ZYGO [Logo]
                                                              ------------------

                                                              Zygo Corporation
                                                              1997 Annual Report





                                  M A K I N G

                               P R E C I S I O N

                                    E V E N

                                    M O R E

                                P R E C I S E .



                                    [Photo]





<PAGE>


<TABLE>

CONSOLIDATED FINANCIAL HIGHLIGHTS
(Thousands, except per share amounts)

<CAPTION>
                                                                 Fiscal Year Ended June 30,          Percentage Change
                                                             ---------------------------------   ---------------------------
                                                               1997       1996(1)       1995     1996 to 1997   1995 to 1996
                                                             -------      -------      -------   ------------   ------------
<S>                                                          <C>          <C>          <C>            <C>           <C>
Net sales ..............................................     $87,220      $57,374      $32,233        52%            78%
Earnings before acquisition-related charges (2) ........     $13,960      $ 7,799      $ 2,749        79            184
Net earnings per common and common equivalent      
  share before acquisition-related charges (2)(3) ......     $  1.16      $  0.72      $  0.32        61            125
Net earnings ...........................................     $ 2,877      $ 7,799      $ 2,749       (63)           184
Net earnings per common and common                           
  equivalent share (3) .................................     $  0.24      $  0.72      $  0.32       (67)           125
Weighted average common shares and                           
  common dilutive equivalents outstanding (3) ..........      11,998       10,878        8,484        10             28

<CAPTION>
                                                                          June 30,                    Percentage Change 
                                                             ---------------------------------   ---------------------------
                                                               1997       1996(1)       1995     1996 to 1997   1995 to 1996
                                                             -------      -------      -------   ------------   ------------
<S>                                                          <C>          <C>          <C>            <C>           <C>
Working capital ........................................     $47,633      $47,148      $17,072         1%           176%
Stockholders' equity ...................................     $62,408      $54,087      $22,333        15            142

----------
<FN>
(1)  Restated to reflect the acquisition of NexStar Automation, Inc. as a pooling-of-interests. Periods prior to fiscal 1996
     have not been restated due to immateriality.

(2)  Excludes nonrecurring acquisition-related charges of $11,083,000 incurred in the first quarter of fiscal 1997.

(3)  Restated to reflect a 2-for-1 stock split effected in the form of a 100% stock dividend declared on January 23, 1997,
     and paid on February 27, 1997 to stockholders of record on February 3, 1997.
</FN>
</TABLE>

             [GRAPHICAL REPRESENTATION OF DATA OF BAR CHARTS BELOW]

                                   NET SALES
                                 (in thousands)

              1993 .................................    $22,702
              1994 .................................    $24,141
              1995 .................................    $32,233
              1996 .................................    $57,374
              1997 .................................    $87,220
                                                        

                          EARNINGS BEFORE INCOME TAXES
              Excluding Acquisition-Related Charges (in thousands)

              1993 .................................    $   698
              1994 .................................    $ 1,328
              1995 .................................    $ 3,956
              1996 .................................    $11,558
              1997 .................................    $21,121


                              NUMBER OF EMPLOYEES
                                   (Year End)

              1993 .................................    193
              1994 .................................    179
              1995 .................................    210
              1996 .................................    287
              1997 .................................    399


                               SALES PER EMPLOYEE

              1993 .................................    $113,000
              1994 .................................    $132,000
              1995 .................................    $173,000
              1996 .................................    $224,000
              1997 .................................    $231,000
                                                        
CORPORATE PROFILE

Zygo Corporation is a customer-focused technology leader well known for
developing yield-enhancement solutions for precision manufacturing industries.
Zygo solutions employ process measuring instruments, automation technology, and
precision components to benefit a wide variety of industries, including:
semiconductor capital equipment and components, data storage, automotive,
optical, and R&D.

Some key applications for Zygo solutions include: semiconductor mask defect
analysis, characterization of disks and heads used in hard disk drives,
ultra-precise measurement of semiconductor stepper stage position, fabrication
of optical components for laser fusion research, and automation for disk drive
manufacturing processes. 

Founded in 1970, Zygo is a publicly-owned company with shares traded on the
NASDAQ exchange. The Company is headquartered in a 100,000-square-foot (growing
to 135,000) facility in Middlefield, Connecticut, with manufacturing, regional
sales, service, and technology centers in Connecticut, California, and Colorado,
and distributors/agents worldwide providing local customer support.

-------------------------------------------------------------------------------
On the cover is a portion of a 3D measurement plot of the surface curvature of
an in-process hard disk platter, as measured and analyzed by Zygo instruments
and software. The shape of the disk's surface is one of the critical elements
manufacturers must control in order to make higher-density drives.
-------------------------------------------------------------------------------

<PAGE>


                                                                               1
TO OUR SHAREOWNERS

Your company concluded fiscal 1997 by posting record performance for the third
consecutive year. These results also mark the fifth year in a row of improved
year over year performance. Net sales of $87 million for fiscal 1997 were up
some 52% as compared to fiscal 1996 net sales of $57 million. As was the case in
fiscal 1996 and 1995, operating profits, pretax profits, and net earnings per
share in fiscal 1997, excluding nonrecurring acquisition-related charges, not
only increased over the previous year's level, but attained historical highs for
your company. Net earnings in fiscal 1997 of $1.16 per share, excluding one-time
acquisition-related charges, increased 61% over the $.72 per share recorded in
fiscal 1996. Continued high productivity within our operations and increased
revenues in all sectors of our business - systems, components, accessories, and
services - drove this strong earnings performance. The demand for our products,
systems, and services continued strong throughout fiscal 1997 and not only
fueled the significant revenue increases, but also resulted in the establishment
of a year-end record backlog of nearly $39 million, up some 77% versus the $22
million backlog at the end of fiscal 1996. As well as posting outstanding
operations performance in fiscal 1997, your company also made progress in a
number of other significant areas resulting in a strengthened ability to serve
our customers and provide increased value to our loyal shareowners. Included in
these activities are a 2-for-1 stock split in the third quarter of our fiscal
year, the successful integration of our subsidiary companies, Technical
Instrument Company and NexStar Automation, Inc., receipt of two prestigious
awards for our newly commercialized ZMI 2000 product line, selection by Lawrence
Livermore National Laboratory as a primary optics supplier for the National
Ignition Facility, receipt of ISO 9001 certification at our Middlefield
operations, and as we began fiscal 1998, the announcement of the addition of two
new members to our corporate family, Sight Systems, Inc. and Digital Instruments
Inc. Let's address each of these areas individually. 

                                  ---------

                                   [PHOTO]
                              OF GARY K. WILLIS
                                    
                                  ---------

STOCK SPLIT: In February of 1997, during the third quarter of our fiscal year,
your board of directors had the pleasure of authorizing a 2-for-1 stock split
effected in the form of a stock dividend paid on February 27, 1997 to
shareowners of record on February 3, 1997. This stock split was our second in as
many years, following a 3-for-2 split effected on August 21, 1995, during the
first quarter of fiscal 1996. The board's action to effect the split responded
to the increasing demand for our company's securities and resulted in further
increases to the practical float of the Company's shares and should further
attract value-oriented institutional investors to your company.

INTEGRATION OF ACQUISITIONS: During August and September of 1996, we completed
the acquisitions of Technical Instrument Company and NexStar Automation, Inc.,
respectively. These acquisitions broadened our measurement capability with the
addition of confocal microscopy technology and added parts handling and discreet
component automation capabilities to our systems offering. Both of these
complementary strengths furthered our ability to provide yield improvement
solutions to our high technology industry customers. The enhanced value of these
solutions became readily apparent to our customers and resulted in accelerated
growth rates of our Middlefield, Connecticut, NexStar, and Technical Instrument
operations.

AWARD WINNING TECHNOLOGY: Once again, during fiscal 1997, your company was
recognized for its innovative technology and the creative development of new
products. We were honored to receive two most prestigious awards for the
introduction of our ZMI 2000 motion measurement and precision positioning
systems: the Photonics Circle of Excellence Award given by Photonics Spectra
magazine to recognize "the 25 most innovative new products" and the R&D 100
Award selected by R&D magazine as "one of the 100 most significant new technical
products of the year." This was the fourth



<PAGE>


2


Circle of Excellence Award and the eighth R&D 100 Award received by your
company. We, of course, are honored to receive such recognition. 

NATIONAL IGNITION FACILITY CONTRACT: At the close of our fiscal year, we
received the initial contracts for the creation of a world class optical
components manufacturing facility from the Lawrence Livermore National
Laboratory. This award selected Zygo as a primary optical components supplier
for the National Ignition Facility to be built at Lawrence Livermore National
Laboratory in California. The National Ignition Facility is being constructed
for, and funded by, the United States Department of Energy for the peaceful
pursuit of nuclear fusion technology. This contract will result in the creation
of a world class optical manufacturing facility at Zygo Middlefield,
Connecticut, headquarters and as the future funding of the program is approved
by Congress, a continuing stream of revenue as the optics component production
continues beyond the turn of the century. In winning this contract, Zygo has
been once again recognized as the premier worldwide supplier of precision flat
optical components.

ISO 9001 CERTIFICATION: Our Middlefield operation was honored to receive ISO
9001 certification in March of 1997. This culminated a multiyear effort of all
of the employees in Middlefield in our total quality management program. A major
factor for our improved financial performance and enhanced ability to satisfy
customers resulted from our quality teams' efforts identifying areas of our
business requiring improvement and installing countermeasures to make such
improvements. ISO certification is a valued recognition of the creation of high
quality processes, procedures, and practices.

--------
ISO 9001
 [LOGO]
--------

ADDITIONS TO THE CORPORATE FAMILY: As we began fiscal 1998, we had the pleasure
of announcing two new additions to the corporate family: Sight Systems, Inc. and
Digital Instruments, Inc. The acquisition of Sight Systems, Inc. was completed
on August 19, 1997 and further strengthens our ability to provide yield
improvement solutions to our customers by broadening our measurement capability
through the addition of enhanced application-specific vision metrology systems.
The letter of intent announcing our intent to acquire Digital Instruments, Inc.
was signed on July 22, 1997 and this acquisition is expected to be completed
through the approval of our shareowners before the end of calendar year 1997.
Digital Instruments is the worldwide leader in the supplying of scanning probe
microscopy and the addition of this technology strengthens our precision
measurement capability. With these acquisitions, we have created the world's
leading supplier of precision metrology and measurement equipment. Both of these
acquisitions will enhance our ability to provide yield improvement solutions to
the high technology market, and we look forward with enthusiasm to integrating
them into our company during fiscal 1998.

OUTLOOK: As we enter fiscal 1998, we are confident in our ability to continue to
better serve our customers and further our performance track record. Our strong
financial position, our operating productivity improvements, our strengthened
competitive product position through new product introductions, and our enhanced
ability to provide yield improvement solutions through the addition of our
acquired companies, all will allow us to take advantage of the opportunities
that present themselves during fiscal 1998. Although no one can predict with
certainty the strength of the demand for our goods and services generated by the
markets we serve, we are optimistic about the future potential of your company
based on our strengthened market position. You, of course, can count on the best
efforts of all of us to continue to drive your company forward. Once again, we
thank you for your continued interest in, and support of, your company.


Sincerely,


/s/ GARY K. WILLIS
-----------------------------------------
    Gary K. Willis
    President and Chief Executive Officer


September 11, 1997

<PAGE>


                                                                               3
PRECISION IS AT THE HEART OF THE SOLUTION

Growing out of the need to remain viable in today's fiercely-competitive
business climate, manufacturers all over the world have been fighting a
continuous battle to retain their existing customers and win over new ones. The
successful ones have realized that the way to do this is simple in concept -
give their customers what they want with a cost/performance value better than
their competition's. Putting this concept into practice means that manufacturers
must continually improve the quality and reliability of their products while
simultaneously reducing production costs.

In some situations, this means reducing the physical size of the product while
increasing it's performance; in other situations, it means making existing
products to much tighter specifications to improve performance and reliability.
In both cases, it is precision that is at the heart of the solution - precision
to produce miniaturized components that do many times the work of their bulky
predecessors, and precision to produce components for everyday-use products that
outperform, outlast, and represent a greater value than previous models.

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                                    [PHOTO]

Everyday-use products, like contact lenses, are manufactured in mass quantity
with greater precision than ever before. Zygo precision helps manufacturers
improve their processes to make better products at lower cost.
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Realizing that precision manufacturing holds the answer to maintaining a
competitive edge, manufacturers are facing production challenges unlike any they
had faced in the past. As new manufacturing techniques were developed to produce
smaller components and improve the precision of existing ones, it quickly became
clear that traditional batch sample testing and manual handling of components
would no longer be sufficient. To meet the challenges of maintaining product
quality, high throughput, and high production yields, new measurement
technologies for evaluating the precision of in-process products, and new
automation technologies for handling components without causing damage or
contamination, would be essential.

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                                    [PHOTO]

Precision manufacturing, once reserved for hi-tech devices like computer hard
disk drives and semiconductor chips, is growing rapidly in many other
industries. Zygo precision helps a wide variety of manufacturers achieve their
quality and production goals.
                                    [PHOTO]
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Zygo Corporation has been monitoring this growing trend in the manufacturing
industry and has committed its considerable resources in precision measurement
and automation technologies to develop solutions that help precision
manufacturers attain their quality and production goals. The next few pages
highlight some key industries that have made astounding progress in pushing the
envelope of product quality and production yields, and have done so with the
help of Zygo's solutions. 

