income tax expense		(1,523	)		81			(1,442	)
Minority interest		(150	)		—			(150	)
Net earnings		2,336			(143	)		2,193
Net earnings per share:
Basic	$	0.13		$	(0.01	)	$	0.12
Diluted		0.13			(0.01	)		0.12
Weighted average number of shares:
Basic		18,013			18,013			18,013
Diluted		18,137			18,137			18,137

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The following table presents the effect of the Restatement on the consolidated statement of operations for the first quarter of fiscal 2005:

	As previously reported			Adjustments			As Restated
Net sales
Products	$	25,883		$	(158	)	$	25,725
Development services		1,695			—			1,695
		27,578			(158	)		27,420
Cost of goods sold
Products		15,168			11			15,179
Development services		1,297			—			1,297
		16,465			11			16,476
Gross profit		11,113			(169	)		10,944
Selling, general, and administrative expenses		5,659			—			5,659
Research, development and engineering expenses		3,208			—			3,208
Operating profit		2,246			(169	)		2,077
Other income (expense):
Interest income		179			—			179
Miscellaneous income (expense), net		(29	)		(27	)		(56	)
Total other income (expense)		150			(27	)		123
Earnings from continuing operations before income taxes and minority interest		2,396			(196	)		2,200
Income tax expense (benefit)		(862	)		95			(767	)
Minority interest		(122	)		6			(116	)
Earnings from continuing operations		1,412			(95	)		1,317
Discontinued TeraOptix operations, net of tax		(61	)		—			(61	)
Charges related to the disposal of TeraOptix, net of tax		(4	)		—			(4	)
Loss from discontinued operations		(65	)		—			(65	)
Net earnings	$	1,347		$	(95	)	$	1,252
Basic - Earnings (loss) per share:
Continuing operations	$	0.08		$	(0.01	)	$	0.07
Discontinued operations		—			—			—
Net earnings (loss)	$	0.08		$	(0.01	)	$	0.07
Diluted - Earnings (loss) per share:
Continuing operations	$	0.08		$	(0.01	)	$	0.07
Discontinued operations		(0.01	)		0.01			—
Net earnings (loss)	$	0.07		$	—		$	0.07
Weighted average number of shares:
Basic		17,923			17,923			17,923
Diluted		18,115			18,115			18,115

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The following table presents the effect of the Restatement on the consolidated balance sheet as of September 30, 2005:

	As previously reported			Adjustments			As Restated
Assets
Current assets:
Cash and cash equivalents	$	17,159		$	—		$	17,159
Marketable securities		20,775			—			20,775
Receivables, net		25,081			(1	)		25,080
Inventories		35,032			—			35,032
Prepaid expenses		2,114			(14	)		2,100
Deferred income taxes		8,934			—			8,934
Total current assets		109,095			(15	)		109,080
Marketable securities		20,615			—			20,615
Property, plant, and equipment, net		31,459			—			31,459
Deferred income taxes		20,304			938			21,242
Intangible assets, net		5,714			—			5,714
Other assets		987			—			987
Total assets	$	188,174		$	923		$	189,097
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable	$	11,705		$	—		$	11,705
Accrued progress payments		24,693			(72	)		24,621
Accrued salaries and wages		3,204			—			3,204
Other accrued expenses		3,254			(50	)		3,204
Income taxes payable		1,409			—			1,409
Total current liabilities		44,265			(122	)		44,143
Other long-term liabilities		94			—			94
Minority interest		777			—			777
Total liabilities		45,136			(122	)		45,014
Commitments
Stockholders’ equity:
Common stock, $.10 par value per share:		1,847			—			1,847
Additional paid-in capital		142,908			—			142,908
Retained earnings (deficit)		6,150			(1,390	)		4,760
Accumulated other comprehensive income (loss):
Currency translation effects		(2,608	)		2,435			(173	)
Net unrealized gain on marketable securities		28			—			28
		148,325			1,045			149,370
Less treasury stock, at cost; 447,205 common shares		5,287			—			5,287
Total stockholders’ equity		143,038			1,045			144,083
Total liabilities and stockholders’ equity	$	188,174		$	923		$	189,097

