Zygo Corporation is a worldwide supplier of optical metrology instruments, precision optics, and electro-optical design and manufacturing services, serving customers in the semiconductor capital equipment and industrial markets. We conduct the majority of our manufacturing in our 153,500 square foot facility in Middlefield, Connecticut and our 39,780 square foot facility in Tucson, Arizona.

On April 2, 2009, Electro Scientific Industries, Inc. ("ESI") and ZYGO agreed to terminate their previously executed merger agreement. Pursuant to the terms of the settlement agreement, ZYGO agreed to pay ESI a break up fee of $5.4 million, and an additional $1.2 million in the event that on or before November 2, 2009, ZYGO's Board of directors approves an alternate transaction proposal for the merger or sale of the company. A reevaluation of the proposed merger with ESI by ZYGO's Board was necessitated by changes in conditions since the merger agreement was executed on October 15, 2008, and led to the withdrawal by the ZYGO Board of its recommendation in favor of the merger agreement.

Orders for the three months ended in March 31, 2009 were $15.6 million, as compared with $39.1 million for the comparable prior year period. Orders for our company's Metrology Solutions segment accounted for 44% of the orders received, with the Optical Systems segment accounting for 56% of orders. The $25.8 million decline in orders from the same period of the prior year occurred primarily in the Metrology Solutions segment, which experienced reduced orders for instruments of $9.9 million, display solutions of $8.3 million, lithography products of $7.7 million, and vision systems of $1.0 million, slightly offset by an increase in orders of $1.1 million in the semiconductor solutions business. Within the Optics segment, orders increased by $2.3 million, primarily due to an increase in orders of laser fusion optics of $2.7 million and contract manufacturing of $1.0 million, partially offset by a decline in orders in precision optics of $1.4 million. We also experienced a decrease of 48% in sales for the three months ended March 31, 2009 as compared with the prior year period, primarily as a result of the global economic downturn.

Demand for certain of our products is impacted by various conditions affecting all our markets. The downturn in the semiconductor market, in particular, affects all of our Metrology Solutions segment product lines in varying degrees. The length and severity of the current downturn in the semiconductor industry is difficult to predict. Based on recent communications with our semiconductor customers and revised external market forecasts, we believe that there will be continued pressure on demand for several of our products at least through the end of fiscal 2009.

In response to the decline in sales and orders, we have taken and continue to take various actions to mitigate the effects on our company of the downturn in the global economy, including reductions in work force, salary adjustments, unpaid furloughs, suspension of our matching 401-K program, and a reduction in director fees. These actions are expected to save us approximately $9.6 million on an annualized basis. We are also discussing partnership opportunities with established semiconductor equipment manufacturers to combine the strength of our core semiconductor technology with a partner's strength in the system automation, sales, and service of high volume manufacturing equipment. Pending a successful conclusion of ongoing discussions with semiconductor equipment manufacturers, we could achieve another $4.0 - $5.0 million of annualized cost savings. There may be further restructuring actions and related charges.

The discussion and analysis of our financial condition and results of operations are based upon our condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these condensed consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues, and expenses, and related disclosures at the date of our condensed consolidated financial statements. On an on-going basis, management evaluates its estimates and judgments, including those related to bad debts, inventories, marketable securities, warranty obligations, income taxes, long-lived assets, 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. As discussed in Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" of the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 2008, as amended by Form 10-K/A, management considers the Company's policies on revenue recognition and allowance for doubtful accounts; inventory valuation; other than temporary impairment of marketable securities; share-based compensation; warranty costs; accounting for income taxes; valuation of long-lived assets; and accruals for health insurance to be critical accounting policies due to the estimates, assumptions, and application of judgment involved in each.

As discussed below and in Note 4 to the Condensed Consolidated Financial Statements, we adopted the provisions of Financial Accounting Standards Board Statement of Financial Accounting Standards No. 157, "Fair Value Measurements" ("SFAS 157") (with the exception of the application of the statement to non-recurring non-financial assets and non-financial liabilities). SFAS 157 defines fair value, establishes a framework for measuring fair value in accordance with generally accepted accounting principles, and expands disclosures about fair value measurements. The provisions of SFAS 157 were effective for our fiscal year beginning July 1, 2008. The adoption of the provisions of SFAS 157 did not have a material effect on us.