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                                    [PHOTO]

Highly-sophisticated electronic circuits, printed on miniature semiconductor
chips, make possible extremely compact electronic devices like cellular
telephones. Zygo precision helps the semiconductor industry pack more and more
circuitry onto microchips.
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<PAGE>


4


DATA STORAGE INDUSTRY

The data storage industry, makers of hard disk drive components and assemblies
used in all computer systems sold in the world today, is an excellent example of
how far the precision, performance, value, and manufacturing volume of
electromechanical devices has advanced in a relatively short period of time.

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                     [GRAPHICAL REPRESENTATION OF BAR CHART]

                            MAGNETIC HEAD SIZE (%)
                            AREA DENSITY

                               Head Size          Areal Density
           Year                 (percent)   (Gigabits per square inch)
           ----                 ---------   --------------------------
           1982 ...........         100%                .03
           1987 ...........          70%                .06
           1992 ...........          50%                .10
           1997 ...........          30%                .85

The physical size of magnetic heads is steadily decreasing, enabling
corresponding increases in the areal density of disk drives.
--------------------------------------------------------------------------------

The first disk storage system for computers had a capacity of just five
megabytes, using a total of 50 rigid disks, each 24-inches in diameter. Because
this device could access data at random, it was tremendously faster than the
linear tape storage devices in use at the time, and opened up the possibility of
using computers for a wide variety of tasks that were previously impractical.
Hard disk technology steadily advanced; disk drives got physically smaller,
while their storage capacity and reliability continued to rise, and their
per-megabyte cost continued to decline. In the early 1980's, Zygo recognized the
business potential of the data storage industry and began developing specialized
software applications for our precision measuring instruments to satisfy the
growing needs of the data storage industry.

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                                    [PHOTO]

Zygo's automated inspection station (above) automatically certifies and sorts
in-process disks, and our Pegasus 2000 system (below) accurately measures the
flying height of in-process heads. Both systems are used on the production line
to remove substandard components from the process.
--------------------------------------------------------------------------------

The data storage industry's interest and confidence in Zygo's instruments and
automation solutions has grown at an increasing rate over the years. Once used
only in new-product development laboratories, Zygo solutions are now an integral
part of the manufacturing process. Zygo instruments and systems are installed on
production lines measuring hard disk platter flatness, and air-bearing surface
geometry, pole tip recession, pole tip dimensions, and flying height of magnetic
heads. Our automation systems provide precise, reliable, contamination-free
handling of drive components for processing and assembly.

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                                    [PHOTO]

Zygo's AAB System automatically measures critical air bearing surface geometries
on over 20,000 heads per day, generating SPC data to help manufacturers improve
their processes.
--------------------------------------------------------------------------------

Looking ahead to the future, Zygo is committed to working closely with the data
storage industry to develop innovative solutions to the new manufacturing
challenges that will undoubtedly arise as the demand to pack more information
into smaller spaces continues to accelerate.

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                                    [PHOTO]

Controlling the characteristics of a magnetic head's pole tips (top) is
essential for manufacturing high-capacity disk drives. Zygo machine vision
metrology systems measure critical x-y dimensions, and our interferometric
systems measure the amount of recession. The 3D measurement plot (above) shows
the slight curvature of a head's air-bearing surfaces, required to maintain
proper flying height.
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<PAGE>


                                                                               5

SEMICONDUCTOR COMPONENT MANUFACTURING INDUSTRY

--------------------------------------------------------------------------------
                                    [PHOTO]

A photomask (below) is the "master" used to print one layer of a semiconductor
chip. Some chips require as many as 20 photomasks; a small defect in any one of
them could result in thousands of unusable chips.
--------------------------------------------------------------------------------

--------------------------------------------------------------------------------

                    [GRAPHICAL REPRESENTATION OF BAR CHART]

                                [ ] LINE WIDTH (um) AND
                                [ ] CHIP DENSITY
                          Millions of Bit/Chip (DRAM)

                            Line Widths           Chip Density
           Year            (micrometers)    [Millions of bits/chip (DRAM)]
           ----            --------------   ------------------------------
           1982 ...........      4.0                   0.256
           1987 ...........      2.0                   2
           1992 ...........      1.0                  16
           1997 ...........      0.35                256

The "line widths" of semiconductor chips is steadily decreasing, enabling
corresponding increases in density of semiconductor device printed on each chip.
--------------------------------------------------------------------------------

--------------------------------------------------------------------------------
                                    [PHOTO]

Multiple semiconductor chips are made at the same time on silicon wafers like
this one. The wafers are then "diced" and the individual chips are put into
"packages", which are then used in a wide variety of products.
--------------------------------------------------------------------------------

In today's world, it's difficult not to encounter something that doesn't have a
semiconductor chip of some type inside. Everyone knows that computers and
calculators rely on these devices, but so do many everyday items like
automobiles, televisions, VCRs, telephones, dishwashers, vacuum cleaners, and
lawnmowers. The intelligence programmed into these chips doesn't think for us,
rather it handles a multitude of tasks to make these appliances more efficient
or easier to use. 

One of the reasons chips have become so commonplace is that manufacturing
techniques have been developed to produce them in much greater quantities and at
much lower cost. Zygo technology has been, and will continue to be, integral in
enabling manufacturers to achieve their ambitious production goals. 

The density of the circuitry on chips has been steadily increasing over the
years, and the growth is accelerating. In the early days of semiconductor
manufacturing, Gordon Moore, founder of Intel Corporation, stated that
semiconductor chip device density would double every two years. He later revised
it to say that the density would double every 18 months. This statement became
known as "Moore's Law" and still holds true today. 

To pack more circuitry on a chip, the lines that comprise the circuitry have to
become thinner. This is known in the semiconductor industry as "line width" and
serves as an indicator of the state of semiconductor manufacturing technology.
Line widths have been steadily decreasing since the semiconductor chip was
invented and, in many of today's chips, the lines are only about 0.35 um
(millionths of a meter) wide. 

With circuitry that small, it doesn't take much of a defect or contaminant to
completely ruin the chip, or a whole batch of chips. Zygo manufactures
specialized microscopes for measuring line widths and defects on wafers, and on
the photomasks containing the circuit patterns printed onto the wafers, to
enable manufacturers to better understand, and improve, their manufacturing
processes. Other Zygo measurement and automation systems are used to measure and
analyze several critical surfaces on wafers, and provide contamination-free
handling and transport during production.

--------------------------------------------------------------------------------
                                    [PHOTO]

Zygo's confocal microscope systems are used to analyze photomask defects, and
manufacturers use the measurement data to improve the process that creates the
photomasks. Special measurement analysis software can simulate the
characteristics of the finished chip's circuitry (above right) before the
photomask is put into actual production.
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<PAGE>


6

SEMICONDUCTOR CAPITAL EQUIPMENT MANUFACTURING

--------------------------------------------------------------------------------
                     [GRAPHICAL REPRESENTATION OF BAR CHART]

     STAGE POSITIONING TOLERANCE                       (In Nanometers)
               1982 ...................................    100
               1987 ...................................     67
               1992 ...................................     37
               1997 ...................................     10

With the demand for increasing chip density and decreasing line widths, the
positioning accuracy tolerances for photolithography steppers are steadily
becoming more stringent as well.
--------------------------------------------------------------------------------


--------------------------------------------------------------------------------
                                    [PHOTO]

Zygo's GPI interferometer system (below) is the accepted standard in the optics
industry for extremely high precision measurements of optical surfaces and lens
systems. These systems are used to verify the precision of the lenses
(measurement above) that print the photomask patterns onto the semiconductor
wafer. 
                                    [PHOTO]
--------------------------------------------------------------------------------

Few things in the history of mankind have had as significant an impact on
people's lives as the development and continuing miniaturization of the
semiconductor chip. Central to the manufacture of chips are machines called
photolithography steppers which photographically print the minute circuitry for
many chips onto a semiconductor wafer. Since the circuitry is applied in layers,
the same area on the wafer must be positioned under the stepper's lenses in
exactly the same position each time a new layer is printed.

In the past, when the chips were not as densely packed with circuitry, the
positioning accuracy required was about 50 nanometers (billionths of a meter).
The circuitry on today's densely-packed chips is much smaller and requires a
positioning accuracy of approximately five nanometers. This is a formidable task
for stepper manufacturers.

To meet the challenges of this task, Zygo developed a measurement system that
reliably measures with the accuracy required for today's, and tomorrow's,
steppers. The award-winning ZMI 2000 distance measuring interferometer system
accurately measures the relative position of the stage assembly that moves and
positions the in-process wafer. The ZMI system continuously sends position
information to the motor controllers that move the stage so the wafer can be
positioned precisely where it needs to be. The ZMI system does this with
unsurpassed reliability and accuracy, on production lines that run 24 hours a
day. 

Another of Zygo's technologies is also an integral part of the accuracy of
today's steppers. The lenses that focus the circuitry patterns onto the wafer
must have near-perfect optical characteristics. The manufacturers of these
lenses rely on the accuracy of Zygo's GPI family of interferometer products to
measure and analyze the surface shape and light transmissive qualities of these
lenses, and provide documentation of the measurements.

--------------------------------------------------------------------------------
                                    [PHOTO]

Zygo's award-winning ZMI 2000 (below) distance measuring interferometer system
is used in many photolithography steppers. Its unrivaled accuracy ensures that
each chip on the wafer is in exactly the right position when a new layer is
printed. Individual chips (left) are a labyrinth of minute circuitry,
imperceptible to the unaided eye.

                                  [PHOTO]     Photonics Circle     
                                             of Excellence Award   R&D 100 Award
                                              
                                                   [logo]              [logo]
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<PAGE>


                                                                               7

AUTOMOTIVE PRECISION MANUFACTURING INDUSTRIES

--------------------------------------------------------------------------------
                     [GRAPHICAL REPRESENTATION OF BAR CHART]

                             MANUFACTURING TOLERANCE
               1982 ...................................     20
               1987 ...................................     10
               1992 ...................................      6
               1997 ...................................      3.5

Mass-produced parts, such as those in automobile engines, are becoming more and
more precise as demonstrated by steady tightening of manufacturing tolerances.
--------------------------------------------------------------------------------
                                    [PHOTO]

Zygo's new MESA system greatly expands the range of surfaces that can be
measured with Zygo products. Precision components with a large amount of surface
figure, previously unmeasurable with Zygo instruments, can now be measured with
the MESA, opening up a great many opportunities for in-process measurements.
--------------------------------------------------------------------------------
                                    [PHOTO]
--------------------------------------------------------------------------------

One of the most imitated automobile commercials in recent memory shows a luxury
sedan with a pyramid of champagne glasses sitting on the hood, unwavering, while
the car is run at simulated high speed - or the one where a steel ball rolls
around the seams of the car's perfectly uniform door, hood, and trunk seams.
These commercials are often imitated by other automobile manufacturers who want
to communicate the idea that precision design and manufacturing, once reserved
for luxury-class cars, is now being applied to models aimed at the general
population.

Several years ago, quality and precision in automobile manufacturing was not at
the level it is today. Strong competition forced manufacturers to look for ways
to improve their products' quality, which meant improving not only the design,
but the precision and consistency of the manufacturing process. The
aforementioned commercials and their imitators are indicators of where the
automotive industry, and manufacturing as a whole, is headed - using higher
levels of precision to improve performance and reliability of all kinds of
commonplace products.

Historically, Zygo instruments have been valuable tools in QC labs, used for
measuring and analyzing critical surfaces on production samples. The measurement
data was used by manufacturing engineers to reduce variability and ensure higher
precision. In recent years, a growing number of manufacturers have been making
Zygo instruments an integral part of their production line, measuring and
analyzing surfaces on 100% of components produced by a variety of processes,
including: machining, grinding, molding, extruding, and polishing. Zygo
instruments assess the quality level of the parts to determine which are
acceptable for further processing and which must be rejected for scrap or
rework. They also perform statistical process control analysis on the
measurement data, which manufacturers use to refine the manufacturing process so
that fewer parts are rejected. 

As this trend toward increasing precision in commonplace products continues,
manufacturers will rely even more heavily on Zygo instruments and technologies
to monitor and improve their production processes. 
--------------------------------------------------------------------------------
                                    [PHOTO]

When comparing surface quality of mass-produced machined parts, there is a
dramatic difference between today's parts (above) and parts produced a few years
ago (below).
                                    [PHOTO]
--------------------------------------------------------------------------------
                                    [PHOTO]

Zygo's NewView 200 microscope system measures and analyzes surface structure on
a wide variety of manufactured parts, including honed, ground, cast, turned,
milled, and etched parts.
                                    [PHOTO]
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<PAGE>


8

OUTLOOK FOR THE FUTURE


So what lies ahead? 

To understand the challenges that will face precision component manufacturers in
the future, we need only to look back a few years to see how much the industry
has progressed in such a short time. Extrapolating this development trend shows
that future demand for precision in manufactured goods will increase as more and
more commonplace products are made with higher levels of precision.