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NOTE 3: RECENT ACCOUNTING PRONOUNCEMENTS

In December 2004, the FASB issued SFAS No. 123(R), “Share Based Payment (as amended).” This statement requires companies to measure and recognize compensation expense for all share-based payments based on their fair value. The standard becomes effective for interim or annual periods beginning after June 15, 2005. We adopted SFAS No. 123(R) in the first quarter of fiscal 2006 using the modified prospective method. SFAS No. 123(R) primarily resulted in a change in our method of measuring and recognizing the fair value of our share-based grants, estimating forfeitures for all unvested awards, and accounting for awards to retirement eligible employees. In addition, changes made to our employee share purchase plan for periods beginning July 1, 2005 render the plan non-compensatory in accordance with SFAS No. 123(R).

The FASB issued SFAS No. 153, “Exchanges of Nonmonetary Assets,” that amends Opinion 29 to eliminate the exception for nonmonetary exchanges of similar productive assets and replaces it with a general exception for exchanges of nonmonetary assets that do not have commercial substance. The adoption of SFAS No. 153 in this quarter did not have a material effect on our financial position or results of operations.

The FASB issued SFAS No. 154, “Accounting Changes and Error Corrections,” which primarily changes the requirements for the accounting for and reporting of a change in accounting principle for all voluntary changes or when an accounting pronouncement does not include specific transition provisions. This applies to accounting changes made after July 1, 2006.

NOTE 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 three months ended September 30, 2004
Cash flow from operating activities from discontinued operations:
Loss from discontinued operations	$	(65	)
Deferred income taxes		(36	)
Other, net		(56	)
Net cash used for operating activities from discontinued operations		(157	)
Net cash used by discontinued operations	$	(157	)

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

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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 September 30,
	2005			2004
	(Restated)			(Restated)
Semiconductor
Sales	$	18,436		$	15,844
Gross profit		7,141			6,394
Gross profit as a % of sales		39	%		40	%
Industrial
Sales	$	15,893		$	11,576
Gross profit		6,012			4,550
Gross profit as a % of sales		38	%		39	%
Total
Sales	$	34,329		$	27,420
Gross profit		13,153			10,944
Gross profit as a % of sales		38	%		40	%

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

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

	Three Months Ended September 30,
	2005			2004
	(Restated)			(Restated)
Metrology
Sales	$	16,257		$	10,608
Gross profit		7,367			4,412
Gross profit as a % of sales		45	%		42	%
Optical Systems Solutions
Sales	$	9,496		$	6,631
Gross profit		1,740			1,399
Gross profit as a % of sales		18	%		21	%
PPS
Sales	$	8,576		$	10,181
Gross profit		4,046			5,133
Gross profit as a % of sales		47	%		50	%
Total
Sales	$	34,329		$	27,420
Gross profit		13,153			10,944
Gross profit as a % of sales		38	%		40	%

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

	Three Months Ended September 30,
	2005		2004
	(Restated)		(Restated)
Domestic	$	13,010	$	8,044
Europe		2,781		2,648
Japan		14,162		14,057
Pacific Rim		4,376		2,671
Total	$	34,329	$	27,420

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 $12,353 (36% of net sales) for the three months ended September 30, 2005, as compared with $12,592 (46% of net sales) for the comparable prior year period. These sales include revenues generated from the development agreements referenced below. Selling prices of products sold to Canon Inc. and Canon Sales Co., Inc. are based, generally, on the terms customarily given to distributors. Revenues generated from the development agreements are recorded on a cost-plus basis. At September 30, 2005 and June 30, 2005, there were, in the aggregate, $4,689 and $3,951, respectively, of trade accounts receivable from Canon Inc. and Canon Sales Co., Inc.

