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.

Orders for the three months ended September 30, 2009 (our first quarter of fiscal 2010) were $22.7 million, as compared with $14.8 million and $28.8 million for the fourth quarter and first quarter, respectively, of fiscal 2009. Orders for our Metrology Solutions segment accounted for 68% of the orders received, with the Optical Systems segment accounting for 32% of orders. The increase in orders from the fourth quarter of fiscal 2009 is due to increases in the Metrology Solutions segment of $5.1 million and of $2.8 million in the Optical Systems segment. The increase in Metrology Solutions segment orders was primarily for our instruments products and extended over a number of different industries. The $6.1 million decline in orders from the same period of the prior year occurred primarily in the Metrology Solutions segment, which experienced reduced orders across all product lines except for Vision Systems, which increased by $1.4 million. Within the Optics Systems segment, orders increased by $1.2 million compared with the three months ended September 30, 2008, primarily due to an increase in orders of laser fusion optics of $2.0 million and contract manufacturing of $0.8 million, partially offset by a declines in orders in precision optics of $1.6 million. Our Metrology Solutions segment now includes an OEM product category, which consists of lithography products, display sensor heads, and semiconductor sensor heads. Our Optical Systems segment continues to include our optical components and electro-optics contract manufacturing products.

In October 2009, we announced a strategic business relationship with Toho Technology Corporation ("Toho") of Nagoya, Japan, pursuant to which Toho will have the exclusive right to certain technology in the manufacturing and distribution of products to the large substrate Flat Panel Display ("FPD") market. Leveraging Toho's strength in manufacturing and design, proximity to the Asian market, and significant presence in the FPD market, allows us to accelerate the deployment of our technology and sale of sensor heads, while enhancing customer application and service support.

In September 2009, we discontinued the Singapore IC packaging operations related to our Vision Systems business due to continuing operating losses and net cash outflows. The results of operations for the aforementioned operations are presented in the Company's Condensed Consolidated Financial Statements as discontinued operations.

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, pay reductions, unpaid furloughs, suspension of our matching 401-K program, and a reduction in director fees. Further restructuring actions and related charges continue to be reviewed, as appropriate.

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, 2009, as amended, 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.

On July 1, 2009, we adopted authoritative guidance that changes the accounting and reporting for minority interests. Minority interests have been recharacterized as non-controlling interests and are reported as a component of equity separate from the parent's equity. Purchases or sales of equity interests that do not result in a change in control will be accounted for as equity transactions. In addition, net income attributable to the non-controlling interest will be included in consolidated net income on the face of the condensed consolidated statements of operations, and upon a loss of control, the interest sold, as well as any interest retained, will be recorded at fair value with any gain or loss recognized in earnings. We have classified non-controlling interest (previously minority interest) as a component of equity for all periods presented. The new guidance is reflected in the condensed consolidated financial statements for all periods presented.

                             RESULTS OF OPERATIONS


Net Sales

                                                       Fiscal 2010             Fiscal 2009
                                                   --------------------    --------------------
(Dollars
in                                                            Net Sales               Net Sales
millions)                                          Amount         %        Amount         %
---------                                          -------    ---------    -------    ---------
Quarter ended
September 30
                       Metrology Solutions         $  16.0           75 %  $  26.8           71 %
                       Optical Systems                 5.3           25 %     10.7           29 %
                                                   -- ----    ---------    -- ----    ---------
                       Total                       $  21.3          100 %  $  37.5          100 %
                                                   -- ----    ---------    -- ----    ---------

Overall, net sales for the three months ended September 30, 2009 decreased 43% as compared with the prior year period, reflecting decreases in Metrology Solutions segment sales of 40% and in Optical Systems segment sales of 50%. The decrease in Metrology Solutions segment net sales was primarily due to volume decreases in lithography of $4.6 million, instruments of $4.0 million, and display solutions of $3.9 million, partially offset by sales increases in semiconductor solutions of $1.2 million and vision systems of $0.4 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 was primarily due to decreases in contract manufacturing and precision optics of $3.9 million and $1.3 million, respectively. The decrease in contract manufacturing sales is primarily related to reductions in shipments to multiple customers based on their respective inventory needs.

Sales in U.S. dollars for the three months ended September 30, 2009 and 2008 were approximately 67% and 77% of total net sales, respectively, with the remaining 33% 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.