Zygo will continue to be an integral part of the progress of precision
manufacturing. We will be developing and acquiring new and innovative
measurement and automation solutions to help manufacturers produce smaller,
faster, more reliable components at a level of precision that wasn't conceivable
a few years ago. 

Traditionally used for applications in the upper reaches of precision
manufacturing, Zygo's product line is being expanded to provide yield
improvement solutions for components with less stringent production tolerances
as well. This approach will greatly expand the number of manufacturing processes
for which we can provide solutions, and open up many new opportunities for the
future. 

We are also dedicated to progressing along the growth and development course
that we have charted for ourselves. By committing resources, both human and
financial, to the task of providing yield-enhancement solutions for precision
manufacturing industries, we will be ensuring our own success by ensuring the
success of our customers.

<PAGE>

<TABLE>


FIVE-YEAR SUMMARY
(Thousands, except per share amounts)                                              Zygo Corporation and Subsidiaries  9

<CAPTION>

                                                                                Fiscal Year Ended June 30,
                                                             ---------------------------------------------------------
                                                               1997       1996(1)      1995        1994         1993
                                                             --------    --------    --------    --------     --------
<S>                                                          <C>         <C>         <C>         <C>          <C>
Net sales ................................................   $ 87,220    $ 57,374    $ 32,233    $ 24,141     $ 22,702
  Instruments and Systems sales ..........................         75%         65%         62%         54%          56%
  Modules and Components sales ...........................         25%         35%         38%         46%          44%
Gross profit .............................................   $ 41,825    $ 25,866    $ 14,231    $ 10,616     $  9,049
  % of sales .............................................         48%         45%         44%         44%          40%
Earnings before taxes and acquisition-related
  charges (2).............................................   $ 21,121    $ 11,558    $  3,956    $  1,328     $    698
    % of sales ...........................................         24%         20%         12%          6%           3%
Earnings before acquisition-related charges (2) ..........   $ 13,960    $  7,799    $  2,749    $    918     $    481
    % of sales ...........................................         16%         14%          9%          4%           2%
Net earnings per common and common equivalent
  share before acquisition-related charges (2)(3) ........   $   1.16    $   0.72    $   0.32    $   0.12     $   0.06
    Earnings per share growth rate .......................         62%        121%        181%         87%         (23)%
Net earnings .............................................   $  2,877    $  7,799    $  2,749    $    918     $    481
Net earnings per common and common
  equivalent share (3) ...................................   $   0.24    $   0.72    $   0.32    $   0.12     $   0.06
Weighted average common share and common
  dilutive equivalents outstanding (3) ...................     11,998      10,878       8,484       7,974        7,804
Research and development .................................   $  7,151    $  5,538    $  3,967    $  2,786     $  3,077
Capital expenditures .....................................   $  4,723    $  2,864    $  1,631    $  1,912     $    910
Depreciation and amortization ............................   $  2,612    $  1,477    $  1,248    $  1,348     $  1,270

<CAPTION>

                                                                                     June 30,
                                                             ---------------------------------------------------------
                                                               1997       1996(1)       1995       1994         1993
                                                             --------    --------     --------    --------     -------
<S>                                                          <C>         <C>         <C>         <C>          <C>
Working capital ..........................................   $ 47,633    $ 47,148    $ 17,072    $ 14,889     $ 14,648
Current ratio ............................................        4.6         5.2         3.6         4.8          4.1
Total assets .............................................   $ 78,799    $ 65,895    $ 29,666    $ 24,499     $ 24,555
Long-term debt (excluding current portion) ...............       --          --          --           481          613
Stockholders' equity .....................................   $ 62,408    $ 54,087    $ 22,333    $ 19,274     $ 18,416
Price-earnings ratio (2) .................................       26.5        30.4        35.2        18.1         38.2
Number of employees at year end ..........................        399         287         210         176          193
Sales per employee - average .............................   $    231    $    224    $    173    $    132     $    113
Book value per common share ..............................   $   5.91    $   5.34    $   2.84    $   2.48     $   2.37
Market price at year-end .................................   $ 30.750    $ 21.875    $ 11.250    $  2.167     $  2.292

</TABLE>
----------
(1)  Restated to reflect the acquisition of NexStar Automation, Inc. as a
     pooling-of-interests. Periods prior to fiscal 1996 have not been restated
     due to immateriality.

(2)  Excludes nonrecurring acquisition-related charges of $11,083,000 incurred
     in the first quarter of fiscal 1997.

(3)  Restated to reflect a 2-for-1 stock split effected in the form of a 100%
     stock dividend declared on January 23, 1997, and paid on February 27, 1997
     to stockholders of record on February 3, 1997

<PAGE>


10

MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION

--------------------------------------------------------------------------------
                          NET SALES BY GEOGRAPHIC AREA
                                 (Fiscal 1997)

                 [GRAPHICAL REPRESENTATION OF PIE CHART BELOW]

            [ ] Domestic (54%) ....................  $47,695
            [ ] Japan (25%) .......................  $21,730
            [ ] Pacific Rim (15%) .................  $12,650
            [ ] Europe and Other (6%) .............  $ 5,145
--------------------------------------------------------------------------------

--------------------------------------------------------------------------------
           GROSS PROFIT AND GROSS PROFIT AS A PERCENT OF NET SALES
                                (in thousands)

                [GRAPHICAL REPRESENTATION OF BAR CHART BELOW]

                                                            Percent
                                               Gross          of
                                               Profit        Sales
                                               ------       ------- 
             1993 .........................   $ 9,049         40%
             1994 .........................   $10,616         44%
             1995 .........................   $14,231         44%
             1996 .........................   $25,866         45%
             1997 .........................   $41,825         48%
                
--------------------------------------------------------------------------------

--------------------------------------------------------------------------------
                              EARNINGS PER SHARE
                    Excluding Acquisition-Related Charges

                [GRAPHICAL REPRESENTATION OF BAR CHART BELOW]

                  1993 .........................   $0.06
                  1994 .........................   $0.12
                  1995 .........................   $0.32
                  1996 .........................   $0.72
                  1997 .........................   $1.16
         
--------------------------------------------------------------------------------

RESULTS OF OPERATIONS

FISCAL 1997 COMPARED TO FISCAL 1996 

Net sales of $87,220,000 for fiscal 1997 increased by $29,846,000 or 52.0% from
fiscal 1996 net sales of $57,374,000. This increase was the result of strong
demand for all of the Company's instruments, systems, and components, as well
as, the addition of Technical Instrument Company ("TIC") from August 8, 1996.
Including TIC on a pro forma basis in fiscal 1996, the increase in net sales in
fiscal 1997, which already included TIC, amounted to $18,761,000 or 27.4%. Net
sales of the Company's instruments and systems, including the impact of TIC,
increased by 75.4% to $65,121,000 and net sales of modules and components, also
including the impact of TIC, increased by 9.1% to $22,099,000, in fiscal 1997,
each from fiscal 1996. These increases in net sales in fiscal 1997 were
principally due to increased market demand from data storage and semiconductor
industry customers. 

The Company's sales outside the United States amounted to $39,525,000 in fiscal
1997, an increase of $12,330,000 or 45.3% from fiscal 1996. Sales in Japan
during fiscal 1997 amounted to $21,730,000, an increase of $1,967,000 over
fiscal 1996 despite a reduction of sales for the Company's motion control
components to Canon Inc. for incorporation into Canon's photolithography
"steppers" used in production of semiconductors. Sales to other geographic
markets outside the U.S. amounted to $17,795,000 in fiscal 1997, an increase of
$10,363,000 or 139.4% from fiscal 1996. This increase was principally the result
of increased demand for the Company's instruments and systems by the data
storage and semiconductor manufacturing industries in the Pacific Rim, the
addition of TIC which has a strong market presence in the Pacific Rim, primarily
among the various producers of semiconductor masks, and increased sales of the
Company's products in Europe due to improved market conditions.


Substantially all of the Company's sales and costs are negotiated and paid in
U.S. dollars. Significant changes in the values of foreign currencies relative
to the value of the U.S. dollar can impact the sales of the Company's products
in its export markets as would changes in the general economic conditions in
those markets. The impact of such changes in foreign currency values on the
Company's sales cannot be measured.

Gross profit in fiscal 1997 amounted to $41,825,000, an increase of $15,959,000
or 61.7% over gross profit of $25,866,000 in fiscal 1996. As a percentage of net
sales, gross profit in fiscal 1997 was 48.0%, as compared to 45.1% in fiscal
1996. Gross profit dollars and gross profit as a percent of net sales increased
principally due to the effect of product mix as the Company's systems generally
sell at higher margins than its OEM metrology components and its optical
components as well as the effect of the volume of net sales and certain
volume-related manufacturing efficiencies.

Selling, general and administrative expenses in fiscal 1997 amounted to
$13,830,000 and increased by $4,330,000 or 45.6% from fiscal 1996. The increase
was primarily due to the impact of including TIC from August 8, 1996,
infrastructure additions, and volume-related expenses, such as commissions paid
to the Company's direct sales personnel and external sales agents. As a
percentage of net sales, selling, general and administrative expenses declined
in fiscal 1997 to 15.9%, as compared to 16.6% in fiscal 1996. 

Research, development and engineering expenses ("R&D") in fiscal 1997 totaled
$7,151,000 and increased by $1,613,000 or 29.1% from fiscal 1996. The increase
in R&D expenses was principally due to the impact of including TIC from August
8, 1996 and increased engineering headcount at the Company's Middlefield,
Connecticut, facilities, partially offset

<PAGE>
                                           Zygo Corporation and Subsidiaries  11

by lower material expenditures. R&D expenses as a percentage of net sales
decreased to 8.2% in fiscal 1997 as compared to 9.7% in fiscal 1996. 

The Company recorded nonrecurring acquisition-related charges in the amount of
$11,083,000 in the three months ended September 30, 1996. The nonrecurring
charges related to $999,000 of expenses incurred to complete the Company's
acquisition of NexStar Automation Inc. ("NexStar") and the write-off of
$10,084,000 of in-process research and development costs in conjunction with the
Company's acquisition of TIC. 

Excluding the nonrecurring acquisition-related charges, the Company's operating
profit in fiscal 1997 was $20,286,000, an increase of $9,458,000 or 87.3% from
operating profit in fiscal 1996. Operating profit in fiscal 1997, including the
nonrecurring acquisition-related charges, amounted to $9,203,000 as compared to
$10,828,000 in fiscal 1996. 

Income tax expense in fiscal 1997 totaled $7,161,000 on earnings before income
taxes of $10,038,000 as compared to $3,759,000 of income taxes in fiscal 1996 on
earnings before income taxes of $11,558,000. The higher tax expense as a
percentage of earnings before taxes in fiscal 1997 compared to fiscal 1996 was
principally a result of the non-tax deductible nature of the $10,084,000 of
in-process research and development charge to earnings in the quarter ended
September 30, 1996. 

Backlog at June 30, 1997, was $38,688,000 compared to $22,397,000 at June 30,
1996, an increase of $16,291,000 or 72.7%. The backlog of the Company's
instruments and systems at June 30, 1997, increased by $8,363,000 or 61.3% from
that at June 30, 1996, principally as a result of stronger demand from customers
in the data storage, semiconductor and other high technology industries for
yield enhancement systems. The backlog of the Company's modules and components
increased by $7,928,000 or 90.5% from the year earlier primarily as a result of
the Company's entering into a contract with the University of California's
Lawrence Livermore National Laboratory ("LLNL"), whereby the Company will be a
primary supplier of large plano optical components for the National Ignition
Facility ("NIF"), a $1.2 billion Department of Energy project at LLNL to produce
the world's largest laser for nuclear fusion research. The contract provides for
the Company to design, manufacture, and equip a world-class optical fabrication
facility at its Middlefield, Connecticut, operations for a fixed price of nearly
$10.0 million over an 18-month period, of which slightly in excess of $5.5
million is presently funded, the majority of which was in backlog at June 30,
1997. 

Net earnings and earnings per share for fiscal 1997 amounted to $2,877,000 and
$.24 as compared to $7,799,000 and $.72, respectively, for fiscal 1996, both
years restated for the 2-for-1 stock split. Excluding nonrecurring
acquisition-related charges, net income for fiscal 1997 totaled $13,960,000, an
increase of $6,161,000 or 79.0% from fiscal 1996. Earnings per share adjusted
for the 2-for-1 stock split, excluding the nonrecurring charges, were $1.16, up
61.1% from $.72 in fiscal 1996, despite a 10.3% increase in shares outstanding.

FISCAL 1996 COMPARED TO FISCAL 1995 

Net sales of $57,374,000 for fiscal 1996 increased by $25,141,000 or 78.0% from
fiscal 1995 net sales of $32,233,000. The increase in net sales in fiscal 1996
was principally due to increased demand for the Company's instruments and
systems from manufacturers of data storage, semiconductor, and other high
technology products. The increase in net sales was also partially attributable
to the inclusion of NexStar Automation, Inc. ("NexStar"). (See note 2). Net
sales of the Company's electro-optical instruments and systems in fiscal 1996,
which accounted for 64.7% of total fiscal 1996 net sales, increased by 86.9%
from fiscal 1995. Net sales of the Company's various components increased by
63.7% in fiscal 1996 from the prior year. 