In September 2002, we entered into a contract with Canon Inc. related to the development of certain interferometers. In March 2004, we signed a preliminary agreement to begin further add-on work; the definitive agreement for this additional work was signed in December 2004. In February 2005, we entered into two additional agreements with Canon Inc. related to the development of prototype production tools and accessories. During the three months ended September 30, 2005 and September 30, 2004, we recognized revenue in the semiconductor segment of $3,961and $1,695, respectively, for these contracts. In addition, Canon Inc. paid us progress payments in accordance with the terms of the developmental contract. The total progress payments related to the developmental contract remaining at September 30, 2005 were $13,238.

NOTE 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 September 30, 2005, we had four foreign currency forward contracts (Yen) outstanding of $2,718. Net gains recognized from foreign currency forward contracts for the first quarter of fiscal 2006 was $82, and are included in other income in the consolidated statements of operations. These gains are substantially offset by foreign exchange losses on intercompany balances recorded by our subsidiaries. We did not enter into any derivative instruments to hedge foreign currency exposure prior to the third quarter of fiscal 2005.

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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.

We also perform development services, which have produced a significant amount of our revenue over the past two years. In September 2002, we entered into a contract with Canon Inc. related to the development of certain interferometers. In March 2004, we signed a preliminary agreement to begin further add-on work; the definitive agreement for this additional work was signed in December 2004. In February 2005, we entered into two additional agreements with Canon Inc. related to the development of prototype production tools and accessories. In the first quarter of fiscal 2006, we recognized $4.0 million of revenue from these developmental services contracts as compared with $1.7 million in the prior year comparable quarter. The development services contracts that were signed in fiscal 2005 were cost plus contracts and were expected to represent approximately $41.0 million in additional revenue through fiscal 2007. To date, a total of $18.2 million of this revenue has been recognized. To the extent that total actual costs on the contracts may be less than originally anticipated, the resulting development services revenue could be less than the original estimated value of the contract. Additionally, our period over period comparable sales, in the future could be adversely affected if we do not continue to provide these development services at similar levels.

We achieved an order level for the first quarter of fiscal 2006 of $38.3 million as compared with $33.9 million for the first quarter of fiscal 2005. This order flow increased backlog at September 30, 2005 to $70.6 million. Orders for the first quarter of our fiscal year are normally lower than the remaining quarters in our fiscal year. Orders in the semiconductor segment of $19.8 million decreased $0.7 million, or 3%, as compared with the fourth quarter of fiscal 2005; however, increased $8.9 million, or 82%, as compared with the first quarter of fiscal 2005. We continue to receive orders from the flat panel market of the semiconductor segment and expect orders to continue for the immediate future. We also experienced an increase in lithography orders over the prior year period, which continued a strengthening in that market area over the last six months. Orders in the industrial segment of $18.6 million decreased by $3.3 million, or 15%, as compared with the fourth quarter of fiscal 2005 and $4.5 million, or 19%, as compared with the first quarter of fiscal 2005.

Beginning in the first quarter of fiscal 2006, we were required to record the expense of share-based payment transactions. Under the method adopted, we were not required to restate the prior year financial statements or include in the current year any expenses related to stock option grants vested as of June 30, 2005. In the quarter ended September 30, 2005, $0.4 million of share-based payment compensation expense was included in operating income. Operating income included share-based payment compensation expense of $0.1 million in cost of goods sold, $0.2 million in selling, general, and administrative expenses (“SG&A”), and $0.1 million in research, development, and engineering expenses (“RD&E”). Share-based compensation expense reduced our diluted earnings per share by $0.01. The share-based compensation expense is estimated to be approximately $0.8 million in the second quarter of fiscal 2006 and $0.4 million in each of the third and fourth quarters of fiscal 2006. These estimates include the expected compensation expense related to current outstanding stock options and restricted shares and to future issuances of stock options which are presently known to us.

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Restatement

We are restating our consolidated financial statements for the first quarter of fiscal 2006 for corrections in the accounting of intercompany transactions from certain of our foreign operations. The corrections are a 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 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.