As discussed below and in Note 14 to the Condensed Consolidated Financial Statements, we adopted the provisions of Financial Accounting Standards Board Statement of Financial Accounting Standards No. 161, "Disclosures about Derivative Instruments and Hedging Activities, an amendment of FASB Statement No. 133" ("SFAS 161") during the third quarter of fiscal 2009. SFAS 161 requires entities to provide enhanced disclosure about how and why the entity uses derivative instruments, how the instruments and related hedged items are accounted for under SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," and how the instruments and related hedged items affect the financial position, results of operations, and cash flows of the entity. The adoption of the provisions of SFAS 161 did not have a material effect on us.

                             RESULTS OF OPERATIONS

Net Sales


                                                 Fiscal 2009             Fiscal 2008
                                            ---------------------   ---------------------
                                                       Net Sales               Net Sales
(Dollars in millions)                       Amount         %        Amount         %
---------------------                       -------   -----------   -------   -----------
Quarter ended March 31
                      Metrology Solutions   $  13.9            70 % $  24.4            63 %
                      Optical Systems           6.1            30 %    14.1            37 %
                                            -- ----   --- -------   - -----   --- -------
                      Total                 $  20.0           100 % $  38.5           100 %
                                            -- ----   --- -------   - -----   --- -------

Nine months ended March 31
                      Metrology Solutions   $  66.1            72 % $  73.5            67 %
                      Optical Systems          25.8            28 %    37.0            33 %
                                            -- ----   --- -------   - -----   --- -------
                      Total                 $  91.9           100 % $ 110.5           100 %
                                            -- ----   --- -------   - -----   --- -------

Overall, net sales for the three months ended March 31, 2009 decreased 48% as compared with the prior year period, reflecting decreases in the Metrology Solutions segment sales of 43% and in Optical Systems segment sales of 57%. The decrease in Metrology Solutions segment net sales was primarily due to volume decreases in lithography of $6.5 million, instruments of $1.6 million, display solutions of $1.6 million, and semiconductor solutions of $0.6 million. These volume decreases, in large measure, are due to a reduction in orders that appears to be tied directly to the general global economic downturn, most notably in the semiconductor industry. A decrease in orders from Canon accounted for the majority of the decrease in lithography sales. The decrease in the Optical Systems segment sales occurred across all operations but was the most pronounced in contract manufacturing and laser fusion, which had decreases of $4.6 million and $2.3 million, respectively. The decrease in contract manufacturing sales is primarily related to reductions in shipments for certain medical device equipment and a reduction in engineering projects.

Net sales for the nine months ended March 31, 2009 decreased 17% as compared with the prior year period, reflecting a decrease in the Metrology Solutions segment sales of 10% and a decrease in Optical Systems segment sales of 30%. The Metrology Solutions segment net sales decrease was primarily due to decreased volume in lithography of $7.5 million and in instruments of $4.3 million, partially offset by sales increases in display solutions of $2.9 million and vision systems of $2.0 million. Vision systems was acquired in February of 2008 resulting in only one month of vision systems sales being included in the third quarter of fiscal 2008.The decrease in the Optical Systems segment net sales was due primarily to decreases in contract manufacturing of $6.8 million and volume decreases of $4.4 million in the laser fusion and precision optics areas. The decrease in contract manufacturing sales was primarily due to a reduction in engineering projects and the volume loss on product manufacturing.

Sales in U.S. dollars for the three and nine months ended March 31, 2009 were approximately 80% and 77% of total net sales, respectively, with the remaining 20% and 23%, respectively, being in Euro or Yen. 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, or in the general economic conditions in our export markets, could materially impact the sales of our products in these markets and our Condensed Consolidated Financial Position and Results of Operations.