The Company's sales outside the United States amounted to $27,195,000 in fiscal
1996, an increase of $12,214,000 or 81.5% from fiscal 1995. Sales in Japan
during fiscal 1996 amounted to $19,763,000, an increase of $10,133,000 over
fiscal 1995. The significant increase was due to the improving Japanese economy
and the improved demand for the Company's instruments and systems, including its
motion control systems which are sold to Canon for incorporation into their
step-and-repeat photolithography systems used in semiconductor manufacturing, as
well as the Company's other systems which are sold to Canon for resale in the
domestic Japanese market or used by Canon in their facilities. Sales to other
geographic markets outside the U.S. amounted to $7,432,000 in fiscal 1996, an
increase of $2,081,000 from fiscal 1995. The 38.9% increase was principally the
result of a continuation of strong sales of the Company's electro-optical
instruments, systems and accessories to the data storage and semiconductor
manufacturing industry in the Pacific Rim and increased sales in Europe. 

Gross profit in fiscal 1996 amounted to $25,866,000, an increase of $11,635,000
or 81.8% over gross profit of $14,231,000 in fiscal 1995. As a percentage of net
sales, gross profit in fiscal 1996 was 45.1%, as compared to 44.2% in fiscal
1995. Gross profit dollars and gross profit as a percent of net sales increased
principally due to the increased volume of sales from electro-optical
instruments and systems, optical components, and services, combined with
volume-related manufacturing efficiencies.

<PAGE>

12  MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)

Selling, general and administrative expenses in fiscal 1996 of $9,500,000
increased by $2,963,000 from fiscal 1995. The increase was principally a result
of volume-related expenses, such as commissions, allowance for doubtful
accounts, and product marketing expenses and necessary infrastructure changes
made to support the growth of the business such as additions to sales and
marketing personnel. Approximately 40.3% of the $2,963,000 increase was
attributable to selling, general and administrative expenses relating to the
addition of NexStar. As a percentage of net sales, selling, general and
administrative expenses declined in fiscal 1996 to 16.6%, as compared to 20.3%
in fiscal 1995, principally due to the 78.0% growth in net sales.

Research and development costs in fiscal 1996 totaled $5,538,000 and increased
by $1,571,000 or 39.6% from fiscal 1995. The increase in R&D expenses primarily
resulted from spending on personnel and materials at both the Company's
principal R&D center in Middlefield, Connecticut, and its R&D facility in Simi
Valley, California, which was formed during the second half of fiscal 1995. As a
percentage of net sales, research and development costs were 9.7% and 12.3% in
fiscal 1996 and fiscal 1995, respectively. 

In fiscal 1996, the Company had operating profit of $10,828,000 as compared to
$3,727,000 in fiscal 1995. Operating profit as a percentage of net sales in
fiscal 1996 improved to 18.9% from 11.6% in fiscal 1995. 

Interest income in fiscal 1996 amounted to $946,000 and was $574,000 higher than
in fiscal 1995. This increase was primarily due to higher cash balances,
principally as a result of the sale by the Company of 845,000 shares of its
common stock in a follow-on offering which generated approximately $22.7 million
in net proceeds to the Company. 

Backlog at June 30, 1996, was $22,397,000 compared to $12,993,000 at June 30,
1995. The $9,404,000 or 72.4% increase in backlog was primarily a result of
stronger demand for all of the Company's electro-optical instruments and systems
and the inclusion of NexStar. The backlog of the Company's instruments and
systems at June 30, 1996, increased by $6,688,000 or 96.3% from that at June 30,
1995. The backlog of the Company's modules and components increased by
$2,716,000 or 44.9% from the year earlier as a result of improved demand for the
Company's motion controllers, used in the semiconductor industry, and its
precision optical components. 

The Company reported net earnings and earnings per common and common equivalent
share of $7,799,000 and $.72, respectively, in fiscal 1996 as compared to
$2,749,000 and $.32 per share in fiscal 1995. This reflected an increase in net
earnings and earnings per share of $5,050,000 (183.7%) and $.40 (125.0%),
respectively, over fiscal 1995. Per share figures have been adjusted to reflect
the impact of the 2-for-1 stock split effective February 27, 1997 and have been
restated to reflect the operations of NexStar for the full fiscal year 1996.

LIQUIDITY AND CAPITAL RESOURCES 

At June 30, 1997 working capital was $47,633,000, an increase of $485,000 from
the amount at June 30, 1996, and the Company had cash and cash equivalents of
$10,981,000 and marketable securities amounting to $12,766,000 for a total of
$23,747,000. The $14,737,000 decrease in cash and cash equivalents and
marketable securities from the amount at June 30, 1996 was partially due to the
cash paid for the acquisition of TIC (See note 2) and the repayment of certain
outstanding indebtedness of TIC (See note 10). Trade accounts receivable
increased by $10,765,000, principally as a result of the growth in the Company's
net sales and the timing of shipments in the fourth quarter of fiscal 1997. As a
result of the addition of TIC and necessary inventory to support the growth in
sales of the Company's electro-optical instruments and systems, inventory
increased by $4,494,000 at June 30, 1997 compared to the year earlier. Accounts
payable and accrued expenses increased by $3,033,000 in fiscal 1997 to
$12,905,000 due to normal business activities. The Company's expenditures for
property, plant and equipment totaled $4,723,000 in fiscal 1997 which was
$1,859,000 more than the prior fiscal year. Capital expenditures were primarily
for capacity additions and productivity improvements in the Company's optical
manufacturing facility, construction of a laser manufacturing work cell at the
Middlefield, Connecticut location, and necessary productivity-related leasehold
improvements made at TIC. The Company expects to complete certain building
additions amounting to $4.2 million in fiscal 1998. These expenditures will be
funded by operating cash flows. These building additions include the expansion
of the Middlefield, Connecticut, site facilities by 35,500 square feet to
accommodate the space required for the NIF facility and to provide additional
office facilities. As of June 30, 1997, there were no borrowings outstanding
under the Company's $3,000,000 bank line of credit. Unused amounts under the
line of credit are available for short-term working capital needs. Stockholders'
equity at June 30, 1997, increased by $8,321,000 from the year earlier to
$62,408,000 as a result of net income of $2,877,000, and increases in the
Company's common stock and paid-in capital accounts resulting from the Company's
acquisition of TIC and the exercise of employee stock options. 

Effective June 30, 1997, TIC, a wholly owned subsidiary of the Company, and
Syncotec Neue Technologien und Instrumente GmbH ("Syncotec"), 

<PAGE>
                                           Zygo Corporation and Subsidiaries  13

a German-based company, completed all necessary legal requirements allowing for
the appropriate transfer and registration of 50 percent of Syncotec shares to
TIC. Effective September 1, 1997, the Company, through TIC, purchased the
remaining 50 percent of Syncotec for approximately $2.0 million in a combination
of cash and the Company's common stock. Syncotec designs, develops,
manufactures, and markets certain products which incorporate TIC's confocal
technology for European customers. Syncotec's sales in the year ended December
31, 1996 amounted to $2.9 million (DM4.9 million). 

The Company announced on July 28, 1997 the signing of a letter of intent
providing for the Company's acquisition of Digital Instruments, Inc.
("Digital"), a privately held California based entity that designs, develops,
and manufactures high precision measurement products and systems which use
scanning probe microscopy imaging and metrology technology. These systems are
used in product research and development applications as well as to improve the
production efficiency and manufacturing yields within the data storage,
semiconductor, and other high technology industries. It is expected that the
Company will acquire all the outstanding stock of Digital and an affiliated
corporation in exchange for 7,000,000 shares of the Company's common stock.
Closing the transaction is subject to various conditions and is expected to be
accounted for as a pooling-of-interests. The transaction is subject, among other
things, to approval by the stockholders of the Company, and is expected to be
completed prior to the end of the calendar year 1997. Digital's revenues for the
year ended December 31, 1996 were approximately $50 million. 

Effective August 19, 1997, the Company acquired Sight Systems, Inc. ("SSI"), a
privately held California based business which designs, develops, and
manufactures application-specific machine vision metrology systems, for 287,400
shares of the Company's common stock. The transaction will be accounted for as a
pooling-of-interests. SSI's revenues for the year ended December 31, 1996 were
approximately $3.5 million. 

FORWARD LOOKING STATEMENTS 

This report contains forward looking statements which are subject to a number of
risks and uncertainties that may cause actual results to differ materially from
expectations. These uncertainties include, but are not limited to, general
economic conditions, competitive conditions in markets served by the Company,
most notably high technology markets such as data storage and semiconductor, and
political developments in countries where the Company conducts business.

--------------------------------------------------------------------------------
                                WORKING CAPITAL
                                 (in thousands)

                 [GRAPHICAL REPRESENTATION OF BAR CHART BELOW]

                   1993 .........................   $14,648
                   1994 .........................   $14,889
                   1995 .........................   $17,072
                   1996 .........................   $47,148
                   1997 .........................   $47,633
 
--------------------------------------------------------------------------------

--------------------------------------------------------------------------------
             CAPITAL EXPENDITURES AND DEPRECIATION AND AMORTIZATION
                                 (in thousands)

                 [GRAPHICAL REPRESENTATION OF BAR CHART BELOW]


                                         Depreciation       Capital
                                       and Amortization   Expenditure
                                       ----------------   -----------
        1993 .........................      $1,270          $  910
        1994 .........................      $1,348          $1,912
        1995 .........................      $1,248          $1,631
        1996 .........................      $1,477          $2,864
        1997 .........................      $2,612          $4,723
 
--------------------------------------------------------------------------------

--------------------------------------------------------------------------------
                              STOCKHOLDERS' EQUITY
                                 (in thousands)

                 [GRAPHICAL REPRESENTATION OF BAR CHART BELOW]

                   1993 .........................   $18,416
                   1994 .........................   $19,274
                   1995 .........................   $22,333
                   1996 .........................   $54,087
                   1997 .........................   $62,408

--------------------------------------------------------------------------------

<PAGE>

14  CONSOLIDATED BALANCE SHEETS                Zygo Corporation and Subsidiaries
(Thousands, except share and per share amounts)

<TABLE>
<CAPTION>
                                                                        June 30,   June 30,
                                                                          1997      1996
                                                                        -------    -------
<S>                                                                     <C>        <C>    
Assets 
Current assets:
        Cash and cash equivalents ..................................    $10,981    $18,449
        Marketable securities (note 3) .............................     12,766     20,035
        Receivables (note 4) .......................................     20,730     10,627
        Inventories (note 5) .......................................     11,656      7,162
        Costs in excess of billings (note 6) .......................      2,082        252
        Prepaid expenses and taxes .................................        590        233
        Deferred income taxes (note 17) ............................      2,205      1,506
                                                                        -------    -------
                Total current assets ...............................     61,010     58,264
                                                                        -------    -------
Property, plant and equipment, net (notes 7, 11, and 19) ...........      9,174      6,512
Goodwill and other intangibles, net (note 8) .......................      7,818        600
Other assets .......................................................        797        519
                                                                        -------    -------
Total assets .......................................................    $78,799    $65,895
                                                                        =======    =======
Liabilities and Stockholders' Equity
Current liabilities:
        Accounts payable ...........................................    $ 4,659    $ 4,302
        Customer progress payments .................................        251        176
        Accrued salaries and wages .................................      3,581      3,083
        Other accrued expenses .....................................      4,414      2,311
        Income taxes payable .......................................        472      1,244
                                                                        -------    -------
                Total current liabilities ..........................     13,377     11,116
                                                                        -------    -------
Deferred income taxes (note 17) ....................................      3,014        692
Stockholders' equity (notes 13, 14, 15 and 16):
        Common stock, $.10 par value per share:
          15,000,000 shares authorized; 10,765,940
          shares issued (10,337,972 in 1996) .......................      1,077        517
        Additional paid-in capital .................................     40,210     34,846
        Retained earnings ..........................................     21,405     19,060
        Net unrealized gain (loss) on marketable securities (note 3)         17        (35)
                                                                        -------    -------
                                                                         62,709     54,388
        Less treasury stock, at cost; 207,600 common shares ........        301        301
                                                                        -------    -------
                Total stockholders' equity .........................     62,408     54,087
                                                                        -------    -------
Total liabilities and stockholders' equity .........................    $78,799    $65,895
                                                                        =======    =======
</TABLE>

See accompanying notes to consolidated financial statements.

<PAGE>


CONSOLIDATED STATEMENTS OF EARNINGS        Zygo Corporation and Subsidiaries  15
(Thousands, except per share amounts)

<TABLE>
<CAPTION>
                                                          Fiscal Year Ended June 30,
                                                      -------------------------------
                                                        1997        1996        1995
                                                      -------     -------     -------
<S>                                                   <C>         <C>         <C>    
Net sales (notes 18 and 19) ......................    $87,220     $57,374     $32,233
Cost of goods sold ...............................     45,395      31,508      18,002
                                                      -------     -------     -------
                Gross profit .....................     41,825      25,866      14,231

Selling, general and administrative expenses .....     13,830       9,500       6,537
Research and development .........................      7,151       5,538       3,967
Nonrecurring acquisition-related charges .........     11,083        --          --
Amortization of goodwill and other intangibles ...        558        --          --
                                                      -------     -------     -------
                Operating profit .................      9,203      10,828       3,727
                                                      -------     -------     -------

Other income (expense):
        Interest income ..........................        883         946         372
        Interest expense (note 10) ...............       --          --           (40)
        Miscellaneous expense, net ...............        (48)       (216)       (103)
                                                      -------     -------     -------
                Total other income ...............        835         730         229
                                                      -------     -------     -------
                Earnings before income taxes .....     10,038      11,558       3,956

Income tax expense (note 17) .....................      7,161       3,759       1,207
                                                      -------     -------     -------
Net earnings .....................................    $ 2,877     $ 7,799     $ 2,749
                                                      =======     =======     =======

Earnings per common and common
        equivalent share (note 14) ...............    $  0.24     $  0.72     $  0.32
                                                      =======     =======     =======

Weighted average common share and common
        dilutive equivalents outstanding (note 14)     11,998      10,878       8,484
                                                      =======     =======     =======
</TABLE>

See accompanying notes to consolidated financial statements.