Continuing Operations

We recorded earnings from continuing operations for the first quarter of fiscal 2006 of $2.2 million, or $0.12 per diluted share, as compared with earnings of $1.3 million, or $0.07 per diluted share, for the first quarter of fiscal 2005.

Net sales by segment are as follows:

	Net Sales By Segment
(In millions)	Three Months Ended
	September 30, 2005		Net Sales %			September, 30, 2004		Net Sales %
		(Restated)		(Restated)			(Restated)		(Restated)
Semiconductor	$	14.4		42	%	$	14.1		52	%
Development Services		4.0		12	%		1.7		6	%
Total Semiconductor		18.4		54	%		15.8		58	%
Total Industrial		15.9		46	%		11.6		42	%
Total	$	34.3		100	%	$	27.4		100	%

	Gross Profit By Segment
(In millions)	Three Months Ended
	September 30, 2005		Gross Profit %			September, 30, 2004		Gross Profit %
		(Restated)		(Restated)			(Restated)		(Restated)
Semiconductor	$	6.1		42	%	$	6.0		43	%
Development Services		1.1		28	%		0.4		24	%
Total Semiconductor		7.2		39	%		6.4		41	%
Total Industrial		6.0		38	%		4.5		39	%
Total	$	13.2		38	%	$	10.9		40	%

Net sales for the first quarter of fiscal 2006 increased $6.9 million, or 25%, to $34.3 million. For the first quarter of fiscal 2006, net sales in the semiconductor segment were $18.4 million, or 54%, of total net sales, as compared with $15.8 million, or 57%, of total net sales, in the comparable prior year period, primarily due to an increase in metrology revenues related to development services of $2.3 million and flat panel revenues of $0.8 million. The increase in semiconductor sales was partially offset by a decline in PPS product sales due to a reduction in orders received in the third and fourth quarters of fiscal 2005 as compared with orders received in the same period of the prior year. Net sales in the industrial segment were $15.9 million, or 46% of total net sales, as compared with the $11.6 million, or 42% of total net sales, in the comparable prior year period. The increase of $4.3 million was primarily due to an increase in optical systems solutions sales of medical devices of $2.3 million and next generation introductions of existing metrology products of $1.8 million.

20

Sales in U.S. dollars for the first quarter of fiscal 2006 were $29.7 million, or 87%, of total net sales for the period. For our sales which are based in foreign currency, we are exposed to foreign exchange fluctuations from the time customers are invoiced in foreign currency until collection occurs. Significant changes in the values of foreign currencies relative to the value of the U.S. dollar can impact the sales of our products in export markets, as would changes in the general economic conditions in those markets. Management believes the percentage of sales in foreign currencies may increase in the current year due to an increase in sales denominated in yen to Japanese customers. In the absence of a substantial increase in sales orders in currency other than U.S. dollars, we believe a 10% appreciation or depreciation of the U.S. dollar against the euro and yen would have an immaterial impact on our consolidated financial position and results of operations.

Gross profit for the first quarter of fiscal 2006 totaled $13.2 million, an increase of $2.3 million, or 21%, from $10.9 million in the first quarter of fiscal 2005. Gross profit as a percentage of sales for the first quarters of fiscal 2006 and 2005 were 38% and 40%, respectively. The decrease in gross profit as a percentage of sales in the first quarter of fiscal 2006 was primarily due to a change in product mix, whereby a greater percentage of sales in the first quarter of fiscal 2006 were generated from traditionally low margin products and services, including development services. The products and services generating the lower margins, including development services, certain optics, and opto-mechanical assemblies, accounted for 27% of sales in the first quarter of fiscal 2006 as compared with 14% in the prior year period.

SG&A in the first quarter of fiscal 2006 amounted to $6.4 million, an increase of $0.7 million, or 12%, from $5.7 million in the first quarter of fiscal 2005. As a percentage of net sales, SG&A for the first quarter of fiscal 2006 and fiscal 2005 was 19% and 21%, respectively. The increase in SG&A as a percentage of sales was due to increasing our presence in the Pacific Rim with the opening of new offices within the last year in Korea, Taiwan, and mainland China to support anticipated future growth. Additionally, $0.2 million was attributable to share-based compensation expense.