<PAGE>

                                               
<TABLE>

16  CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY                                            Zygo Corporation and Subsidiaries
    (Thousands of dollars)


<CAPTION>
                                                                                         Unrealized
                                                               Additional              Gain (Loss) on                  Total
                                                        Common   Paid-In    Retained      Marketable    Treasury   Stockholders'
                                                         Stock   Capital    Earnings      Securities     Stock         Equity
                                                        -------------------------------------------------------------------------
<S>                                                     <C>      <C>         <C>            <C>          <C>          <C>    
Balance at June 30, 1994 ............................   $  266   $10,484     $ 8,893        $ (68)       $(301)       $19,274
        Net earnings ................................     --        --         2,749         --           --            2,749
        Net unrealized gain on marketable                                                                          
           securities, net of related tax effect.....     --        --          --             65         --               65
        Exercise of employee stock options.                                                                         
           and related tax effect ...................        3       242        --           --           --              245
        Stock split (note 14) .......................      134      --          (134)        --           --             --
                                                        ------   -------     -------        -----        -----        -------
Balance at June 30, 1995 ............................      403    10,726      11,508           (3)        (301)        22,333
        Net earnings ................................     --        --         7,799         --           --            7,799
        Shares issued for NexStar (note 2) ..........       25     1,017        (247)        --           --              795
        Net unrealized loss on marketable                                                                          
           securities, net of related tax effect.....     --        --          --            (32)        --              (32)
        Issuance of common stock (note 14) ..........       85    22,607        --           --           --           22,692
        Exercise of employee stock options                                                                         
           and related tax effect ...................        4       496        --           --           --              500
                                                        ------   -------     -------        -----        -----        -------
Balance at June 30, 1996 ............................      517    34,846      19,060          (35)        (301)        54,087
        Net earnings ................................     --        --         2,877         --           --            2,877
        Shares issued for TIC (note 2) ..............       10     2,990        --           --           --            3,000
        Net unrealized gain on marketable                                                                          
           securities, net of related tax effect.....     --        --          --             52         --               52
        Exercise of employee stock options                                                                         
           and related tax effect ...................       18     2,374        --           --           --            2,392
        Stock split (note 14) .......................      532      --          (532)        --           --             --
                                                        ------   -------     -------        -----        -----        -------
Balance at June 30, 1997 ............................   $1,077   $40,210     $21,405        $  17        $(301)       $62,408
                                                        ======   =======     =======        =====        =====        =======
</TABLE>

See accompanying notes to consolidated financial statements.

<PAGE>


CONSOLIDATED STATEMENTS OF CASH FLOWS      Zygo Corporation and Subsidiaries  17
(Thousands of dollars)

<TABLE>
<CAPTION>
                                                                           Fiscal Year Ended June 30,
                                                                         -----------------------------
                                                                           1997       1996       1995
                                                                         --------   --------   -------
<S>                                                                      <C>        <C>        <C>    
Cash provided by (used for) operating activities:
        Net earnings ..................................................  $  2,877   $  7,799   $ 2,749
        Adjustments to reconcile net earnings to cash provided by
                operating activities:
                Depreciation and amortization .........................     2,612      1,477     1,248
                Deferred income taxes .................................      (255)       (67)     (248)
                Loss on disposal of assets ............................       298        266       251
                Nonrecurring acquisition-related IPR&D charges (note 2)    10,084       --        --
                Gain on sale of marketable securities .................       (49)       (16)     --
                Changes in operating accounts:
                        Receivables ...................................    (7,682)    (3,579)   (2,220)
                        Costs in excess of billings ...................    (1,830)      (252)     --
                        Inventories ...................................      (764)    (1,519)   (2,387)
                        Prepaid expenses and taxes ....................        20        350      (313)
                        Accounts payable and accrued expenses .........    (1,244)     4,136     2,751
                                                                         --------   --------   -------
                Net cash provided by operating activities .............     4,067      8,595     1,831
                                                                         --------   --------   -------
Cash provided by (used for) investing activities:
        Additions to property, plant and equipment ....................    (4,723)    (2,864)   (1,631)
        Investment in marketable securities ...........................    (3,772)   (16,986)   (1,229)
        Investments in other assets ...................................      (154)      (229)      (39)
        Acquisition of business .......................................   (11,699)      --        (100)
        Proceeds from the sale of marketable securities ...............     6,098        999      --
        Proceeds from maturity of marketable securities ...............     4,860      3,660     1,465
        Proceeds from sale of assets ..................................        18          4        12
                                                                         --------   --------   -------
                Net cash used for investing activities ................    (9,372)   (15,416)   (1,522)
                                                                         --------   --------   -------
Cash provided by (used for) financing activities:
        Repayments of long-term debt ..................................    (2,662)      --        (656)
        Net proceeds from issuance of common stock ....................      --       22,692      --
        Exercise of employee stock options ............................       499        150       245
                                                                         --------   --------   -------
                Net cash provided by (used for) financing activities ..    (2,163)    22,842      (411)
                                                                         --------   --------   -------
Net increase (decrease) in cash and cash equivalents ..................    (7,468)    16,021      (102)
Cash and cash equivalents, beginning of year ..........................    18,449      2,428     2,530
                                                                         --------   --------   -------
Cash and cash equivalents, end of year ................................  $ 10,981   $ 18,449   $ 2,428
                                                                         ========   ========   =======
</TABLE>

See accompanying notes to consolidated financial statements.

<PAGE>

18 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
   June 30, 1997, 1996, and 1995

NOTE 1: SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES

PRINCIPLES OF CONSOLIDATION

The accompanying consolidated financial statements include the accounts of Zygo
Corporation and its subsidiaries (the "Company" or "Zygo"). All material
transactions and accounts with the subsidiaries have been eliminated from the
consolidated financial statements. As discussed in Note 2, all the outstanding
shares of NexStar Automation, Inc. ("NexStar") were acquired by the Company on
September 12, 1996, in a transaction accounted for as a pooling-of-interests,
and, accordingly, the Company's consolidated financial statements for fiscal
1996 have been restated to include the accounts and operations of NexStar. The
operating results for NexStar were not material to the combined results of the
two companies for all periods prior to fiscal 1996, and therefore, results for
those periods have not been restated.

CASH AND CASH EQUIVALENTS

The Company considers cash and cash investments with maturities at the date of
purchase of less than three months to be cash and cash equivalents.

MARKETABLE SECURITIES

The Company considers investments in securities with maturities at the date of
purchase in excess of three months as marketable securities. Marketable
securities primarily consist of tax-exempt municipal debt securities. All
securities held by the Company at June 30, 1997 and 1996, were classified as
available-for-sale and recorded at fair value or held to maturity and recorded
at cost. Unrealized holding gains and losses, net of the related tax effect, on
available-for-sale securities are excluded from earnings and are reported as a
separate component of stockholders' equity until realized.

INVENTORIES

Inventories are stated at the lower of cost (determined on a first-in, first-out
basis) or market.

REVENUE RECOGNITION

Revenues, other than revenue under the National Ignition Facility ("NIF")
contract (note 20) and revenue from certain automation contracts (note 6), are
recognized when units are shipped. Revenues related to NIF and automation
contracts are recognized under the percentage-of-completion method of
accounting.

DEPRECIATION

Depreciation rates are based on the estimated useful lives of the various
classes of assets and are computed using the straight-line method.

EARNINGS PER SHARE 

Earnings per common and common equivalent share amounts represent primary
earnings per share and are based upon the weighted average number of common
shares outstanding, plus, when their effect is dilutive, the weighted average
number of shares issuable upon exercise of outstanding stock options, less the
weighted average number of common shares which could have been repurchased with
the proceeds available from the assumed exercise of the outstanding options.
Fully diluted earnings per share are not significantly different from primary
earnings per share.

GAIN CONTINGENCY 

The Company was awarded $2,668,710 plus recovery of certain costs in a judgment
rendered by the United States District Court (District of Arizona) on June 2,
1994. The Court's decision was appealed to the Court of Appeals for the Federal
Circuit located in Washington, D.C. by the defendant and oral arguments of the
appeal were heard by the Court on March 9, 1995. On April 1, 1996, the United
States Court of Appeals for the Federal Circuit rendered an Opinion Announcing
Judgment of the Court. The appellate court affirmed-in-part and reversed-in-part
the District Court's earlier findings and remanded the case to the District
Court for a redetermination of the damage award. The Company has not recorded
any gain from the District Court's earlier ruling and will not until a final
determination of the award is made.

STOCK SPLIT

The Board of Directors of the Company declared a 2-for-1 split of the Company's
common shares, effected in the form of a 100% stock dividend which was paid on
February 27, 1997, to shareholders of record as of the close of business on
February 3, 1997. The Board of Directors of the Company also declared a 3-for-2
split of the Company's common shares, effected in the form of a 50% stock
dividend paid on August 21, 1995, to shareholders of record as of the close of
business on August 1, 1995. All presentations involving numbers of shares and
amounts per share in 1996 and prior years have been restated to reflect the
stock splits.

CAPITAL STOCK

The Company follows the practice of recording amounts received upon the exercise
of options by crediting common stock and additional capital. No charges are
reflected in the consolidated statements of operations as a result of the grant
or exercise of stock options which are granted with an exercise price at
fair-market value on the date of grant. The Company realizes an income tax
benefit from the exercise or early disposition of certain stock options. This
benefit results in a decrease in current income taxes payable and an increase in
additional capital.

FAIR VALUE OF FINANCIAL INSTRUMENTS 

The carrying amounts of cash, accounts receivable, accounts payable, and accrued
expenses approximate fair value because of the short maturity of these items.

USE OF ESTIMATES

Management of the Company has made a number of estimates and assumptions
relating to the reporting of assets


<PAGE>
                                           Zygo Corporation and Subsidiaries  19

and liabilities and the disclosure of contingent assets and liabilities to
prepare these financial statements in conformity with generally accepted
accounting principles. Actual results could differ from those estimates.

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

Statement of Financial Accounting Standards No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be disposed of
("Statement 121") was issued in 1995. Statement 121 requires that long-lived
assets to be disposed of, certain identifiable intangibles, and goodwill to be
held and used by an entity be reviewed for impairment whenever events or changes
in circumstances indicate that the carrying amount of an asset may not be
recoverable. Statement 121 was adopted for the Company's fiscal year 1996 and
has not had a material impact on its operating results or financial condition.

Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based
Compensation ("Statement 123"), was issued in 1995. Implementation is required
in the fiscal year commencing July 1, 1996. Statement 123 established financial
accounting and reporting standards for stock-based compensation plans. The
Company has adopted the disclosure requirements of Statement 123, effective for
the fiscal year ended June 30, 1997. (See note 15). Accordingly, no compensation
cost has been recognized for its stock option plans under Statement 123.

Statement of Financial Accounting Standards No. 128, Earnings Per Share
("Statement 128"), was issued in 1997 and is effective for financial statements
for both interim and annual periods ending after December 15, 1997. Statement
128 was issued to simplify the computation of EPS and to make the U.S. standard
more compatible with the EPS standards of other countries and that of the
International Accounting Standards Committee. The Company intends to adopt
Statement 128 for its interim period ended December 31, 1997, as early adoption
is not permitted.

Statement of Financial Accounting Standards No. 129, Disclosure of Information
about Capital Structure ("Statement 129"), was issued in 1997 and is effective
for financial statements for both interim and annual periods ending after
December 15, 1997. Statement 129 was issued to establish standards for
disclosing information about an entity's capital structure. The Company is
currently compliant with this standard.

Statement of Financial Accounting Standards No. 130, Reporting Comprehensive
Income ("Statement 130"), was issued in 1997 and is effective for financial
statements for both interim and annual periods ending after December 15, 1997.
Statement 130 was issued to establish standards for reporting and display of
comprehensive income and components in a full set of general purpose financial
statements. The Company will adopt this statement no later than the interim
period ended December 31, 1997.

Statement of Financial Accounting Standards No. 131, Disclosures about Segments
of an Enterprise and Related Information ("Statement 131"), was issued in 1997
and is effective for financial statements for both interim and annual periods
ending after December 15, 1997. Statement 131 was issued to establish standards
for the way public business enterprises are to report information about
operating segments in annual financial statements and requires those enterprises
to report selected information about operating segments in interim financial
reports issued to shareholders. It also establishes standards for related
disclosures about products and services, geographic areas, and major customers.
The Company will adopt this statement no later than the interim period ended
December 31, 1997.

NOTE 2: MERGERS AND ACQUISITIONS

On August 8, 1996, the Company acquired and accounted for as a purchase, the
proprietary products division of Technical Instrument Company ("TIC"), a
privately held California-based entity that designs, manufactures, markets and
sells microscope systems and other precision optical instrument systems and
components. The Company paid $11,699,000 and issued unregistered shares of its
common stock, $.10 par value, valued at $3.0 million in exchange for all the
outstanding capital stock of TIC. The net purchase price was allocated to its
net assets acquired, less a write-off of $10,084,000 of in-process research and
development costs ("IPR&D"), as follows:

(Thousands of dollars)
Working capital .......................................  $   867
Property, plant and equipment .........................      135
Other assets ..........................................      573
Goodwill and other intangibles ........................    7,580
Debt assumed ..........................................   (2,662) 
Deferred tax liability, net ...........................   (1,878)
                                                         -------
                                                         $ 4,615
                                                         =======

Results of operations after the acquisition date are included in the 1997
Consolidated Statements of Earnings. Fiscal 1997 sales would have been increased
$1,727,000 for the July 1, 1996 to August 8, 1996 time frame with no material
impact on earnings. The following unaudited pro forma information for 1996 has
been prepared assuming that this acquisition had taken place at the beginning of
the period. The pro forma information includes adjustments to record the
amortization of intangibles arising from the transaction, to reduce interest
income for cash used for the transaction, and to adjust income taxes for the
reduction in interest income. The unaudited pro forma financial information is

<PAGE>
20 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

not necessarily indicative of the results of operations as they would have been
had the transactions been effected on the assumed dates.

                                                          Fiscal Year Ended 
                                                            June 30, 1996    
(Thousands, except per share amounts)                     -----------------
Pro forma net sales ......................................     $68,459
Pro forma net earnings ...................................     $ 7,968
Pro forma net earnings per common share ..................     $  0.72
                                                          -----------------

On September 12, 1996, the Company issued 500,000 shares of its common stock,
effected for the 2-for-1 stock split, in exchange for all of the outstanding
shares of NexStar Automation, Inc. ("NexStar"). The acquisition has been
accounted for as a pooling of interests and, accordingly, the Company's
consolidated financial statements for fiscal 1996 have been restated to include
the accounts and operations of NexStar. The operating results for NexStar were
not material to the combined results of the two companies for all periods prior
to fiscal 1996, and therefore, results for those periods have not been restated.
In connection with the acquisition, $999,000 of acquisition-related costs were
incurred and have been charged to nonrecurring acquisition expense in the first
quarter of fiscal 1997. The acquisition costs consisted of legal, investment
banking, and accounting fees.

NOTE 3: MARKETABLE SECURITIES

Marketable securities at June 30, 1997, consist primarily of tax-exempt bonds
issued by various state and municipal agencies which are reported either at fair
value or at cost depending on their classification. The unrealized gain on
marketable securities of $28,920 (gross) is shown net of its related tax effect
of $11,742 as a separate component of stockholders' equity.

Dividend and interest income are recognized when earned. Realized gains and
losses are included in earnings and are derived using the specific
identification method for determining the cost of securities sold.

The cost, gross unrealized holding gains, gross unrealized holding losses, and
fair value for available-for-sale securities at June 30, 1997 and 1996, were as
follows:
                      
                                             Gross         Gross              
                                          Unrealized      Unrealized          
                                            Holding        Holding       Fair 
                                  Cost       Gains          Losses       Value
(Thousands of dollars)            ----    ----------      ----------     -----
At June 30, 1997
  State and local     
    municipal bonds .........   $ 5,536       $29            $--        $ 5,565
                                -------       ---            ---        -------
At June 30, 1996
  State and local
    municipal bonds .........   $11,098       $--            $59        $11,039
                                -------       ---            ---        -------

The Company recorded gross realized gains on the maturity of investment
securities of $49,228 and $15,611 in 1997 and 1996, respectively. There were no
gross realized losses recorded in 1997 or 1996.

Maturities of investment securities classified as available-for-sale were as
follows at June 30, 1997:
                      
                                                                       Fair   
                                                             Cost      Value  
(Thousands of dollars)                                       ----      -----  
Due within one year .....................................   $  --     $  --
Due after one year through five years ...................    5,536     5,565
                                                            ------    ------
                                                            $5,536    $5,565
                                                            ======    ======

Maturities of investment securities classified as held-to-maturity were as
follows at June 30, 1997:
                       
                                                                       Fair   
                                                             Cost      Value  
(Thousands of dollars)                                       ----      -----  
Due within one year .....................................   $7,201    $7,201
Due after one year through five years ...................      --        --
                                                            ------    ------
                                                            $7,201    $7,201
                                                            ======    ======

NOTE 4: ACCOUNTS RECEIVABLE

At June 30, 1997 and 1996, accounts receivable, net of allowances, were as
follows:

                                                       June 30,        June 30,
                                                         1997            1996
(Thousands of dollars)                                  -------         -------
Trade (note 19) ......................................  $21,047         $10,282
Other ................................................      411             612
                                                        -------         -------
                                                         21,458          10,894
Allowance ............................................     (728)           (267)
                                                        -------         -------
                                                        $20,730         $10,627
                                                        =======         =======

NOTE 5: INVENTORIES

Inventories at June 30, 1997 and 1996 were as follows:

                                                       June 30,        June 30,
                                                         1997            1996
(Thousands of dollars)                                  -------         -------
Raw materials and manufactured parts .................  $ 7,435         $ 3,126
Work in process ......................................    3,248           3,558
Finished goods .......................................      973             478
                                                        -------         -------
                                                        $11,656         $ 7,162
                                                        =======         =======

NOTE 6: COSTS IN EXCESS OF BILLINGS

Revenues from automation projects are accounted for under the
percentage-of-completion method, using total project costs incurred to date in
relation to estimated total costs of the contracts to measure the stage of
completion. The cumulative effects of revisions of estimated total contract
costs and revenues are recorded in the period in which the facts become known.
When a loss is anticipated on a contract, the full amount of the loss is
provided for currently. The differences between amounts billed and revenue
recognized is shown as costs in excess of billings on the accompanying balance
sheets.

Totals of revenue earned and billings issued on contracts were as follows:

                                                       June 30,        June 30,
                                                         1997            1996
(Thousands of dollars)                                  -------         -------
Revenue recognized to date ...........................  $14,674         $ 6,303
Billings to date .....................................   12,592           6,051
                                                        -------         -------
                                                        $ 2,082         $   252
                                                        =======         =======
<PAGE>


                                           Zygo Corporation and Subsidiaries  21


NOTE 7:  PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment are stated at cost. Costs of replacements and
improvements are capitalized and depreciated. Maintenance and repairs are
charged to expense as incurred. At June 30, 1997 and 1996, property, plant and
equipment, at cost, was as follows:

                                                       June 30,        June 30,
                                                         1997            1996
(Thousands of dollars)                                  -------         -------
Land (note 19) .......................................  $   650         $   650
Building .............................................    4,170           4,352
Machinery, equipment and office furniture ............   15,372          12,072
Leasehold improvements ...............................      277              18
Construction in progress .............................    1,396             896
                                                        -------         -------
                                                         21,865          17,988
Less accumulated depreciation ........................   12,691          11,476
                                                        -------         -------
                                                        $ 9,174         $ 6,512
                                                        =======         =======

NOTE 8: GOODWILL AND OTHER INTANGIBLES

The cost of intangible assets is amortized on a straight-line basis which ranges
from 4 to 20 years. During fiscal 1997, goodwill and other intangibles increased
by $7,799,000 largely due to the Company's acquisition of Technical Instrument
Company. (See note 2). This increase was partially offset by current year
amortization of $581,000. Management evaluates, on an ongoing basis, the
carrying value of its intangible assets and makes adjustments, when impairments
are identified. Goodwill and other intangibles, net, at June 30, 1997 and 1996
were as follows:

                                                       June 30,        June 30,
                                                         1997            1996
(Thousands of dollars)                                  -------         -------
Goodwill and other intangibles .......................  $ 8,594         $   795
Accumulated amortization .............................      776             195
                                                        -------         -------
                                                        $ 7,818         $   600
                                                        =======         =======

NOTE 9: BANK LINE OF CREDIT

The Company has a $3,000,000 unsecured bank line of credit with interest at
LIBOR plus 60 basis points (approximately 6.7% at June 30, 1997). The line of
credit is available through November 30, 1997. At June 30, 1997 and 1996, no
amounts were outstanding under the bank line of credit.


NOTE 10: LONG-TERM DEBT

In the quarter ended March 31, 1995, the Company retired its 1977 and 1981
Series Industrial Development Bonds totaling $375,000 and $150,000,
respectively, prior to scheduled maturity. This transaction resulted in no
extraordinary gain or loss. The funds for these retirements were obtained from
internally generated cash flows. 

As part of the acquisition of TIC, the Company assumed outstanding debt totaling
$2,662,000. The Company repaid this debt immediately after the acquisition.

Interest payments were $0, $0, and $39,900 in fiscal 1997, 1996, and 1995,
respectively.

NOTE 11: LEASES

The Company leases certain manufacturing equipment and facilities under
operating leases, some of which include cost escalation clauses, expiring on
various dates through 2001. Total rental expense charged to operations was
$509,000 in 1997, $336,000 in 1996, and $183,000 in 1995. At June 30, 1997, the
minimum future rental commitments under noncancellable leases payable over the
remaining lives of the leases were:

                                                                Minimum      
                                                             Future Rental   
                                                              Commitments    
(Thousands of dollars)                                       -------------   

1998 .....................................................      $  517
1999 .....................................................         473
2000 .....................................................         391
2001 .....................................................         101
                                                                ------
                                                                $1,482
                                                                ======

NOTE 12: PROFIT-SHARING PLAN

The Company maintains a deferred profit-sharing plan under which substantially
all full-time employees of the Company are eligible to participate.
Profit-sharing expense for the years ended June 30, 1997, 1996, and 1995
amounted to $2,007,600, $1,295,600 and $440,000, respectively. Profit-sharing
contributions are determined annually at the discretion of the Board of
Directors.

Effective June 30, 1985, the existing profit-sharing plan was revised
and amended to incorporate a 401(k) tax deferred payroll deduction program and
an Employee Stock Ownership Program. Under the 401(k) program, employees may
contribute a tax deferred amount of up to 15% of their compensation, as defined.
The Company may contribute to the 401(k) program, an amount determined annually
at the discretion of the Board of Directors. The 401(k) contribution expense for
the years ended June 30, 1997, 1996, and 1995 amounted to $468,700, $333,900,
and $255,000, respectively. 

Under the Employee Stock Ownership Program, the Company may, at the discretion
of the Board of Directors, contribute its own stock or cash to purchase its own
stock. The purchased stock's fair market value shall not exceed the maximum
amount of employee stock ownership credit as determined under Section 416 of the
Internal Revenue Code. There were no purchases and no contributions made under
this program for the years ended June 30, 1997, 1996, and 1995.

NOTE 13: STOCKHOLDERS' AGREEMENTS

A registration rights agreement was entered into by Canon Inc., Wesleyan
University, Paul F. Forman, Carl A. Zanoni, Sol F. Laufer, and the Company in
November 1993, granting to each of these stockholders the right, until November
30, 1998, to have his or its shares of Common Stock included in any registered
public offering of the Company's securities.

<PAGE>
22 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 14: STOCKHOLDERS' EQUITY

On January 23, 1997 the Board of Directors declared a 2-for-1 split effected in
the form of a 100% stock dividend payable on February 27, 1997, to shareholders
of record on February 3, 1997. This transaction resulted in the issuance of
approximately 5,320,000 additional shares of Common Stock. Stockholders' Equity
had been adjusted to recognize the effect of the stock split by reclassifying
from retained earnings to paid-in capital the par value of the additional shares
arising from the split. In addition, all references in the financial statements
to numbers of shares, per share amounts, stock option data, and market prices of
the Company's Common Stock have been restated to give retroactive recognition to
the stock split.

On July 20, 1995, the Board of Directors approved an increase in the authorized
shares of the Company's Common Stock from 10,000,000 to 15,000,000 which was
approved by the Company's stockholders at its annual meeting held on November
16, 1995. On December 13, 1995, the Company commenced a public offering of
1,300,000 shares of Common Stock, of which 845,000 shares were sold by the
Company, and 455,000 shares were sold by certain of the Company's stockholders.
The Company generated approximately $22.7 million in net proceeds, which is
being used for working capital and other general corporate purposes, and for
acquisitions.