RD&E for the first quarter of fiscal 2006 totaled $3.5 million, an increase of $0.3 million, or 9%, from $3.2 million in the first quarter of fiscal 2005. This increase was primarily due to costs associated with our semiconductor initiatives in the flat panel display and process control areas and $0.1 million in share-based compensation expense.

The income tax expense from operations in the first quarter of fiscal 2006 totaled $1.4 million, or 38% of pre-tax earnings, which compares with an income tax expense of $0.8 million, or 35% of pre-tax earnings, in the first quarter of fiscal 2005. The increase in the effective tax rate is primarily due to increased income in foreign operations, which operate in higher tax jurisdictions, and an increase in tax upon additional monies repatriated from these foreign operations.

RELATED PARTY TRANSACTIONS

In September 2002, we entered into a contract with Canon Inc. related to the development of certain interferometers. In March 2004, we signed a preliminary agreement to begin further add-on work; the definitive agreement for this additional work was signed in December 2004. In February 2005, we entered into two additional agreements with Canon Inc. related to the development of prototype production tools and accessories. During the three months ended September 30, 2005 and September 30, 2004, we recognized revenue in the semiconductor segment of $4.0 million and $1.7 million, respectively, from these contracts.

LIQUIDITY AND CAPITAL RESOURCES

At September 30, 2005, working capital was $64.9 million, an increase of $1.6 million from $63.3 million at June 30, 2005. We maintained cash, cash equivalents, and marketable securities at September 30, 2005 totaling $58.5 million, an increase of $1.6 million, from $56.9 million at June 30, 2005. Major fluctuations in working capital included decreases in accrued liabilities of $4.5 million, due to the timing of several payments, and $1.8 million in accounts payable, and an increase in inventory of $1.3 million, partially offset by a $3.0 million decrease in accounts receivables due to several large customer payments and an increase in progress payments from customers of $2.9 million. There were no borrowings outstanding under our $3.0 million bank line of credit at September 30, 2005.

Acquisitions of property, plant, and equipment were $1.4 million during the first quarter ended September 30, 2005. Management believes that cash generated from operations, together with the liquidity provided by existing cash balances, will be sufficient to satisfy our liquidity requirements for the next 12 months.

CRITICAL ACCOUNTING POLICIES, SIGNIFICANT JUDGMENTS, AND ESTIMATES

The discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of

21

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

Share-Based Payments

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

Revenue Recognition and Allowance for Doubtful 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 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.

22

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, 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.

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.

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 Annual report on Form 10-K, as amended by Amendment No. 2, for the year ended June 30, 2005.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

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

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

Item 4. Controls and Procedures

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/A 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 our Form 10-K/A being filed concurrently herewith 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. We had carried out an evaluation, as of September 30, 2005, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures. In light of the material weakness in internal control over financial reporting referenced above, our Chief Executive Officer and Chief Financial Officer now have concluded that our disclosure controls and procedures were not effective at a reasonable assurance level as of September 30, 2005.

In response to this material weakness, management performed additional analyses and other post-closing procedures to ensure our restated consolidated financial statements were prepared in accordance with generally accepted accounting principles. Accordingly, management, including our Chief Executive Officer and Chief Financial Officer, believes the restated 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.

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 inter-company transactions, including dedicating additional resources to our consolidation processes 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 eliminated in consolidation.

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PART II - Other Information

Item 6. Exhibits
(a)	Exhibits:
	10.1*	Zygo Restricted Stock Agreement
	10.2*	Zygo Stock Option Agreement
	31.1	Certification of Chief Executive Officer under Rule 13a-14(a)
	31.2	Certification of Chief Financial Officer under Rule 13a-14(a)
	32.1	Certification of Chief Executive Officer and Chief Financial Officer

* Exhibits were filed with the form 10-Q as originally filed on November 9, 2005.

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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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