NOTE 15: STOCK COMPENSATION PLANS

As of June 30, 1997, Zygo Corporation has two stock based compensation plans,
which are described below. (See note 16). The Company applies APB Opinion No.
25, Accounting for Stock Issued to Employees, and related interpretations in
accounting for its plans. Since all options are granted with an exercise price
equal to the fair-market value on the date of the grant, no compensation cost
has been recognized for its fixed option plans. Pro forma information regarding
net income and earnings per share is required by SFAS No. 123 "Accounting for
Stock-Based Compensation", which requires that the information be determined as
if the Company has accounted for its stock options granted in fiscal years
beginning after December 15, 1994 under the fair value method of the statement.
The fair value of options at date of grant was estimated using the Black-Scholes
model. The Company's pro forma information follows:

                                                       June 30,        June 30, 
                                                         1997            1996   
(In thousands, except per share amounts)               -------         -------  
Pro forma net income ................................   $  423          $6,613  
Pro forma earnings per share ........................   $  .04          $  .61

The fair values of these options at the date of grant was estimated with the
following weighted average assumptions for 1997 and 1996: risk free interest
rate 6.8%, no dividend yield, volatility factor of the expected market price of
the Company's common stock of 69% and an expected life of the option of 6.6
years. The above pro forma information is based on historical activity and may
not represent future trends.

NOTE 16: STOCK OPTION PLANS

1987 STOCK OPTION PLAN AND DATA

The Zygo Corporation 1987 Amended and Restated Stock Option Plan permits the
granting of non-qualified options to purchase a total of 2,850,000 shares
(adjusted for splits) of common stock at prices not less than the fair-market
value on the date of grant. Options generally become exercisable at the rate of
25% of the shares each year commencing one year after the date of grant. The
Plan, as amended will expire on September 3, 2002.

                                                          June 30, 1997
                                                    ---------------------------
                                                                    Weighted
                                                                    Average
                                                     Shares      Exercise Price
                                                    ---------    --------------
Outstanding at beginning of year .................  1,304,674       $ 2.1836
Granted ..........................................    322,500       $17.9720
Exercised ........................................   (232,950)      $ 2.1436
Expired or canceled ..............................       (900)      $ 1.6650
                                                    ---------
Outstanding at end of year .......................  1,393,324       $ 5.6865
                                                    =========

                                                          June 30, 1996
                                                    ---------------------------
                                                                    Weighted
                                                                    Average
                                                     Shares      Exercise Price
                                                    ---------    --------------
Outstanding at beginning of year .................  1,375,574       $ 2.0347
Granted ..........................................     15,500       $14.2426
Exercised ........................................    (86,400)      $ 1.7554
Expired or canceled ..............................          0       $ 0.0000
                                                    ---------
Outstanding at end of year .......................  1,304,674       $ 2.1982
                                                    =========

                                                          June 30, 1995
                                                    ---------------------------
                                                                    Weighted
                                                                    Average
                                                     Shares      Exercise Price
                                                    ---------    --------------
Outstanding at beginning of year .................    911,850       $ 1.8393
Granted ..........................................    540,226       $ 2.2436
Exercised ........................................    (76,502)      $ 1.6339
Expired or canceled ..............................          0       $ 0.0000
                                                    ---------
Outstanding at end of year .......................  1,375,574       $ 2.0347
                                                    =========

<PAGE>
                                           Zygo Corporation and Subsidiaries  23


1994 NON-EMPLOYEE DIRECTOR STOCK OPTION PLAN AND DATA

The Zygo Corporation 1994 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 fair-market
value on the date of grant. Options become exercisable at the rate of 20% of the
shares each year commencing one year after the date of grant. The Plan, as
amended, will expire on August 25, 2004.


                                                          June 30, 1997
                                                    ---------------------------
                                                                    Weighted
                                                                    Average
                                                     Shares      Exercise Price
                                                    ---------    --------------
Outstanding at beginning of year .................   450,000        $ 6.2292
Granted ..........................................         0        $ 0.0000
Exercised ........................................         0        $ 0.0000
Expired or canceled ..............................         0        $ 0.0000
                                                     -------
Outstanding at end of year .......................   450,000        $ 6.2292
                                                     =======

                                                          June 30, 1996
                                                    ---------------------------
                                                                    Weighted
                                                                    Average
                                                     Shares      Exercise Price
                                                    ---------    --------------
Outstanding at beginning of year .................   375,000        $ 2.0000
Granted ..........................................    75,000        $24.2594
Exercised ........................................         0        $ 0.0000
Expired or canceled ..............................         0        $ 0.0000
                                                     -------
Outstanding at end of year .......................   450,000        $ 6.2292
                                                     =======

                                                          June 30, 1995
                                                    ---------------------------
                                                                    Weighted
                                                                    Average
                                                     Shares      Exercise Price
                                                    ---------    --------------
Outstanding at beginning of year .................         0        $ 0.0000
Granted ..........................................   375,000        $ 2.0000
Exercised ........................................         0        $ 0.0000
Expired or canceled ..............................         0        $ 0.0000
                                                     -------
Outstanding at end of year .......................   375,000        $ 2.0000
                                                     =======

The following table summarizes information about all fixed stock options
outstanding at June 30, 1997:

                               Options Outstanding
        -------------------------------------------------------------------
                                Number     Weighted Average
            Range of         Outstanding      Remaining        Weighted
            Exercise           as of        Contractual         Average
             Prices         June 30, 1997       Life         Exercise Price
        -----------------   -------------   --------------   --------------
        $ 1.25  -  $ 1.92       293,950         2.68           $ 1.6287
        $ 2.00  -  $ 2.00       896,624         6.77           $ 2.0000
        $ 2.29  -  $14.88       360,750         6.93           $ 6.6211
        $15.57  -  $22.75       208,500         9.11           $19.1843
        $25.75  -  $25.75         8,500         9.67           $25.7500
        $27.38  -  $27.38        75,000         8.92           $27.3750
        -----------------   -------------   --------------   --------------
        $ 1.25  -  $27.38     1,843,324         6.52           $ 5.9308
        =================   =============   ==============   ==============


                               Options Exercisable
        -------------------------------------------------------------------
             Range of                 Number                   Weighted
             Exercise            Exercisable as of              Average
              Prices               June 30, 1997             Exercise Price
        -----------------        -----------------           --------------
        $ 1.25  -  $ 1.92             284,950                   $ 1.6276
        $ 2.00  -  $ 2.00             443,999                   $ 2.0000
        $ 2.29  -  $14.88             119,875                   $ 2.6261
        $15.57  -  $22.75               1,500                   $15.6900
        $25.75  -  $25.75                   0                   $ 0.0000
        $27.38  -  $27.38              15,000                   $27.3700
        -----------------        -----------------           --------------
        $ 1.25  -  $27.38             865,324                   $ 2.4270
        =================        =================           ==============



NOTE 17: INCOME TAXES

The components of income tax expense (benefit) for each year are as follows:

                                                  Fiscal Year Ended June 30,
                                                  --------------------------
                                                    1997     1996     1995
(Thousands of dollars)                             ------   ------   ------
Currently payable:
  Federal .......................................  $5,614   $3,264   $1,036
  State .........................................   1,494      910      421
                                                   ------   ------   ------
                                                   $7,108   $4,174   $1,457
                                                   ======   ======   ======
Deferred:
  Federal .......................................  $   38   $ (319)  $ (188)
  State .........................................      15      (96)     (62)
                                                   ------   ------   ------
                                                   $   53   $ (415)  $ (250)
                                                   ======   ======   ======
Total income tax expense ........................  $7,161   $3,759   $1,207
                                                   ======   ======   ======


Income taxes paid amounted to $6,068,000 (including cash payments of $5,432,500
and $635,500 of prior year overpayments applied to fiscal 1997), $3,403,300 and
$793,100 (including additional taxes owed for fiscal 1991), in fiscal 1997,
1996, and 1995, respectively. 

The total income tax expense differs from the amount computed by applying the
applicable U.S. federal income tax rate of 35% in 1997 and 34% in 1996 and 1995
to earnings before income taxes for the following reasons:

                                                  Fiscal Year Ended June 30,
                                                  --------------------------
                                                    1997     1996     1995
(Thousands of dollars)                             ------   ------   ------
Computed "expected" tax expense .................  $3,516   $3,994   $1,345
Increases (reductions) in
  taxes resulting from:
    Nondeductible acquisition-
      related charges ...........................   3,634      --       --
    State taxes, net of federal
      income tax benefit ........................     989      537      237
    Tax exempt interest income ..................    (170)    (245)    (108)
    FSC benefit .................................    (724)    (543)    (194)
    Other, net ..................................     (84)      16      (73)
                                                   ------   ------   ------
                                                   $7,161   $3,759   $1,207
                                                   ======   ======   ======

<PAGE>
24  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


The tax effects of temporary differences that give rise to significant portions
of the deferred tax assets and deferred tax liabilities as of June 30, 1997 and
1996, are presented below:

                                                       June 30,        June 30,
                                                         1997            1996
(Thousands of dollars)                                  -------         -------
Deferred tax assets:
  Accounts receivable, principally due to
    the allowance for doubtful accounts .............    $  295         $  110
  Warranty costs ....................................       347            246
  Vacation costs ....................................       104             30
  Medical insurance costs ...........................       123            123
  Inventory valuation ...............................     1,386            969
  Unrealized loss on marketable securities ..........        --             24
  Other .............................................        28             64
                                                         ------         ------
                                                          2,283          1,566
  Less valuation allowance ..........................        --             --
                                                         ------         ------
  Deferred tax asset ................................     2,283          1,566
Deferred tax liabilities:
  Prepaid expenses ..................................       (67)           (60)
  Plant and equipment, principally due
    to differences in depreciation expense ..........      (555)          (662)
  Intangibles .......................................    (2,429)            --
  Unrealized gain on marketable securities ..........       (11)            --
  Other .............................................       (30)           (30)
                                                         ------         ------
  Deferred tax liability ............................    (3,092)          (752)
                                                         ------         ------
Net deferred tax asset (liability) ..................    $ (809)        $  814
                                                         ======         ======

The net current deferred tax assets and net non-current deferred tax liabilities
as recorded on the balance sheet as of June 30, 1997 and 1996, are as follows:


                                                        June 30,        June 30,
                                                          1997            1996
(Thousands of dollars)                                  -------         -------
Net current deferred tax asset ......................    $2,205         $1,506
Net noncurrent deferred tax liability ...............    (3,014)          (692)
                                                         ------         ------
Net deferred tax asset (liability) ..................    $ (809)        $  814
                                                         ======         ======

A valuation allowance has not been recorded because the Company believes that
the deferred tax assets will, more likely than not, be realized. This
determination is based largely upon the Company's historical earnings trend as
well as its ability to carryback reversing items and recover taxes paid in the
carryback period. In addition, the Company has the ability to offset deferred
tax assets against deferred tax liabilities associated with such items as
depreciation and amortization.

NOTE 18:  PRODUCTS, PRINCIPAL CUSTOMERS, AND OPERATIONS BY GEOGRAPHIC AREA

The Company designs, develops, manufactures, and markets precision measurement
and automation systems and components used to enhance production in high
technology industries. The Company is headquartered in Middlefield, Connecticut,
and also has operations in Longmont, Colorado, and in Newbury Park, Simi Valley,
and Sunnyvale, California.

Sales to Canon Inc. and to Canon Sales Co., Inc., accounted for more than 20% of
total Company sales for each of the years ended June 30, 1997, 1996 and 1995.
(See note 19.) For the years ended June 30, 1996 and 1995, sales to a major
manufacturer of computer disk drives and related hardware and software,
accounted for 16% and 17%, respectively, of total Company sales. No other
individual customer accounted for more than 10% of total Company sales for any
year presented in the accompanying consolidated financial statements.

Export sales by geographic area were as follows:

                                                  Fiscal Year Ended June 30,
                                                  --------------------------
                                                    1997     1996      1995
(Thousands of dollars)                             ------   ------    ------
Far east:
  Japan ......................................    $21,730   $19,763  $ 9,630
  Pacific Rim ................................     12,650     4,765    3,279
                                                  -------   -------  -------
Total Far East ...............................    $34,380   $24,528  $12,909
Europe and other .............................      5,145     2,667    2,072
                                                  -------   -------  -------
Total ........................................    $39,525   $27,195  $14,981
                                                  =======   =======  =======


NOTE 19: RELATED PARTY TRANSACTIONS

Sales to Canon Inc., a stockholder, and to Canon Sales Co., Inc., a distributor
for certain of the Company's products in Japan and a subsidiary of Canon Inc.,
amounted to approximately $17,564,000 (20% of net sales), $19,761,000 (34% of
net sales), and $9,553,000 (30% of net sales), for the years ended June 30,
1997, 1996, and 1995, respectively.

Selling prices of products sold to Canon Inc. and Canon Sales Co., Inc. are
based, generally, on the normal terms given to distributors. At June 30, 1997,
1996, and 1995, there was approximately, in the aggregate, $2,345,500,
$3,198,100, and $1,104,700, respectively, of trade accounts receivable from
Canon Inc. and Canon Sales Co., Inc.

On January 4, 1996, the Company purchased approximately 22 acres of land
adjacent to the Company's facility in Middlefield, Connecticut, for a purchase
price of $440,000. The land, which was jointly owned by Paul F. Forman, Sol F.
Laufer, and Carl A. Zanoni, founders of the Company, is intended to be used to
facilitate the expansion of the Company's buildings and/or parking facilities in
the future.

NOTE 20:  MATERIAL CONTRACTS

On May 9, 1997, the Company announced it had entered into a contract with the
University of California's Lawrence Livermore National Laboratory ("LLNL"),
whereby the Company will be a primary supplier of large plano optical components
for the National Ignition Facility ("NIF"), a $1.2 billion Department of Energy
project at LLNL to produce the world's largest laser for nuclear fusion
research. The contract provides for the Company to design, manufacture, and
equip a world-class optical fabrication facility at its Middlefield,
Connecticut, operations for a fixed price of nearly $10 million over an 18-month
time period. The contract is presently funded to slightly in excess of $5.5
million and,

<PAGE>
                                           Zygo Corporation and Subsidiaries  25


consistent with similar government contracts, requires additional appropriations
from the U.S. Congress prior to the Company's receiving additional funding.
Revenues recognized on this contract in fiscal 1997 were immaterial. To
accommodate the space required for the NIF facility and provide additional
office facilities, the Company has commenced work at its Middlefield,
Connecticut, site to expand its facilities by 35,500 square feet. It is expected
that the addition will be completed in December 1997.

NOTE 21: SUBSEQUENT EVENTS

On June 30, 1997, Technical Instrument Company ("TIC"), a wholly owned
subsidiary of the Company, and Syncotec Neue Technologien und Instrumente GmbH
("Syncotec"), a German-based company, completed all necessary legal requirements
allowing for the appropriate transfer and registration of a 50 percent ownership
interest in Syncotec. The conclusion of this transaction completed commitments
made by the former owners of TIC and enabled the Company to release $440,000 of
contingent proceeds recorded as a liability at the time of the TIC acquisition
by the Company. The Company, through TIC, is negotiating the purchase of the
remaining 50 percent of Syncotec for approximately $2.0 million in a combination
of cash and the Company's common stock. Syncotec designs, develops,
manufactures, and markets certain products which incorporate TIC's confocal
technology for European customers. Syncotec's sales in the year ended December
31, 1996 amounted to $2.9 million (DM4.9 million).

The Company announced on July 28, 1997 the signing of a letter of intent
providing for the Company's acquisition of Digital Instruments, Inc.
("Digital"), a privately held California-based entity that designs, develops,
and manufactures high precision measurement products and systems which use
scanning probe microscopy imaging and metrology technology. These systems are
used in product research and development applications as well as to improve the
production efficiency and manufacturing yields within the data storage,
semiconductor, and other high technology industries. It is expected that the
Company will acquire all the outstanding stock of Digital and an affiliated
corporation in exchange for 7,000,000 shares of the Company's common stock.
Closing the transaction is subject to various conditions and is expected to be
accounted for as a pooling-of-interests. The transaction is subject, among other
things, to approval by the stockholders of the Company, and is expected to be
completed prior to the end of the calendar year 1997. Digital's revenues for the
year ended December 31, 1996 were approximately $50 million.

Additionally, the Company is in the process of acquiring Sight Systems, Inc.
("SSI"), a privately held California-based business that designs, develops,
and manufactures application-specific vision metrology systems for 287,400
shares of the Company's common stock. The transaction will be accounted for as a
pooling-of-interests. SSI's revenues for the year ended December 31, 1996 were
approximately $3.5 million.

<PAGE>


26  REPORTS OF MANAGEMENT AND INDEPENDENT AUDITORS

                                               Zygo Corporation and Subsidiaries
REPORT OF MANAGEMENT

Management is responsible for preparing the Company's financial statements and
related information that appears in this annual report. Management believes that
the financial statements fairly reflect the form and substance of transactions
and reasonably present the Company's financial condition and results of
operations in conformity with generally accepted accounting principles.
Management has included in the Company's financial statements amounts that are
based on estimates and judgments which it believes are reasonable under the
circumstances.

The Company maintains a system of internal accounting policies, procedures, and
controls intended to provide reasonable assurance, at appropriate cost, that
transactions are executed in accordance with Company authorization and are
properly recorded and reported in the financial statements, and that assets are
adequately safeguarded. 

KPMG Peat Marwick LLP audits the Company's financial statements in accordance
with generally accepted auditing standards and provides an objective,
independent review of the fairness of reported financial condition and results
of operations.

The Board of Directors of the Company has an Audit Committee composed of
nonmanagement directors. The Committee meets with financial management and the
independent auditors to review internal accounting controls and accounting,
auditing, and financial reporting matters. 


/s/ MARK J. BONNEY
-----------------------------------------
Mark J. Bonney
Vice President, Finance & Administration,
Treasurer, and Chief Financial Officer


REPORT OF INDEPENDENT AUDITORS

THE BOARD OF DIRECTORS AND STOCKHOLDERS OF ZYGO CORPORATION:

We have audited the accompanying consolidated balance sheets of Zygo Corporation
and subsidiaries as of June 30, 1997 and 1996, and the related consolidated
statements of earnings, stockholders' equity and cash flows for each of the
years in the three-year period ended June 30, 1997. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits. 

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Zygo Corporation and
subsidiaries as of June 30, 1997 and 1996, and the results of their operations
and their cash flows for each of the years in the three-year period ended June
30, 1997, in conformity with generally accepted accounting principles. 


[LOGO] KPMG PEAT MARWICK LLP 
-----------------------------
KPMG PEAT MARWICK LLP 
Hartford, Connecticut
August 8, 1997

<PAGE>


SELECTED CONSOLIDATED QUARTERLY FINANCIAL DATA
(Thousands, except per share amounts)

                                           Zygo Corporation and Subsidiaries  27
<TABLE>
<CAPTION>
                                                                         For the Fiscal Year Ended June 30, 1997
                                                                   ---------------------------------------------------
                                                                   September 30   December 31     March 31     June 30
                                                                   ------------   -----------     --------     -------
<S>                                                                   <C>           <C>           <C>          <C>    
Net sales ..........................................................  $18,443       $20,810       $22,476      $25,491
Earnings before taxes and acquisition-                                                                        
   related charges (2) .............................................  $ 4,345       $ 4,873       $ 5,771      $ 6,132
Income taxes .......................................................    1,206         1,774         2,078        2,103
                                                                      -------       -------       -------      -------
Earnings before acquisition-related charges (2) ....................  $ 3,139       $ 3,099       $ 3,693      $ 4,029
                                                                      =======       =======       =======      =======
Net earnings per common and common equivalent
   share before acquisition-related charges (2)(3)(4) ..............  $  0.26       $  0.26       $  0.31      $  0.33
                                                                      =======       =======       =======      =======

Net earnings (3) ...................................................  $(7,944)      $ 3,099       $ 3,693      $ 4,029
                                                                      =======       =======       =======      =======
Net earnings per common and common                                                                            
   equivalent share (3)(4) .........................................  $ (0.77)      $  0.26       $  0.31      $  0.33
                                                                      =======       =======       =======      =======
<CAPTION>
                                                                        For the Fiscal Year Ended June 30, 1996 (1)
                                                                   ---------------------------------------------------
                                                                   September 30   December 31     March 31     June 30
                                                                   ------------   -----------     --------     -------
<S>                                                                   <C>           <C>           <C>          <C>    
Net sales ..........................................................  $11,831       $13,479       $15,231      $16,833
Earnings before income taxes .......................................  $ 1,549       $ 2,415       $ 3,585      $ 4,009
Income taxes .......................................................      588           876         1,038        1,257
                                                                      -------       -------       -------      -------
Net earnings .......................................................  $   961       $ 1,539       $ 2,547      $ 2,752
                                                                      =======       =======       =======      =======
Earnings per common and common
   equivalent share (3)(4) .........................................  $  0.10       $  0.15       $  0.22      $  0.23
                                                                      =======       =======       =======      =======
<FN>
----------

(1)  Restated to reflect the acquisition of NexStar Automation, Inc. as a pooling-of-interests. Periods prior to fiscal
     1996 have not been restated due to immateriality.

(2)  Excludes nonrecurring acquisition-related charges of $11,083,000 incurred in the first quarter of fiscal 1997.

(3)  Restated to reflect a 2-for-1 stock split effected in the form of a 100% stock dividend declared on January 23,
     1997, and paid on February 27, 1997 to stockholders of record on February 3, 1997.

(4)  Quarterly per share earnings do not necessarily equal the total per share earnings reported for the year as a
     result of the dilutive effect of common stock equivalents on the calculation of per share earnings.
</FN>
</TABLE>


STOCK DATA

NASDAQ Symbol: ZIGO

The number of stockholders of record at June 30, 1997, was 514.

The Company's common shares are traded over-the-counter and are quoted on the
NASDAQ/National Market.

Market price data for 1997 and 1996, adjusted for the effect of the 2-for-1
stock split which was effective on February 27, 1997, was as follows: 

                Fiscal Year Ended June 30, 1997  Fiscal Year Ended June 30, 1996
                -------------------------------  -------------------------------
                     High         Low                High         Low
                    -------     -------             -------     ---------
First quarter ....  $21 1/2     $14                 $14 5/8     $10 1/3  
Second quarter ...  $26         $12 1/4             $17 3/4     $12
Third quarter ....  $29 7/8     $21                 $20 1/8     $10 1/4
Fourth quarter ...  $31 1/2     $21 1/2             $31 1/16    $17 11/16
----------
Source: National Association of Securities Dealers, Inc.

<PAGE>

28  STOCKHOLDER INFORMATION                    Zygo Corporation and Subsidiaries

FORM 10-K405 AVAILABLE

Stockholders may obtain from the Company, without charge, a copy of the Annual
Report on Form 10-K405 filed with the Securities and Exchange Commission for
fiscal 1997.

Written requests should be directed to:

Sheree F. Denny
Director, Corporate Financial
  Planning and Reporting
Zygo Corporation
Laurel Brook Road
Middlefield, Connecticut 06455

E-mail requests should be
directed to:

investor@zygo.com

ANNUAL MEETING

November 13, 1997, at 10 a.m.
Hotel Inter / Continental
111 East 48th Street
(Lexington and Park)
New York, New York 10017

CORPORATE HEADQUARTERS

Laurel Brook Road
Middlefield, Connecticut 06455
Web Site: www.zygo.com
E-mail: inquire@zygo.com

NEXSTAR AUTOMATION, INC.

2505-A Trade Centre Avenue
Longmont, Colorado 80501
Web Site: www.zygo.com
E-mail: inquire@nexstarauto.com

SIGHT SYSTEMS, INC.

3541 Old Conejo Road #119
Newbury Park, California 91320
Web Site: www.zygo.com,
E-mail: inquire@zygo.com

TECHNICAL INSTRUMENT COMPANY

650 North Mary Avenue
Sunnyvale, California 94086
Web Sites: www.technical.com
           www.zygo.com
E-mail: sales@technical.com

AUDITORS

KPMG Peat Marwick LLP
City Place II 
Hartford, Connecticut 06103 

LEGAL COUNSEL 

Fulbright & Jaworski L.L.P. 
666 Fifth Avenue 
New York, New York 10103 

TRANSFER AGENT AND REGISTRAR

Continental Stock Transfer 
and Trust Company 
2 Broadway 
New York, New York 10004

DIVIDENDS 

The Company has not declared
or paid cash dividends since
becoming a public company.

Zygo, the Zygo logo, NexStar, and Sight Systems are registered trademarks of
Zygo Corporation.

<PAGE>

DIRECTORS AND OFFICERS

-------------------------


        [Photo]


-------------------------

Clockwise from upper left: John R. Rockwell, Paul W. Murrill, Michael R. Corboy,
Robert G. McKelvey, Seymour E. Liebman, Paul F. Forman, Robert B. Taylor.

DIRECTORS

MICHAEL R. CORBOY
Chairman and President,
Corboy Investment Company

PAUL F. FORMAN
Chairman of the Board
Zygo Corporation

SEYMOUR E. LIEBMAN
Executive Vice President and General Counsel
Canon U.S.A., Inc.

ROBERT G. MCKELVEY
Chairman and President
George McKelvey Co., Inc.

PAUL W. MURRILL
Professional Engineer

JOHN R. ROCKWELL
Retired Senior Executive

ROBERT B. TAYLOR
Vice President and Treasurer
Wesleyan University

GARY K. WILLIS
Zygo Corporation

CARL A. ZANONI
Zygo Corporation


OFFICERS

GARY K. WILLIS
President and
Chief Executive Officer

AHMAD AKRAMI
Vice President,
President NexStar Automation

WILLIAM H. BACON
Vice President,
Director of Corporate Quality

MARK J. BONNEY
Vice President, Finance and Administration,
Treasurer, and Chief Financial Officer

FRANCIS E. LUNDY
Vice President,
President Technical Instrument Company

ROBERT A. SMYTHE
Vice President,
Director of Sales and Marketing

CARL A. ZANONI
Vice President,
Research, Development
and Engineering

PAUL JACOBS
Secretary

-------------------------


        [Photo]


-------------------------

From left to right: Carl A. Zanoni, Paul Jacobs (Partner, Fulbright and Jaworski
L.L.P.), Gary K. Willis, Michael Fedoras (Partner, KPMG Peat Marwick LLP), Mark
J. Bonney.


OPERATING LOCATIONS

NexStar Automation

AHMAD AKRAMI
President

Sight Systems

DAVID GRANT
President

Technical Instrument Company

FRANCIS E. LUNDY
President

<PAGE>


ZYGO  [LOGO]
------------


Zygo Corporation
Laurel Brook Road
Middlefield, Connecticut 06455
Telephone: 860.347.8506
Facsimile: 860.347.8372
E-mail: inquire@zygo.com
Web Site: www.zygo.com